10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC  20549

________________

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: June 27, 2009

Commission file number: 1-10827

PAR PHARMACEUTICAL COMPANIES, INC.

(Exact name of registrant as specified in its charter)

Delaware	22-3122182
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

300 Tice Boulevard, Woodcliff Lake, New Jersey  07677

(Address of principal executive offices)

Registrant’s telephone number, including area code:  (201) 802-4000

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___  

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  X  No___  

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

Large accelerated filer [X]    

Accelerated filer [  ]   

Non-accelerated filer [   ]

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes        No  X

Number of shares of the Registrant’s common stock outstanding as of July 28, 2009: 34,768,551

TABLE OF CONTENTS

PAR PHARMACEUTICAL COMPANIES, INC.

FORM 10-Q

FOR THE FISCAL QUARTER ENDED JUNE 27, 2009

PAGE

PART I   

FINANCIAL INFORMATION

Item 1.

Condensed Consolidated Financial Statements (unaudited)

Condensed Consolidated Balance Sheets as of June 27, 2009 and

December 31, 2008

  3

Condensed Consolidated Statements of Operations for the three months and six months

ended June 27, 2009 and June 28, 2008

  4

Condensed Consolidated Statements of Cash Flows for the six months

ended June 27, 2009 and June 28, 2008

  5

Notes to Condensed Consolidated Financial Statements

  6

Item 2.    

Management’s Discussion and Analysis of Financial Condition

and Results of Operations

32

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

47

Item 4.

 Controls and Procedures

  48

PART II

OTHER INFORMATION

Item 1.

Legal Proceedings

  48

Item 1A.

Risk Factors

53

Item 2.   

Unregistered Sales of Equity Securities and Use of Proceeds

53

Item 4.

Submission of Matters to a Vote of Security Holders

54

Item 6.   

Exhibits

54

SIGNATURES

55

2

PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

PAR PHARMACEUTICAL COMPANIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share Data)

(Unaudited)

	June 27,	December 31,
	2009	2008
ASSETS
Current assets:
Cash and cash equivalents	$139,359	$170,629
Available for sale marketable debt and equity securities	62,980	93,097
Accounts receivable, net	261,950	83,408
Inventories	55,072	42,504
Prepaid expenses and other current assets	15,581	20,040
Deferred income tax assets	37,474	53,060
Income taxes receivable	22,257	35,397
Total current assets	594,673	498,135
Property, plant and equipment, at cost less accumulated depreciation and      amortization	79,271	79,439
Available for sale marketable debt and equity securities	1,150	1,949
Intangible assets, net	78,252	35,208
Goodwill	63,729	63,729
Deferred financing costs and other assets	828	1,159
Non-current deferred income tax assets, net	67,211	68,618
Total assets	$885,114	$748,237
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$ -	$130,141
Accounts payable	38,622	22,879
Payables due to distribution agreement partners	177,103	91,451
Accrued salaries and employee benefits	14,550	11,850
Accrued expenses and other current liabilities	37,466	38,352
Total current liabilities	267,741	294,673
Long-term debt, less current portion	120,038	-
Other long-term liabilities	41,259	41,581
Commitments and contingencies	-	-
Stockholders' equity
Common Stock, par value $0.01 per share, authorized 90,000,000 shares;
issued  37,560,564 and 37,392,469 shares	375	374
Additional paid-in capital	325,173	319,976
Retained earnings	199,360	159,470
Accumulated other comprehensive gain	816	122
Treasury stock, at cost 2,792,963 and 2,716,010 shares	(69,648)	(67,959)
Total stockholders' equity	456,076	411,983
Total liabilities and stockholders’ equity	$885,114	$748,237

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

3

PAR PHARMACEUTICAL COMPANIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands, Except Per Share Data)

(Unaudited)

	Three Months Ended		Six Months Ended
	June 27,	June 28,	June 27,	June 28,
	2009	2008	2009	2008
Revenues:
Net product sales	$400,149	$108,289	$600,372	$259,526
Other product related revenues	3,852	4,648	7,664	8,339
Total revenues	404,001	112,937	608,036	267,865
Cost of goods sold	317,593	87,829	457,559	193,236
Gross margin	86,408	25,108	150,477	74,629
Operating expenses:
Research and development	5,937	15,955	13,109	33,113
Selling, general and administrative	44,117	36,690	77,077	68,037
Settlements and loss contingencies, net	61	-	(3,315)	-
Restructuring costs	81	-	1,482	-
Total operating expenses	50,196	52,645	88,353	101,150
Gain on sale of product rights and other	265	500	1,365	2,125
Operating income (loss)	36,477	(27,037)	63,489	(24,396)
Gain on bargain purchase	3,021	-	3,021	-
Gain on extinguishment of senior subordinated     convertible notes	504	-	749	-
Equity in loss of joint venture	-	(310)	-	(330)
Loss on marketable securities and other investments,     net	-	(433)	(55)	(433)
Interest income	667	2,129	1,824	5,143
Interest expense	(2,595)	(3,544)	(5,162)	(7,054)
Income (loss) from continuing operations before     provision (benefit) for income taxes	38,074	(29,195)	63,866	(27,070)
Provision (benefit) for income taxes	14,087	(8,236)	23,624	(7,495)
Income (loss) from continuing operations	23,987	(20,959)	40,242	(19,575)
Discontinued operations:
Gain from discontinued operations	-	-	-	505
Provision for income taxes	176	268	352	713
Gain (loss) from discontinued operations	(176)	(268)	(352)	(208)
Net income (loss)	$23,811	($21,227)	$39,890	($19,783)
Basic earnings (loss) per share of common stock:
Income (loss) from continuing operations	$0.71	($0.63)	$1.20	($0.59)
Gain (loss) from discontinued operations	0.00	(0.01)	(0.01)	(0.01)
Net income (loss)	$0.71	($0.64)	$1.19	($0.60)
Diluted earnings (loss) per share of common stock:
Income (loss) from continuing operations	$0.71	($0.63)	$1.19	($0.59)
Gain (loss) from discontinued operations	0.00	(0.01)	(0.01)	(0.01)
Net income (loss)	$0.71	($0.64)	$1.18	($0.60)
Weighted average number of common shares      outstanding:
Basic	33,630	33,304	33,616	33,262
Diluted	33,771	33,304	33,772	33,262

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

4

PAR PHARMACEUTICAL COMPANIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

	Six Months Ended
	June 27,	June 28,
	2009	2008
Cash flows from operating activities:
Net income (loss)	$39,890	($19,783)
Deduct: (Loss) gain from discontinued operations, net of tax	(352)	208
Income from continuing operations	40,242	(19,575)
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Deferred income taxes	16,567	(973)
Non-cash interest expense	2,842	3,720
Depreciation and amortization	18,601	11,473
Loss on marketable securities and other investments, net	-	433
Equity in loss of joint venture	-	330
Allowances against accounts receivable	5,523	(47,141)
Share-based compensation expense	7,243	7,152
Loss on disposal of fixed assets	327	162
Gain on extinguishment of senior subordinated convertible notes	(749)	-
Gain on bargain purchase	(3,021)	-
Other	126	(55)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable	(184,986)	50,039
(Increase) decrease in inventories	(10,747)	33,113
Decrease in prepaid expenses and other assets	4,353	2,823
Increase (decrease) in accounts payable, accrued expenses and other liabilities	19,180	(14,894)
Increase in payables due to distribution agreement partners	85,652	8,406
Increase in income taxes receivable/payable	10,983	(4,442)
Net cash provided by operating activities	12,136	30,571
Cash flows from investing activities:
Capital expenditures	(5,656)	(8,656)
Purchases of intangibles	-	(20,000)
Business acquisitions	(55,300)	-
Purchases of available for sale debt securities	(10,000)	(81,710)
Proceeds from maturity and sale of available for sale marketable debt and             equity securities	41,981	56,430
Proceeds from settlement with liquidated fund	-	1,667
Capital contributions to joint venture	-	(728)
Net cash used in investing activities	(28,975)	(52,997)
Net cash provided by investing activities from discontinued operations		505
Cash flows from financing activities:
Proceeds from issuances of common stock upon exercise of stock options	109	304
Proceeds from the issuance of common stock under the Employee Stock             Purchase Program	102	143
Excess tax benefits on exercise of nonqualified stock options	37	197
Purchase of treasury stock	(1,690)	(1,199)
Reductions in principal due to repurchases of senior subordinated convertible notes	(12,989)	-
Net cash used in financing activities	(14,431)	(555)
Net decrease in cash and cash equivalents	(31,270)	(22,476)
Cash and cash equivalents at beginning of period	170,629	200,132
Cash and cash equivalents at end of period	$139,359	$177,656
Supplemental disclosure of cash flow information:
Cash (received) paid during the period for:
Income taxes, net	($4,034)	($2,276)
Interest	$2,107	$2,875
Non-cash transactions:
Capital expenditures incurred but not yet paid	$372	$1,963

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

5

PAR PHARMACEUTICAL COMPANIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 27, 2009

 (Unaudited)

Par Pharmaceutical Companies, Inc. operates primarily through its wholly owned subsidiary, Par Pharmaceutical, Inc. (collectively referred to herein as “Par,” “the Company,” “we,” “our,” or “us”), in two business segments, for the development, manufacture and distribution of generic pharmaceuticals and branded pharmaceuticals in the United States.  In 2007, Par began operating the brand pharmaceutical segment under the name Strativa Pharmaceuticals (“Strativa”).  Marketed products are principally in the solid oral dosage form (tablet, caplet and two-piece hard-shell capsule).  Par also distributes several oral suspension products, nasal spray products, and certain products in the semi-solid form of a cream.   

Note 1 - Basis of Presentation:

The accompanying condensed consolidated financial statements at June 27, 2009 and for the three-month and six-month periods ended June 27, 2009 and June 28, 2008 are unaudited; in the opinion of Par’s management, however, such statements include all adjustments necessary to present fairly the information presented therein.  The condensed consolidated balance sheet at December 31, 2008 was derived from Par’s audited consolidated financial statements included in Par’s 2008 Annual Report on Form 10-K.

Pursuant to accounting requirements of the Securities and Exchange Commission (the “SEC”) applicable to Quarterly Reports on Form 10-Q, the accompanying condensed consolidated financial statements and these Notes do not include all disclosures required by accounting principles generally accepted in the United States (“GAAP”) for audited financial statements.  Accordingly, these statements should be read in conjunction with Par’s 2008 Annual Report on Form 10-K and its Current Report on Form 8-K dated June 19, 2009 that contains updated historical financial statements and financial data included in Par’s 2008 Annual Report on Form 10-K for accounting adjustments related to the adoption of Financial Accounting Standards Board (“FASB”) issued FASB Staff Position No. APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement) (“FSP APB 14-1”).  Results of operations for interim periods are not necessarily indicative of those that may be achieved for full fiscal years.

Note 2 — Change in Accounting Principle and Related Adjustments to Previously Issued Financial Statements:

In May 2008, the FASB issued FSP APB 14-1.  Under the new rules for convertible debt instruments that may be settled entirely or partially in cash upon conversion, an entity should separately account for the liability and equity components of the instrument in a manner that reflects the issuer’s economic interest cost.  Previous guidance provided for accounting of this type of convertible debt instruments entirely as debt. Par’s senior subordinated convertible notes are subject to FSP APB 14-1.  Upon conversion, Par has agreed to satisfy its conversion obligation in cash in an amount equal to the principal amount of the notes converted.  The effect of the new rules for this type of convertible debt instruments is that the equity component would be included in the additional paid-in capital section of stockholders’ equity on Par’s condensed consolidated balance sheet and the value of the equity component would be treated as original issue discount for purposes of accounting for the debt component of the convertible debt instruments.  FSP APB 14-1 was effective as of January 1, 2009, with retrospective application required.  For instruments subject to the scope of FSP APB 14-1, higher interest expense will result through the accretion of the discounted carrying value of the debt instruments to their face amount over their term.  Prior period interest expense will also be higher than previously reported due to retrospective application.  Par estimates that its original $200 million aggregate principal amount of 2.875% senior subordinated convertible notes due 2010 had an approximate initial measurement of a $169 million liability component and a $31 million equity component.  Annual interest expense was retroactively adjusted upward between $5.6 million to $7.0 million for the years 2008, 2007, 2006, and 2005.  

The table below sets forth the effect of the adjustments on the applicable line items within Par’s condensed consolidated statement of operations for the three-month and six-month periods ended June 28, 2008 ($ amounts in thousands):

	Three months ended June 28, 2008
	As previously reported	Adjustments	As adjusted
Interest expense	($1,667)	($1,877)	($3,544)
Loss from continuing operations before benefit for income taxes	($27,318)	($1,877)	($29,195)
Benefit for income taxes	($7,523)	($713)	($8,236)
Loss from continuing operations	($19,795)	($1,164)	($20,959)
Net loss	($20,063)	($1,164)	($21,227)

Basic earnings (loss) per share of common stock:
Loss from continuing operations	($0.59)	($0.04)	($0.63)
Net loss	($0.60)	($0.04)	($0.64)
Diluted earnings (loss) per share of common stock:
Loss from continuing operations	($0.59)	($0.04)	($0.63)
Net loss	($0.60)	($0.04)	($0.64)

 6

	Six months ended June 28, 2008
	As previously reported	Adjustments	As adjusted
Interest expense	($3,334)	($3,720)	($7,054)
Loss from continuing operations before benefit for income taxes	($23,350)	($3,720)	($27,070)
Benefit for income taxes	($6,081)	($1,414)	($7,495)
Loss from continuing operations	($17,269)	($2,306)	($19,575)
Net loss	($17,477)	($2,306)	($19,783)
Basic earnings (loss) per share of common stock:
Loss from continuing operations	($0.52)	($0.07)	($0.59)
Net loss	($0.53)	($0.07)	($0.60)
Diluted earnings (loss) per share of common stock:
Loss from continuing operations	($0.52)	($0.07)	($0.59)
Net loss	($0.53)	($0.07)	($0.60)

The table below sets forth the effect of the adjustments on the applicable line items within Par’s condensed consolidated statements of cash flows for the six-month period ended June 28, 2008 ($ amounts in thousands):

	As previously reported	Adjustments	As adjusted
Cash flows from operating activities:
Net loss	($17,477)	($2,306)	($19,783)
Loss from continuing operations	($17,269)	($2,306)	($19,575)
Adjustments to reconcile net income to net cash provided by    operating activities:
Deferred income taxes	$441	($1,414)	($973)
Non-cash interest expense	-	$3,720	$3,720
Net cash provided by operating activities	$30,571	-	$30,571

Note 3 - Share-Based Compensation:

Par adopted Statement of Financial Accounting Standards No. 123 (Revised 2004), “Share-Based Payment” (“SFAS 123R”), effective January 1, 2006.  SFAS 123R requires companies to recognize compensation expense in the amount equal to the fair value of all share-based payments granted to employees.  Par elected the modified prospective transition method and, therefore, adjustments to prior periods were not required as a result of adopting SFAS 123R.  Under this method, the provisions of SFAS 123R apply to all awards granted after the date of adoption and to any unrecognized expense of non-vested awards at the date of adoption based on the grant date fair value.   Under SFAS 123R, Par recognizes share-based compensation ratably over the service period applicable to the award.  SFAS 123R also amended SFAS No. 95, “Statement of Cash Flows,” to require that excess tax benefits that have been reflected as operating cash flows be reflected as financing cash flows.  In accordance with SFAS 123R, $0.04 million and $0.2 million

7

of excess tax benefits for the six months ended June 27, 2009 and June 28, 2008, have been classified as both an operating cash outflow and financing cash inflow.  

Par grants share-based awards under its various plans, which provide for the granting of non-qualified stock options, restricted stock (including restricted stock with market performance vesting conditions) and restricted stock units to members of our Board of Directors and to our employees.  Stock options, restricted stock and restricted stock units generally vest ratably over four years or sooner and stock options have a maximum term of ten years.   

As of June 27, 2009, there were approximately 4.6 million shares of common stock available for future stock option grants.  Par issues new shares of common stock when stock option awards are exercised.  Stock option awards outstanding under our current plans were granted at exercise prices that were equal to the market value of Par’s common stock on the date of grant.  At June 27, 2009, approximately 0.8 million shares remain available under such plans for restricted stock (including restricted stock with market conditions described below) and restricted stock unit grants.

Stock Options

Par uses the Black-Scholes stock option pricing model to estimate the fair value of stock option awards with the following weighted average assumptions:

	For the three	For the three	For the six	For the six
	months ended	months ended	months ended	months ended
	June 27,	June 28,	June 27,	June 28,
	2009	2008	2009	2008
Risk-free interest rate	2.3%	-	1.9%	3.0%
Expected life (in years)	6.3	-	6.3	6.3
Expected Volatility	45.9%	-	43.9%	48.5%
Dividend	0%	-	0%	0%

The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable.  Par compiled historical data on an employee-by-employee basis from the grant date through the settlement date.  The results of analyzing the historical data showed that there were three distinct populations of optionees, the Executive Officers Group, the Outside Directors Group, and the All Others Group.  The expected life of options represents the period of time that the options are expected to be outstanding and is based generally on historical trends.  However, because none of Par’s existing options have reached their full 10-year term, and also because the majority of such options granted are out-of-the-money and the expected life of out-of-the-money options is uncertain, we opted to use the “simplified” method for “plain vanilla” options described in Staff Accounting Bulletin 107.  The “simplified method” calculation is the average of the vesting term plus the original contractual term divided by 2.  Par will revisit this assumption at least annually or sooner if circumstances warrant.  The risk-free rate is based on the yield on the Federal Reserve treasury rate with a maturity date corresponding to the expected term of the option granted.  The expected volatility assumption is based on the historical volatility of Par’s common stock over a term equal to the expected term of the option granted.  SFAS 123R also requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.  It is assumed that no dividends will be paid during the entire term of the options.  All option valuation models require input of highly subjective assumptions.  Because Par's employee stock options have characteristics significantly different from those of traded options, and because changes in subjective input assumptions can materially affect the fair value estimate, the actual value realized at the time the options are exercised may differ from the estimated values computed above.  The weighted average per share fair value of options granted in the three month period ended June 27, 2009 was $5.40.  The Company did not grant any options in the three month period ended June 28, 2008.  The weighted average per share fair value of options granted in the six month periods ended June 27, 2009 and June 28, 2008 were $5.82 and $9.92.

Set forth below is the impact on Par’s results of operations of recording share-based compensation from its stock options for the three-month and six-month periods ended June 27, 2009 and June 28, 2008 ($ amounts in thousands):

	For the three months ended		For the six months ended
	June 27,	June 28,	June 27,	June 28,
	2009	2008	2009	2008
Cost of goods sold	$119	$76	$244	$138
Research and development	-	190	-	346
Selling, general and administrative	1,068	686	2,194	1,246
Total, pre-tax	$1,187	$952	$2,438	$1,730
Tax effect of share-based compensation	(451)	(362)	(926)	(658)
Total, net of tax	$736	$590	$1,512	$1,072

8

The following is a summary of Par’s stock option activity (shares and aggregate intrinsic value in thousands):

	Shares	Weighted Average Exercise Price	Weighted Average Remaining Life	Aggregate Intrinsic Value
Balance at December 31, 2008	4,065	$31.88
Granted	1,207	12.90
Exercised	(16)	6.86
Forfeited	(697)	38.44
Balance at June 27, 2009	4,559	$25.95	6.1	$4,057
Exercisable at June 27, 2009	2,617	$34.78	4.0	$620
Vested and expected to vest at June 27,      2009	4,434	$26.26	5.1	$3,848

The total fair value of shares vested during the three-month period ended June 27, 2009 was $0.5 million and $0.8 million for the three-month period ended June 28, 2008.  The total fair value of shares vested during the six-month period ended June 27, 2009 was $2.5 million and $6.0 million for the six-month period ended June 28, 2008.  As of June 27, 2009, the total compensation cost related to all non-vested stock options granted to employees but not yet recognized was approximately $10.6 million, net of estimated forfeitures.  This cost will be amortized on a straight-line basis over the remaining weighted average vesting period of 3.0 years.   

Restricted Stock/Restricted Stock Units

Outstanding restricted stock and restricted stock units generally vest ratably over four years.  The related share-based compensation expense is recorded over the requisite service period, which is the vesting period.  The fair value of restricted stock is based on the market value of Par’s common stock on the date of grant.  

The impact on Par’s results of operations of recording share-based compensation from restricted stock for the three-month and six-month periods ended June 27, 2009 and June 28, 2008 was as follows ($ amounts in thousands):

	For the three months ended		For the six months ended
	June 27,	June 28,	June 27,	June 28,
	2009	2008	2009	2008
Cost of goods sold	$207	$160	$388	$324
Research and development	-	399	-	809
Selling, general and administrative	1,858	1,435	3,487	2,910
Total, pre-tax	$2,065	$1,994	$3,875	$4,043
Tax effect of stock-based compensation	(785)	(758)	(1,473)	(1,537)
Total, net of tax	$1,280	$1,236	$2,402	$2,506

The following is a summary of Par’s restricted stock activity (shares and aggregate intrinsic value in thousands):

	Shares	Weighted Average Grant Price	Aggregate Intrinsic Value
Non-vested balance at December 31, 2008	864	$20.84
Granted	216	13.00
Vested	(181)	27.12
Forfeited	(69)	18.06
Non-vested balance at June 27, 2009	830	$17.65	$12,080

9

The following is a summary of Par’s restricted stock unit activity (shares and aggregate intrinsic value in thousands):

	Shares	Weighted Average Grant Price	Aggregate Intrinsic Value
Unvested restricted stock unit balance at December 31, 2008	106	$23.72
Granted	64	12.83
Vested and shares issued	(58)	21.22
Forfeited	-	-
Unvested restricted stock unit balance at June 27, 2009	112	$18.83	$1,633
Vested awards not issued	110	$24.17	$1,608
Total restricted stock unit balance at June 27, 2009	222	$21.47	$3,241

As of June 27, 2009, the total compensation cost related to all non-vested restricted stock and restricted stock units (excluding restricted stock grants with market conditions described below) granted to employees but not yet recognized was approximately $12.8 million, net of estimated forfeitures; this cost will be amortized on a straight-line basis over the remaining weighted average vesting period of approximately 2.2 years.  

Restricted Stock Grants With Market Performance Vesting Conditions

In 2008, Par issued restricted stock grants with market performance vesting conditions.  The vesting of restricted stock grants issued to certain employees of Par is contingent upon multiple market conditions that are factored into the fair value of the restricted stock at grant date with cliff vesting after three years if the market conditions have been met.  Vesting will occur if the applicable continued employment condition is satisfied and the Total Stockholder Return (“TSR”) on Par’s common stock exceeds a minimum TSR relative to Par’s stock price at the beginning of the three-year vesting period, the TSR meets or exceeds the median of a defined peer group of approximately 15 companies, and/or the TSR exceeds the Standard and Poor’s 400 Mid Cap Index (“S&P 400”) over the three-year measurement period beginning on January 1 in the year of grant and ending after three years on December 31.  A maximum number of 466 thousand shares of common stock could be issued after the three-year vesting period depending on the achievement of the TSR goals.  No shares of common stock will be issued if Par’s TSR is below 6% annualized return over the three-year vesting period, except by operation of the provisions of approximately 5 employment contracts for senior executives under specific termination conditions.  Any shares earned will be distributed after the end of the three-year period, except by operation of the provisions of approximately 5 employment contracts under specific termination conditions.  In all circumstances, restricted stock granted does not entitle the holder the right, or obligate Par, to settle the restricted stock in cash.  

        The effect of the market conditions on the restricted stock issued to certain employees of Par is reflected in the fair value on the grant date.  The restricted stock grants with market conditions were valued using a Monte Carlo simulation.  The Monte Carlo simulation estimates the fair value based on the expected term of the award, risk-free interest rate, expected dividends, and the expected volatility for Par, its peer group, and the S&P 400.  The expected term was estimated based on the vesting period of the awards (3 years), the risk-free interest was based on the yield on the Federal Reserve treasury rate with a maturity matching the vesting period (2.6%).  The expected dividends were assumed to be zero.  Volatility was based on historical volatility over the expected term (40%).  Restricted stock that included multiple market conditions had a grant date fair value per restricted share of $24.78.  

        The following table summarizes the components of Par’s stock-based compensation related to its restricted stock grants with market conditions recognized in our financial statements for the three-month and six-month periods ended June 27, 2009 and June 28, 2008 ($ amounts in thousands):

	For the three months ended		For the six months ended
	June 27,	June 28,	June 27,	June 28,
	2009	2008	2009	2008
Cost of goods sold	$46	$59	$93	$110
Research and development	-	149	-	276
Selling, general and administrative	410	535	836	993
Total, pre-tax	$456	$743	$929	$1,379
Tax effect of stock-based compensation	(173)	(282)	(353)	(524)
Total, net of tax	$283	$461	$576	$855

10

         As of June 27, 2009, $2.8 million of total unrecognized compensation cost, net of estimated forfeitures, related to restricted stock grants with market conditions, is expected to be recognized over a weighted average period of approximately 1.5 years.

The following is a summary of Par’s restricted stock grants with market conditions activity (shares and aggregate intrinsic value in thousands):

	Shares	Weighted Average Grant Date Fair Value Per Share	Aggregate Intrinsic Value
Non-vested balance at December 31, 2008	290	$24.78
Granted	-	-
Vested	-	-
Forfeited	(29)	24.78
Non-vested balance at June 27, 2009	261	$24.78	$3,803

Employee Stock Purchase Program:

Par maintains an Employee Stock Purchase Program (the “Program”).  The Program is designed to qualify as an employee stock purchase plan under Section 423 of the Internal Revenue Code of 1986, as amended.  It enables eligible employees to purchase shares of Par’s common stock at a 5% discount to the fair market value.  An aggregate of 1,000,000 shares of common stock has been reserved for sale to employees under the Program.  Employees purchased 3,000 shares during the three-month period ended June 27, 2009 and 4,000 shares during the three-month period ended June 28, 2008.  Employees purchased 9,000 shares during the six-month period ended June 27, 2009 and 8,000 shares during the six-month period ended June 28, 2008.  

Note 4 - Available for Sale Marketable Debt and Equity Securities:

At June 27, 2009 and December 31, 2008, all of Par’s investments in marketable debt and equity securities were classified as available for sale and, as a result, were reported at their estimated fair values on the condensed consolidated balance sheets.  Refer to Note 5 - “Fair Value Measurements.”  The following is a summary of amortized cost and estimated fair value of Par’s marketable debt and equity securities available for sale at June 27, 2009 ($ amounts in thousands):

				Estimated
		Unrealized		Fair
	Cost	Gain	(Loss)	Value
Securities issued by government agencies	$16,300	$137	$ -	$16,437
Debt securities issued by various state and     local municipalities and agencies	27,906	172	-	28,078
Other debt securities	18,231	268	(34)	18,465
Available for sale marketable debt securities	62,437	577	(34)	62,980
Marketable equity securities available for sale    Hana Biosciences, Inc.	375	775	-	1,150
Total	$62,812	$1,352	($34)	$64,130

Of the $0.03 million of unrealized loss as of June 27, 2009, $0.03 million has been in an unrealized loss position for greater than one year.  Par believes that these losses are not other-than-temporary as it has no intent to sell the debt securities with unrealized losses and it is not more likely than not that Par will be required to sell any debt securities with unrealized losses.  All available for sale debt securities are classified as current on Par’s condensed consolidated balance sheet as of June 27, 2009.

Par sold its investment in a debt security issued by Ford Motor Credit Company for approximately $1.6 million during the first quarter of 2009.  Par recorded a pre-tax gain of $0.3 million in the condensed consolidated statement of operations.  This item was included in Loss on marketable securities and other investments, net on the condensed consolidated statement of operations.  

11

Par recorded a loss of $0.2 million in the condensed consolidated statement of operations during the first quarter of 2009, which represented an other-than-temporary impairment of Par’s investment in Hana Biosciences, Inc. (“Hana”), triggered by the severity of the loss and the duration of the period that the investment has been in a loss position.  This item was included in Loss on marketable securities and other investments, net on the condensed consolidated statement of operations.  Par classified its investment in Hana (at the revised cost of $0.4 million) as a non-current asset on its condensed consolidated balance sheet.  During the three months ended June 27, 2009, Par has recorded a $0.8 million unre alized gain through equity on the condensed consolidated balance sheet as of June 27, 2009.  As of June 27, 2009 the total amount of unrealized gain which is reflected as part of stockholder’s equity totaled $0.8 million .

The following is a summary of amortized cost and estimated fair value of Par’s investments in debt and marketable equity securities available for sale at December 31, 2008 ($ amounts in thousands):

				Estimated
		Unrealized		Fair
	Cost	Gain	(Loss)	Value
Securities issued by government agencies	$41,241	$300	$ -	$41,541
Debt securities issued by various state and      local municipalities and agencies	28,309	276	-	28,585
Other debt securities	24,698	-	(378)	24,320
Available for sale marketable debt securities	94,248	576	(378)	94,446
Marketable equity securities available for sale    Hana Biosciences, Inc.	600	-	-	600
Total	$94,848	$576	($378)	$95,046

 The following is a summary of the contractual maturities of Par’s available for sale debt securities at June 27, 2009 ($ amounts in thousands):

	June 27, 2009
		Estimated Fair
	Cost	Value
Less than one year	$31,587	$31,806
Due between 1-2 years	27,876	28,180
Due between 2-5 years	2,974	2,994
Total	$62,437	$62,980

Note 5 – Fair Value Measurements:

As described in Note 20 “Recent Accounting Pronouncements,” Par adopted SFAS 157 with respect to financial assets and liabilities as of January 1, 2008.  SFAS 157 defines fair value as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  SFAS 157 requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:

Level 1: Quoted market prices in active markets for identical assets and liabilities.  Active market means a market in which transactions for assets or liabilities occur with “sufficient frequency” and volume to provide pricing information on an ongoing unadjusted basis.  Our Level 1 assets include Par’s investment in Hana Biosciences, Inc. that is traded in an active exchange market.  

Level 2:  Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Par’s Level 2 assets primarily include debt securities including governmental agency and municipal securities, and corporate bonds with quoted prices that are traded less frequently than exchange-traded instruments.  All of Par’s Level 2 asset values are determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data.  The pricing model information is provided by third party entities (e.g., banks or brokers).  In some instances, these third party entities engage external pricing services to estimate

12

the fair value of these securities.  Par has a general understanding of the methodologies employed by the pricing services in their pricing models.  Par corroborates the estimates of non-binding quotes from the third party entities’ pricing services to an independent source that provides quoted market prices from broker or dealer quotations.  Large differences, if any, are investigated by Par.  Based on historical differences, Par has not been required to adjust quotes provided by the third party entities’ pricing services used in estimating the fair value of these securities.  

Level 3: Unobservable inputs that are not corroborated by market data.

The fair value of Par’s financial assets and liabilities measured at fair value on a recurring basis were as follows ($ amounts in thousands):

	Estimated Fair Value at June 27, 2009	Level 1	Level 2	Level 3
Securities issued by government agencies       (Note 4)	$16,437	$ -	$16,437	$ -
Debt securities issued by various state and local     municipalities and agencies (Note 4)	28,078	-	28,078	-
Other debt securities (Note 4)	18,465	-	18,465	-
Marketable equity securities available for sale Hana     Biosciences, Inc. (Note 4)	1,150	1,150	-	-
Total investments in debt and marketable equity     securities	$64,130	$1,150	$62,980	$ -

Note 6 - Accounts Receivable:

Par recognizes revenue for product sales when title and risk of loss have transferred to its customers, when reliable estimates of rebates, chargebacks, returns and other adjustments can be made, and when collectability is reasonably assured. This is generally at the time that products are received by the customers.  Upon recognizing revenue from a sale, Par records estimates for chargebacks, rebates and incentive programs, product returns, cash discounts and other sales reserves that reduce accounts receivable.

The following tables summarize the impact of accounts receivable reserves and allowance for doubtful accounts on the gross trade accounts receivable balances at each balance sheet date ($ amounts in thousands):

	June 27,	December 31,
	2009	2008
Gross trade accounts receivable	$379,647	$194,661
Chargebacks	(23,608)	(32,738)
Rebates and incentive programs	(35,102)	(27,110)
Returns	(39,196)	(38,128)
Cash discounts and other	(19,790)	(13,273)
Allowance for doubtful accounts	(1)	(4)
Accounts receivable, net	$261,950	$83,408

Allowance for doubtful accounts	For the six-month period ended
	June 27,	June 28,
	2009	2008
Balance at beginning of period	($4)	($20)
Additions – charge to expense	-	-
Adjustments and/or deductions	3	1
Balance at end of period	($1)	($19)

13

The following tables summarize the activity for the six months ended June 27, 2009 and the six months ended June 28, 2008,  in the accounts affected by the estimated provisions described below ($ amounts in thousands):

	For the Six Month Period Ended June 27, 2009
Accounts receivable reserves	Beginning balance	Provision recorded for current period sales	(Provision) reversal recorded for prior period sales		Credits processed	Ending balance
Chargebacks	($32,738)	($81,289)	($435)	(1)	$90,854	($23,608)
Rebates and incentive programs	(27,110)	(53,382)	157		45,233	(35,102)
Returns	(38,128)	(14,482)	(812)		14,226	(39,196)
Cash discounts and other	(13,273)	(30,161)	-		23,644	(19,790)
Total	($111,249)	($179,314)	($1,090)		$173,957	($117,696)
Accrued liabilities (2)	($21,912)	($12,133)	$803		$9,183	($24,059)

	For the Six Month Period Ended June 28, 2008
Accounts receivable reserves	Beginning balance	Provision recorded for current period sales	(Provision) reversal recorded for prior period sales		Credits processed	Ending balance
Chargebacks	($46,006)	($198,996)	($539)	(1)	$214,412	($31,129)
Rebates and incentive programs	(42,859)	(42,513)	(1,571)	(3)	63,129	(23,814)
Returns	(47,102)	(8,323)	4,293	(4)	12,234	(38,898)
Cash discounts and other	(16,158)	(23,777)	349		28,442	(11,144)
Total	($152,125)	($273,609)	$2,532		$318,217	($104,985)
Accrued liabilities (2)	($17,684)	($13,966)	($192)		$8,183	($23,659)

(1)

Unless specific in nature, the amount of provision or reversal of reserves related to prior periods for chargebacks is not determinable on a product or customer specific basis; however, based upon historical analysis and analysis of activity in subsequent periods, Par has determined that its chargeback estimates remain reasonable.

(2)

Includes amounts due to customers for which no underlying accounts receivable exists and is principally comprised of Medicaid rebates and rebates due under other U.S. Government pricing programs.  

(3)

The changes in accounts receivable reserves recorded for prior period sales related to rebates and incentives programs are principally comprised of the finalization of contract negotiations with a certain customer that resulted in an adjustment of ($2.3) million to our rebates and incentive programs for sales made to that customer in the fourth quarter of 2007.  With the exception of the foregoing factor, there were no other factors that were deemed to be material individually or in the aggregate.  

(4)

The changes in accounts receivable reserves recorded for prior period sales related to returns principally comprised of the successful resolution in the six-month period ended June 28, 2008 of a customer dispute over invalid customer deductions taken in prior periods of $1.5 million, and an update to management’s prior period returns estimates of $2.8 million relating to the loss of a customer for certain products and new returns information that became available during the six-month period ended June 28, 2008.

Par sells its products directly to wholesalers, retail drug store chains, drug distributors, mail order pharmacies and other direct purchasers and customers that purchase its products indirectly through the wholesalers, including independent pharmacies, non-warehousing retail drug store chains, managed health care providers and other indirect purchasers.  Par has entered into agreements at negotiated contract prices with those health care providers that purchase products through Par’s wholesale customers at those contract prices.  Chargeback credits are issued to wholesalers for the difference between Par’s invoice price to the wholesaler and the contract price through which the product is resold to health care providers.  Approximately 44% of our net product sales were derived from the wholesale distribution channel for the three months ended June 27, 2009 and 68% for the three months ended June 28, 2008.  The information that Par considers when establishing its chargeback reserves includes contract and non-contract sales trends, average historical contract pricing, actual price changes, processing time lags and customer inventory information from its three largest

14

wholesale customers.  Par’s chargeback provision and related reserve vary with changes in product mix, changes in customer pricing and changes to estimated wholesaler inventory.  

Customer rebates and incentive programs are generally provided to customers as an incentive for the customers to continue carrying Par’s products or replace competing products in their distribution channels with products sold by Par.  Rebate programs are based on a customer’s dollar purchases made during an applicable monthly, quarterly or annual period.  Par also provides indirect rebates, which are rebates paid to indirect customers that have purchased Par’s products from a wholesaler under a contract with Par.  The incentive programs include stocking or trade show promotions where additional discounts may be given on a new product or certain existing products as an added incentive to stock Par’s products.  Par may, from time to time, also provide price and/or volume incentives on new products that have multiple competitors and/or on existing products that confront new competition in order to attempt to secure or maintain a certain market share.  The information that Par considers when establishing its rebate and incentive program reserves are rebate agreements with and purchases by each customer, tracking and analysis of promotional offers, projected annual sales for customers with annual incentive programs, actual rebates and incentive payments made, processing time lags, and for indirect rebates, the level of inventory in the distribution channel that will be subject to indirect rebates.  Par does not provide incentives designed to increase shipments to its customers that it believes would result in out-of-the ordinary course of business inventory for them.  Par regularly reviews and monitors estimated or actual customer inventory information at its three largest wholesale customers for its key products to ascertain whether customer inventories are in excess of ordinary course of business levels.

Pursuant to a drug rebate agreement with the Centers for Medicare and Medicaid Services, TriCare and similar supplemental agreements with various states, Par provides a rebate on drugs dispensed under such government programs.  Par determines its estimate of the Medicaid rebate accrual primarily based on historical experience of claims submitted by the various states and any new information regarding changes in the Medicaid program that might impact Par’s provision for Medicaid rebates.  In determining the appropriate accrual amount Par considers historical payment rates; processing lag for outstanding claims and payments; and levels of inventory in the distribution channel.  Par reviews the accrual and assumptions on a quarterly basis against actual claims data to help ensure that the estimates made are reliable.  On January 28, 2008, the Fiscal Year 2008 National Defense Authorization Act was enacted, which expands TriCare to include prescription drugs dispensed by TriCare retail network pharmacies.  TriCare rebate accruals reflect this program expansion and are based on actual and estimated rebates on Department of Defense eligible sales.

Par accepts returns of product according to the following criteria: (i) the product returns must be approved by authorized personnel with the lot number and expiration date accompanying any request and (ii) Par generally will accept returns of products from any customer and will provide the customer with a credit memo for such returns if such products are returned within six months prior to, and until 12 months following, such products’ expiration date. Par records a provision for product returns based on historical experience, including actual rate of expired and damaged in-transit returns, average remaining shelf-lives of products sold, which generally range from 12 to 48 months, and estimated return dates.  Additionally, Par considers other factors when estimating its current period return provision, including levels of inventory in the distribution channel, significant market changes that may impact future expected returns, and actual product returns, and may record additional provisions for specific returns that it believes are not covered by the historical rates.

Par offers cash discounts to its customers, generally 2% of the sales price, as an incentive for paying within invoice terms, which generally range from 30 to 90 days.  Par accounts for cash discounts by reducing accounts receivable by the full amount of the discounts that Par expects its customers to take.  In addition to the significant gross-to-net sales adjustments described above, Par periodically makes other sales adjustments.  Par generally accounts for these other gross-to-net adjustments by establishing an accrual in the amount equal to its estimate of the adjustments attributable to the sale.

Par may at its discretion provide price adjustments due to various competitive factors, through shelf-stock adjustments on customers’ existing inventory levels.  There are circumstances under which Par may not provide price adjustments to certain customers as a matter of business strategy, and consequently may lose future sales volume to competitors and risk a greater level of sales returns on products that remain in the customer’s existing inventory.

As detailed above, Par has the experience and access to relevant information that it believes are necessary to reasonably estimate the amounts of such deductions from gross revenues.  Some of the assumptions used by Par for certain of its estimates are based on information received from third parties, such as wholesale customer inventories and market data, or other market factors beyond Par’s control.  The estimates that are most critical to the establishment of these reserves, and therefore, would have the largest impact if these estimates were not accurate, are estimates related to contract sales volumes, average contract pricing, customer inventories and return volumes.  Par regularly reviews the information related to these estimates and adjusts its reserves accordingly, if and when actual experience differs from previous estimates.  With the exception of the product returns allowance, the ending balances of accounts receivable reserves and allowances generally are processed during a two-month to four-month period.

Use of Estimates in Reserves

Par believes that its reserves, allowances and accruals for items that are deducted from gross revenues are reasonable and appropriate based on current facts and circumstances.  It is possible, however, that other parties applying reasonable judgment to the same facts and circumstances could develop different allowance and accrual amounts for items that are deducted from gross revenues.

15

Additionally, changes in actual experience or changes in other qualitative factors could cause Par’s allowances and accruals to fluctuate, particularly with newly launched or acquired products.  Par reviews the rates and amounts in its allowance and accrual estimates on a quarterly basis. If future rates and amounts are significantly greater than those reflected in its recorded reserves, the resulting adjustments to those reserves would decrease Par’s reported net revenues; conversely, if actual product returns, rebates and chargebacks are significantly less than those reflected in its recorded reserves, then the resulting adjustments to those reserves would increase its reported net revenues. If Par were to change its assumptions and estimates, its reserves would change, which would impact the net revenues that Par reports.  Par regularly reviews the information related to these estimates and adjusts its reserves accordingly, if and when actual experience differs from previous estimates.  

Major Customers – Gross Accounts Receivable

	June 27,	December 31,
	2009	2008
McKesson Corporation	21%	36%
CVS Caremark	16%	5%
AmerisourceBergen Corporation	14%	17%
Walgreen Corporation	10%	4%
Other customers	39%	38%
Total gross accounts receivable	100%	100%

During the six months ended June 27, 2009, Par shipped a greater percentage of metoprolol as compared to prior periods directly to retail customers such as CVS and Walgreens to help alleviate supply issues in the market.

Note 7 - Inventories:

($ amounts in thousands)

	June 27,	December 31,
	2009	2008
Raw materials and supplies	$16,348	$13,760
Work-in-process	3,338	4,495
Finished goods	35,386	24,249
	$55,072	$42,504

Inventory write-offs (inclusive of pre-launch inventories detailed below) were $2.2 million for the quarter ended June 27, 2009 and $1.8 million for the quarter ended June 28, 2008.  Inventory write-offs were $4.7 million for the year-to-date period ended June 27, 2009 and $4.9 million for the year-to-date period ended June 28, 2008.

Par capitalizes inventory costs associated with certain products prior to regulatory approval and product launch, based on management's judgment of reasonably certain future commercial use and net realizable value, when it is reasonably certain that the pre-launch inventories will be saleable.  The determination to capitalize is made once Par (or its third party development partners) has filed an Abbreviated New Drug Application (“ANDA”) that has been acknowledged by the FDA for containing sufficient information to allow the FDA to conduct their review in an efficient and timely manner and management is reasonably certain that all regulatory and legal hurdles will be cleared.  This determination is based on the particular facts and circumstances relating to the expected FDA approval of the generic drug product being considered, and accordingly, the time frame within which the determination is made varies from product to product.  Par could be required to write down previously capitalized costs related to pre-launch inventories upon a change in such judgment, or due to a denial or delay of approval by regulatory bodies, or a delay in commercialization, or other potential factors.  As of June 27, 2009, Par had approximately $1.5 million in inventories related to products that were not yet available to be sold.      

The amounts in the table below are also included in the total inventory balances presented above.

Pre-Launch Inventories

($ amounts in thousands)

	June 27,	December 31,
	2009	2008
Raw materials and supplies	$1,529	$577
Work-in-process	-	542
Finished goods	-	474
	$1,529	$1,593

16

Pre-launch inventories at December 31, 2008 were mainly comprised of specific in-house developed products.  Since that time, Par maintained the levels of non-commercial inventory flat by launching new products during the first half of 2009 and replenishing raw materials of anticipated future launches.  Write-offs of pre-launch inventories, net of partner allocation, were $0 for the quarter ended June 27, 2009 and $1.0 million for the quarter ended June 28, 2008.  Write-offs of pre-launch inventories, net of partner allocation, were $0.4 million for the year-to-date period ended June 27, 2009 and $2.0 million for the year-to-date period ended June 28, 2008.

Note 8 – Property, Plant and Equipment, net:

($ amounts in thousands)

	June 27,	December 31,
	2009	2008
Land	$1,882	$1,882
Buildings	25,581	25,571
Machinery and equipment	47,629	44,027
Office equipment, furniture and fixtures	4,841	4,774
Computer software and hardware	43,687	29,179
Leasehold improvements	11,911	11,548
Construction in progress	4,016	16,462
	139,547	133,443
Less accumulated depreciation and amortization	60,276	54,004
	$79,271	$79,439

Depreciation and amortization expense related to property, plant and equipment was $3.0 million and $3.1 million for the three months ended June 27, 2009 and June 28, 2008.   Depreciation and amortization expense related to property, plant and equipment was $5.5 million and $6.9 million for the six months ended June 27, 2009 and June 28, 2008.  

Note 9 - Intangible Assets, net:

($ amounts in thousands)

	June 27,	December 31,
	2009	2008
QOL Medical, LLC Asset Purchase Agreement, net of accumulated amortization of            $1,140	$53,581	$ -
Spectrum Development and Marketing Agreement, net of accumulated amortization            of  $16,215 and $6,839	8,785	18,161
Trademark licensed from Bristol-Myers Squibb Company, net of accumulated            amortization of $4,549 and $3,850	5,452	6,151
Paddock Licensing Agreement, net of accumulated amortization of $2,750 and $2,250	3,250	3,750
Genpharm, Inc. Distribution Agreement, net of accumulated amortization of $7,943            and $7,582	2,890	3,251
SVC Pharma LP License and Distribution Agreement, net of accumulated           amortization of $1,555 and $1,106	2,129	2,578
MDRNA, Inc. Asset Purchase Agreement, net of accumulated amortization of $0	1,400	-
FSC Laboratories Agreement, net of accumulated amortization of $5,068 and $4,816	754	1,006
Other intangible assets, net of accumulated amortization of $5,237 and $5,216	11	32
Bristol-Myers Squibb Company Asset Purchase Agreement, net of accumulated         amortization of $11,699 and $11,420	-	279
	$78,252	$35,208

Par recorded amortization expense related to intangible assets of $13.1 million for the six-month period ended June 27, 2009 and $4.5 million for the six-month period ended June 28, 2008, and the majority of this amortization expense is included in cost of goods sold.

During the three-month period ended June 27, 2009, the Company acquired the rights to Nascobal^® Nasal Spray from QOL

17

Medical, LLC for $54.5 million in cash and the assumption of certain liabilities. The purchase price of the acquisition has been allocated to the net tangible and intangible assets acquired on the basis of estimated fair values.  The Company allocated the purchase price based on input from third party appraisals. The fair value of the product rights received is being amortized on a straight-line basis over twelve years. Refer to “Nascobal^®” in Note 19, “Acquisitions.”

During the three-month period ended June 27, 2009, the Company acquired additional rights to calcitonin, a generic drug, from MDRNA, Inc., mainly in order to facilitate the acquisition of the rights to Nascobal^® Nasal Spray.  The purchase price of the acquisition has been allocated to the net tangible and intangible assets acquired on the basis of estimated fair values.  The Company allocated the purchase price based on input from third party appraisals.  This asset has a fair market value of $1.4 million and will be amortized over its estimated useful life of 2 years.  Refer to “MDRNA, Inc.” in Note 19, “Acquisitions.”

Amortization expense related to the intangible assets currently being amortized is expected to total approximately $9.2 million for the remainder of 2009, $12.4 million in 2010, $11.0 million in 2011, $7.4 million in 2012, $5.2 million in 2013, and $33.1 million thereafter.  

Par evaluates all intangible assets for impairment quarterly or whenever events or other changes in circumstances indicate that the carrying value of an asset may no longer be recoverable.  As of June 27, 2009, Par believes its net intangible assets are recoverable.  

Note 10 - Income Taxes:

Par reflects interest and penalties attributable to income taxes, to the extent they arise, as a component of its income tax provision or benefit.  

The IRS is currently examining Par’s 2003-2007 federal income tax returns.  Prior periods have either been audited or are no longer subject to IRS audit.  Par is currently under audit by two state jurisdictions for the years 2003-2005.  In most other state jurisdictions, Par is no longer subject to examination by tax authorities for years prior to 2004.

Current deferred income tax assets at June 27, 2009 consisted of temporary differences primarily related to accounts receivable reserves.  Current deferred income tax assets at December 31, 2008 consisted of temporary differences primarily related to accounts receivable reserves and accrued expenses.  Non-current deferred income tax assets at June 27, 2009 and December 31, 2008 consisted of the tax benefit related to purchased call options, acquired in-process research and development and timing differences primarily related to intangible assets and stock options.

Par’s effective tax rate for continuing operations for the three months ended June 27, 2009 was 37% and 28% for the three months ended June 28, 2008.  Par’s effective tax rate for continuing operations for the six months ended June 27, 2009 was 37% and 28% for the six months ended June 28, 2008.

Note 11 - Long-Term Debt:

Long-Term Debt

($ amounts in thousands)

	June 27,	December 31,
	2009	2008
Senior subordinated convertible notes	$120,038	$130,141
Less current portion	-	(130,141)
	$120,038	$-

On June 27, 2009, the senior subordinated convertible notes had a face value of $128.2 million and a quoted market value of approximately $122.4 million.  On December 31, 2008, the senior subordinated convertible notes had a face value of $142 million and a quoted market value of approximately $112 million.  The notes bear interest at an annual rate of 2.875%, payable semi-annually on March 30 and September 30 of each year.  The notes are convertible into common stock at an initial conversion price of $88.76 per share, upon the occurrence of certain events.  Upon conversion, Par has agreed to satisfy the conversion obligation in cash in an amount equal to the principal amount of the notes converted.  The notes mature on September 30, 2010, unless earlier converted or repurchased.  Par may not redeem the notes prior to their maturity date.  

See “Legal Proceedings” in Note 14, “Commitments, Contingencies and Other Matters” for discussion involving notices of default and acceleration Par received from the Trustee of Par’s 2.875% senior subordinated convertible notes due 2010 and the related litigation that resulted in Par reflecting the obligations as a current liability as of December 31, 2008.  In June 2009, the lawsuit was

18

dismissed; and as a result Par reflected the obligations as a long-term liability, in accordance with the September 30, 2010 maturity date of the notes, on the condensed consolidated balance sheet as of June 27, 2009.    

In March 2009, Par repurchased senior subordinated convertible notes in the aggregate principal (face) amount of $2.5 million for approximately $2.3 million, including accrued interest.  Par recorded a gain of approximately $0.2 million in the first quarter of 2009 related to this debt extinguishment.  

In June 2009, Par repurchased senior subordinated convertible notes in the aggregate principal amount of $11.3 million for approximately $10.8 million, including accrued interest.  Par recorded a gain of approximately $0.5 million, in the second quarter of 2009 related to this debt extinguishment.  Subsequent to June 27, 2009, Par repurchased additional senior subordinated notes.  Refer to Note 21, “Subsequent Events” for further details.  

See Note 2, “Change in Accounting Principle and Related Adjustments to Previously Issued Financial Statements” for the impact of the adoption of FSP APB 14-1.  

Note 12 - Changes in Stockholders’ Equity:

Changes in Par’s Common Stock, Additional Paid-In Capital and Accumulated Other Comprehensive Income/(Loss) accounts during the six-month period ended June 27, 2009 were as follows:

				Accumulated
			Additional	Other
	Common Stock		Paid-In	Comprehensive
	Shares	Amount	Capital	Income/(Loss)
Balance, December 31, 2008	37,392	$374	$319,976	$122
Unrealized gain on available for sale securities,     net of tax	-	-	-	694
Exercise of stock options	17	-	109	-
Tax benefit from exercise of stock options	-	-	37	-
Tax deficiency related to vesting of restricted     stock	-	-	(1,484)	-
Issuance of common stock under the Employee     Stock Purchase Program	-	-	102	-
Forfeitures of restricted stock	(96)	(1)	1	-
Issuances of restricted stock	248	2	(2)	-
Compensatory arrangements	-	-	7,243	-
Other	-	-	(809)	-
Balance, June 27, 2009	37,561	$375	$325,173	$816

Comprehensive Income (Loss)	Three months ended		Six months ended
	June 27,	June 28,	June 27,	June 28,
	2009	2008	2009	2008
Net income (loss)	$23,811	($21,227)	$39,890	($19,783)
Other comprehensive income (loss):
Unrealized gain on marketable securities, net of tax	724	445	660	127
Less: reclassification adjustment for net losses     included in net income, net of tax	-	-	34	-
Comprehensive income (loss)	$24,535	($20,782)	$40,584	($19,656)

In April 2004, Par’s Board of Directors authorized the repurchase of up to $50.0 million of Par’s common stock.  The repurchases may be made, subject to compliance with applicable securities laws, from time to time in the open market or in privately negotiated transactions.  Shares of common stock acquired through the repurchase program are and will be available for general corporate purposes.  Par had repurchased 849 thousand shares of its common stock for approximately $32.2 million pursuant to the April 2004 authorization.  On September 28, 2007, Par announced that its Board approved an expansion of its share repurchase program allowing for the repurchase of up to $75.0 million of Par’s common stock, inclusive of the $17.8 million remaining from the April 2004 authorization.  Par repurchased 1,643 thousand shares of its common stock for approximately $31.4 million pursuant to the

19

expanded program in 2007.  The authorized amount remaining for stock repurchases under the repurchase program was $43.6 million, as of June 27, 2009.  The repurchase program has no expiration date.

See Note 2, “Change in Accounting Principle and Related Adjustments to Previously Issued Financial Statements” for the impact of the adoption of FSP APB 14-1.  

Note 13 - Earnings Per Share:

The following is a reconciliation of the amounts used to calculate basic and diluted earnings per share:

	Three months ended		Six months ended
	June 27,	June 28,	June 27,	June 28,
	2009	2008	2009	2008
Income (loss) from continuing operations	$23,987	($20,959)	$40,242	($19,575)
Gain from discontinued operations	-	-	-	505
Provision for income taxes	176	268	352	713
Gain (loss) from discontinued operations	(176)	(268)	(352)	(208)
Net income (loss)	$23,811	($21,227)	$39,890	($19,783)
Basic:
Weighted average number of common shares     outstanding	33,630	33,304	33,616	33,262
Income (loss) from continuing operations	$0.71	($0.63)	$1.20	($0.59)
Gain (loss) from discontinued operations	0.00	(0.01)	(0.01)	(0.01)
Net income (loss) per share of common stock	$0.71	($0.64)	$1.19	($0.60)
Assuming dilution:
Weighted average number of common shares     outstanding	33,630	33,304	33,616	33,262
Effect of dilutive securities	141	-	156	-
Weighted average number of common and     common equivalent shares outstanding	33,771	33,304	33,772	33,262
Income (loss) from continuing operations	$0.71	($0.63)	$1.19	($0.59)
Gain (loss) from discontinued operations	0.00	(0.01)	(0.01)	(0.01)
Net income (loss) per share of common     stock	$0.71	($0.64)	$1.18	($0.60)

Outstanding options of 4.0 million as of June 27, 2009 and 4.1 million as of June 28, 2008 were not included in the computation of diluted earnings per share because their exercise prices were greater than the average market price of the common stock during the respective periods and their inclusion would, therefore, have been anti-dilutive.  For the three months and six months ended June 27, 2009, restricted stock grants with market conditions were not included in the calculation of diluted earnings per share because the Total Stockholder Return (“TSR”) on Par’s common stock did not exceed a minimum TSR relative to Par’s stock price at the beginning of the vesting period.  In addition, outstanding warrants sold concurrently with the sale of the senior subordinated convertible notes in September 2003 and issued in conjunction with the acquisition of Kali in June 2004 were not included in the computation of diluted earnings per share as of June 27, 2009 and June 28, 2008.  The warrants related to the notes are exercisable for an aggregate of 1,444 thousand shares of common stock at an exercise price of $105.20 per share and the warrants related to the Kali acquisition are exercisable for an aggregate of 150 thousand shares of common stock at an exercise price of $47.00 per share.

Note 14 - Commitments, Contingencies and Other Matters:

Legal Proceedings

Unless otherwise indicated in the details provided below, Par cannot predict with certainty the outcome or the effects on Par of the litigations described below.  The outcome of these litigations could include substantial damages, the imposition of substantial fines, penalties, and injunctive or administrative remedies, however unless otherwise indicated, Par at this time is not able to estimate the possible loss or range of loss, if any, associated with these legal proceedings.

20

Contractual Matters

On May 3, 2004, Pentech Pharmaceuticals, Inc. (“Pentech”) filed an action against Par in the United States District Court for the Northern District of Illinois.  This action alleged that Par breached its contract with Pentech relating to the supply and marketing of paroxetine (Paxil®) and that Par breached fiduciary duties allegedly owed to Pentech.  On February 9, 2009, following a bench trial, the district court entered a judgment in favor of Pentech and against Par in the amount of $70 million.  Subsequently, on March 5, 2009, in order to avoid any further costs, burdens or distractions of litigation, Par entered into a settlement agreement with Pentech pursuant to which Par paid Pentech an amount of approximately $66 million.  Pursuant to the terms of the agreement, a stipulation dismissing the appeal of judgment and Pentech’s satisfaction of judgment was filed with the District Court.

Corporate Litigation

Par and certain of its former executive officers have been named as defendants in consolidated class action lawsuits filed on behalf of purchasers of common stock of Par between July 23, 2001 and July 5, 2006. The lawsuits followed Par’s July 5, 2006 announcement regarding the restatement of certain of its financial statements and allege that Par and certain members of its then management engaged in violations of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), by issuing false and misleading statements concerning Par’s financial condition and results of operations. The class actions are pending in the United States District Court, District of New Jersey.  On June 24, 2008, the Court dismissed co-lead plaintiffs’ Consolidated Amended Complaint without prejudice with leave to re-file.  On July 24, 2008, co-lead plaintiffs filed a Second Consolidated Amended Complaint. Par and the individual defendants have filed a motion to dismiss.  The motion has been fully briefed but not yet scheduled for argument.  Par and the individual defendants intend to vigorously defend the class action.

On September 1, 2006, Par received a notice of default from the American Stock Transfer & Trust Company, as trustee (the “Trustee”)  of Par’s 2.875% Senior Subordinated Convertible Notes due 2010 (the “Notes”). The Trustee claimed, in essence, that Par’s failure to include financial statements in its Quarterly Report on Form 10-Q for the second quarter of 2006 constituted a default under Section 6.2 of the Indenture, dated as of September 30, 2003 (the “Indenture”), between Par, as issuer, and the Trustee, relating to the Notes.  Under the Indenture, Par is required only to provide the Trustee with copies of its annual and other reports (or copies of such portions of such reports as the SEC may by rules and regulations prescribe) that it is required to file with the SEC pursuant to Section 13 or 15(d) of the Exchange Act within 15 calendar days after it files such annual and other reports with the SEC. Moreover, Par’s Indenture specifically contemplates providing the Trustee with portions of reports. On August 24, 2006 (within 15 days of filing with the SEC), Par provided to the Trustee a copy of its Quarterly Report on Form 10-Q for the second quarter of 2006. Par’s Form 10-Q did not include Par’s financial statements for the second quarter of 2006 and related Management’s Discussion and Analysis due to Par’s work to restate certain of its past financial statements, and, therefore, in accordance with SEC rules, Par filed a Form 12b-25 Notification of Late Filing disclosing the omissions. Par’s Form 12b-25 also was provided to the Trustee on August 24, 2006. Accordingly, Par believes that it complied with the Indenture provision in question.

After Par communicated its position to the Trustee, the Trustee filed a lawsuit, on October 19, 2006, on behalf of the holders of the Notes, in the Supreme Court of the State of New York, County of New York, alleging a breach of the Indenture and of an alleged covenant of good faith and fair dealing. The lawsuit demanded, among other things, that Par pay the holders of the Notes either the principal, any accrued and unpaid interest and additional interest (as such term is defined in the Indenture), if any, or the difference between the fair market value of the Notes on October 2, 2006 and par, whichever the Trustee elects, or in the alternative, damages to be determined at trial, alleged by the Trustee to exceed $30.0 million. Par removed the lawsuit to the U.S. District Court for the Southern District of New York and filed its answer to the complaint in that Court. On January 19, 2007, the Trustee filed a motion for summary judgment. On February 16, 2007, Par filed its response to the Trustee’s motion for summary judgment and cross-moved for summary judgment in its favor.  On June 19, 2009, the U.S. District Court for the Southern District of New York dismissed the lawsuit.  On June 22, 2009, the Court issued its opinion and order denying the Trustee’s motion for summary judgment and granting Par’s cross-motion for summary judgment.  The Court ruled that Par’s actions did not breach the Indenture and dismissed all of the Trustees’ claims.    

Patent Related Matters

On April 28, 2006, CIMA Labs, Inc. (“CIMA”) and Schwarz Pharma, Inc. (“Schwarz Pharma”) filed separate lawsuits against Par in the United States District Court for the District of New Jersey.  CIMA and Schwarz Pharma each have alleged that Par infringed U.S. Patent Nos. 6,024,981 (the “’981 patent”) and 6,221,392 (the “’392 patent”) by submitting a Paragraph IV certification to the FDA for approval of alprazolam orally disintegrating tablets.  CIMA owns the ’981 and ’392 patents and Schwarz Pharma is CIMA’s exclusive licensee.  The two lawsuits were consolidated on January 29, 2007.  In response to the lawsuit, Par has answered and counterclaimed denying CIMA’s and Schwarz Pharma’s infringement allegations, asserting that the ’981 and ’392 patents are not infringed and are invalid and/or unenforceable. All 40 claims in the ’981 patent were rejected in two non-final office actions in a reexamination proceeding at the United States Patent and Trademark Office (“PTO”) on February 24, 2006 and on February 24, 2007.  The ‘392 patent is also the subject of a reexamination proceeding.  As of July 10, 2008, the PTO has rejected with finality all claims pending in both the ‘392 and ‘981 patents.  CIMA has moved to stay this lawsuit pending the outcome of the reexamination proceedings and to consolidate this lawsuit with another lawsuit in the same district involving the same patents (CIMA Labs, Inc. et al.

21

v. Actavis Group hf et al.). Par intends to vigorously defend this lawsuit and pursue its counterclaims.

Par entered into a licensing agreement with developer Paddock Laboratories, Inc. (“Paddock”) to market testosterone 1% gel, a generic version of Unimed Pharmaceuticals, Inc.’s (“Unimed”) product Androgel®.  Pursuant to this agreement, Par is responsible for management of any litigation and payment of all legal fees associated with this product.  The product, if successfully brought to market, would be manufactured by Paddock and marketed by Par.  Paddock has filed an ANDA (that is pending with the FDA) for the testosterone 1% gel product.  As a result of the filing of the ANDA, Unimed and Laboratories Besins Iscovesco (“Besins”), co-assignees of the patent-in-suit, filed a lawsuit against Paddock in the United States District Court for the Northern District of Georgia, alleging patent infringement on August 22, 2003.  Par has an economic interest in the outcome of this litigation by virtue of its licensing agreement with Paddock.  Unimed and Besins sought an injunction to prevent Paddock from manufacturing the generic product.  On September 13, 2006, Par acquired from Paddock all rights to the ANDA for testosterone 1% gel, a generic version of Unimed’s product Androgel® for $6 million.  The lawsuit was resolved by a settlement and license agreement that terminates all on-going litigation and permits Par to launch the generic version of the product no earlier than August 31, 2015 and no later than February 28, 2016, assuring Par’s ability to market a generic version of Androgel® well before the expiration of the patents at issue.  On March 7, 2007, Par was issued a Civil Investigative Demand seeking information and documents in connection with the court-approved settlement in 2006 of the patent infringement case, Unimed v. Paddock, in the U.S. District Court for Northern District of Georgia.  The Bureau of Competition for the Federal Trade Commission (“FTC”) is investigating whether the settlement of the litigation constituted unfair methods of competition in a potential violation of Section 5 of the FTC Act.  On January 30, 2009, the FTC filed a lawsuit against the Company in the U.S. District Court for the District of Central California alleging violations of antitrust laws stemming from Par’s court-approved settlement in the patent litigation.  On February 2, 2009, Meijer Distribution, Inc. filed a class action complaint in the same district court alleging antitrust violations and seeking treble damages. On February 3, 2009, both Rochester Drug Co-Operative, Inc. and Louisiana Wholesale Drug Co., Inc. filed class action complaints in the same district court.  On April 9, 2009, the U.S. District Court for Central California granted Par’s motion to transfer the FTC lawsuit, as well as the three aforementioned class action suits, to the U.S. District Court for Northern Georgia, the jurisdiction in which Par’s original consent judgment relating to the patent litigation settlement entered.  On April 10, 2009, the cases were transferred.  On April 17, 2009 the Fraternal Order of Police, Fort Lauderdale Lodge 31 Insurance Trust Fund filed a class action complaint naming Par in the U.S. District Court for the District of New Jersey and on April 21, 2009 Raymond Scurto on behalf of another class, filed a second class action complaint naming Par in the same court both alleging antitrust violations.  On May 28, 2009, the FTC filed an amended complaint in the United States District Court, Northern District of Georgia, realleging violations of antitrust laws stemming from Par’s court-approved settlement in the patent litigation but dropping its California state claims as well as its first Sherman Act claim.  On June 18, 2009, Rite Aid, Eckerd, and CVS, among others, filed a class action complaint naming Par in the U.S. District Court for the Middle District of Pennsylvania alleging antitrust violations.  On June 29, 2009, Walgreens, among others, filed a class action complaint naming Par in the U.S. District Court for the Middle District of Pennsylvania as well, alleging antitrust violations.  Par believes it has complied with all applicable laws in connection with the court-approved settlement and intends to vigorously defend these actions.

On December 19, 2006, Reliant Pharmaceuticals, Inc. (“Reliant”) filed a lawsuit against Par in the United States District Court for the District of Delaware.  Reliant alleged, in its Complaint, that Par infringed U.S. Patent No. 5,681,588 (the “’588 patent”) by submitting a Paragraph IV certification to the FDA for approval to market generic 325 mg Propafenone HCl SR capsules.  On January 26, 2007, Reliant amended its complaint to add the additional allegation that Par infringed the ‘588 patent by submitting a Paragraph IV certification to the FDA for approval to market generic 225 mg and 425 mg—in addition to the 325 mg—Propafenone HCl SR capsules.  Par has Answered and Counterclaimed denying Reliant’s infringement allegations, and asserting that the ’588 patent is invalid and unenforceable.  On April 17, 2009, a dismissal with prejudice was entered in the case pursuant to a settlement agreement between the parties.  In view of this agreement, Par will enter the market with generic Rythmol SR on January 1, 2011 or earlier depending on certain circumstances.

On May 9, 2007, Purdue Pharma Products L.P. (“Purdue”), Napp Pharmaceutical Group Ltd. (“Napp”), Biovail Laboratories International SRL (“Biovail”), and Ortho-McNeil, Inc. (“Ortho-McNeil”) filed a lawsuit against Par in the United States District Court for the District of Delaware.  The complaint alleges infringement of U.S. Patent No. 6,254,887 (the “’887 patent”) because Par submitted a Paragraph IV certification to the FDA for approval of 200 mg extended release tablets containing tramadol hydrochloride.  On May 30, 2007, Par filed its Answer and Counterclaim to the Complaint seeking a declaration of noninfringement and invalidity of the '887 patent.  A subsequent Complaint was served on July 2, 2007 in the same District Court.  The new Complaint alleges that Par's 100 mg and 200 mg extended release tablets containing tramadol hydrochloride infringe the ‘887 patent.  Par filed its Answer and Counterclaim on July 23, 2007 and will assert all available defenses in addition to seeking a declaration of noninfringement and invalidity of the '887 patent.  On October 24, 2007, plaintiffs filed an amended complaint in the Delaware District Court in view of Par's amendment of its ANDA to include the 300 mg strength of extended release tramadol. On April 22, 2009, Par’s bench trial in U.S. District Court of Delaware concluded and Par filed its post-trial briefs on May 23, 2009 and its replies on June 15, 2009.   Par awaits the court’s decision and intends to defend this action vigorously and pursue its counterclaims against the plaintiffs.

On July 6, 2007, Sanofi-Aventis and Debiopharm, S.A. filed a lawsuit against Par and its development partner, MN Pharmaceuticals ("MN"), in the United States District Court for the District of New Jersey.  The complaint alleges infringement of

22

U.S. Patent Nos. 5,338,874 and 5,716,988 because Par and MN submitted a Paragraph IV certification to the FDA for approval of 50 mg/10 ml, 100 mg/20 ml, and 200 mg/40 ml oxaliplatin by injection.  Par and MN filed their Answer and Counterclaims on October 10, 2007 and an amendment to it on October 22, 2007.  On January 14, 2008, following MN's amendment of its ANDA to include oxaliplatin injectable 5 mg/ml, 40 ml vial, Sanofi-Aventis filed a complaint asserting infringement of the '874 and the '988 patents.  Par and MN filed their Answer and Counterclaim on February 20, 2008.  The court has set an expert discovery deadline of June 9, 2009, with all motions due by June 15, 2009.  On June 18, 2009, the U.S. District Court granted summary judgment of non-infringement to several defendants including Par on the ’874 patent but has not rendered a summary judgment decision regarding the ’988 patent to date.  On June 15, 2009, Par filed motions for summary judgment concerning two additional patents to accompany the Company’s earlier filed summary judgment motions on the ’874 and ’988 patents.  Par and MN intend to defend these actions vigorously and pursue their counterclaims against Sanofi and Debiopharm.

On September 21, 2007, Sanofi-Aventis and Sanofi-Aventis U.S., LLC (“Sanofi-Aventis”) filed a lawsuit against Par and its development partner, Actavis South Atlantic LLC ("Actavis"), in the United States District Court for the District of Delaware.  The complaint alleges infringement of U.S. Patent Nos. 4,661,491 and 6,149,940 because Par and Actavis submitted a Paragraph IV certification to the FDA for approval of 10 mg alfuzosin hydrochloride extended release tablets. Par has filed an Answer to the Complaint and counterclaims that the patents asserted are not infringed and are invalid.  On April 3, 2008, the judge ordered all actions in the case stayed pending the plaintiff’s motion for transfer and consolidation under the rules governing multi-district litigation.  On June 9, 2008, the Multi-District Litigation Panel granted plaintiff’s motion for transfer and consolidation and lifted the stay of litigation.  On December 24, 2008, Par agreed to terminate its collaboration agreement with Actavis and, with it, all obligations and all benefits related to Alfuzosin.  An order for stipulated dismissal of Par from the litigation was entered May 9, 2009.

 On October 1, 2007, Elan Corporation, PLC (“Elan”) filed a lawsuit against Par and its development partner, IntelliPharmaCeutics Corp., and IntelliPharmaCeutics Ltd. ("IPC") in the United States District Court for the District of Delaware.  On October 5, 2007, Celgene Corporation (“Celgene”) and Novartis filed a lawsuit against IPC in the United States District Court for the District of New Jersey.  The Complaint in the Delaware case alleged infringement of U.S. Patent Nos. 6,228,398 and 6,730,325 because Par submitted a Paragraph IV certification to the FDA for approval of 5, 10, 15, and 20 mg dexmethylphenidate hydrochloride extended release capsules.  The original Complaint in the New Jersey case alleged infringement of U.S. Patent Nos. 6,228,398; 6,730,325; 5,908,850; 6,355,656; 6,528,530; 5,837,284; and 6,635,284 because Par and IPC submitted a Paragraph IV certification to the FDA for approval of 5, 10, 15, and 20 mg dexmethylphenidate extended release capsules.  Par and IPC filed an Answer and Counterclaims in both the Delaware case and the New Jersey case.  Elan filed a motion to consolidate the cases on January 2, 2008, and on February 20, 2008, the judge in the Delaware litigation consolidated all four related cases pending in Delaware and entered a scheduling order providing for April 15, 2009 as the deadline for all discovery, June 29, 2009 as the date for a Markman hearing, and August 17, 2009 as the date for a bench trial.  The Delaware court has established a March 5, 2009 deadline for fact discovery and a June 15, 2009 deadline for expert discovery.  A Rule 16 conference was held for the New Jersey litigation on March 4, 2008 setting a deadline of December 12, 2008 for all discovery with a Markman hearing scheduled for June 19, 2009.  The New Jersey court has set a fact discovery deadline of March 1, 2009.  On July 1, 2009, the Delaware district court removed the trial, pre-trial conference, and claim construction hearing from the calendar with discovery due November 6, 2009 and claim construction briefing due November 9, 2009.  Par intends to defend these actions vigorously and pursue its counterclaims against Elan, Celgene and Novartis.

On September 13, 2007, Santarus, Inc. (“Santarus”), and The Curators of the University of Missouri (“Missouri”) filed a lawsuit against Par in the United States District Court for the District of Delaware.  The Complaint alleges infringement of U.S. Patent Nos. 6,699,885; 6,489,346; and 6,645,988 because Par submitted a Paragraph IV certification to the FDA for approval of 20 mg and 40 mg omeprazole/sodium bicarbonate capsules.  Par filed its Answer and Counterclaims on October 17, 2007.  A scheduling conference was held February 11, 2008, setting September 8, 2008 as the date for the claim construction hearing and July 13, 2009 as the first day of the bench trial. On December 20, 2007, Santarus, Inc., and Missouri filed a second lawsuit against Par in the United States District Court for the District of Delaware alleging infringement of U.S. Patent Nos. 6,699,885; 6,489,346; 6,780,882; and 6,645,988 because Par submitted a Paragraph IV certification to the FDA for approval of 20 mg and 40 mg omeprazole/sodium bicarbonate powders for oral suspension.  Par filed an Answer and Counterclaims in this action as well.  On March 4, 2008, the cases pertaining to Par’s ANDAs for omeprazole capsules and omeprazole oral suspension (see below) were consolidated for all purposes.  Par filed its claim construction brief on August 22, 2008, and its answering brief on September 22, 2008, as the Court rescheduled the Markman hearing.  The Court held a Markman hearing on November 5, 2008 and issued its claim construction order on the same day.  The Delaware District Court conducted a bench trial from July 13-17, 2009, and found for Santarus only on the issue of infringement, while not rendering an opinion on the issues of invalidity and unenforceability.  The parties will participate in post-trial briefing with initial briefs due August 14, 2009.  Par intends to defend this action vigorously and pursue its counterclaims against Santarus and Missouri.

On December 11, 2007, AstraZeneca Pharmaceuticals, LP, AstraZeneca UK Ltd., IPR Pharmaceuticals, Inc. and Shionogi Seiyaku Kabushiki Kaisha filed a lawsuit against Par in the United States District Court for the District of Delaware.  The Complaint alleges patent infringement because Par submitted a Paragraph IV certification to the FDA for approval of 5 mg, 10 mg, 20 mg and 40 mg rosuvastatin calcium tablets.  Par filed an Answer and Counterclaims, and on April 11, 2008, the court held a scheduling

23

conference setting the Markman hearing for March 10, 2009, the pre-trial conference for January 11, 2010, and a bench trial for February 15, 2010. Par intends to defend these actions vigorously and pursue its counterclaims against AstraZeneca Pharmaceuticals, LP, AstraZeneca UK Ltd., IPR Pharmaceuticals, Inc. and Shionogi Seiyaku Kabushiki Kaisha.

On November 14, 2008, Pozen, Inc. filed a lawsuit against Par in the United States District Court for the Eastern District of Texas.  The Complaint alleges infringement of U.S. Patent Nos. 6,060,499; 6,586,458; and 7,332,183 because Par submitted a Paragraph IV certification to the FDA for approval of 500 mg/85 mg naproxen sodium/sumatriptan succinate oral tablets.  Par filed an Answer and Counterclaims on December 8, 2008 and the court has scheduled a Markman hearing for February 2010 and trial for October 2010.  On March 17, 2009, Par filed an Amended Answer and Counterclaim in order to join GlaxoSmithKline as a counterclaim defendant in this litigation.  On April 28, 2009, GSK was dismissed from the case by the Court, but will be bound by its decision and will be required to produce witnesses and materials during discovery.  Par intends to defend this action vigorously and pursue its counterclaims against Pozen.

On April 15, 2009, Par filed a declaratory judgment Complaint against Novartis and Ajinomoto Co., Inc. in the United States District Court for the Eastern District of Pennsylvania.  The complaint seeks declaratory judgment of invalidity and non-infringement of U.S. Patent Nos. 5,463,116; 5,488,150; 6,559,188; 6,641,841; 6,844,008; and 6,878,749 in view of Par’s December 22, 2004 submission of a Paragraph IV certification to the FDA for approval of 60 mg and 120 mg nateglinide oral tablets.  Par intends to prosecute this action vigorously against Novartis and Ajinomoto.  

On April 29, 2009, Pronova BioPharma ASA filed a lawsuit against Par in the United States District Court for the District of Delaware.  The complaint alleges infringement of U.S. Patent Nos. 5,502,077 and 5,656,667 because Par submitted a Paragraph IV certification to the FDA for approval of omega-3-acid ethyl esters oral capsules.  Par intends to defend this action vigorously and pursue its defenses and counterclaims against Pronova.   

On July 1, 2009, Alcon Research Ltd. filed a lawsuit against Par in the United States District Court for the District of Delaware.  The complaint alleges infringement of U.S. Patent Nos. 5,510,383; 5,631,287; 5,849,792; 5,889,052; 6,011,062; 6,503,497; 6,849,253 because Par submitted a Paragraph IV certification to the FDA for approval of 0.004% travoprost ophthalmic solutions and 0.004% travoprost ophthalmic solutions (preserved).  Par intends to defend this action vigorously and pursue its defenses and counterclaims against Alcon.

Industry Related Matters

Beginning in September 2003, Par, along with numerous other pharmaceutical companies, has been named as a defendant in actions brought by state Attorneys General and a number of municipal bodies within the state of New York, as well as a federal qui tam action brought on behalf of the United States by the pharmacy Ven-A-Care of the Florida Keys, Inc. ("Ven-A-Care") alleging generally that the defendants defrauded the state Medicaid systems by purportedly reporting “Average Wholesale Prices” (“AWP”) and/or “Wholesale Acquisition Costs” that exceeded the actual selling price of the defendants’ prescription drugs.  To date, Par has been named as a defendant in substantially similar civil law suits filed by the Attorneys General of Alabama, Alaska, Hawaii, Idaho, Illinois, Iowa, Kentucky, Massachusetts, Mississippi, South Carolina, Texas and Utah, and also by the city of New York, 46 counties across New York State and Ven-A-Care.  These cases generally seek some combination of actual damages, and/or double damages, treble damages, compensatory damages, statutory damages, civil penalties, disgorgement of excessive profits, restitution, disbursements, counsel fees and costs, litigation expenses, investigative costs, injunctive relief, punitive damages, imposition of a constructive trust, accounting of profits or gains derived through the alleged conduct, expert fees, interest and other relief that the court deems proper. Several of these cases have been transferred to the AWP multi-district litigation proceedings pending in the U.S. District Court for the District of Massachusetts for pre-trial proceedings.  The case brought by the state of Mississippi will be litigated in the Chancery Court of Rankin County, Mississippi and the federal case brought by Ven-A-Care will be litigated in the United States District of Massachusetts.  The other cases will likely be litigated in the state or federal courts in which they were filed.  In the Utah suit, the time for responding to the Complaint has not yet elapsed.  In each of the remainder of these matters, Par has either moved to dismiss the complaints or answered the complaints denying liability.  Par intends to defend each of these actions vigorously.

            In addition, at various times between 2006 and 2009, the Attorneys General of Florida, Indiana and Virginia and the United States Office of Personnel Management (the “USOPM”) issued subpoenas, and the Attorneys General of Michigan, Tennessee and Texas issued civil investigative demands, to Par.  The demands generally request documents and information relating to sales and marketing practices that allegedly caused pharmacies to dispense higher priced drugs when presented with prescriptions for certain products.  Par has provided, or is in the process of providing, certain documents in response to these subpoenas to the respective Attorneys General and the USOPM and will continue to cooperate with the Attorneys General and the USOPM in these investigations if it is called upon to do so. 

24

Other

On March 19, 2009, Par was served with a subpoena by the Department of Justice requesting documents related to Strativa’s marketing of Megace® ES.  The subpoena indicated that the Department of Justice is currently investigating promotional practices in the sales and marketing of Megace® ES.  We intend to fully cooperate with the Department of Justice's inquiry.

Par is, from time to time, a party to certain other litigations, including product liability litigations.  Par believes that these litigations are part of the ordinary course of its business and that their ultimate resolution will not have a material adverse effect on its financial condition, results of operations or liquidity. Par intends to defend or, in cases where Par is plaintiff, to prosecute these litigations vigorously.

Contingency

Par accrued for a loss contingency related to a routine post award contract review of Par’s Department of Veterans Affairs contract (the “VA Contingency”) for the periods 2004 to 2007 that is being conducted by the Office of Inspector General of the Department of Veterans Affairs.  The regulations that govern the calculations used to generate the pricing-related information are complex and require the exercise of judgment.  Should there be ambiguity with regard to how to interpret the regulations that govern the calculations, and report these calculations, and even in the absence of any such ambiguity, a governmental authority may take a position contrary to the position that Par has taken.  In accordance with Statement of Financial Accounting Standards No. 5, Accounting for Contingencies, Par accrues for contingencies by a charge to income when it is both probable that a loss will be incurred and the amount of the loss can be reasonably estimated.  In the event that Par’s loss contingency is ultimately determined to be higher than originally accrued, the recording of the additional liability may result in a material impact on Par’s results of operations, liquidity or financial condition when such additional liability is accrued.  Par’s estimate of the probable loss is approximately $4.9 million, including interest, which has been accrued as of June 27, 2009.

Note 15 – Discontinued Operations – Related Party Transaction:

In January 2006, Par announced the divestiture of FineTech Laboratories, Ltd (“FineTech”), effective December 31, 2005.  Par transferred the business for no proceeds to Dr. Arie Gutman, president and chief executive officer of FineTech.  Dr. Gutman also resigned from Par’s Board of Directors.  The results of FineTech operations are classified as discontinued for all periods presented because Par has no continuing involvement in FineTech.  In January 2008, Dr. Gutman sold FineTech to a third party.  Under the terms of the divestiture, Par received $0.5 million which represents Par’s share of the net proceeds of the sale transaction.  This $0.5 million has been classified as discontinued operations on the condensed consolidated statement of operations for the period ended June 28, 2008.  

Note 16 - Segment Information:

Par operates in two reportable business segments: generic pharmaceuticals and branded pharmaceuticals.  Branded products are marketed under brand names through marketing programs that are designed to generate physician and consumer loyalty.  Branded products generally are patent protected, which provides a period of market exclusivity during which they are sold with little or no competition.  Par operates the brand pharmaceutical segment under the name Strativa Pharmaceuticals.  Generic pharmaceutical products are the chemical and therapeutic equivalents of reference brand drugs.  The Drug Price Competition and Patent Term Restoration Act of 1984 provides that generic drugs may enter the market upon the approval of an ANDA and the expiration, invalidation or circumvention of any patents on corresponding brand drugs, or the expiration of any other market exclusivity periods related to the brand drugs.  

The business segments of Par were determined based on management’s reporting and decision-making requirements in accordance with SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information.  Par believes that its generic products represent a single operating segment because the demand for these products is mainly driven by consumers seeking a lower cost alternative to brand name drugs.  Par’s generic drugs are developed using similar methodologies, for the same purpose (e.g., seeking bioequivalence with a brand name drug nearing the end of its market exclusivity period for any reason discussed above).  Par’s generic products are produced using similar processes and standards mandated by the FDA, and Par’s generic products are sold to similar customers.  Based on the economic characteristics, production processes and customers of Par’s generic products, Par has determined that its generic pharmaceuticals are a single reportable business segment.  Par’s chief operating decision maker does not review the generic segment in any more granularity, such as at the therapeutic or other classes or categories.  Certain of Par’s expenses, such as the direct sales force and other sales and marketing expenses and specific research and development expenses, are charged directly to either of the two segments.   Other expenses, such as general and administrative expenses and non-specific research and development expenses, are allocated between the two segments based on assumptions determined by Par’s management.

25

  The financial data for the two business segments are as follows:

	Three months ended		Six months ended
	June 27,	June 28,	June 27,	June 28,
	2009	2008	2009	2008
Revenues:
Generic	$382,167	$92,901	$570,248	$222,785
Strativa	21,834	20,036	37,788	45,080
Total revenues	$404,001	$112,937	$608,036	$267,865
Gross margin:
Generic	$70,701	$9,228	$122,732	$39,360
Strativa	15,707	15,880	27,745	35,269
Total gross margin	$86,408	$25,108	$150,477	$74,629
Operating income (loss):
Generic	$44,862	($26,119)	$76,240	($24,440)
Strativa	(8,385)	(918)	(12,751)	44
Total operating income (loss)	$36,477	($27,037)	$63,489	($24,396)
Gain on bargain purchase	3,021	-	3,021	-
Gain on extinguishment of senior subordinated         convertible notes	504	-	749	-
Equity in loss of joint venture	-	(310)	-	(330)
Loss on marketable securities and other          investments, net	-	(433)	(55)	(433)
Interest income	667	2,129	1,824	5,143
Interest expense	(2,595)	(3,544)	(5,162)	(7,054)
Provision (benefit) for income taxes	14,087	(8,236)	23,624	(7,495)
Income (loss) from continuing operations	$23,987	($20,959)	$40,242	($19,575)

Par’s chief operating decision maker does not review our assets, depreciation or amortization by business segment at this time as they are not material to its branded operations.  Therefore, such allocations by segment are not provided.

Total revenues of Par’s top selling products were as follows:

	Three months ended		Six months ended
	June 27,	June 28,	June 27,	June 28,
Product	2009	2008	2009	2008
Generic
Metoprolol succinate ER (Toprol-XL®)	$306,349	$39,011	$418,563	$82,309
Sumatriptan succinate injection (Imitrex®)	21,824	-	37,844	-
Meclizine Hydrochloride (Antivert®)	8,905	-	18,725	6,426
Dronabinol (Marinol®)	5,502	-	12,503	-
Propranolol HCl ER (Inderal LA®)	3,209	3,469	7,210	8,924
Cabergoline (Dostinex®)	3,100	4,613	6,875	12,595
Cholestyramine Powder (Questran®)	2,985	1,904	4,358	4,340
Tramadol HCl and acetaminophen tablets     (Ultracet®)	2,192	563	3,720	472
Fluoxetine (Prozac®)	2,171	1,357	3,187	3,374
Methimazole (Tapazole®)	2,019	2,204	4,394	5,223
Megestrol oral suspension (Megace®)	1,764	2,754	4,647	4,819
Hydralazine Hydrochloride (Apresazide®)	1,651	1,618	4,273	4,204
Fluticasone (Flonase®)	1,235	10,529	5,392	28,291
Ibuprofen Rx (Advil®, Nuprin®, Motrin®)	715	2,551	3,859	5,831
Various amoxicillin products (Amoxil®)	250	3,201	373	8,789
Other product related revenues (2)	1,352	2,006	2,664	3,054
Other (1)	16,944	17,121	31,661	44,134
Total Generic Revenues	$382,167	$92,901	$570,248	$222,785

Strativa
Megace® ES	$17,136	$17,394	$30,590	$39,795
Nascobal® Nasal Spray (3)	2,198	-	2,198	-
Other product related revenues (2)	2,500	2,642	5,000	5,285
Total Strativa Revenues	$21,834	$20,036	$37,788	$45,080

26

(1) The further detailing of revenues of the other approximately 60 generic drugs is impracticable due to the low volume of revenues associated with each of these generic products.  No single product in the other category is in excess of 3% of total generic revenues for three-month or six-month periods ended June 27, 2009 or June 28, 2008.

(2) Other product related revenues represents licensing and royalty related revenues from profit sharing agreements related to products such as Nifedipine ER, the generic version of Procardia®, doxycycline monohydrate, the generic version of Adoxa®, and Nitrofurantoin, the generic version of Macrobid®.  Other product related revenues included in the Strativa segment relate to a co-promotion arrangement with Solvay.  On January 30, 2009, the FTC filed a lawsuit against the Company in the U.S. District Court for the District of Central California alleging violations of antitrust laws stemming from Par’s court-approved settlement in the patent litigation with Solvay Pharmaceuticals (See “Legal Proceedings” in Note 14, “Commitments, Contingencies and Other Matters”).  

(3) Refer to Note 19, “Acquisitions.”

During the six-month period ended June 27, 2009, Par recognized a gain on the sale of product rights of $1.4 million and $1.5 million during the six-month period ended June 28, 2008 related to the sale of multiple ANDAs.  In November 2007, Par entered into an agreement to provide certain information and other deliverables related to Megace^® ES to enable the formal technology transfer to a third party seeking to commercialize Megace^® ES outside of the U.S.  Par recorded $0.6 million in the operating results of the first quarter of 2008 when Par’s obligations were fulfilled related to this agreement.

Note 17 - Research and Development Agreements:

In July 2007, we entered into an exclusive licensing agreement with BioAlliance Pharma to acquire the U.S. commercialization rights to BioAlliance's miconazole, mucoadhesive bucccal tablets, which is marketed under the brand name Loramyc® in Europe, an antifungal therapy in development for the treatment of oropharyngeal candidiasis, an opportunistic infection commonly found in immunocompromised patients, including those with HIV and cancer.  Under the terms of the agreement, we paid BioAlliance an initial payment of $15.0 million.  BioAlliance completed Phase III studies and on February 6, 2009 submitted a NDA for miconazole bucccal tablets.  On April 9, 2009, we announced that the NDA was not accepted based on the lack of an imprint code on the tablet.  BioAlliance developed a debossed tablet and resubmitted the NDA on June 16, 2009.  If the product receives FDA approval, we will pay BioAlliance $20.0 million and commercialize the product, which will be supplied by BioAlliance.  In addition to paying BioAlliance royalties on net sales, BioAlliance may also receive additional milestone payments if commercial sales achieve specified sales targets.  

In June 2008, we entered into an exclusive licensing agreement with MonoSol Rx to acquire the U.S. commercialization rights to MonoSol’s orally dissolving film strip formulation of ondansetron, which is being developed for the prevention of nausea and vomiting associated with chemotherapy, radiotherapy, and the post-operative period.  Under the terms of the agreement, we made payments to MonoSol totaling $3.5 million through March 2009.  MonoSol completed Phase III studies and on April 7, 2009, we submitted a NDA for the product and on June 10, 2009 we announced that the FDA accepted the NDA for review.  If the product receives FDA approval, we will pay MonoSol $2.5 million and commercialize the product, which will be supplied by MonoSol.  In addition to royalties on net sales, MonoSol may also receive additional milestone payments if commercial sales achieve specified sales targets.

Note 18 – Restructuring Costs:

In October 2008, Par announced its plans to resize its generic products division as part of an ongoing strategic assessment of its businesses.  In conjunction with this plan, Par has taken steps to reduce its research and development expenses by decreasing its internal generic research and development effort.  Under this plan, Par is continuing to concentrate its efforts on completing a more focused portfolio of generic products and will continue to look for opportunities with external partners.  In addition, during the fourth quarter of 2008, Par initiated actions to trim its generic product portfolio in an effort to retain only those marketed products that

27

deliver acceptable profit to Par.  These actions resulted in a workforce reduction of approximately 190 positions in manufacturing, research and development, and general and administrative functions.  In connection with these actions, Par incurred expenses for severance and other employee-related costs.  In addition, as part of its plans to resize its generic products division, Par made the determination to abandon or sell certain assets that resulted in asset impairments, and accelerated depreciation expense.  

During the first quarter of 2009, Par incurred additional restructuring costs as it continued to execute this plan.  The Company recognized pretax charges of approximately $1.4 million, ($0.9 million, after-tax) primarily comprised of one-time termination benefit costs. The pretax charges are reported in the “Restructuring costs” line in the condensed consolidated statements of operations for the three months ended June 27, 2009.  

The following table summarizes the restructuring costs incurred by Par in the first quarter of 2009 and the remaining related restructuring liabilities balance (included in accrued expenses and other current liabilities on the condensed consolidated balance sheet) as of June 27, 2009 ($ amounts in thousands);

Restructuring Activities	Initial Charge	Liabilities at December 31, 2008	Cash Payments	Additional Charges	Reversals, Reclass or Transfers	Liabilities at June 27, 2009
Severance and employee     benefits to be paid in cash	$6,254	$6,254	$2,989	$1,309	$ -	$4,574
Severance related to share-    based compensation	3,291	-	-	-	-	-
Asset impairments and     other	5,907	60	173	173	-	$60
	$15,452	$6,314	$3,162	$1,482	$ -	$4,634

 Par expects that approximately $6 million of the initial charge and $1.4 million of the additional charges will result in cash expenditures during 2009.  The carrying amount of assets held for sale related to these actions was $2.0 million at June 27, 2009 and included in other current assets on the condensed consolidated balance sheet.

Par previously disclosed that it had expected to record $4 million of accelerated depreciation related to assets that were held and used as of December 31, 2008 and were expected to be idled or sold in late 2009.  In conjunction with its acquisition of Nascobal^® and the MDRNA facility (see Note 19 – “Acquisitions”), Par reevaluated its plan for these assets.  Under its revised plans, these assets will be held and used for the life of the asset, and therefore Par resumed depreciating these assets in the first quarter of 2009 in accordance with their expected useful life.  Par accounted for these actions as a change in estimate in accordance with US GAAP.

Note 19 – Acquisitions

During the three months ended June 27, 2009, the Company acquired Nascobal^® from QOL Medical, LLC and certain assets and liabilities from MDRNA, Inc., as described in more detail below.  The acquisitions have been accounted for as business combinations under the guidance of SFAS No. 141(R).  One of the acquisitions resulted in an excess of the fair value of assets acquired over the purchase price and was accounted for as a gain on the condensed consolidated statement of operations.  The Company has allocated the purchase price, including the value of identifiable intangibles with a finite life supported by third party appraisals.  Purchase price allocations will be finalized no later than twelve months from acquisition.  The operating results of the acquired businesses have been included in the consolidated financial results of the Company from March 31, 2009, the date of acquisition.  The operating results were primarily reflected as part of the Strativa segment.  

MDRNA, Inc.

On March 31, 2009, the Company acquired certain assets and liabilities from MDRNA, Inc., mainly in order to facilitate the acquisition of the rights to Nascobal^® Nasal Spray, described below.  The assets acquired will be primarily used in the production of Nascobal^® Nasal Spray.  The purchase price of the acquisition was $0.8 million in cash paid at closing.  The purchase was funded from the Company’s cash on hand.

The acquisition has been accounted for as a bargain purchase under SFAS No. 141(R).  The purchase price of the acquisition has been allocated to the net tangible and intangible assets acquired, with the excess of the fair value of assets acquired over the purchase price recorded as a gain.  The gain is mainly attributed to MDRNA’s plans to exit its contract manufacturing business.  The acquired intangible asset has no tax basis.  The Company allocated the purchase price based on input from third party appraisals.  From March 31, 2009, the date of acquisition, the financial impact of the assets and liabilities acquired from MDRNA were immaterial to total revenues and operating income of the Company.  

28

($ amounts in  thousands)	Estimated             Fair Value		Estimated  Useful Life
Inventory related to a generic product	$	1,121	N/A
Property, plant, and equipment		1,300	4 to 10 years
Intangible asset related to a generic product		1,400	2 years
Net tangible and intangible assets		3,821
Purchase price		800
Gain on Bargain Purchase	$	3,021

Nascobal^®

On March 31, 2009, the Company acquired the rights to Nascobal^® Nasal Spray from QOL Medical, LLC for $54.5 million in cash and the assumption of certain liabilities.  Nascobal^® Nasal Spray is an FDA-approved prescription vitamin B12 treatment indicated for maintenance of remission in certain pernicious anemia patients, as well as a supplement for a variety of B12 deficiencies.  Under the terms of the Asset Purchase Agreement, the Company deposited $2 million of the purchase price into escrow as security for potential indemnification claims that the Company may have against the seller.  After 12 months, any amounts remaining in escrow will be turned over to QOL Medical.  The Company funded the purchase from cash on hand.  The Company has determined that the acquired intangible asset will be tax deductible.  The Company recorded $2.2 million of revenue from sales of Nascobal^® Nasal Spray during the three months ended June 27, 2009 as part of the Strativa segment (refer to Note 16 – Segment Information).  The Company does not track operating income (or operating loss) at the product level.  The operating loss of the Strativa segment, which includes the Nascobal^® Nasal Spray results, for the three and six month periods ended June 27, 2009 are disclosed in Note 16.  

The purchase price of the acquisition has been allocated to the net tangible and intangible assets acquired on the basis of estimated fair values based on input from third party appraisals, as follows:

($ amounts in  thousands)	Estimated                 Fair Value		Estimated  Useful Life
Inventory	$	700	N/A
Intangible assets		54,721	12 years
Accounts receivable reserves		(921)	N/A
Net tangible and intangible assets	$	54,500

Pro Forma Information (unaudited)

Since the Company acquired Nascobal^® from QOL Medical and certain assets and liabilities from MDRNA on March 31, 2009, there are no differences between actual operating results and pro forma results for the three month period ended June 27, 2009.  The following unaudited pro forma information for the six months ended June 27, 2009, assumes the acquisitions occurred as of January 1, 2009 and the unaudited pro forma information for six months ended June 28, 2008, assumes the acquisitions occurred as of January 1, 2008:

	Six months ended		Six months ended
(In thousands, except per share data)	June 27, 2009		June 28, 2008
Total revenues	$	611,285	$	269,563
Income (loss) from continuing operations		39,412		(19,786)
Income (loss) from continuing operations per diluted share	$	1.17	$	(0.59)

The unaudited pro forma information does not purport to be indicative of the results that actually would have been achieved had the operations been combined during the periods presented, nor is it intended to be a projection of future results or trends.

Note 20 – Recent Accounting Pronouncements:

In May 2009, the FASB issued SFAS 165, Subsequent Events, (“SFAS 165”), which established general standards of accounting for and disclosure of events that occur after the balance sheet date but prior to the issuance of the financial statements.  SFAS 165 distinguishes events requiring recognition in the financial statements and those that may require disclosure in the financial statements.  Furthermore, SFAS 165 requires disclosure of the date through which subsequent events were evaluated.  SFAS 165 is effective for interim and annual periods after June 15, 2009. We have adopted SFAS 165 for the quarter ended June 27, 2009.  The Company has evaluated the period after the balance sheet date up through August 4, 2009, which is the date that the condensed

29

consolidated financial statements were issued, and determined that there were no subsequent events or transactions that required recognition or disclosure in the condensed consolidated financial statements, except as disclosed in Note 21.

In April 2009, the FASB issued FASB Staff Position FAS 157-4, Determining Whether a Market Is Not Active and a Transaction Is Not Distressed, or FSP FAS 157-4; FSP FAS 157-4 provides guidelines for making fair value measurements more consistent with the principles presented in SFAS 157.  FSP FAS 157-4 provides additional authoritative guidance in determining whether a market is active or inactive, and whether a transaction is distressed, is applicable to all assets and liabilities (i.e. financial and nonfinancial) and will require enhanced disclosures.  This FASB Staff Position is effective for periods ending after June 15, 2009.  The adoption of FSP FAS 157-4 did not have a material impact on Par’s financial position, results of operation, or cash flows.

In April 2009, the FASB issued FASB Staff Position FAS 115-2, and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments, or FSP FAS 115-2, and FAS 124-2; and FSP FAS 115-2, and FAS 124-2 provides additional guidance to provide greater clarity about the credit and noncredit component of an other-than-temporary impairment event and to more effectively communicate when an other-than-temporary impairment event has occurred. This FSP applies to debt securities. This FASB Staff Position is effective for periods ending after June 15, 2009.  The adoption of FSP FAS 115-2, and FAS 124-2 did not have a material impact on Par’s financial position, results of operation, or cash flows.

In April 2009, the FASB issued FASB Staff Position FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, or FSP FAS 107-1 and APB 28-1. FSP FAS 107-1 and APB 28-1, amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments in interim as well as in annual financial statements. This FSP also amends APB Opinion No. 28, Interim Financial Reporting, to require those disclosures in all interim financial statements. This FASB Staff Position is effective for periods ending after June 15, 2009.  The adoption of FSP FAS 107-1 and APB 28-1 did not have a material impact on Par’s financial statements as the required disclosures had historically been presented during interim periods.  

In April 2009, the FASB issued FASB Staff Position FSP FAS 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies, or FSP FAS 141(R)-1. FSP FAS 141(R)-1, amends FASB Statement No. 141 (R), BusinessCombinations, to state a contingency acquired in a business combination should be measured at fair value if the acquisition-date value of that asset or liability can be determined during the measurement period.   This FASB Staff Position is effective as of January 1, 2009.  Our acquisitions of the worldwide rights to Nascobal® (Cyanocobalamin, USP) Nasal Spray from QOL Medical LLC and the related assets acquired and operating leases assumed from MDRNA, Inc. in the second quarter of 2009 was accounted for under SFAS 141R.  Refer to Note 19 – “Acquisitions.”

In June 2008, the FASB issued EITF 07-5, Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock.  EITF 07-5 provides that an entity should use a two step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument's contingent exercise and settlement provisions.  EITF 07-5 was effective as of the beginning of our 2009 fiscal year.  The adoption of EITF 07-5 did not have a material impact on our financial position, results of operation, or cash flows.

In December 2007, the FASB ratified Emerging Issue Task Force Issue No. 07-1 (“EITF 07-1”), Accounting for Collaborative Arrangements.  A contractual arrangement falls within the scope of EITF 07-1 if the arrangement requires the parties to be active participants and the arrangement exposes the parties to significant risks and rewards that are tied to the commercial success of the endeavor.  Costs incurred and revenue generated on sales to third parties should be reported in the statement of operations based on the guidance in EITF Issue No. 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent.  The equity method of accounting should not be applied to a collaborative arrangement within the scope of this issue without the creation of a separate legal entity for the arrangement.  Payments between parties to the collaborative arrangement should be presented in the statement of operations based on the nature of the arrangement and each entity's business operations, the contractual terms of the arrangement as well as if existing GAAP is applicable.  EITF 07-1 requires companies to disclose the nature and purpose of the arrangement, its rights and obligations under the arrangement, the accounting policy applied to the arrangement, and the amounts attributable to transactions between other participants to the collaborative arrangement and where in the statement of operations these amounts have been classified.  EITF 07-1 requires that companies comply in its first fiscal year beginning after December 15, 2008 and transition to the guidance in this issue by retrospectively applying the guidance to all periods presented for all arrangements existing at the effective date, unless it is impracticable to do so.  The impracticability assessment should be made on an arrangement-by-arrangement basis and certain disclosures would be required if a company utilizes the impracticability exception.  The adoption of EITF 07-1 did not have a material impact on our financial position, results of operation, or cash flows.

In December 2007, the FASB issued FASB Statement No. 141 (Revised 2007) (“SFAS 141R”), Business Combinations.  SFAS 141R will significantly change the accounting for business combinations.  Under SFAS 141R, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition date fair value with limited exceptions.  SFAS 141R will change the accounting treatment for certain specific items, including; acquisition costs will be generally expensed as incurred, minority interests will be valued at fair value at the acquisition date, acquired contingent liabilities will be recorded at fair value at the acquisition date and subsequently measured at either the higher of such amount or the amount determined under existing guidance for non-acquired contingencies, in-process research and development will be recorded at fair value as an indefinite-lived

30

intangible asset at the acquisition date, restructuring costs associated with a business combination will be generally expensed subsequent to the acquisition date, and changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense.  SFAS 141R also includes a substantial number of new disclosure requirements.  SFAS 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.  Earlier adoption was prohibited. Our acquisitions of the worldwide rights to Nascobal® (Cyanocobalamin, USP) Nasal Spray from QOL Medical LLC and the related assets acquired and operating leases assumed from MDRNA, Inc. in the second quarter of 2009 was accounted for under SFAS 141R.  Refer to Note 19 – “Acquisitions.”        

  In December 2007, SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51 (“SFAS 160”), was issued. SFAS 160 requires entities to report noncontrolling (minority) interests as a component of stockholders’ equity on the balance sheet; include all earnings of a consolidated subsidiary in consolidated results of operations; and treat all transactions between an entity and noncontrolling interest as equity transactions between the parties.  SFAS 160 was effective for Par’s fiscal year beginning 2009 and adoption is prospective only; however, presentation and disclosure requirements described above must be applied retrospectively.  The adoption of SFAS 160 did not have a material impact on our financial position, results of operation, or cash flows.    

In September 2006, the FASB issued SFAS No. 157 Fair Value Measurements (“SFAS 157”).  SFAS 157 establishes a common definition for fair value to be applied to GAAP guidance requiring use of fair value, establishes a framework for measuring fair value, and expands disclosure about such fair value measurements.  SFAS 157 applies to fair value measurements that are already required or permitted by other accounting standards, except for measurements of share-based payments and measurements that are similar to, but not intended to be, fair value.  The FASB has previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute.  Accordingly, this Statement does not require any new fair value measurements.  SFAS 157 is effective for fiscal years beginning after November 15, 2007.  Par’s adoption of SFAS 157 with respect to financial assets and liabilities as of January 1, 2008 did not have a material impact on its consolidated financial statements.  Refer to Note 5, “Fair Value Measurements.”  The effective date of SFAS 157 with regard to non-financial assets and liabilities was January 1, 2009 for Par.  These non-financial assets and liabilities include goodwill.  The adoption of SFAS 157 for our nonfinancial assets and liabilities that are remeasured at fair value on a non-recurring basis did not impact our financial position or results of operations; however, SFAS 157 could have an impact in future periods.  In addition, we may have additional disclosure requirements in the event we complete an acquisition or incur impairment of our assets in future periods.

Note 21 – Subsequent Events:

In July 2009, Par repurchased senior subordinated convertible notes that were to mature on September 30, 2010 in the aggregate principal amount of $35.5 million for approximately $34.0 million, including accrued interest.  The notes bore interest at an annual rate of 2.875%.  As of August 4, 2009, the notes had an outstanding aggregate principal amount of $92.7 million.   

Watson Pharmaceuticals announced on August 3, 2009 that the FDA had approved two of its ANDAs for metoprolol.  Par will no longer be the sole distributor for those two SKUs (packaging sizes).  Par anticipates that its sales volume and unit price for metoprolol will be adversely impacted. 

31

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

Forward-Looking Statements

Certain statements in this Report constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, including those concerning management’s expectations with respect to future financial performance, trends and future events, particularly relating to sales of current products and the development, approval and introduction of new products.  To the extent that any statements made in this Quarterly Report contain information that is not historical, such statements are essentially forward-looking.  These statements are often, but not always, made using words such as “estimates,” “plans,” “projects,” “anticipates,” “continuing,” “ongoing,” “expects,” “intends,” “believes,” “forecasts” or similar words and phrases.  Such forward-looking statements are subject to known and unknown risks, uncertainties and contingencies, many of which are beyond our control, which could cause actual results and outcomes to differ materially from those expressed in this Quarterly Report.  Risk factors that might affect such forward-looking statements include those set forth in Item 1A (“Risk Factors”) of our Annual Report on Form 10-K for the year ended December 31, 2008, in Item 1A of this and our subsequent Quarterly Reports on Form 10-Q, and from time to time in our other filings with the SEC, including Current Reports on Form 8-K, and on general industry and economic conditions.  Any forward-looking statements included in this Quarterly Report are made as of the date of this Quarterly Report only, and, subject to any applicable law to the contrary,  we assume no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

The following discussion should be read in conjunction with Par’s Condensed Consolidated Financial Statements and related Notes to Condensed Consolidated Financial Statements contained elsewhere in this Quarterly Report on Form 10-Q.

OVERVIEW

The introduction of new manufactured and distributed products at selling prices that generate adequate gross margins is critical to our ability to generate economic value and ultimately the creation of adequate returns for our stockholders.  In late 2008 and early 2009, we resized our generic products division as part of an ongoing strategic assessment of our businesses.  This initiative is intended to enable us to optimize our current generic product portfolio and our pipeline of first-to-file/first-to-market generic products.  As a result, we believe we are better positioned to compete in the generic marketplace over the long term.  We significantly reduced our research and development expenses by decreasing levels of internal research and development activities in an effort to focus on completing products currently in development.  Also, we will continue seeking additional generic products for sale through new and existing distribution agreements or acquisitions of complementary products and businesses, additional first-to-file opportunities and unique dosage forms to differentiate our products in the marketplace.  We pay a percentage of the gross or net profits or sales to our strategic partners on sales of products covered by our distribution agreements.  Generally, products that Par has developed internally, and as to which it is not required to split any profits with strategic partners, contribute higher gross margins than products covered by distribution agreements.  To continue the development of our brand pharmaceutical segment, Strativa Pharmaceuticals (“Strativa”), on March 31, 2009, we acquired the worldwide rights to Nascobal^® Nasal Spray.  Nascobal^® Nasal Spray is an FDA-approved prescription vitamin B12 treatment indicated for maintenance of remission in certain pernicious anemia patients, as well as a supplement for a variety of B12 deficiencies.  It is the first and currently only once-weekly, self-administered alternative to B12 injections.  

Sales and gross margins of our products depend principally on the: (i) introduction of other generic drug manufacturers’ products in direct competition with our significant products; (ii) ability of generic competitors to quickly enter the market after patent or exclusivity period expire, or during exclusivity periods with authorized generic products, diminishing the amount and duration of significant profits to Par from any one product; (iii) pricing practices of competitors and the removal of competing products from the market; (iv) continuation of existing distribution agreements; (v) introduction of new distributed generic products and brand products; (vi) consolidation among distribution outlets through mergers, acquisitions and the formation of buying groups; (vii) willingness of generic drug customers, including wholesale and retail customers, to switch among generic pharmaceutical manufacturers; (viii) approval of ANDAs, introduction of new Par manufactured products, and future new product launches; (ix) granting of potential marketing exclusivity periods; (x) extent of market penetration for the existing product line; (xi) level, quality and amount of customer service; and (xii) market acceptance of our recently introduced branded product (Nascobal^®) and the successful development to commercialization of our in-licensed branded product pipeline.

Net sales and gross margins derived from generic pharmaceutical products often follow a pattern based on regulatory and competitive factors that are believed by management to be unique to the generic pharmaceutical industry.  As the patent(s) for a brand name product and the related exclusivity period(s) expire, the first generic manufacturer to receive regulatory approval from the FDA for a generic equivalent of the product is often able to capture a substantial share of the market.  At that time, however, the branded company may license an authorized generic product to a competing generic company.  As additional generic manufacturers receive regulatory approvals for competing products, the market share and the price of that product have typically declined, often significantly, depending on several factors, including the number of competitors, the price of the brand product and the pricing strategy of the new competitors.

32

GENERIC BUSINESS

Our strategy for our generic division is to continue to differentiate ourselves by carefully choosing opportunities with minimal competition (i.e., first-to-file and first-to-market products).  By leveraging our expertise in research and development, manufacturing and distribution, we are able to effectively and efficiently pursue these opportunities and support our partners.

In the three-month and six-month periods ending June 27, 2009, our generic business net revenues and gross margin were concentrated in a few products, including two products that were launched subsequent to the first quarter of 2008.  The top 5 generic products accounted for approximately 86% of total consolidated revenues and approximately 63% of total consolidated gross margins in the second quarter of 2009.  The top 5 generic products accounted for approximately 81% of total consolidated revenues and approximately 58% of total consolidated gross margins in the year-to-date period of 2009.  

We began selling metoprolol succinate ER (metoprolol) in the fourth quarter of 2006 as the authorized generic distributor pursuant to a supply and distribution agreement with AstraZeneca.  There had been two competitors marketing generic metoprolol until the fourth quarter of 2008, when those two companies stopped selling metoprolol due to violations of the FDA’s current Good Manufacturing Practices.  Throughout the second quarter and year-to-date periods of 2009, we did not have competition for sales of the four SKUs (packaging sizes) of metoprolol that we sell, which resulted in increased volume of units sold coupled with a price increase commensurate with being the sole generic distributor.  Watson Pharmaceuticals announced on August 3, 2009, however, that the FDA had approved two of its ANDAs for metoprolol, and accordingly, we will no longer be the sole distributor for those two SKUs.  We anticipate that our sales volume and unit price for metoprolol will be adversely impacted.  Additionally, the two competitors that previously sold metoprolol could remedy the violations cited in their respective manufacturing operations by the FDA and reenter the market, which could also adversely impact our metoprolol revenues.  In addition to new competition, supply issues could also adversely impact our future sales of metoprolol.

In the fourth quarter of 2008, we launched generic versions of Imitrex^® (sumatriptan) injection 4mg and 6mg starter kits and 4mg and 6mg prefilled syringe cartridges pursuant to a supply and distribution agreement with GlaxoSmithKline plc.  Throughout the second quarter and year-to-date periods of 2009, we remained the sole generic distributor of 3 SKUs with one competitor for a single SKU.     

In the third quarter of 2008, we launched dronabinol in 2.5mg, 5mg and 10mg strengths in soft gel capsules.  We share net product margin, as contractually defined, on sales of dronabinol with SVC Pharma LP, an affiliate of Rhodes Technologies.  

We marketed meclizine prior to an explosion at the manufacturing facility of our API supplier in February 2008.  Subsequently, we qualified a new API source and received the appropriate approval of our abbreviated new drug application to manufacture and market meclizine utilizing our new supplier.  We reintroduced meclizine HCl tablets in 12.5mg and 25mg strengths in the third quarter of 2008.  Throughout the second quarter and year-to-date periods of 2009, we believe we were the exclusive supplier of this generic product.  

In addition, our investments in generic development are expected to yield approximately 6 to 9 new product launches during the remainder of 2009 and 2010 based on one or more of the following: expiry of the relevant 30-month stay period; patent expiry date; and expiry of regulatory exclusivity.  However, such dates may change due to various circumstances, including extended litigation, outstanding citizens petitions, other regulatory requirements set forth by the FDA, and stays of litigation.  These launches will be significant mileposts for Par as we expect many of these products to be first-to-file/first-to-market opportunities with gross margins in excess of our current portfolio.  Par or our strategic partners currently have approximately 37 ANDAs pending with the FDA, which includes 14 first-to-file and/or first-to-market opportunities.  No assurances can be given that we or any of our strategic partners will successfully complete the development of any of these products either under development or proposed for development, that regulatory approvals will be granted for any such product, that any approved product will be produced in commercial quantities or that any approved product will be sold profitably.

STRATIVA

For Strativa, we will continue to invest in the marketing and sales of our promoted products and prepare for the commercialization of our licensed products.   In addition, we will continue to seek new licenses and acquisitions that accelerate the growth of our branded business.   

In July 2005, we received FDA approval for our first New Drug Application (“NDA”), filed pursuant to Section 505(b)(2) of the Federal Food, Drug and Cosmetic Act, and immediately began marketing megestrol acetate oral suspension NanoCrystal® Dispersion (“Megace® ES”).  Megace® ES is indicated for the treatment of anorexia, cachexia or any unexplained significant weight loss in patients with a diagnosis of AIDS and is utilizing the Megace® brand name that the company has licensed from Bristol-Myers Squibb Company.  The net book value of the trademark was $5.5 million at June 27, 2009 and will be amortized over approximately 3.5 years.  We have promoted Megace® ES as our primary brand product since 2005 through March 2009.  With the acquisition of Nascobal®, Strativa will focus on marketing both Megace® ES and Nascobal®.       

33

In September 2006, we entered into an extended-reach agreement with Solvay Pharmaceuticals, Inc. that provides for our branded sales force to co-promote Androgel® for a period of six years.  As compensation for our marketing and sales efforts, we will receive up to $10 million annually, paid quarterly, for the six-year period.  On January 30, 2009, the FTC filed a lawsuit against us in the U.S. District Court for the District of Central California alleging violations of antitrust laws stemming from our court-approved settlement in the patent litigation with Solvay Pharmaceuticals.  On April 9, 2009, the U.S. District Court of Central California granted our motion to transfer the lawsuit, along with three class action lawsuits that had been filed in the same court, to the United States District Court for the Northern District of Georgia, the jurisdiction in which our consent judgment in connection with the original patent litigation had been entered.  On April 17, 2009 and April 21, 2009, two additional class action plaintiffs filed complaints in the United States District Court for the District of New Jersey alleging antitrust law violations.  On June 29, 2009, an additional class action complaint was filed in the United States District Court for the District of Pennsylvania also alleging antitrust violations.  We believe we have complied with all applicable laws in connection with the court-approved settlement and intend to vigorously defend these actions.

In July 2007, we entered into an exclusive licensing agreement with BioAlliance Pharma to acquire the U.S. commercialization rights to BioAlliance's miconazole, mucoadhesive bucccal tablets, which is marketed under the brand name Loramyc® in Europe, an antifungal therapy in development for the treatment of oropharyngeal candidiasis, an opportunistic infection commonly found in immunocompromised patients, including those with HIV and cancer.  BioAlliance submitted an NDA for the product in February 2009, and on April 9, 2009, we announced that the NDA was not accepted based on the lack of an imprint code on the tablet.  BioAlliance developed a debossed tablet and resubmitted the NDA on June 16, 2009.  If the product receives FDA approval, we will pay BioAlliance $20.0 million and commercialize the product, which will be supplied by BioAlliance.  In addition to paying BioAlliance royalties on net sales, BioAlliance may receive milestone payments if commercial sales achieve specified sales targets.

In August 2007, we acquired the North American commercial rights to Zensana^TM (ondansetron HCl) Oral Spray from Hana Biosciences, Inc.  Ondansetron is indicated for the prevention of nausea and vomiting associated with chemotherapy, radiotherapy, and the post-operative period.  Par and its development partner in this program, NovaDel Pharma, Inc., are collaborating in the reformulation of Zensana^TM.  In 2008, bioequivalence to the reference drug was achieved in certain studies and not achieved in others.  We are working with NovaDel to further evaluate the results in order to determine the next steps for the Zensana^TM program.

In June 2008, we entered into an exclusive licensing agreement with MonoSol Rx to acquire the U.S. commercialization rights to MonoSol’s orally dissolving film strip formulation of ondansetron, which is being developed for the prevention of nausea and vomiting associated with chemotherapy, radiotherapy, and the post-operative period.  On April 7, 2009, we submitted an NDA for the product and on June 10, 2009 we announced that the FDA accepted the NDA for review.  If the product receives FDA approval, we will pay MonoSol $2.5 million and commercialize the product, which will be supplied by MonoSol.  In addition to royalties on net sales, MonoSol may receive milestone payments if commercial sales achieve specified sales targets.

In January 2008, we entered into an exclusive licensing agreement with Alfacell Corporation to acquire the U.S. commercialization rights to Alfacell’s Onconase® (ranpirnase), then in development for the treatment of unresectable malignant mesothelioma.  In May 2008, Alfacell reported that the preliminary data from its Phase III clinical trial did not meet statistical significance for the primary endpoint of overall survival in unresectable malignant mesothelioma.  On January 27, 2009, Alfacell reported that, at a pre-NDA meeting with the FDA, the FDA recommended that an additional clinical trial be conducted prior to submitting an NDA.  We have no obligation to provide Alfacell with any additional funding to conduct another clinical trial, and we understand that Alfacell’s current financial situation does not allow it to pursue an additional clinical trial until other sources of capital are secured and that Alfacell is exploring strategic alternatives and sources of additional capital.  Due to these developments, we no longer consider this contract to be material to us.

 On March 31, 2009, we acquired the worldwide rights to Nascobal^® (Cyanocobalamin, USP) Nasal Spray from QOL Medical, LLC.  Nascobal^® Nasal Spray is an FDA-approved prescription vitamin B12 treatment indicated for maintenance of remission in certain pernicious anemia patients, as well as a supplement for a variety of B12 deficiencies.  Under the terms of the all cash transaction, we paid QOL Medical $54.5 million for the worldwide rights to Nascobal^® Nasal Spray.  Nascobal^® Nasal Spray will be manufactured by Par with assets acquired on March 31, 2009 from MDRNA, Inc.       

OTHER CONSIDERATIONS

In addition to the substantial costs of product development, we may incur significant legal costs in bringing certain products to market. Litigation concerning patents and proprietary rights is often protracted and expensive. Pharmaceutical companies with patented brand products increasingly are suing companies that produce generic forms of their patented brand products for alleged patent infringement or other violations of intellectual property rights, which could delay or prevent the entry of such generic products into the market. Generally, a generic drug may not be marketed until the applicable patent(s) on the brand name drug expires. When an ANDA is filed with the FDA for approval of a generic drug, the filing person may certify either that the patent listed by the FDA as covering the branded product is about to expire, in which case the ANDA will not become effective until the expiration of such patent, or that the patent listed as covering the branded drug is invalid or will not be infringed by the manufacture, sale or use of the new drug

34

for which the ANDA is filed.  In either case, there is a risk that a branded pharmaceutical company may sue the filing person for alleged patent infringement or other violations of intellectual property rights.  Because a substantial portion of our current business involves the marketing and development of generic versions of brand products, the threat of litigation, the outcome of which is inherently uncertain, is always present.  Such litigation is often costly and time-consuming, and could result in a substantial delay in, or prevent, the introduction and/or marketing of products, which could have a material adverse effect on our business, financial condition, prospects and results of operations.

RESULTS OF OPERATIONS

Revenues

Total revenues of our top selling products were as follows:

	Three months ended			Six months ended
	June 27,	June 28,		June 27,	June 28,
Product	2009	2008	$ Change	2009	2008	$ Change
Generic
Metoprolol succinate ER     (Toprol-XL®)	$306,349	$39,011	$267,338	$418,563	$82,309	$336,254
Sumatriptan succinate     injection (Imitrex®)	21,824	-	21,824	37,844	-	37,844
Meclizine Hydrochloride    (Antivert®)	8,905	-	8,905	18,725	6,426	12,299
Dronabinol (Marinol®)	5,502	-	5,502	12,503	-	12,503
Propranolol HCl ER     (Inderal LA®)	3,209	3,469	(260)	7,210	8,924	(1,714)
Cabergoline (Dostinex®)	3,100	4,613	(1,513)	6,875	12,595	(5,720)
Cholestyramine Powder     (Questran®)	2,985	1,904	1,081	4,358	4,340	18
Tramadol HCl and      acetaminophen tablets     (Ultracet®)	2,192	563	1,629	3,720	472	3,248
Fluoxetine (Prozac®)	2,171	1,357	814	3,187	3,374	(187)
Methimazole (Tapazole®)	2,019	2,204	(185)	4,394	5,223	(829)
Fluticasone (Flonase®)	1,235	10,529	(9,294)	5,392	28,291	(22,899)
Various amoxicillin     products (Amoxil®)	250	3,201	(2,951)	373	8,789	(8,416)
Other product related     revenues	1,352	2,006	(654)	2,664	3,054	(390)
Other	21,074	24,044	(2,970)	44,440	58,988	(14,548)
Total Generic Revenues	$382,167	$92,901	$289,266	$570,248	$222,785	$347,463
Strativa
Megace® ES	$17,136	$17,394	($258)	$30,590	$39,795	($9,205)
Nascobal® Nasal Spray	2,198	-	2,198	2,198	-	2,198
Other product related     revenues	2,500	2,642	(142)	5,000	5,285	(285)
Total Strativa Revenues	$21,834	$20,036	$1,798	$37,788	$45,080	($7,292)

	Three months ended
					Percentage of Total Revenues
($ in thousands)	June 27, 2009	June 28, 2008	$ Change	% Change	June 27, 2009	June 28, 2008
Revenues:
Generic	$382,167	$92,901	$289,266	311.4%	94.6%	82.3%
Strativa	21,834	20,036	1,798	9.0%	5.4%	17.7%
Total revenues	$404,001	$112,937	$291,064	257.7%	100.0%	100.0%

The increase in generic segment revenues in the second quarter of 2009 was primarily due to the lack of competition for sales of metoprolol.  The consequence of the lack of competition was a proportional increase of both volume of units sold coupled with a price increase commensurate with being the sole distributor of the generic product in the second quarter of 2009.  We also launched various sumatriptan SKUs in the fourth quarter of 2008.  Throughout the second quarter of 2009, we remained the sole distributor of 3 sumatriptan SKUs with one competitor for a single SKU.  In the third quarter of 2008, we launched multiple strengths of dronabinol.  We also commenced shipment of meclizine HCl tablets in 12.5mg and 25mg strengths in the third quarter of 2008.  We believe we

35

were the exclusive supplier of this generic product throughout the second quarter of 2009.  These gains were tempered by lower sales of fluticasone, as the supply agreement with GlaxoSmithKline plc was not extended and we had sold all available inventories as of June 27, 2009.  In addition, cabergoline sales were negatively impacted by the loss of key customers and pricing pressure due to additional competition.  The decrease in sales of amoxicillin was due to its discontinuation in the fourth quarter of 2008.  Products aggregated in “Other” also declined principally due to the generic segment’s resizing that included the trimming of the generic product portfolio to only retain those marketed products that deliver acceptable gross margins, coupled with pricing pressures on the remaining products.  

Net sales of distributed products, which consist of products manufactured under contract and licensed products, were $346.0 million or 86% of the Company’s total product revenues for the three month period ended June 27, 2009 and $67.0 million or 59% of our total product revenues for the three month period ended June 28, 2008.  The increase in the percentage is primarily driven by higher sales of metoprolol, dronabinol, and sumatriptan.  We are substantially dependent upon distributed products for our overall sales and any inability by our suppliers to meet demand could adversely affect our future results of operations.

The increase in Strativa segment revenues in the second quarter of 2009 was primarily due to the acquisition of Nascobal^® Nasal Spray and the associated relaunch of the product by Strativa.

	Six months ended
					Percentage of Total Revenues
	June 27,	June 28,			June 27,	June 28,
($ in thousands)	2009	2008	$ Change	%Change	2009	2008
Revenues:
Generic	$570,248	$222,785	$347,463	156.0%	93.8%	83.2%
Strativa	37,788	45,080	(7,292)	(16.2%)	6.2%	16.8%
Total revenues	$608,036	$267,865	$340,171	127.0%	100.0%	100.0%

Net sales of distributed products, which consist of products manufactured under contract and licensed products, were $491.0 million or 82% of the Company’s total product revenues for the six month period ended June 27, 2009 and $156.0 million or 58% of our total product revenues for the six month period ended June 28, 2008.  

The net sales decline of Megace^® ES in the year-to-date period of 2009 is primarily attributed to the timing of trade buying patterns.   In December 2007, the trade delayed its Megace^® ES purchases until after the holidays to the benefit of the 2008 year-to-date period.  In December 2008, the trade accelerated its Megace^® ES purchases before the holidays to the detriment of the 2009 year-to-date period.  Megace^® ES also experienced higher returns during the 2009 year-to-date period as compared to the comparable prior year-to-date period.  

Gross Revenues to Total Revenues Deductions

Generic drug pricing at the wholesale level can create significant differences between our invoice price and net selling price.  Wholesale customers purchase product from us at invoice price, then resell the product to specific healthcare providers on the basis of prices negotiated between us and the providers, and the wholesaler submits a chargeback credit to us for the difference.  We record estimates for these chargebacks as well as sales returns, rebates and incentive programs, and the sales allowances for all our customers at the time of sale as deductions from gross revenues, with corresponding adjustments to our accounts receivable reserves and allowances.

As detailed above, we have the experience and the access to relevant information that we believe necessary to reasonably estimate the amounts of such deductions from gross revenues.  Some of the assumptions we use for certain of our estimates are based on information received from third parties, such as wholesale customer inventory data and market data, or other market factors beyond our control.  The estimates that are most critical to the establishment of these reserves, and therefore would have the largest impact if these estimates were not accurate, are estimates related to expected contract sales volumes, average contract pricing, customer inventories and return levels.  We regularly review the information related to these estimates and adjust our reserves accordingly if and when actual experience differs from previous estimates.  With the exception of the product returns allowance, the ending balances of account receivable reserves and allowances generally are eliminated during a two- to four-month period, on average.

We recognize revenue for product sales when title and risk of loss have transferred to our customers and when collectability is reasonably assured.  This is generally at the time that products are received by the customers.  Upon recognizing revenue from a sale, we record estimates for chargebacks, rebates and incentives, returns, cash discounts and other sales reserves that reduce accounts receivable.  

36

Our gross revenues before deductions for chargebacks, rebates and incentive programs (including rebates paid under federal and state government Medicaid drug reimbursement programs), sales returns and other sales allowances were as follows:

	June 27, 2009	Percentage of Gross Revenues	June 28, 2008	Percentage of Gross Revenues
	($ thousands)		($ thousands)
Gross revenues	$799,770		$553,100
Chargebacks	(81,724)	10.2%	(199,535)	36.1%
Rebates and incentive programs	(53,225)	6.7%	(44,084)	8.0%
Returns	(15,294)	1.9%	(4,030)	0.7%
Cash discounts and other	(30,161)	3.8%	(23,428)	4.2%
Medicaid rebates and rebates due     under other US Government     pricing programs	(11,330)	1.4%	(14,158)	2.6%
Total deductions	(191,734)	24.0%	(285,235)	51.6%
Total revenues	$608,036	76.0%	$267,865	48.4%

The total gross-to-net sales adjustments as a percentage of gross sales decreased for the six months ended June 27, 2009, compared to the six months ended June 28, 2008, primarily due to a significant reduction of chargebacks.  This decrease was driven primarily by the increase in metoprolol sales during the first half of 2009.  Metoprolol sales increase was driven by lack of competition that resulted in increased volume to retail chains which do not result in a chargeback as well as a price increase, commensurate with being the sole distributor of the generic product throughout the six months ended June 27, 2009, which reduces the chargebacks that we pay to wholesalers.  This was coupled with lower overall volume of sales of products that carry higher than average chargeback rates, including lower fluticasone sales, and the discontinuation of other lower margin products.  The decrease of rebates and incentive programs as a percentage of gross sales was driven by the lack of incentive programs in the first half of 2009 related to certain discontinued products such as fluticasone.  Refer to the June 28, 2008 accounts receivable reserves activity table below for details of the prior period returns reduction amount.

The following tables summarize the activity for the six months ended June 27, 2009 and June 28, 2008 in the accounts affected by the estimated provisions described above:

	For the Six Month Period Ended June 27, 2009
Accounts receivable reserves	Beginning balance	Provision recorded for current period sales	(Provision) reversal recorded for prior period sales		Credits processed	Ending balance
Chargebacks	($32,738)	($81,289)	($435)	(1)	$90,854	($23,608)
Rebates and incentive programs	(27,110)	(53,382)	157		45,233	(35,102)
Returns	(38,128)	(14,482)	(812)		14,226	(39,196)
Cash discounts and other	(13,273)	(30,161)	-		23,644	(19,790)
Total	($111,249)	($179,314)	($1,090)		$173,957	($117,696)
Accrued liabilities (2)	($21,912)	($12,133)	$803		$9,183	($24,059)

37

	For the Six Month Period Ended June 28, 2008
Accounts receivable reserves	Beginning balance	Provision recorded for current period sales	(Provision) reversal recorded for prior period sales		Credits processed	Ending balance
Chargebacks	($46,006)	($198,996)	($539)	(1)	$214,412	($31,129)
Rebates and incentive     programs	(42,859)	(42,513)	(1,571)	(3)	63,129	(23,814)
Returns	(47,102)	(8,323)	4,293	(4)	12,234	(38,898)
Cash discounts and other	(16,158)	(23,777)	349		28,442	(11,144)
Total	($152,125)	($273,609)	$2,532		$318,217	($104,985)
Accrued liabilities (2)	($17,684)	($13,966)	($192)		$8,183	($23,659)

(1)

Unless specific in nature, the amount of provision or reversal of reserves related to prior periods for chargebacks is not determinable on a product or customer specific basis; however, based upon historical analysis and analysis of activity in subsequent periods, we have determined that our chargeback estimates remain reasonable.

(2)

Includes amounts due to customers for which no underlying accounts receivable exists and is principally comprised of Medicaid rebates and rebates due under other U.S. Government pricing programs.  

(3)

The changes in accounts receivable reserves recorded for prior period sales related to rebates and incentives programs are principally comprised of the finalization of contract negotiations with a certain customer that resulted in an adjustment of ($2.3) million to our rebates and incentive programs for sales made to that customer in the fourth quarter of 2007.  With the exception of the foregoing factor, there were no other factors that were deemed to be material individually or in the aggregate.  

(4)

The changes in accounts receivable reserves recorded for prior period sales related to returns principally comprised of the successful resolution in the six-month period ended June 28, 2008 of a customer dispute over invalid customer deductions taken in prior periods of $1.5 million, and an update to management’s prior period returns estimates of $2.8 million relating to the loss of a customer for certain products and new returns information that became available during the six-month period ended June 28, 2008.

Use of Estimates in Reserves

We believe that our reserves, allowances and accruals for items that are deducted from gross revenues are reasonable and appropriate based on current facts and circumstances. It is possible, however, that other parties applying reasonable judgment to the same facts and circumstances could develop different allowance and accrual amounts for items that are deducted from gross revenues. Additionally, changes in actual experience or changes in other qualitative factors could cause Par’s allowances and accruals to fluctuate, particularly with newly launched or acquired products.  We review the rates and amounts in our allowance and accrual estimates on a quarterly basis. If future estimated rates and amounts are significantly greater than those reflected in our recorded reserves, the resulting adjustments to those reserves would decrease our reported net revenues; conversely, if actual product returns, rebates and chargebacks are significantly less than those reflected in our recorded reserves, the resulting adjustments to those reserves would increase our reported net revenues. If we were to change our assumptions and estimates, our reserves would change, which would impact the net revenues that we report.  We regularly review the information related to these estimates and adjust our reserves accordingly, if and when actual experience differs from previous estimates.  

Gross Margin

We consider gross margin to be a key performance indicator of our profitability.    

	Three months ended
				Percentage of Total Revenues
	June 27,	June 28,		June 27,	June 28,
($ in thousands)	2009	2008	$ Change	2009	2008
Gross margin:
Generic	$70,701	$9,228	$61,473	18.5%	9.9%
Strativa	15,707	15,880	(173)	71.9%	79.3%
Total gross margin	$86,408	$25,108	$61,300	21.4%	22.2%

38

Our increase in gross margin dollars for the three months ended June 27, 2009 is primarily due to higher sales of metoprolol coupled with the launches of sumatriptan and dronabinol and higher sales of meclizine.  These four products, along with propranolol and cabergoline, totaled approximately $57 million gross margin dollars and a margin percentage of approximately 16% for the second quarter of 2009.  Gross margin related to all other revenues (approximately $14 million and a margin percentage of approximately 41%) benefited from the generic segment’s resizing which began in the fourth quarter of 2008 that included the trimming of the generic product portfolio to only retain those marketed products that deliver acceptable gross margins, royalties, the first quarter launch of alprazolam that has a high gross margin percentage, and additional tramadol business due to loss of a competitor that had to exit the market during the second quarter of 2009.   The increase in generic gross margin percentage can be primarily attributed to the discontinuation of sales of many products that faced pricing pressures in the second quarter of 2008 and were eliminated as part of our restructuring in the fourth quarter of 2008 coupled with the launches of sumatriptan and dronabinol and higher sales of meclizine.   

Strativa gross margin dollars decreased for the three months ended June 27, 2009, primarily due to lower sales of Megace® ES.  Strativa’s gross margin percentage deteriorated due mainly to lower margin Nascobal^® Nasal Spray sales.   The gross margin percentage of Nascobal^® Nasal Spray was negatively impacted by purchase price adjustments associated with inventory acquired and sold in the second quarter of 2009.  

	Six months ended
				Percentage of Total Revenues
	June 27,	June 28,		June 27,	June 28,
($ in thousands)	2009	2008	$ Change	2009	2008
Gross margin:
Generic	$122,732	$39,360	$83,372	21.5%	17.7%
Strativa	27,745	35,269	(7,524)	73.4%	78.2%
Total gross margin	$150,477	$74,629	$75,848	24.7%	27.9%

Our increase in gross margin dollars for the six months ended June 27, 2009 is primarily due to higher sales of metoprolol coupled with the launches of sumatriptan and dronabinol and higher sales of meclizine.  These four products, along with propranolol and cabergoline, totaled approximately $92 million gross margin dollars and a margin percentage of approximately 18% for the 2009 year-to-date period.  Gross margin related to all other revenues (approximately $31 million and a margin percentage of approximately 45%) benefited from the generic segment’s resizing which began in the fourth quarter of 2008 that included the trimming of the generic product portfolio to only retain those marketed products that deliver acceptable gross margins, royalties, the first quarter launch of alprazolam that has a high gross margin percentage and additional tramadol business due to loss of a competitor that had to exit the market during the second quarter of 2009.   

Strativa gross margin dollars decreased for the six months ended June 27, 2009, primarily due to lower sales of Megace® ES.

Operating Expenses

Research and Development

	Three months ended
					Percentage of Total Revenues
($ in thousands)	June 27, 2009	June 28, 2008	$ Change	% Change	June 27, 2009	June 28, 2008
Research and development:
Generic	$4,972	$13,332	($8,360)	(62.7%)	1.3%	14.4%
Strativa	965	2,623	(1,658)	(63.2%)	4.4%	13.1%
Total research and     development	$5,937	$15,955	($10,018)	(62.8%)	1.5%	14.1%

Generic:

In October 2008, we announced plans to resize our generic unit as part of an ongoing strategic assessment of our businesses.  In conjunction with this action, we significantly reduced our internal Generic research and development effort during the first quarter of 2009.  These actions led to reduced second quarter 2009 expenditures of $8.4 million driven by a $2.5 million reduction in employment related costs on headcount reductions of approximately 65 employees.  The remainder of the savings was achieved through lower development and biostudy costs as we concentrate our efforts on completing a more focused portfolio of generic products.  

39

Strativa:

The decrease in Strativa research and development expenditures principally reflects:

·

the non-recurrence of a $1.25 million initial milestone to MonoSol Rx in June of 2008 when Strativa acquired the commercialization rights in the United States and its territories to the orally dissolving film strips (ODFS) formulation of ondansetron.

·

the non-recurrence of approximately $1.1 million of costs related to the development of Zensana^TM, an oral spray formulation of ondansetron, which was acquired in the latter half of 2007.  

These reductions were tempered by FDA filing fees associated with the New Drug Application for ODFS formulation of ondansetron incurred in the second quarter of 2009.

	Six months ended
					Percentage of Total Revenues
($ in thousands)	June 27, 2009	June 28, 2008	$ Change	% Change	June 27, 2009	June 28, 2008
Research and development:
Generic	$10,862	$25,032	($14,170)	(56.6%)	1.9%	11.2%
Strativa	2,247	8,081	(5,834)	(72.2%)	5.9%	17.9%
Total research and     development	$13,109	$33,113	($20,004)	(60.4%)	2.2%	12.4%

Generic:

As cited above, we significantly reduced our internal Generic research and development effort during the first half of 2009.  Expenditures were reduced by $14.2 million driven by a $4.8 million reduction in employment related costs.  The remainder of the savings was achieved through lower development and biostudy costs as we concentrate our efforts on completing a more focused portfolio of generic products.  

Strativa:

In addition to the drivers cited for the three month period ended June 27, 2009 above, the decrease in Strativa research and development for the year-to-date period principally reflects:

·

the non-recurrence of a $5 million initial cash payment made to Alfacell Corporation in the first quarter of 2008 under an exclusive licensing agreement with Alfacell to acquire the commercialization rights to Onconase® in the United States.   

·

a $1.0 million milestone payment triggered by MonoSol Rx in January 2009 upon successful completion of bioequivalence reports for ODFS which indicated successful completion of all clinical studies and all applicable clinical end-points necessary to file an NDA for the product with the FDA.  Based upon these studies, on April 7, 2009, Strativa submitted an NDA for ODFS to the FDA seeking approval in 8 mg and 4 mg strengths for the prevention of nausea and vomiting associated with chemotherapy, radiotherapy, and the post-operative period.  To date, Strativa has paid MonoSol Rx a total of $3.5 million for the completion of certain milestones; the next milestone payment is payable upon FDA approval of the NDA.

Although there can be no such assurance, total research and development expenses for 2009, including payments to be made to unaffiliated companies, and expected milestone payments under currently executed brand licensing arrangements (refer to Notes to Condensed Consolidated Financial Statements – Note 17 – “Research and Development Agreements”) are expected to decrease by approximately 50% to 60% from 2008.

Selling, General and Administrative Expenses

	Three months ended
					Percentage of Total Revenues
($ in thousands)	June 27, 2009	June 28, 2008	$ Change	% Change	June 27, 2009	June 28, 2008
Selling, general and     administrative	$44,117	$36,690	$7,427	20.2%	10.9%	32.5%

The net increase in SG&A expenditures principally reflects:

·

an increase of $6.8 million related to our on-going expenditures supporting Strativa sales and marketing, driven primarily by an increase in the field force of approximately 60 additional employees and other expenses and activities related to the relaunch of Nascobal® Nasal Spray, as well as development costs of other products;

·

$0.7 million of increased allocations of stock based compensation costs driven by the significant downsizing of the Research and Development organization (total stock based compensation costs for Par are essentially flat versus prior year) and;

40

·

an increase in employment costs of $0.4 million, driven by higher estimated bonus costs.

These increases were tempered by lower legal costs of $0.8 million.

	Six months ended
					Percentage of Total Revenues
($ in thousands)	June 27, 2009	June 28, 2008	$ Change	% Change	June 27, 2009	June 28, 2008
Selling, general and      administrative	$77,077	$68,037	$9,040	13.3%	12.7%	25.4%

The net increase in SG&A expenditures principally reflects:

·

an increase of $6.8 million related to Par’s on-going expenditures supporting Strativa sales and marketing, driven primarily by an increase in the field force of approximately 60 additional employees and other expenses and activities related to the relaunch of Nascobal® Nasal Spray, as well as development costs for other products;

·

an increase in employment costs of $1.4 million, driven by higher estimated bonus costs and;

·

$1.4 million of increased allocations of stock based compensation costs driven by the significant downsizing of the Research and Development organization (total stock based compensation costs for Par are essentially flat versus prior year.)

These increases were tempered by lower legal costs of $0.3 million.

Settlements and Loss Contingencies, net

	Three months ended		Six months ended
	June 27,	June 28,	June 27,	June 28,
($ in thousands)	2009	2008	2009	2008
Settlements and loss contingencies, net	$61	$ -	($3,315)	$ -

Settlements and loss contingencies, net, of $3.3 million during the six months ended June 27, 2009, is principally comprised of a net $3.4 million gain related to the final resolution of our litigation with Pentech Pharmaceuticals, Inc. which occurred in the first quarter of 2009.  On February 9, 2009, following a bench trial, the United States District Court for the Northern District of Illinois entered a judgment in favor of Pentech and against Par in the amount of $70.0 million.  This action had alleged that we breached our contract with Pentech relating to the supply and marketing of paroxetine (Paxil®) and that we breached fiduciary duties allegedly owed to Pentech.  As a result of the court’s decision, we recorded $45 million in settlements and loss contingencies, net, on the consolidated statements of operations for the year ended December 31, 2008.  Subsequently, in March 2009, Par and Pentech entered into a settlement agreement and release under which the parties fully resolved all disputes, claims, and issues in connection with this litigation for $66.1 million.  We paid $66.1 million in cash and recorded a $3.9 million gain related to this settlement, net of $0.5 million of interest accrued from January 1, 2009.  

Restructuring Costs

	Three months ended		Six months ended
	June 27,	June 28,	June 27,	June 28,
($ in thousands)	2009	2008	2009	2008
Restructuring costs	$81	$ -	$1,482	$ -

In October 2008, we announced our plans to resize our generic products division as part of an ongoing strategic assessment of our businesses.  In conjunction with this plan, we have taken steps to reduce our research and development expenses by decreasing internal generic research and development effort.  Under this plan, we are continuing to concentrate our efforts on completing a more focused portfolio of generic products and will continue to look for opportunities with external partners.  In addition, during the fourth quarter of 2008, we initiated actions to trim our generic product portfolio in an effort to retain only those marketed products that deliver acceptable profit.  These actions resulted in a workforce reduction of approximately 190 positions in manufacturing, research and development, and general and administrative functions.  In connection with these actions, we incurred expenses for severance and other employee-related costs.  In addition, as part of our plans to resize our generic products division, we determined to abandon or sell certain assets that resulted in asset impairments, and accelerated depreciation expense.  

During the first half of 2009, we incurred additional restructuring costs as we continued to execute this plan, principally driven by charges for one-time termination benefit costs recognized in the first quarter.    

41

            The following table summarizes the restructuring costs in the first half of 2009 and the remaining related restructuring liabilities balance (included in accrued expenses and other current liabilities on the condensed consolidated balance sheet) as of June 27, 2009 ($ amounts in thousands):

Restructuring Activities	Initial Charge	Liabilities at December 31, 2008	Cash Payments	Additional Charges	Reversals, Reclass or Transfers	Liabilities at June 27, 2009
Severance and employee     benefits to be paid in cash	$6,254	$6,254	$2,989	$1,309	$ -	$4,574
Severance related to share-    based compensation	3,291	-	-	-	-	-
Asset impairments and other	5,907	60	173	173	-	$60
Total	$15,452	$6,314	$3,162	$1,482	$ -	$4,634

           We previously disclosed that we had expected to record $4 million of accelerated depreciation related to assets that were held and used as of December 31, 2008 and were expected to be idled or sold in late 2009.  During the first quarter of 2009, and in conjunction with our acquisition of Nascobal^® and MDRNA (refer to Notes to Condensed Consolidated Financial Statements – Note 19 – “Acquisitions”), we have reevaluated our plan for these assets.  Under our revised plans, these assets will be held and used for the life of the asset, and therefore we had resumed depreciating these assets in the first quarter of 2009 in accordance with their expected useful life.  We accounted for these actions as a change in estimate in accordance with U.S. GAAP.

Gain on Sale of Product Rights and other

	Three months ended		Six months ended
	June 27,	June 28,	June 27,	June 28,
($ in thousands)	2009	2008	2009	2008
Gain on sale of product rights and other	$265	$500	$1,365	$2,125

During the three-month periods ended June 27, 2009 and June 28, 2008, we recognized a gain on the sale of product rights of $0.3 million and $0.5 million, related to the sale of multiple ANDAs.  During the six-month periods ended June 27, 2009 and June 28, 2008, we recognized a gain on the sale of product rights of $1.4 million and $1.5 million, related to the sale of multiple ANDAs.

In November 2007, we entered into an agreement to provide certain information and other deliverables related to Megace^® ES to enable the formal technology transfer to a third party seeking to commercialize Megace^® ES outside of the U.S.  We recorded $0.6 million in the quarter ended June 28, 2008, when our obligations were fulfilled related to this agreement.

Operating Income (Loss)

	Three months ended			Six months ended
($ in thousands)	June 27, 2009	June 28, 2008	$ Change	June 27, 2009	June 28, 2008	$ Change
Operating income (loss):
Generic	$44,862	($26,119)	$70,981	$76,240	($24,440)	$100,680
Strativa	(8,385)	(918)	(7,467)	(12,751)	44	(12,795)
Total operating income (loss)	$36,477	($27,037)	$63,514	$63,489	($24,396)	$87,885

Our increased operating income in the second quarter of 2009 was mainly due to the increase in gross margins for the generic segment as discussed above, coupled with the decrease in research and development expenditures, somewhat tempered by sales and marketing expenditures in support of Strativa’s relaunch of Nascobal^® Nasal Spray.

Gain on Bargain Purchase

	Three months ended		Six months ended
	June 27,	June 28,	June 27,	June 28,
($ in thousands)	2009	2008	2009	2008
Gain on bargain purchase	$3,021	$ -	$3,021	$ -

42

During the three-month period ended June 27, 2009, we recorded a $3.0 million gain related to the acquisition of certain assets and certain operating leases from MDRNA, Inc.  The acquisition has been accounted for as a bargain purchase under SFAS No. 141(R).  The purchase price of the acquisition has been allocated to the net tangible and intangible assets acquired, with the excess of the fair value of assets acquired over the purchase price recorded as a gain.  The gain is mainly attributed to MDRNA’s plans to exit its contract manufacturing business.  

Gain on Extinguishment of Senior Subordinated Convertible Notes

	Three months ended		Six months ended
	June 27,	June 28,	June 27,	June 28,
($ in thousands)	2009	2008	2009	2008
Gain on extinguishment of senior subordinated      convertible notes	$504	$ -	$749	$ -

In June 2009, we repurchased senior subordinated convertible notes that were to mature on September 30, 2010 in the aggregate principal amount of $11.3 million for approximately $10.8 million, including accrued interest.  The notes bore interest at an annual rate of 2.875%.  The repurchase also resulted in the write-off of approximately $0.07 million of deferred financing costs in the second quarter of 2009.  We recorded a gain of approximately $0.5 million in the second quarter of 2009 related to this debt extinguishment.

In March 2009, we repurchased senior subordinated convertible notes in the aggregate principal amount of $2.5 million for approximately $2.3 million, including accrued interest.  The repurchase also resulted in the write-off of approximately $0.02 million of deferred financing costs.  We recorded a gain of approximately $0.25 million, in the first quarter of 2009 related to this debt extinguishment.  

Interest Income

	Three months ended		Six months ended
	June 27,	June 28,	June 27,	June 28,
($ in thousands)	2009	2008	2009	2008
Interest income	$667	$2,129	$1,824	$5,143

Interest income principally includes interest income derived primarily from money market and other short-term investments.  Our return on investments was negatively impacted by the overall decline in yields available on reinvested funds, coupled with a lower average portfolio balance principally due to the cash settlement to Pentech and the purchase price related to our acquisition of Nascobal and certain assets from MDRNA.

Interest Expense

	Three months ended		Six months ended
	June 27,	June 28,	June 27,	June 28,
($ in thousands)	2009	2008	2009	2008
Interest expense	($2,595)	($3,544)	($5,162)	($7,054)

Interest expense principally includes interest payable on our senior subordinated convertible notes due 2010 and is lower primarily due to our repurchase of notes in the aggregate principal amount of $71.8 million during October 2008, March 2009 and June 2009.   As further detailed in Note 2 – “Change in Accounting Principle and Related Adjustments to Previously Issued Financial Statements” of the accompanying condensed consolidated financial statements, on January 1, 2009, Par adopted the provisions of FASB Staff Position No. APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement) (“FSP APB 14-1”) and restated second quarter 2008 interest expense to $3.5 million.

Income Taxes

	Three months ended		Six months ended
	June 27,	June 28,	June 27,	June 28,
($ in thousands)	2009	2008	2009	2008
Provision for income taxes	$14,087	($8,236)	$23,624	($7,495)
Effective tax rate	37%	28%	37%	28%

The provisions were based on the applicable federal and state tax rates for those periods (see Notes to condensed consolidated financials statements - Note 10 – “Income Taxes”).

43

Discontinued Operations

	Three months ended		Six months ended
	June 27,	June 28,	June 27,	June 28,
($ in thousands)	2009	2008	2009	2008
Gain from discontinued operations	$ -	$ -	$ -	$505
Provision for income taxes	176	268	352	713
(Loss) gain from discontinued operations	($176)	($268)	($352)	($208)

In January 2006, we announced the divestiture of FineTech Laboratories, Ltd (“FineTech”), effective December 31, 2005.  We transferred the business for no proceeds to Dr. Arie Gutman, president and chief executive officer of FineTech.  Dr. Gutman also resigned from our Board of Directors.  The results of FineTech operations have been classified as discontinued for all periods presented because we had no continuing involvement in FineTech.  In January 2008, Dr. Gutman sold FineTech to a third party.  Under the terms of the divestiture, we received $0.5 million during the first quarter of 2008 which represents our share of the net proceeds of the sale transaction.  This $0.5 million has been classified as discontinued operations on the condensed consolidated statement of operations for the six month period ended June 28, 2008.  

FINANCIAL CONDITION

Liquidity and Capital Resources

	Six months ended
	June 27,
($ in thousands)	2009
Cash and cash equivalents at beginning of period	$170,629
Net cash provided by operating activities	12,136
Net cash used in investing activities	(28,975)
Net cash used in financing activities	(14,431)
Net decrease in cash and cash equivalents	($31,270)
Cash and cash equivalents at end of period	$139,359

Cash and cash equivalents at June 27, 2009 decreased from December 31, 2008.  Cash provided by operations for the six months ended June 27, 2009, reflects the cash generated by operations partially offset by cash paid to Pentech in connection with the unfavorable court decision of approximately $66 million.  Cash flows used by investing activities were primarily driven by the acquisitions of Nascobal^® from QOL Medical, LLC and certain assets and liabilities from MDRNA, Inc. for approximately $55 million offset by the liquidation of net investments in available for sale debt securities to fund the acquisitions and the payment of the unfavorable court decision related to Pentech.  Cash used in financing activities in the six-month period ended June 27, 2009 mainly represented the repurchase of approximately $14 million (face value) of senior subordinated convertible notes.  

Our working capital, current assets minus current liabilities, of $327 million at June 27, 2009 increased approximately $123 million from $203 million at December 31, 2008, which reflects the reclassification of our senior subordinated convertible notes to long-term due to the June 2009 dismissal of the related litigation (see Note 14).  The working capital ratio, which is calculated by dividing current assets by current liabilities, was 2.22x at June 27, 2009 compared to 1.69x at December 31, 2008.  We believe that our working capital ratio indicates the ability to meet our ongoing and foreseeable obligations for the next 12 fiscal months.  

44

Sources of Liquidity

Our primary source of liquidity is cash received from customers.  In the second quarter of 2009, we collected approximately $276 million with respect to net product sales as compared to approximately $150 million in the second quarter of 2008.  For year-to-date 2009, we collected approximately $437 million with respect to net product sales as compared to approximately $290 million in the comparable year-to-date period in 2008.  The increase can be attributed to our improved sales performance in the second quarter and year-to-date period of 2009 as compared to the prior year comparable periods, which, as discussed above, was driven primarily by metoprolol sales, the revenue from which increased dramatically in 2009 due to a lack of competitive products in the market.  Our ability to continue to generate cash from operations is predicated not only on our ability to maintain a sustainable amount of sales of our current product portfolio, but also our ability to monetize our product pipeline and future products that we may acquire.  Our generic product pipeline included 14 first-to-file and/or first-to-market opportunities (a total of 37 ANDAs pending with the FDA) and our Strativa pipeline had 3 brand drugs in active development as of June 27, 2009.  Our future profitability depends, to a significant extent, upon our ability to introduce, on a timely basis, new generic products that are either the first to market (or among the first to market) or otherwise can gain significant market share.  Commercializing brand pharmaceutical products is more costly than generic products.  We cannot be certain that our expenditures will result in the successful development or launch of brand products that will prove to be commercially successful or will improve the long-term profitability of our business.  

We also filed a “shelf” registration statement during the second quarter of 2009.  Under the “shelf” registration, we may sell any combination of common stock, preferred stock, debt securities, or warrants from time to time for an aggregate offering price of up to $150 million.  We have no current plans to raise capital via the “shelf” registration statement.  

Uses of Liquidity

Our uses of liquidity and future and potential uses of liquidity include the following:

·

Cash paid for the acquisitions of Nascobal^® from QOL Medical, LLC and certain assets and liabilities from MDRNA, Inc. for approximately $55 million during the second quarter of 2009.  

·

Cash paid to Pentech in connection with the unfavorable court decision of approximately $66 million in the first quarter of 2009.

·

Cash paid for inventory purchases was approximately $57 million for the second quarter of 2009 as compared to approximately $38 million for prior year quarter.  Cash paid for inventory purchases was approximately $94 million for the year-to-date period in 2009 as compared to approximately $69 million for prior year year-to-date period.  The increase is mainly due to our 2009 sales performance improvement, which resulted in improved inventory turns.

·

Cash paid to all other suppliers and third parties was approximately $171 million for the second quarter of 2009 as compared to approximately $92 million for the prior year quarter.  Cash paid to all other suppliers and third parties was approximately $274 million for the year-to-date period in 2009 as compared to approximately $149 million for the prior year comparable period.  The increase is mainly due to our 2009 sales performance improvement of distributed products that resulted in higher amounts paid to partners.   

·

Cash compensation paid to employees was approximately $15 million for the second quarter of 2009 as compared to approximately $15 million for the prior year quarter.  Cash compensation paid to employees was approximately $35 million for the year-to-date period in 2009 as compared to approximately $43 million for the prior year year-to-date period.  The decrease for the year-to-date period was mainly due to the resizing of our generic products division begun in October 2008, which resulted in a workforce reduction of approximately 190 positions coupled with lower bonus payments in 2009.   

·

The payment of the senior subordinated convertible notes with a face amount of $128.2 million at June 27, 2009 by September 2010 or sooner.

·

Potential liabilities related to the outcomes of audits by regulatory agencies like the IRS or the Office of Inspector General of the Department of Veterans Affairs.  We accrued for a loss contingency estimated at approximately $4.9 million, including interest, as of June 27, 2009 related to a routine post award contract review of our Department of Veterans Affairs contract for the periods 2004 to 2007 that is being conducted by the Office of Inspector General of the Department of Veterans Affairs.  In the event that our loss contingency is ultimately determined to be higher than originally accrued, the recording of the additional liability may result in a material impact on our liquidity or financial condition when such additional liability is paid.  

·

2009 capital expenditures are expected to total approximately $8 million.  

·

Expenditures related to current business development and product acquisition activities.  As of June 27, 2009, the total potential future payments that ultimately could be due under existing agreements related to products in various stages of development were approximately $50 million. This amount is exclusive of contingencies tied to the achievement of sales milestones, which will be funded through future revenue streams.  

45

·

Normal course payables due to distribution agreement partners of approximately $177 million as of June 27, 2009 related primarily to amounts due under profit sharing agreements.  We expect to pay substantially all of the $177 million during the first two months of the third quarter of 2009.  The risk of lower cash receipts from customers due to potential decreases in revenues associated with competition or supply issues related to partnered products, in particular metoprolol, would be mitigated by proportional decreases in amounts payable to distribution agreement partners.  

We believe that we will be able to monetize our current product portfolio, our product pipeline, and future product acquisitions and generate sufficient operating cash flows and that along with existing cash, cash equivalents and available for sale securities will allow us to meet our financial obligations over the foreseeable future.  We expect to continue to fund our operations, including our research and development activities, capital projects, in-licensing product activity and obligations under our existing distribution and development arrangements discussed herein, out of our working capital.  Our future product acquisitions may require additional debt and/or equity financing; there can be no assurance that we will be able to obtain any such additional financing when needed on acceptable or favorable terms.

In 2004, our Board authorized the repurchase of up to $50 million of our common stock.  Repurchases are made, subject to compliance with applicable securities laws, from time to time in the open market or in privately negotiated transactions.  Shares of common stock acquired through the repurchase program are available for general corporate purposes.  On September 28, 2007, we announced that our Board approved an expansion of our share repurchase program allowing for the repurchase of up to $75 million of our common stock, inclusive of the $17.8 million remaining from the 2004 authorization.  We repurchased 1.6 million shares of our common stock for approximately $31.4 million pursuant to the expanded program in the fourth quarter of 2007.  The authorized amount remaining for stock repurchases under the repurchase program was approximately $43.6 million, as of June 27, 2009.  We do not currently anticipate utilizing additional available authorization under the repurchase program.

In addition to our cash and cash equivalents, we had approximately $63 million of available for sale debt securities classified as current assets on the condensed consolidated balance sheet as of June 27, 2009.  These available for sale debt securities were all available for immediate sale.  We intend to continue to use our current liquidity to support the expansion of our Strativa business, enter into product license arrangements, potentially acquire other complementary businesses and products, and for general corporate purposes.

Contractual Obligations as of June 27, 2009

The dollar values of our material contractual obligations and commercial commitments as of June 27, 2009 were as follows, in $ thousands:

		Amounts Due by Period
Obligation	Total Monetary	2009	2010 to	2012 to	2014 and
	Obligations		2011	2013	thereafter	Other
Operating leases	$10,807	$2,435	$6,682	$1,337	$353	$ -
Convertible notes (1)	128,175	-	128,175	-	-	-
Interest payments (2)	4,649	1,888	2,761	-	-	-
Purchase obligations (3)	145,980	145,980	-	-	-	-
Long-term tax liability (4)	41,259	-	-	-	-	41,259
Severance payments	4,069	4,069	-	-	-	-
Other	372	372	-	-	-	-
Total obligations	$335,311	$154,744	$137,618	$1,337	$353	$41,259

(1)

The Senior Subordinated Convertible Notes mature on September 30, 2010, unless earlier converted or repurchased.  During July 2009, we also repurchased an additional $35.5 million (face value) of the Senior Subordinated Convertible Notes.  

(2)

 Interest payments represent the total interest due under the Notes until their contractual maturity on September 30, 2010.  A portion of these amounts would not be payable if the Notes are earlier converted, accelerated or repurchased.

(3)

 Purchase obligations consist of both cancelable and non-cancelable inventory and non-inventory items.  Approximately $97 million of the total purchase obligations at June 27, 2009 related to metoprolol.  

(4)

The difference between a tax position taken or expected to be taken in a tax return and the benefit recognized and measured pursuant to FIN 48 represents an unrecognized tax benefit.  An unrecognized tax benefit is a liability that represents a potential future obligation to the taxing authorities.  As of June 27, 2009, the amount represents unrecognized tax benefits, interest and penalties based on evaluation of tax positions and concession on tax issues challenged by the IRS.  We do not expect to make a significant tax payment related to these long-term liabilities within the next year; however, we cannot estimate in which period

46

thereafter such tax payments may occur.  For presentation on the table above, we included the related long-term liability in the “Other” column.     

Financing

At June 27, 2009, our total outstanding short and long-term debt, including the current portion, had a face value of $128.2 million.  The amount consisted of Senior Subordinated Convertible Notes that we sold in 2003 pursuant to Rule 144A under the Securities Act of 1933, as amended.  The Notes bear interest at an annual rate of 2.875%, payable semi-annually on March 30 and September 30 of each year.  The Notes are convertible into shares of common stock at an initial conversion price of $88.76 per share, only upon the occurrence of certain events.  Upon redemption, we have agreed to satisfy the conversion obligation in cash in an amount equal to the principal amount of the Notes converted.  The Notes mature on September 30, 2010, unless earlier converted or repurchased.  We may not redeem the Notes prior to the maturity date.    

In conjunction with the adoption of FSP APB 14-1, we allocated a portion of the Senior Subordinated Convertible Notes between liability and equity components of the instrument in a manner that reflects the issuer’s economic interest cost.  Previous guidance provided for accounting of our type of convertible debt instruments entirely as debt.  The effect of FSP APB 14-1 for our type of convertible debt instrument is that the equity component is included in the additional paid-in capital section of stockholders’ equity on Par’s condensed consolidated balance sheet and the value of the equity component is treated as original issue discount for purposes of accounting for the debt component of the convertible debt instruments.  FSP APB 14-1 was effective as of January 1, 2009, with retrospective application required.  Higher interest expense will result through the accretion of the discounted carrying value of the debt instruments to their face amount over their term.  Prior period interest expense was also higher than previously reported due to retrospective application.  As of June 27, 2009, our condensed consolidated balance sheet reflects the debt amount of $120.0 million, a related deferred tax liability amount of $3.2 million and an equity component of $5.0 million.  

Critical Accounting Policies and Use of Estimates

Our critical accounting policies are set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008 and our Current Report on Form 8-K dated June 19, 2009 that contains updated historical financial statements and financial data included in our 2008 Annual Report on Form 10-K for accounting adjustments related to the adoption of FSP APB 14-1.  There has been no change, update or revision to our critical accounting policies subsequent to the filing of our Annual Report on Form 10-K for the fiscal year ended December 31, 2008 and our Current Report on Form 8-K dated June 19, 2009.

Subsequent Events

In July 2009, we repurchased senior subordinated convertible notes that were to mature on September 30, 2010 in the aggregate principal amount of $35.5 million for approximately $34.0 million, including accrued interest.  The notes bore interest at an annual rate of 2.875%.  As of August 4, 2009, the notes had an outstanding aggregate principal amount of $92.7 million.   

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Available for sale debt securities   

The primary objectives for our investment portfolio are liquidity and safety of principal. Investments are made with the intention to achieve the best available rate of return on traditionally low risk investments.  We do not buy and sell securities for trading purposes.  Our investment policy limits investments to certain types of instruments issued by institutions with investment-grade credit ratings, the U.S. government and U.S. governmental agencies.  We are subject to market risk primarily from changes in the fair values of our investments in debt securities including governmental agency and municipal securities, and corporate bonds.  These instruments are classified as available for sale securities for financial reporting purposes.  A ten percent increase in interest rates on June 27, 2009 would have caused the fair value of our investments in available for sale debt securities to decline by approximately $0.2 million as of that date.  Additional investments are made in overnight deposits and money market funds. These instruments are classified as cash and cash equivalents for financial reporting purposes, generally have lower interest rate risk relative to investments in debt securities and changes in interest rates generally have little or no impact on their fair values.  For cash, cash equivalents and available for sale debt securities, a ten percent decrease in interest rates would decrease the interest income we earned by approximately $0.2 million on an annual basis.      

47

The following table summarizes the carrying value of available for sale securities that subject Par to market risk at June 27, 2009 and December 31, 2008 ($ amounts in thousands):

	June 27,	December 31,
	2009	2008
Securities issued by government agencies	$16,437	$41,541
Debt securities issued by various state and local municipalities and agencies	28,078	28,585
Other debt securities	18,465	24,320
Marketable equity securities available for sale	1,150	600
Total	$64,130	$95,046

Senior Subordinated Convertible Notes

The outstanding face value of our Senior Subordinated Convertible Notes on June 27, 2009 was $128.2 million and they bear fixed interest at an annual rate of 2.875%.  The Notes mature on September 30, 2010, unless earlier converted or repurchased.  On June 27, 2009, the Senior Subordinated Convertible Notes had a quoted market value of approximately $122.4 million, which was higher than the quoted market value as of December 31, 2008.  

We do not have any financial obligations exposed to significant variability in interest rates.  

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our filings with the SEC is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), as appropriate, to allow timely decisions regarding required disclosure based on the definition of  “disclosure controls and procedures” as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  In designing and evaluating disclosure controls and procedures, we have recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply judgment in evaluating our controls and procedures.  An evaluation was performed under the supervision and with the participation of Company management, including the CEO and the CFO, to assess the effectiveness of the design and operation of its disclosure controls and procedures (as defined under the Exchange Act) as of June 27, 2009.  Based on that evaluation, our management, including our CEO and the CFO, concluded that our disclosure controls and procedures were effective as of June 27, 2009.

Changes in Internal Control over Financial Reporting

Par completed the implementation of its new revenue management (contracts and pricing) system during the quarter ended June 27, 2009.  As a result there have been changes to our business processes; however, there have been no material changes to our internal controls over financial reporting.

 There have been no other changes identified during the quarter ended June 27, 2009 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

Contractual Matters

On May 3, 2004, Pentech Pharmaceuticals, Inc. (“Pentech”) filed an action against Par in the United States District Court for the Northern District of Illinois.  This action alleged that Par breached its contract with Pentech relating to the supply and marketing of paroxetine (Paxil®) and that Par breached fiduciary duties allegedly owed to Pentech.  On February 9, 2009, following a bench trial, the district court entered a judgment in favor of Pentech and against Par in the amount of $70 million.  Subsequently, on March 5, 2009, in order to avoid any further costs, burdens or distractions of litigation, Par entered into a Settlement Agreement with Pentech pursuant to which Par paid Pentech an amount of approximately $66 million.  Pursuant to the terms of the agreement, a stipulation dismissing the appeal of judgment and Pentech’s satisfaction of judgment was filed with the District Court.

48

Corporate Litigation

Par and certain of its former executive officers have been named as defendants in consolidated class action lawsuits filed on behalf of purchasers of common stock of Par between July 23, 2001 and July 5, 2006. The lawsuits followed Par’s July 5, 2006 announcement regarding the restatement of certain of its financial statements and allege that Par and certain members of its then management engaged in violations of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), by issuing false and misleading statements concerning Par’s financial condition and results of operations. The class actions are pending in the United States District Court, District of New Jersey.  On June 24, 2008, the Court dismissed co-lead plaintiffs’ Consolidated Amended Complaint without prejudice with leave to re-file.  On July 24, 2008, co-lead plaintiffs filed a Second Consolidated Amended Complaint. Par and the individual defendants have filed a motion to dismiss.  The motion has been fully briefed but not yet scheduled for argument.  Par and the individual defendants intend to vigorously defend the class action.

On September 1, 2006, Par received a notice of default from the American Stock Transfer & Trust Company, as trustee (the “Trustee”)  of Par’s 2.875% Senior Subordinated Convertible Notes due 2010 (the “Notes”). The Trustee claimed, in essence, that Par’s failure to include financial statements in its Quarterly Report on Form 10-Q for the second quarter of 2006 constituted a default under Section 6.2 of the Indenture, dated as of September 30, 2003 (the “Indenture”), between Par, as issuer, and the Trustee, relating to the Notes.  Under the Indenture, Par is required only to provide the Trustee with copies of its annual and other reports (or copies of such portions of such reports as the SEC may by rules and regulations prescribe) that it is required to file with the SEC pursuant to Section 13 or 15(d) of the Exchange Act within 15 calendar days after it files such annual and other reports with the SEC. Moreover, Par’s Indenture specifically contemplates providing the Trustee with portions of reports. On August 24, 2006 (within 15 days of filing with the SEC), Par provided to the Trustee a copy of its Quarterly Report on Form 10-Q for the second quarter of 2006. Par’s Form 10-Q did not include Par’s financial statements for the second quarter of 2006 and related Management’s Discussion and Analysis due to Par’s work to restate certain of its past financial statements, and, therefore, in accordance with SEC rules, Par filed a Form 12b-25 Notification of Late Filing disclosing the omissions. Par’s Form 12b-25 also was provided to the Trustee on August 24, 2006. Accordingly, Par believes that it complied with the Indenture provision in question.

After Par communicated its position to the Trustee, the Trustee filed a lawsuit, on October 19, 2006, on behalf of the holders of the Notes, in the Supreme Court of the State of New York, County of New York, alleging a breach of the Indenture and of an alleged covenant of good faith and fair dealing. The lawsuit demanded, among other things, that Par pay the holders of the Notes either the principal, any accrued and unpaid interest and additional interest (as such term is defined in the Indenture), if any, or the difference between the fair market value of the Notes on October 2, 2006 and par, whichever the Trustee elects, or in the alternative, damages to be determined at trial, alleged by the Trustee to exceed $30.0 million. Par removed the lawsuit to the U.S. District Court for the Southern District of New York and filed its answer to the complaint in that Court. On January 19, 2007, the Trustee filed a motion for summary judgment. On February 16, 2007, Par filed its response to the Trustee’s motion for summary judgment and cross-moved for summary judgment in its favor.  On June 19, 2009, the U.S. District Court for the Southern District of New York dismissed the lawsuit.  On June 22, 2009, the Court issued its opinion and order denying the Trustee’s motion for summary judgment and granting Par’s cross-motion for summary judgment.  The Court ruled that Par’s actions did not breach the Indenture and dismissed all of the Trustees’ claims.    

Patent Related Matters

On April 28, 2006, CIMA Labs, Inc. (“CIMA”) and Schwarz Pharma, Inc. (“Schwarz Pharma”) filed separate lawsuits against Par in the United States District Court for the District of New Jersey.  CIMA and Schwarz Pharma each have alleged that Par infringed U.S. Patent Nos. 6,024,981 (the “’981 patent”) and 6,221,392 (the “’392 patent”) by submitting a Paragraph IV certification to the FDA for approval of alprazolam orally disintegrating tablets.  CIMA owns the ’981 and ’392 patents and Schwarz Pharma is CIMA’s exclusive licensee.  The two lawsuits were consolidated on January 29, 2007.  In response to the lawsuit, Par has answered and counterclaimed denying CIMA’s and Schwarz Pharma’s infringement allegations, asserting that the ’981 and ’392 patents are not infringed and are invalid and/or unenforceable. All 40 claims in the ’981 patent were rejected in two non-final office actions in a reexamination proceeding at the United States Patent and Trademark Office (“PTO”) on February 24, 2006 and on February 24, 2007.  The ‘392 patent is also the subject of a reexamination proceeding.  As of July 10, 2008, the PTO has rejected with finality all claims pending in both the ‘392 and ‘981 patents.  CIMA has moved to stay this lawsuit pending the outcome of the reexamination proceedings and to consolidate this lawsuit with another lawsuit in the same district involving the same patents (CIMA Labs, Inc. et al. v. Actavis Group hf et al.). Par intends to vigorously defend this lawsuit and pursue its counterclaims.

Par entered into a licensing agreement with developer Paddock Laboratories, Inc. (“Paddock”) to market testosterone 1% gel, a generic version of Unimed Pharmaceuticals, Inc.’s (“Unimed”) product Androgel®.  Pursuant to this agreement, Par is responsible for management of any litigation and payment of all legal fees associated with this product.  The product, if successfully brought to market, would be manufactured by Paddock and marketed by Par.  Paddock has filed an ANDA (that is pending with the FDA) for the testosterone 1% gel product.  As a result of the filing of the ANDA, Unimed and Laboratories Besins Iscovesco (“Besins”), co-assignees of the patent-in-suit, filed a lawsuit against Paddock in the United States District Court for the Northern District of Georgia, alleging patent infringement on August 22, 2003.  Par has an economic interest in the outcome of this litigation by virtue of its licensing agreement with Paddock.  Unimed and Besins sought an injunction to prevent Paddock from manufacturing the generic

49

product.  On September 13, 2006, Par acquired from Paddock all rights to the ANDA for testosterone 1% gel, a generic version of Unimed’s product Androgel® for $6 million.  The lawsuit was resolved by a settlement and license agreement that terminates all on-going litigation and permits Par to launch the generic version of the product no earlier than August 31, 2015 and no later than February 28, 2016, assuring Par’s ability to market a generic version of Androgel® well before the expiration of the patents at issue.  On March 7, 2007, Par was issued a Civil Investigative Demand seeking information and documents in connection with the court-approved settlement in 2006 of the patent infringement case, Unimed v. Paddock, in the U.S. District Court for Northern District of Georgia.  The Bureau of Competition for the Federal Trade Commission (“FTC”) is investigating whether the settlement of the litigation constituted unfair methods of competition in a potential violation of Section 5 of the FTC Act.  On January 30, 2009, the FTC filed a lawsuit against the company in the U.S. District Court for the District of Central California alleging violations of antitrust laws stemming from Par’s court-approved settlement in the patent litigation.  On February 2, 2009, Meijer Distribution, Inc. filed a class action complaint in the same district court alleging antitrust violations and seeking treble damages. On February 3, 2009, both Rochester Drug Co-Operative, Inc. and Louisiana Wholesale Drug Co., Inc. filed class action complaints in the same district court.  On April 9, 2009, the U.S. District Court for Central California granted Par’s motion to transfer the FTC lawsuit, as well as the three aforementioned class action suits, to the U.S. District Court for Northern Georgia, the jurisdiction in which Par’s original consent judgment relating to the patent litigation settlement entered.  On April 10, 2009, the cases were transferred.  On April 17, 2009 the Fraternal Order of Police, Fort Lauderdale Lodge 31 Insurance Trust Fund filed a class action complaint naming Par in the U.S. District Court for the District of New Jersey and on April 21, 2009 Raymond Scurto on behalf of another class, filed a second class action complaint naming Par in the same court both alleging antitrust violations.  On May 28, 2009, the FTC filed an amended complaint in the United States District Court, Northern District of Georgia, realleging violations of antitrust laws stemming from Par’s court-approved settlement in the patent litigation but dropping its California state claims as well as its first Sherman Act claim.  On June 18, 2009, Rite Aid, Eckerd, and CVS, among others, filed a class action complaint naming Par in the U.S. District Court for the Middle District of Pennsylvania alleging antitrust violations.  On June 29, 2009, Walgreens, among others, filed a class action complaint naming Par in the U.S. District Court for the Middle District of Pennsylvania as well, alleging antitrust violations.  Par believes it has complied with all applicable laws in connection with the court-approved settlement and intends to vigorously defend these actions.

On December 19, 2006, Reliant Pharmaceuticals, Inc. (“Reliant”) filed a lawsuit against Par in the United States District Court for the District of Delaware.  Reliant alleged, in its Complaint, that Par infringed U.S. Patent No. 5,681,588 (the “’588 patent”) by submitting a Paragraph IV certification to the FDA for approval to market generic 325 mg Propafenone HCl SR capsules.  On January 26, 2007, Reliant amended its complaint to add the additional allegation that Par infringed the ‘588 patent by submitting a Paragraph IV certification to the FDA for approval to market generic 225 mg and 425 mg—in addition to the 325 mg—Propafenone HCl SR capsules.  Par has Answered and Counterclaimed denying Reliant’s infringement allegations, and asserting that the ’588 patent is invalid and unenforceable.  On April 17, 2009, a dismissal with prejudice was entered in the case pursuant to a settlement agreement between the parties.  In view of this agreement, Par will enter the market with generic Rythmol SR on January 1, 2011 or earlier depending on certain circumstances.

On May 9, 2007, Purdue Pharma Products L.P. (“Purdue”), Napp Pharmaceutical Group Ltd. (“Napp”), Biovail Laboratories International SRL (“Biovail”), and Ortho-McNeil, Inc. (“Ortho-McNeil”) filed a lawsuit against Par in the United States District Court for the District of Delaware.  The complaint alleges infringement of U.S. Patent No. 6,254,887 (the “’887 patent”) because Par submitted a Paragraph IV certification to the FDA for approval of 200 mg extended release tablets containing tramadol hydrochloride.  On May 30, 2007, Par filed its Answer and Counterclaim to the Complaint seeking a declaration of noninfringement and invalidity of the '887 patent.  A subsequent Complaint was served on July 2, 2007 in the same District Court.  The new Complaint alleges that Par's 100 mg and 200 mg extended release tablets containing tramadol hydrochloride infringe the ‘887 patent.  Par filed its Answer and Counterclaim on July 23, 2007 and will assert all available defenses in addition to seeking a declaration of noninfringement and invalidity of the '887 patent.  On October 24, 2007, plaintiffs filed an amended complaint in the Delaware District Court in view of Par's amendment of its ANDA to include the 300 mg strength of extended release tramadol. On April 22, 2009, Par’s bench trial in U.S. District Court of Delaware concluded and Par filed its post-trial briefs on May 23, 2009 and its replies on June 15, 2009.   Par awaits the court’s decision and intends to defend this action vigorously and pursue its counterclaims against the plaintiffs.

On July 6, 2007, Sanofi-Aventis and Debiopharm, S.A. filed a lawsuit against Par and its development partner, MN Pharmaceuticals ("MN"), in the United States District Court for the District of New Jersey.  The complaint alleges infringement of U.S. Patent Nos. 5,338,874 and 5,716,988 because Par and MN submitted a Paragraph IV certification to the FDA for approval of 50 mg/10 ml, 100 mg/20 ml, and 200 mg/40 ml oxaliplatin by injection.  Par and MN filed their Answer and Counterclaims on October 10, 2007 and an amendment to it on October 22, 2007.  On January 14, 2008, following MN's amendment of its ANDA to include oxaliplatin injectable 5 mg/ml, 40 ml vial, Sanofi-Aventis filed a complaint asserting infringement of the '874 and the '988 patents.  Par and MN filed their Answer and Counterclaim on February 20, 2008.  The court has set an expert discovery deadline of June 9, 2009, with all motions due by June 15, 2009.  On June 18, 2009, the U.S. District Court granted summary judgment of non-infringement to several defendants including Par on the ’874 patent but has not rendered a summary judgment decision regarding the ’988 patent to date.  On June 15, 2009, Par filed motions for summary judgment concerning two additional patents to accompany the Company’s earlier filed summary judgment motions on the ’874 and ’988 patents.  Par and MN intend to defend these actions vigorously and pursue their counterclaims against Sanofi and Debiopharm.

50

On September 21, 2007, Sanofi-Aventis and Sanofi-Aventis U.S., LLC (“Sanofi-Aventis”) filed a lawsuit against Par and its development partner, Actavis South Atlantic LLC ("Actavis"), in the United States District Court for the District of Delaware.  The complaint alleges infringement of U.S. Patent Nos. 4,661,491 and 6,149,940 because Par and Actavis submitted a Paragraph IV certification to the FDA for approval of 10 mg alfuzosin hydrochloride extended release tablets. Par has filed an Answer to the Complaint and counterclaims that the patents asserted are not infringed and are invalid.  On April 3, 2008, the judge ordered all actions in the case stayed pending the plaintiff’s motion for transfer and consolidation under the rules governing multi-district litigation.  On June 9, 2008, the Multi-District Litigation Panel granted plaintiff’s motion for transfer and consolidation and lifted the stay of litigation.  On December 24, 2008, Par agreed to terminate its collaboration agreement with Actavis and, with it, all obligations and all benefits related to Alfuzosin.  An order for stipulated dismissal of Par from the litigation was entered May 9, 2009.

 On October 1, 2007, Elan Corporation, PLC (“Elan”) filed a lawsuit against Par and its development partner, IntelliPharmaCeutics Corp., and IntelliPharmaCeutics Ltd. ("IPC") in the United States District Court for the District of Delaware.  On October 5, 2007, Celgene Corporation (“Celgene”) and Novartis filed a lawsuit against IPC in the United States District Court for the District of New Jersey.  The Complaint in the Delaware case alleged infringement of U.S. Patent Nos. 6,228,398 and 6,730,325 because Par submitted a Paragraph IV certification to the FDA for approval of 5, 10, 15, and 20 mg dexmethylphenidate hydrochloride extended release capsules.  The original Complaint in the New Jersey case alleged infringement of U.S. Patent Nos. 6,228,398; 6,730,325; 5,908,850; 6,355,656; 6,528,530; 5,837,284; and 6,635,284 because Par and IPC submitted a Paragraph IV certification to the FDA for approval of 5, 10, 15, and 20 mg dexmethylphenidate extended release capsules.  Par and IPC filed an Answer and Counterclaims in both the Delaware case and the New Jersey case.  Elan filed a motion to consolidate the cases on January 2, 2008, and on February 20, 2008, the judge in the Delaware litigation consolidated all four related cases pending in Delaware and entered a scheduling order providing for April 15, 2009 as the deadline for all discovery, June 29, 2009 as the date for a Markman hearing, and August 17, 2009 as the date for a bench trial.  The Delaware court has established a March 5, 2009 deadline for fact discovery and a June 15, 2009 deadline for expert discovery.  A Rule 16 conference was held for the New Jersey litigation on March 4, 2008 setting a deadline of December 12, 2008 for all discovery with a Markman hearing scheduled for June 19, 2009.  The New Jersey court has set a fact discovery deadline of March 1, 2009.  On July 1, 2009, the Delaware district court removed the trial, pre-trial conference, and claim construction hearing from the calendar with discovery due November 6, 2009 and claim construction briefing due November 9, 2009.  Par intends to defend these actions vigorously and pursue its counterclaims against Elan, Celgene and Novartis.

On September 13, 2007, Santarus, Inc. (“Santarus”), and The Curators of the University of Missouri (“Missouri”) filed a lawsuit against Par in the United States District Court for the District of Delaware.  The Complaint alleges infringement of U.S. Patent Nos. 6,699,885; 6,489,346; and 6,645,988 because Par submitted a Paragraph IV certification to the FDA for approval of 20 mg and 40 mg omeprazole/sodium bicarbonate capsules.  Par filed its Answer and Counterclaims on October 17, 2007.  A scheduling conference was held February 11, 2008, setting September 8, 2008 as the date for the claim construction hearing and July 13, 2009 as the first day of the bench trial. On December 20, 2007, Santarus, Inc., and Missouri filed a second lawsuit against Par in the United States District Court for the District of Delaware alleging infringement of U.S. Patent Nos. 6,699,885; 6,489,346; 6,780,882; and 6,645,988 because Par submitted a Paragraph IV certification to the FDA for approval of 20 mg and 40 mg omeprazole/sodium bicarbonate powders for oral suspension.  Par filed an Answer and Counterclaims in this action as well.  On March 4, 2008, the cases pertaining to Par’s ANDAs for omeprazole capsules and omeprazole oral suspension (see below) were consolidated for all purposes.  Par filed its claim construction brief on August 22, 2008, and its answering brief on September 22, 2008, as the Court rescheduled the Markman hearing.  The Court held a Markman hearing on November 5, 2008 and issued its claim construction order on the same day.  The Delaware District Court conducted a bench trial from July 13-17, 2009, and found for Santarus only on the issue of infringement, while not rendering an opinion on the issues of invalidity and unenforceability.  The parties will participate in post-trial briefing with initial briefs due August 14, 2009.  Par intends to defend this action vigorously and pursue its counterclaims against Santarus and Missouri.

On December 11, 2007, AstraZeneca Pharmaceuticals, LP, AstraZeneca UK Ltd., IPR Pharmaceuticals, Inc. and Shionogi Seiyaku Kabushiki Kaisha filed a lawsuit against Par in the United States District Court for the District of Delaware.  The Complaint alleges patent infringement because Par submitted a Paragraph IV certification to the FDA for approval of 5 mg, 10 mg, 20 mg and 40 mg rosuvastatin calcium tablets.  Par filed an Answer and Counterclaims, and on April 11, 2008, the court held a scheduling conference setting the Markman hearing for March 10, 2009, the pre-trial conference for January 11, 2010, and a bench trial for February 15, 2010. Par intends to defend these actions vigorously and pursue its counterclaims against AstraZeneca Pharmaceuticals, LP, AstraZeneca UK Ltd., IPR Pharmaceuticals, Inc. and Shionogi Seiyaku Kabushiki Kaisha.

On November 14, 2008, Pozen, Inc. filed a lawsuit against Par in the United States District Court for the Eastern District of Texas.  The Complaint alleges infringement of U.S. Patent Nos. 6,060,499; 6,586,458; and 7,332,183 because Par submitted a Paragraph IV certification to the FDA for approval of 500 mg/85 mg naproxen sodium/sumatriptan succinate oral tablets.  Par filed an Answer and Counterclaims on December 8, 2008 and the court has scheduled a Markman hearing for February 2010 and trial for October 2010.  On March 17, 2009, Par filed an Amended Answer and Counterclaim in order to join GlaxoSmithKline as a counterclaim defendant in this litigation.  On April 28, 2009, GSK was dismissed from the case by the Court, but will be bound by its

51

decision and will be required to produce witnesses and materials during discovery.  Par intends to defend this action vigorously and pursue its counterclaims against Pozen.

On April 15, 2009, Par filed a declaratory judgment Complaint against Novartis and Ajinomoto Co., Inc. in the United States District Court for the Eastern District of Pennsylvania.  The complaint seeks declaratory judgment of invalidity and non-infringement of U.S. Patent Nos. 5,463,116; 5,488,150; 6,559,188; 6,641,841; 6,844,008; and 6,878,749 in view of Par’s December 22, 2004 submission of a Paragraph IV certification to the FDA for approval of 60 mg and 120 mg nateglinide oral tablets.  Par intends to prosecute this action vigorously against Novartis and Ajinomoto.  

On April 29, 2009, Pronova BioPharma ASA filed a lawsuit against Par in the United States District Court for the District of Delaware.  The complaint alleges infringement of U.S. Patent Nos. 5,502,077 and 5,656,667 because Par submitted a Paragraph IV certification to the FDA for approval of omega-3-acid ethyl esters oral capsules.  Par intends to defend this action vigorously and pursue its defenses and counterclaims against Pronova.   

On July 1, 2009, Alcon Research Ltd. filed a lawsuit against Par in the United States District Court for the District of Delaware.  The complaint alleges infringement of U.S. Patent Nos. 5,510,383; 5,631,287; 5,849,792; 5,889,052; 6,011,062; 6,503,497; 6,849,253 because Par submitted a Paragraph IV certification to the FDA for approval of 0.004% travoprost ophthalmic solutions and 0.004% travoprost ophthalmic solutions (preserved).  Par intends to defend this action vigorously and pursue its defenses and counterclaims against Alcon.

Industry Related Matters

Beginning in September 2003, Par, along with numerous other pharmaceutical companies, has been named as a defendant in actions brought by state Attorneys General and a number of municipal bodies within the state of New York, as well as a federal qui tam action brought on behalf of the United States by the pharmacy Ven-A-Care of the Florida Keys, Inc. ("Ven-A-Care") alleging generally that the defendants defrauded the state Medicaid systems by purportedly reporting “Average Wholesale Prices” (“AWP”) and/or “Wholesale Acquisition Costs” that exceeded the actual selling price of the defendants’ prescription drugs.  To date, Par has been named as a defendant in substantially similar civil law suits filed by the Attorneys General of Alabama, Alaska, Hawaii, Idaho, Illinois, Iowa, Kentucky, Massachusetts, Mississippi, South Carolina, Texas and Utah, and also by the city of New York, 46 counties across New York State and Ven-A-Care.  These cases generally seek some combination of actual damages, and/or double damages, treble damages, compensatory damages, statutory damages, civil penalties, disgorgement of excessive profits, restitution, disbursements, counsel fees and costs, litigation expenses, investigative costs, injunctive relief, punitive damages, imposition of a constructive trust, accounting of profits or gains derived through the alleged conduct, expert fees, interest and other relief that the court deems proper. Several of these cases have been transferred to the AWP multi-district litigation proceedings pending in the U.S. District Court for the District of Massachusetts for pre-trial proceedings.  The case brought by the state of Mississippi will be litigated in the Chancery Court of Rankin County, Mississippi and the federal case brought by Ven-A-Care will be litigated in the United States District of Massachusetts.  The other cases will likely be litigated in the state or federal courts in which they were filed.  In the Utah suit, the time for responding to the Complaint has not yet elapsed.  In each of the remainder of these matters, Par has either moved to dismiss the complaints or answered the complaints denying liability.  Par intends to defend each of these actions vigorously.

            In addition, at various times between 2006 and 2009, the Attorneys General of Florida, Indiana and Virginia and the United States Office of Personnel Management (the “USOPM”) issued subpoenas, and the Attorneys General of Michigan, Tennessee and Texas issued civil investigative demands, to Par.  The demands generally request documents and information relating to sales and marketing practices that allegedly caused pharmacies to dispense higher priced drugs when presented with prescriptions for certain products.  Par has provided, or is in the process of providing, certain documents in response to these subpoenas to the respective Attorneys General and the USOPM and will continue to cooperate with the Attorneys General and the USOPM in these investigations if it is called upon to do so. 

Other

On March 19, 2009, Par was served with a subpoena by the Department of Justice requesting documents related to Strativa’s marketing of Megace® ES.  The subpoena indicated that the Department of Justice is currently investigating promotional practices in the sales and marketing of Megace® ES.  We intend to fully cooperate with the Department of Justice's inquiry.

Par is, from time to time, a party to certain other litigations, including product liability litigations.  Par believes that these litigations are part of the ordinary course of its business and that their ultimate resolution will not have a material adverse effect on its financial condition, results of operations or liquidity.  Par intends to defend or, in cases where Par is plaintiff, to prosecute these litigations vigorously.

Contingency

Par accrued for a loss contingency related to a routine post award contract review of Par’s Department of Veterans Affairs contract (the “VA Contingency”) for the periods 2004 to 2007 that is being conducted by the Office of Inspector General of the

52

Department of Veterans Affairs.  The regulations that govern the calculations used to generate the pricing-related information are complex and require the exercise of judgment.  Should there be ambiguity with regard to how to interpret the regulations that govern the calculations, and report these calculations, and even in the absence of any such ambiguity, a governmental authority may take a position contrary to the position that Par has taken.  In accordance with Statement of Financial Accounting Standards No. 5, Accounting for Contingencies, Par accrues for contingencies by a charge to income when it is both probable that a loss will be incurred and the amount of the loss can be reasonably estimated.  In the event that Par’s loss contingency is ultimately determined to be higher than originally accrued, the recording of the additional liability may result in a material impact on Par’s results of operations, liquidity or financial condition when such additional liability is accrued.  Par’s estimate of the probable loss is approximately $4.9 million, including interest, which has been accrued as of June 27, 2009.

ITEM 1A.  RISK FACTORS

In addition to the other information set forth in this Report, you should carefully consider the factors discussed in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2008, which could materially affect our business, results of operations, financial condition or liquidity.  The risks described in our Annual Report on Form 10-K for the year ended December 31, 2008 have not materially changed.  The risks described in our Annual Report are not the only risks facing us.  Additional risks and uncertainties not currently known to us, or that we currently believe are immaterial, also may materially adversely affect our business, results of operations, financial condition or liquidity.

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

Issuer Purchases of Equity Securities⁽¹⁾

Quarter Ending June 27, 2009

Period	Total Number of Shares of Common Stock Purchased (2)	Average Price Paid per Share of Common Stock	Total Number of Shares of Common Stock Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares of Common Stock that May Yet Be Purchased Under the Plans or Programs (3)
March 29, 2009 through May 2, 2009	966	N/A	-	-
May 3, 2009 through May 30, 2009	372	N/A	-	-
May 31, 2009 through June 27, 2009	1,256	N/A	-	2,991,697
Total	2,594	N/A	-

(1)

In April 2004, the Board authorized the repurchase of up to $50.0 million of Par’s common stock.  Repurchases are made, subject to compliance with applicable securities laws, from time to time in the open market or in privately negotiated transactions, whenever it appears prudent to do so.  Shares of common stock acquired through the repurchase program are available for reissuance for general corporate purposes.  On September 28, 2007, we announced that our Board approved an expansion of its share repurchase program allowing for the repurchase of up to $75 million of our common stock, inclusive of the $17.8 million remaining from the April 2004 authorization.  The authorized amount remaining for stock repurchases under the repurchase program was $43.6 million, as of June 27, 2009.  The repurchase program has no expiration date.    

(2)

The total number of shares purchased represents 2,594 shares surrendered to Par to satisfy tax withholding obligations in connection with the vesting of restricted stock issued to employees.

(3)

Based on the closing price of our common stock on the New York Stock Exchange of $14.56 at June 26, 2009.

53

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

We held our Annual Meeting of Stockholders on June 9, 2009 and the following matters were voted upon.

PROPOSAL 1

The stockholders voted in favor of the proposal to elect our nominee for Class I director for a term expiring at the Annual Meeting of Stockholders to be held in 2012.

VOTES

VOTES

 FOR  

WITHHELD

Peter S. Knight

27,868,300

3,158,061

PROPOSAL 2

The firm of Deloitte & Touche LLP was ratified as our independent registered public accounting firm for the 2009 fiscal year.  30,908,024 shares voted in favor of the ratification of the selection of Deloitte & Touche LLP, 85,044 shares voted against, and 33,293 shares abstained.

PROPOSAL 3

Our non-binding advisory vote on Par’s 2008 executive compensation programs and policies for our Named Executives (as described in the Compensation Discussion and Analysis set forth in our Proxy Statement filed with the SEC on April 21, 2009) was approved by the stockholders.  28,867,001 shares voted in favor of the advisory vote, 2,100,735 shares voted against, and 58,625 shares abstained.

ITEM 6.  EXHIBITS

10.1

Asset Purchase Agreement by and among Par Pharmaceutical, Inc., QOL Medical, LLC and, solely with respect to certain provisions, the members of QOL, dated as of March 31, 2009 (filed herewith).*

31.1

Certification of the Principal Executive Officer (filed herewith).

31.2

Certification of the Principal Financial Officer (filed herewith).

32.1

Certification by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (attached hereto).

32.2

Certification by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (attached hereto).

*

Indicates that portions of this agreement have been omitted and filed separately with the SEC in a confidential treatment request pursuant to Rule 24b-2 of the Exchange Act.

54

SIGNATURES

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

PAR PHARMACEUTICAL COMPANIES, INC.

  (Registrant)

Date:  August 4, 2009

/s/ Patrick G. LePore                                                

Patrick G. LePore

Chairman, President and Chief Executive Officer

Date:  August 4, 2009

/s/ Lawrence A. Kenyon                                                      

Lawrence A. Kenyon

Executive Vice President and Chief Financial Officer

55

EXHIBIT INDEX

Exhibit Number

Description

10.1

Asset Purchase Agreement by and among Par Pharmaceutical, Inc., QOL Medical, LLC and, solely with respect to certain provisions, the members of QOL, dated as of March 31, 2009 (filed herewith).*

31.1

Certification of the Principal Executive Officer (filed herewith).

31.2

Certification of the Principal Financial Officer (filed herewith).

32.1

Certification by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (attached hereto).

32.2

Certification by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (attached hereto).

*

Indicates that portions of this agreement have been omitted and filed separately with the SEC in a confidential treatment request pursuant to Rule 24b-2 of the Exchange Act.

56

EX-10.1

CONFIDENTIAL INFORMATION OMITTED

(TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION)

ASTERISKS DENOTE SUCH OMMISSION

EXHIBIT 10.1

ASSET PURCHASE AGREEMENT

by and among

PAR PHARMACEUTICAL, INC.

QOL MEDICAL, LLC

and, solely with respect to certain provisions,

THE MEMBERS OF QOL

dated as of March 31, 2009

NY663381v.16

CONFIDENTIAL INFORMATION OMITTED

(TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION)

ASTERISKS DENOTE SUCH OMMISSION

TABLE OF CONTENTS

Page

1.

Purchase and Sale of Assets

1

1.1

Purchase and Sale of Assets.

1

1.2

Grant of License.

1

1.3

Grant of Sublicense.

2

1.4

Retention of Excluded Assets; Certain Documentation.

2

2.

Assumption of Liabilities

2

2.1

Assumption of Assumed Liabilities.

2

2.2

Excluded Liabilities.

2

3.

Purchase Price and Payment.

2

3.1

Purchase Price.

2

3.2

Allocation of Purchase Price.

3

3.3

Payment of Sales, Use and Other Taxes.

3

4.

Closing

3

4.1

Time and Place.

3

4.2

Deliveries at Closing.

4

5.

Representations and Warranties of Seller.

4

5.1

Organization, Etc.

4

5.2

Authority of Seller.

5

5.3

Consents and Approvals.

5

5.4

Non-Contravention.

5

5.5

Litigation; Compliance with Applicable Laws.

6

5.6

Financial Information.

6

5.7

Contracts.

6

- i - -

CONFIDENTIAL INFORMATION OMITTED

(TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION)

ASTERISKS DENOTE SUCH OMMISSION

5.8

Title to Acquired Assets.

7

5.9

Regulatory Issues.

8

5.10

Product Intellectual Property.

8

5.11

Tax Matters.

9

5.12

No Material Adverse Effect.

10

5.13

Brokers.

10

5.14

Disclaimer of Other Representations and Warranties.

10

6.

Representations and Warranties of Buyer.

10

6.1

Corporate Organization.

10

6.2

Authority of Buyer.

10

6.3

Consents and Approvals.

11

6.4

Non-Contravention.

11

6.5

Brokers.

11

7.

Covenants of the Parties

11

7.1

Conduct of the Business.

11

7.2

Continued Due Diligence.

12

7.3

Notices of Certain Events; Continuing Disclosure.

12

7.4

Exclusive Dealings.

13

7.5

Reasonable Best Efforts.

13

7.6

Cooperation and Transition.

13

7.7

Public Announcements.

14

7.8

Bulk Sales.

14

7.9

NDC Numbers; Marketing Materials.

14

7.10

Regulatory Matters.

15

7.11

Post-Closing Orders and Payments.

16

- ii - -

CONFIDENTIAL INFORMATION OMITTED

(TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION)

ASTERISKS DENOTE SUCH OMMISSION

7.12

Rebates; Government Price Reporting Obligations.

16

7.13

Insurance.

16

7.14

Sales Tax Certificate.

17

7.15

Further Assurances.

17

7.16

Product Returns.

17

7.17

Cooperation relating to Non-Indemnifiable Claims.

18

7.18

Release of Liens of Company Creditors.

18

8.

Conditions to the Obligations of Seller.

18

8.1

Agreements and Conditions.

18

8.2

Representations and Warranties.

18

8.3

No Legal Proceedings.

18

8.4

Officer’s Certificate.

19

8.5

Secretary’s Certificate.

19

8.6

Purchase Price.

19

8.7

Ancillary Agreements.

19

8.8

Sales Tax Certificate.

19

9.

Conditions to the Obligations of Buyer.

19

9.1

Agreements and Conditions.

19

9.2

Representations and Warranties.

19

9.3

No Legal Proceedings.

19

9.4

Officer’s Certificate.

20

9.5

Secretary’s Certificate.

20

9.6

Ancillary Agreements.

20

9.7

Certificates of Status.

20

9.8

Consents.

20

- iii - -

CONFIDENTIAL INFORMATION OMITTED

(TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION)

ASTERISKS DENOTE SUCH OMMISSION

9.9

Liens.

20

9.10

Restrictive Contracts.

20

9.11

Standstill Agreement.

20

9.12

Consummation of MDRNA Transaction.

20

9.13

Authorization Letters from DMF Holders.

20

9.14

Wholesaler Inventories.

21

9.15

Returns Report.

21

10.

Indemnification.

21

10.1

Termination of Representations and Warranties.

21

10.2

Indemnification Obligations of Seller.

21

10.3

Indemnification Obligations of Buyer.

21

10.4

Procedures for Indemnification; Defense.

22

10.5

Limitations.

23

11.

Termination and Abandonment.

24

11.1

Methods of Termination.

24

11.2

Procedure upon and Effect of Termination.

24

12.

Non-Competition; Confidentiality.

24

12.1

Non-Competition.

24

12.2

No-Competing Interests.

25

12.3

Non-Disruption.

25

12.4

Confidentiality.

25

12.5

Remedies for Breach.

25

13.

Miscellaneous

25

13.1

Notices.

25

13.2

Entire Agreement.

27

- iv - -

CONFIDENTIAL INFORMATION OMITTED

(TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION)

ASTERISKS DENOTE SUCH OMMISSION

13.3

Waiver.

27

13.4

Amendment.

27

13.5

Third Party Beneficiaries.

27

13.6

Assignment; Binding Effect.

27

13.7

Headings.

28

13.8

Severability.

28

13.9

Governing Law.

28

13.10

Consent to Jurisdiction and Forum Selection.

28

13.11

Expenses.

28

13.12

Counterparts.

28

14.

Definitions.

28

14.1

Defined Terms.

28

14.2

Construction of Certain Terms and Phrases.

38

14.3

Disclosure Schedules.

38

- v - -

CONFIDENTIAL INFORMATION OMITTED

(TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION)

ASTERISKS DENOTE SUCH OMMISSION

ANNEXES

Annex 1 – Non-Competition Provisions

Annex 2 – Certain Provisions Applicable to QOL Members

EXHIBITS

Exhibit A – Form of Seller Letter to FDA

Exhibit B – Form of Buyer Letter to FDA

Exhibit C – Form of Assignment and Assumption Agreement

Exhibit D – Form of Escrow Agreement

Exhibit E – Form of Patent Assignment

Exhibit F – Form of Trademark Assignment

SCHEDULES

Schedule 1.3	Sublicense
Schedule 5.3(a)	Seller Governmental Consents
Schedule 5.3(b)	Seller Third Party Consents
Schedule 5.4	Non-Contravention
Schedule 5.5(a)	Litigation
Schedule 5.6	Financial Information
Schedule 5.7(b)(i)	Restrictive Contracts
Schedule 5.7(b)(ii)	Assumed Contracts
Schedule 5.8	Liens
Schedule 5.9(b)	Regulatory Issues
Schedule 5.9(c)	Improvements to Manufacturing Process
Schedule 5.10(c)	Trademarks
Schedule 5.10(d)	Annuities, Maintenance Fees and Renewals
Schedule 6.3	Buyer Governmental Consents
Schedule 7.6(c)(i)	Restrictive Contracts to Amend or Terminated Before Closing
Schedule 7.6(c)(ii)	Restrictive Contracts to Amend or Terminated After Closing
Schedule 9.9	Liens, Etc. to be Released at Closing
Schedule 14.1(a)	Inventory
Schedule 14.1(b)	Certain Product Intellectual Property

- vi - -

CONFIDENTIAL INFORMATION OMITTED

(TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION)

ASTERISKS DENOTE SUCH OMMISSION

ASSET PURCHASE AGREEMENT

This Asset Purchase Agreement (this “Agreement”) is made and entered into as of March 31, 2009, by and among Par Pharmaceutical, Inc., a Delaware corporation (“Buyer”), QOL Medical, LLC, a Delaware limited liability company (“Seller”), and the members of Seller who are signatories to this Agreement (each, a “QOL Member”), it being understood that Trevor Blake and Edwin Hernandez have entered into this Agreement only with respect to Annex 1 and Annex 2 and the other QOL Members have entered into this Agreement only with respect to Annex 2. Buyer, Seller and the QOL Members are sometimes referred to in this Agreement individually as a “Party” and collectively as the “Parties”.

RECITALS

WHEREAS, Seller is the holder of certain Regulatory Approvals relating to Nascobal™ (cyanocobalamin, USP), both nasal spray and gel forms (as further defined herein, the “Product”); and

WHEREAS, Seller desires to sell the Regulatory Approvals and certain related assets and rights related to the Product to Buyer, and Buyer desires to purchase the  such assets and rights from Seller.

AGREEMENT

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

1.

Purchase and Sale of Assets

1.1

Purchase and Sale of Assets.

  Subject to the terms and conditions of this Agreement, at the Closing, Seller shall sell, transfer, convey, assign and deliver, or cause to be sold, transferred, conveyed, assigned and delivered, to Buyer, and Buyer shall purchase, acquire and accept from Seller, all of Seller’s right, title and interest in and to the Acquired Assets for the consideration set forth in Section 3.  At and subsequent to the Closing, the Seller shall perform all obligations required of Seller under this Agreement.

1.2

Grant of License.

(a)

Effective upon the Closing, Seller hereby grants to Buyer and its Affiliates a royalty-free, fully paid-up, perpetual, exclusive, transferable (only to a transferee of ownership of the Product), sub-licensable, world-wide and irrevocable license to use in connection with the making, having made, selling, having sold, using, and importing the

- 1 - -

CONFIDENTIAL INFORMATION OMITTED

(TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION)

ASTERISKS DENOTE SUCH OMMISSION

Product and any component thereof, any and all intellectual property rights currently existing as of the Closing and owned by Seller to the extent not included in Product Intellectual Property (including tooling and equipment specifications) that are necessary for Buyer’s making, having made, selling, having sold, using and importing of the Product and any component thereof as it is being done currently or currently contemplated by or on behalf of Seller (the “Other IP”).  The Parties hereby acknowledge and agree that (i) no license rights, other than those explicitly granted by Seller under this Section 1.2(a), are implicitly granted to Buyer with respect to the Other IP, and (ii) Seller expressly reserves all of its other rights with respect to the Other IP.

(b)

Subject to license granted in Section 1.2(a), all Other IP and the confidential information therein are and will remain the exclusive property or rights of the Seller, whether or not specifically recognized or perfected under the laws of the jurisdiction in which the Product is being made, sold, used or imported.  Buyer shall treat the confidential information embodied therein in the same manner it treats it own confidential information.  

1.3

Grant of Sublicense.

  Effective upon the Closing, Seller hereby grants a sublicense to Buyer and its Affiliates on terms and conditions set forth on Schedule 1.3.

1.4

Retention of Excluded Assets; Certain Documentation.

  From and after the Closing, Seller shall retain all of its right, title and interest in and to the Excluded Assets and Seller may retain, for legal and regulatory purposes only, an archival copy of all Assumed Contracts, Books and Records, Marketing Materials and other documents or materials conveyed hereunder.

2.

Assumption of Liabilities

2.1

Assumption of Assumed Liabilities.

  Subject to the terms and conditions of this Agreement, as of the Closing Date, Buyer agrees to assume, satisfy, perform, pay and discharge the Assumed Liabilities.

2.2

Excluded Liabilities.

  Seller shall retain and remain solely responsible for, and shall satisfy, perform, pay and discharge when due, any and all Excluded Liabilities.

3.

Purchase Price and Payment.

3.1

Purchase Price.

(a)

Purchase Price.  Buyer shall pay Fifty-Four Million Five Hundred Thousand Dollars ($54,500,000.00), subject to adjustment as set forth herein (the “Purchase Price”) and assume the Assumed Liabilities at Closing.

- 2 -

CONFIDENTIAL INFORMATION OMITTED

(TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION)

ASTERISKS DENOTE SUCH OMMISSION

(b)

Payments of Purchase Price.  At the Closing, Buyer shall make the following payments:

(i)

the Final Payoff Amount to the Company Creditors in accordance with the Payoff Letter;

(ii)

Two Million Dollars ($2,000,000.00) (the “Escrow Amount”) deposited by Buyer in an escrow account designated by the Escrow Agent (the “Escrow Account”) to be held in and disbursed from the Escrow Account in accordance with the terms of the Escrow Agreement, which amount shall be subject to reduction for indemnity claims in accordance with Section 10.2 and the Escrow Agreement; and

(iii)

Fifty-Two Million, Five Hundred Thousand Dollars ($52,500,000.00) minus the Final Payoff Amount, to Seller.

(c)

Escrow Release Date.  On the date one day after the date that is twenty-four (24) months following the Closing Date (such date, the “Escrow Release Date”), the Escrow Agent shall disburse to the Seller the amounts remaining in the Escrow Account, including any interest earned on the Escrow Amount, subject to any claim notice pursuant to Section 10.4 delivered to the Seller prior to 5:00 P.M. Eastern Standard Time on the Escrow Release Date (and any subsequent resolution of any disputes as provided in Section 10).

(d)

Payment of Funds.  All payments due to Seller pursuant to this Section 3.1 shall be paid by wire transfer of immediately available funds to accounts designated in writing by Seller at least two (2) Business Days prior to the Closing Date.

3.2

Allocation of Purchase Price.

  Within sixty (60) days after the Closing Date, Seller and Buyer shall agree in good faith on an allocation of the Purchase Price and all other capitalized costs among the Acquired Assets in accordance Section 1060 of the Code and the Treasury Regulations thereunder (and any state, local or foreign law, as applicable) (the “Tax Allocation”); provided, that Buyer and Seller agree that the Inventory and the non-compete provisions contained herein shall be valued at no more than $2,000,000 in the aggregate.  Each of the Parties agrees to report (and to cause its Affiliates to report) the transactions contemplated by this Agreement in a manner consistent with Section 1060 of the Code and the Treasury Regulations thereunder (and any state, local or foreign law, as applicable) and with the terms of this Agreement, including the Tax Allocation, and agrees not to take any position inconsistent therewith in any Tax Return (including IRS Form 8594), in any Tax refund claim, in any litigation or otherwise.

3.3

Payment of Sales, Use and Other Taxes.

  Seller shall be solely responsible for all sales, use, transfer, value added, gross receipts and other similar Taxes, if any, arising out of the sale by Seller of the Acquired Assets to Buyer pursuant to this Agreement, except for any recording fees due at the time of recording the assignments of any of the Acquired Assets.  Seller, as required by applicable Law, shall timely file or cause to be filed all necessary documents with respect to Taxes that are the Seller’s

- 3 -

CONFIDENTIAL INFORMATION OMITTED

(TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION)

ASTERISKS DENOTE SUCH OMMISSION

obligation.  Buyer shall be responsible for all recording fees due in connection with recording the assignment of any of the Acquired Assets from Seller to Buyer.  In addition, all personal property, ad valorem or other similar Taxes (other than and excluding income Taxes) levied with respect to the Acquired Assets for a taxable period which includes (but does not end on) the Closing Date shall be apportioned between Buyer and Seller based on the number of days included in such period through (and which includes) the Closing Date and the number of days included in such period after the Closing Date, and Buyer and Seller shall cooperate fully, as and to the extent reasonably requested by the other Party, in connection with the filing of Tax Returns with respect to Taxes addressed in this Section 3.3.

4.

Closing

4.1

Time and Place.

  The closing of the sale and transfer of the Acquired Assets, to be effective at 12:01 A.M. Eastern Standard Time on the Closing Date (the “Closing”), will take place at the offices of Buyer’s special counsel, K&L Gates LLP, located at 599 Lexington Avenue, New York, NY 10022, or at another place designated by Buyer, on the second (2^nd) Business Day following the date on which all of the conditions to each Party’s obligations under Sections 8 and 9 have been satisfied or (if permitted) waived, or at such other time, date and/or place as mutually agreed to by the Parties hereto (such date of the Closing being hereinafter referred to as the “Closing Date”).  

4.2

Deliveries at Closing.

(a)

Closing Deliveries by Seller.  At the Closing, Seller shall deliver or cause to be delivered: (i) immediately following the Closing to the FDA, a letter duly executed by Seller notifying the FDA of transfer of Seller’s rights to the Regulatory Approvals to Buyer, the form of which is attached hereto as Exhibit A; (ii) to Buyer, (A) physical possession of the Inventory by means of instruction to the third party in possession of the Inventory to ship the Inventory to the location designated by Buyer; (B) an electronic copy of the Seller NDA’s; (C) the Assumed Contracts; (D) the Assignment and Assumption Agreement and other instruments of assignment, conveyance and transfer as are necessary to effect and confirm the sale, transfer, conveyance, and assignment of the Acquired Assets and the assumption of the Assumed Liabilities, and the other Ancillary Agreements, each duly executed by Seller; and (E) correct and complete reports as set forth in Sections 9.14 and 9.15.  On or before the Closing Date, Seller shall commence shipment, to be received by Buyer no later than seven (7) Business Days after the Closing Date, of the Regulatory Approvals, Marketing Materials and the Books and Records to the location selected by Buyer.

(b)

Closing Deliveries by Buyer.  At the Closing, Buyer shall deliver or cause to be delivered to Seller, the Assignment and Assumption Agreement and other instruments of assignment, conveyance and transfer as are necessary to effect and confirm the sale, transfer, conveyance, and assignment of the Acquired Assets and the assumption of the Assumed Liabilities, and the other Ancillary Agreements to which the Buyer will become party, each duly executed by Buyer.  Upon receipt of the Seller NDAs in hardcopy form from Seller,

- 4 -

CONFIDENTIAL INFORMATION OMITTED

(TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION)

ASTERISKS DENOTE SUCH OMMISSION

Buyer shall deliver to the FDA a letter duly executed by Buyer notifying the FDA of the assumption by Buyer of the Regulatory Approvals, the form of which is attached hereto as Exhibit B.

5.

Representations and Warranties of Seller.

  Seller represents and warrants to Buyer as of the date of this Agreement and as of the Closing Date, subject to such exceptions as are specifically disclosed in the Disclosure Schedules supplied by Seller to Buyer and dated as of the date of this Agreement, as follows:

5.1

Organization, Etc.

  Seller is a limited liability company duly organized, validly existing and in good standing under the laws of Delaware and has all requisite power and authority to own its assets and carry on its business as currently conducted by it.  Seller has full limited liability company power and authority to conduct its business and is duly qualified and in good standing in each jurisdiction where such qualification is required, except for any jurisdiction where failure to be so qualified and/or in good standing would not reasonably be expected to materially impair or delay Seller’s ability to perform its obligations hereunder.

5.2

Authority of Seller.

  Seller has all necessary entity power and authority to enter into this Agreement and the Ancillary Agreements to which it shall become a party and to carry out the transactions contemplated hereby and thereby.  The execution, delivery and performance by Seller of its obligations under this Agreement and the Ancillary Agreements to which it shall become a party have been duly and validly authorized and no additional limited liability company or member authorization or consent is required in connection with the execution, delivery and performance by Seller of this Agreement or the Ancillary Agreements to which it shall become a party.  This Agreement and the Ancillary Agreements to which it shall become a party have been (or will be) duly and validly executed and delivered by Seller and, when executed and delivered by the QOL Members and the Buyer, will constitute a legal, valid and binding obligation of Seller enforceable against it in accordance with its terms except (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors rights generally, and (b) as limited by general principles of equity.

5.3

Consents and Approvals.

(a)

Except as set forth on Schedule 5.3(a), no consents, waivers, approvals, Orders or authorizations of, or registrations, declarations or filings with, any Governmental or Regulatory Authority (“Seller Governmental Consents”) are required by or with respect to Seller in connection with the execution and delivery by Seller of this Agreement or the Ancillary Agreements to which it shall become a party or the performance of its obligations hereunder or thereunder.

- 5 -

CONFIDENTIAL INFORMATION OMITTED

(TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION)

ASTERISKS DENOTE SUCH OMMISSION

(b)

Except as set forth on Schedule 5.3(b), no consents, waivers, approvals, or authorizations of, or notices to, any third party (other than a Governmental or Regulatory Authority) (“Seller Third Party Consents”, and together with Seller Governmental Consents, the “Seller Consents”) are required by or with respect to Seller in connection with the execution and delivery by Seller of this Agreement or the Ancillary Agreements to which it shall become a party or the performance of its obligations hereunder or thereunder.

5.4

Non-Contravention.

  Except as set forth on Schedule 5.4, the execution and delivery by Seller of this Agreement and the Ancillary Agreements to which it shall become a party does not, and the performance by Seller of its obligations hereunder and thereunder and the consummation of the transactions contemplated hereby and thereby will not:

(a)

conflict with or violate any provisions of the organizational documents of Seller;

(b)

assuming the receipt of the Seller Consents, conflict with or result in a violation or breach of any term or provision of any Law applicable to Seller or the Acquired Assets; or

(c)

assuming the receipt of the Seller Consents, conflict with or result in a breach or default (or an event that, with notice or lapse of time or both, would constitute a breach or default) under, or termination of, any Assumed Contract.

5.5

Litigation; Compliance with Applicable Laws.

(a)

Except as set forth on Schedule 5.5(a), there is no claim, action, suit, investigation or proceeding pending against (or to the Knowledge of Seller any basis therefor), or to the Knowledge of Seller, threatened against or affecting, any Acquired Asset, or the transactions contemplated hereby before any court or arbitrator or any governmental body, agency, official or authority.

(b)

Except as set forth on Schedule 5.5(b), (i) Seller has not received any notice from any other Person challenging its ownership of or right to use any Product Intellectual Property and (ii) there has not been any, and there are no, product liability suits, claims, actions, proceedings or, to the Knowledge of Seller, investigations pending or, to the Knowledge of Seller, threatened against Seller, relating to the Product.

(c)

Except as set forth on Schedule 5.5(c), Seller is and has been in compliance in all material respects with all Laws applicable to the Acquired Assets (excluding the Legacy IP).  The foregoing shall not apply to matters concerning infringement or misappropriation of intellectual property rights, which are the subject of Section 5.10.

5.6

Financial Information.

- 6 -

CONFIDENTIAL INFORMATION OMITTED

(TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION)

ASTERISKS DENOTE SUCH OMMISSION

  Schedule 5.6 sets forth for the unaudited 2008 calendar year and the unaudited two (2)-month period ending on February 28, 2009, Seller’s gross sales of the Product and related Rebates (by category) and returns received and reserved for, all of which, except as noted on Schedule 5.6, were prepared in accordance with United States generally accepted accounting principles (“GAAP”), applied on a basis consistent with Seller’s past practices, subject to routine year-end adjustments (such as routine cutoff adjustments) and provided, that Rebates are estimated by period (as the actual amounts are not known until some time after the ends of the respective periods) in accordance with GAAP applied on a basis consistent with Seller’s past practices.  Also included on Schedule 5.6 are monthly reports generated by Seller’s service provider, Integrated Commercialization Solutions, Inc. (“ICS”), which reports reflect correct and complete Product returns data (detailing number of units and dollar amounts) for October 2008 through February 2009; provided, that inaccuracies in such reports that in the aggregate amount to less than $10,000 shall not constitute a breach of this representation and warranty.

5.7

Contracts.

(a)

For purposes of this Agreement, “Restrictive Contract” means the following, other than Assumed Contracts:

(i)

any material customer, client, licensing or supply Contract related to any of the Acquired Assets;

(ii)

any Contract containing any covenant or provision that materially limits, curtails or restricts the ability of Seller to make use of or transfer any Acquired Assets;

(iii)

any non-competition agreement or any other agreement or obligation that limits or purports to limit in any respect the manner in which, or the geographic areas in which, the Product may be developed, manufactured or sold;

(iv)

any partnership, joint venture or strategic alliance (or any contract substantially similar to any of the foregoing)  to which any Acquired Asset is subject;

(v)

any Contract pursuant to which any third party has any material right with respect to any Acquired Asset or the Product; or

(vi)

any commitment or agreement to enter into any of the foregoing.

(b)

Schedule 5.7(b)(i) sets forth a correct and complete list of the Restrictive Contracts and Schedule 5.7(b)(ii) sets forth a correct and complete list of Assumed Contracts.  Seller has heretofore delivered or made available (via Seller’s online data room) to Buyer a correct and complete copy of each contract required to be listed on Schedule 5.7(b)(i) and Schedule 5.7(b)(ii), together with any and all amendments and supplements thereto.

- 7 -

CONFIDENTIAL INFORMATION OMITTED

(TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION)

ASTERISKS DENOTE SUCH OMMISSION

(c)

Each of the Assumed Contracts is valid, binding and in full force and effect and is enforceable in all respects in accordance with its terms by Seller, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors’ rights generally and (ii) as limited by general principles of equity.  Except as set forth on Schedule 5.3(a) or Schedule 5.3(b), no approval, consent or waiver of any Person is needed in order that any Assumed Contract continue in full force and effect following the consummation of the transactions contemplated by this Agreement.  Seller is not in material default under any Assumed Contract, nor does any condition exist that, with notice or lapse of time or both, would constitute a material default thereunder by Seller.  To the Knowledge of Seller, no other party to any Assumed Contract is in material default thereunder, nor does any condition exist that with notice or lapse of time, or both, would constitute a material default by any such other party thereunder.  Seller has not received any notice of breach or default with respect to any Assumed Contract, which breach has not been cured, or granted to any third party any rights, adverse or otherwise, that would constitute a material breach of any Assumed Contract, and Seller has not received any notice of termination or cancellation under any Assumed Contract.

5.8

Title to Acquired Assets.

  Subject to the disclosures provided in Schedule 5.8, Seller has good and marketable title to, or a valid, enforceable and transferable interest in, the Acquired Assets (except that with respect to Product Intellectual Property other than the Patents and Trademarks, Seller has a valid and enforceable right to use such Product Intellectual Property), free and clear of all mortgages, security interests, charges, encumbrances, liens, assessments, title defects, pledges, licenses and encroachments (“Liens”); provided, that the representations and warranties in this Section 5.8 shall not apply to Legacy IP that Seller has not used in connection with the Product.  The foregoing representations shall not apply to matters concerning infringement or misappropriation of intellectual property rights, which are the subject of Section 5.10.

5.9

Regulatory Issues.

(a)

Since October 17, 2005, Seller has filed or caused to be filed all notices and reports required by a Governmental or Regulatory Authority in connection with the Regulatory Approvals (other than those not yet due), including any such annual reports filed in accordance with FDA regulations; provided, that the foregoing representation and warranty shall not be interpreted as a representation and warranty that Seller’s raw material suppliers have filed all notices and reports required to be made by such suppliers.  Since October 17, 2005, Seller has not received:  (i) any FDA Form 483’s relating to the Product; (ii) any FDA Notices of Adverse Findings relating to the Product; or (iii) any warning letters from the FDA concerning the Product.  Since October 17, 2005, the Product has not been the subject of a product recall, market withdrawal or replacement required by any Governmental or Regulatory Authority or initiated by the Seller (other than routine replacements or refunds with respect to expired product and the voluntary discontinuation of sales of Nascobal Gel in 2006).

(b)

Schedule 5.9(b) sets forth a true and complete list of all (i) adverse drug experiences, (ii) material events and matters concerning or affecting safety of the

- 8 -

CONFIDENTIAL INFORMATION OMITTED

(TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION)

ASTERISKS DENOTE SUCH OMMISSION

Product brought to the attention of Seller and (iii) complaints brought to the attention of Seller with respect to the Product, whether related to safety, manufacturing, stability or otherwise, in each case, since October 17, 2005.  

(c)

Except as set forth on Schedule 5.9(c), Seller has not, during the twelve (12)-month period prior to the date hereof, designed, and, to the Knowledge of Seller, has no immediate intention of designing, any material improvements to the manufacturing process related to the Product.

(d)

Since October 17, 2005, Seller has complied with all obligations arising from or related to any commitments to or requirements of any Governmental or Regulatory Authority pursuant to any agreement entered into between Seller and such Governmental or Regulatory Authority and involving the Product.

5.10

Product Intellectual Property.

(a)

Other than as alleged in connection with the Litigation Matter, to the Knowledge of Seller, no third party is infringing the Patents or Trademarks or misappropriating the trade secrets within the Product Intellectual Property (excluding the Legacy IP).

(b)

Seller’s development, manufacture and sale of the Product and its use of the Product Intellectual Property  in connection therewith within the United States and South Korea as of the date hereof and as of the Closing Date has not and does not infringe, nor is such development, manufacture or sale of the Product or use of the Product Intellectual Property as of the date hereof and as of the Closing Date the result of any misappropriation of, any intellectual property rights of any other Person.  Except as disclosed on Schedule 5.10(b), there have been no claims asserted against Seller alleging that Seller’s development, manufacture or sale of the Product or Seller’s use of the Product Intellectual Property in such countries infringes or is the result of any misappropriation of any intellectual property rights of any other Person.  

(c)

Schedule 5.10(c) sets forth a correct and complete list of all Trademarks (including registration numbers and jurisdictions of registrations), domain names and a scanned copy of the Trade Dress used in the marketing of the Product, other than “QOL” and any derivation thereof.

(d)

Since October 17, 2005 with respect to the Trademarks and since June 12, 2007 with respect to the Patents, (i) Seller has paid all annuities and maintenance fees and filed all renewals due as of the date hereof and Schedule 5.10(d) sets forth such annuities, maintenance fees and renewals due before May 31, 2009 in respect of the issued Patents and the Trademarks, and (ii) except as set forth on Schedule 5.10(d), in no instance has the eligibility of any issued Patent or Trademark, or any application that has been filed by Seller with respect to any Patent or Trademark, for protection under applicable Law been forfeited to the public domain by omission of any required notice or any other action or inaction of Seller.

5.11

Tax Matters.

- 9 -

CONFIDENTIAL INFORMATION OMITTED

(TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION)

ASTERISKS DENOTE SUCH OMMISSION

(a)

Seller has filed or caused to be filed on a timely basis all Tax Returns that it was required to file.  All such Tax Returns are true, correct and complete in all material respects.  All Taxes relating to the Acquired Assets that are due and payable have been timely paid in full.  There is no Tax deficiency that could result in any lien on the Product or any of the Acquired Assets or in a claim against Buyer as transferee or owner of the Acquired Assets.  There are no “bulk sales” provisions relating to Taxes that Buyer or Seller must comply with that could result in a Lien on the Acquired Assets or could result in the imposition of a Tax liability on Buyer.  Seller has collected and remitted (or shall remit) all sales and use Taxes as required by Law in each local jurisdiction in which it does business.  

(b)

Seller has not waived (and is not subject to a waiver of) any statute of limitations in respect of the payment or assessment of Taxes and has not agreed to any extension of time with respect to any Tax assessment or deficiency (other than with respect to limitation periods that have since expired).

(c)

Seller is not a party to any agreement extending the time within which to file any Tax Return.  There is no dispute or claim concerning any Tax Liability of Seller relating to any Acquired Asset either (i) claimed or raised by any taxing authority or (ii) otherwise known to Seller.  No claim has been made by a jurisdiction in which Seller does not file Tax Returns that Seller is or may be subject to Tax relating to any Acquired Asset by that jurisdiction and no taxing authority in such a jurisdiction has made any inquiry regarding such matters.

(d)

Seller is not obligated in connection with the Acquired Assets to pay the Taxes of another person by contract, as transferee, as successor, or otherwise.

(e)

Seller is not a “retailer” in accordance with the Laws of Kentucky, and Buyer will not be subject to successor liability for any Tax resulting from the purchase of the Acquired Assets located in Kentucky.

5.12

No Material Adverse Effect.

  There has been no Material Adverse Effect since December 1, 2008.

5.13

Brokers.

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

5.14

Disclaimer of Other Representations and Warranties.

  Except as expressly set forth in this Article 5, Seller makes no representation or warranty, express or implied, at law or in equity, in respect of any of its assets (including the Acquired Assets and the Assumed Liabilities), liabilities or operations, including

- 10 -

CONFIDENTIAL INFORMATION OMITTED

(TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION)

ASTERISKS DENOTE SUCH OMMISSION

with respect to merchantability or fitness for any particular purpose, and any such other representations or warranties are hereby expressly disclaimed.  

6.

Representations and Warranties of Buyer.

  Buyer represents and warrants to Seller as of the date of this Agreement and as of the Closing Date, subject to such exceptions as are specifically disclosed in the Disclosure Schedules supplied by Buyer to Seller and dated as of the date of this Agreement, as follows:

6.1

Corporate Organization.

  Buyer is a corporation duly organized, validly existing and in good standing under the laws of Delaware and has all requisite power and authority to own its assets and carry on its business as currently conducted by it.  Buyer is duly authorized to conduct its business and is in good standing in each jurisdiction where such qualification is required, except for any jurisdiction where failure to so qualify could not reasonably be expected to materially impair or delay Buyer’s ability to perform its obligations hereunder.

6.2

Authority of Buyer.

  Buyer has all necessary power and authority to enter into this Agreement and the Ancillary Agreements to which it shall become a party and to carry out the transactions contemplated hereby and thereby.  The execution, delivery and performance by Buyer of this Agreement and the Ancillary Agreements to which it shall become a party have been duly and validly authorized and no additional corporate authorization or consent is required in connection with the execution, delivery and performance by Buyer of this Agreement or the Ancillary Agreements to which it shall become a party.  This Agreement and the Ancillary Agreements to which it shall become a party have been (or will be) duly and validly executed and delivered by Buyer and, when executed and delivered by Seller and the QOL Members, will constitute a legal, valid and binding obligation of Buyer enforceable against it in accordance with its terms except (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors’ rights generally, and (b) as limited by general principles of equity.

6.3

Consents and Approvals.

  Except as set forth on Schedule 6.3, no consents, waivers, approvals, Orders or authorizations of, or registrations, declarations or filings with, any Governmental or Regulatory Authority are required by Buyer (“Buyer Governmental Consents”) in connection with the execution and delivery by Buyer of this Agreement or the Ancillary Agreements to which it shall become a party or the performance of its obligations hereunder or thereunder.

6.4

Non-Contravention.

  The execution and delivery by Buyer of this Agreement and the Ancillary Agreements to which it shall become a party does not, and the performance by it of its

- 11 -

CONFIDENTIAL INFORMATION OMITTED

(TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION)

ASTERISKS DENOTE SUCH OMMISSION

obligations hereunder and thereunder and the consummation of the transactions contemplated hereby and thereby will not:

(a)

conflict with or violate any provision of the organizational documents of Buyer; or

(b)

assuming the receipt of all Buyer Governmental Consents, conflict with or result in a violation or breach of any term or provision of any Law applicable to Buyer.

6.5

Brokers.

  Buyer has not retained any broker in connection with the transactions contemplated hereunder.  Neither Seller nor any QOL Member has, and will not have, any obligation to pay any brokers, finders, investment bankers, financial advisors or similar fees in connection with this Agreement or the transactions contemplated hereby by reason of any action taken by or on behalf of Buyer.

7.

Covenants of the Parties

7.1

Conduct of the Business.

  From the date hereof until the Closing Date, (a) Seller shall (i) conduct its business with respect to the Product and the Acquired Assets only in the ordinary course, consistent with past practices and reasonable industry standards, (ii) continue to conduct the Litigation Matter in a diligent manner and (iii) maintain all Regulatory Documentation as current and timely, as required by the FDA or other Governmental or Regulatory Authority, and (b) Seller shall not without the consent of the Buyer (which consent shall not be unreasonably withheld, delayed or conditioned):

(i)

sell, lease, license or otherwise dispose of the Acquired Assets except (A) pursuant to existing contracts or commitments and (B) the sale of the inventory in the ordinary course of business consistent with past practices;

(ii)

terminate or amend any agreement set forth on Schedule 5.7(b)(i) or Schedule 5.7(b)(ii) other than as contemplated by Section 7.6(c) or enter into any agreement or arrangement that would, if in effect as of the date hereof, otherwise be required to be set forth on such Schedule other than purchase orders in the ordinary course of business;

(iii)

engage in any special promotional activities and/or special discounts with respect to the Product;

(iv)

(A) take or agree or commit to take any action that would make any representation and warranty made by Seller under this Agreement on the date hereof inaccurate in any respect at, or as of any time prior to, the Closing Date or (B) omit or agree or commit to omit to take any action necessary to prevent any such representation or warranty from being inaccurate in any respect at any such time; or

- 12 -

CONFIDENTIAL INFORMATION OMITTED

(TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION)

ASTERISKS DENOTE SUCH OMMISSION

(v)

settle or agree to settle any claim, suit, action or other proceeding relating to the Product or the Acquired Assets or file any motions or serve or respond to any discovery requests in the Litigation Matter; or

(vi)

agree or commit to do any of the foregoing.

7.2

Continued Due Diligence.

  From the date hereof until the Closing Date, Seller shall (a) give Buyer, its counsel, financial advisors, financing sources, auditors and other authorized representatives full access to the offices, properties, books and records of Seller related to the Product and the Acquired Assets, (b) furnish to Buyer, its counsel, financial advisors, auditors and other authorized representatives such financial and operating data and other information relating to the Product and the Acquired Assets as such Persons may reasonably request and (c) instruct the employees, counsel and financial advisors of Seller to cooperate with Buyer in its investigation of the Product and the Acquired Assets.  No investigation by Buyer pursuant to this Section 7.2 shall affect any representation or warranty given by Seller hereunder or any of Buyer’s rights under this Agreement.

7.3

Notices of Certain Events; Continuing Disclosure.

(a)

Seller shall promptly notify Buyer of:

(i)

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 or otherwise asserting or claiming any rights with respect to the Product or the Acquired Assets;

(ii)

any notice or other communication from any Governmental or Regulatory Authority relating to the Product or the Acquired Assets; and

(iii)

any actions, suits, claims, investigations or proceedings commenced or, to the Knowledge of Seller, threatened against, or relating to or involving or otherwise against or affecting the Product or the Acquired Assets or that relate to the consummation of the transactions contemplated by this Agreement.

(b)

Until the Closing Date, Seller and Buyer shall have the continuing obligation promptly to advise the other party with respect to any matter hereafter arising or discovered that, if existing or known at the date of this Agreement, would have been required to be set forth or described in a Disclosure Schedule to this Agreement (including adding new Disclosure Schedules to include the matters that are an exception to a representation or warranty but for which no Schedule is currently provided), or that constitutes a breach or prospective breach of this Agreement; provided, that except as indicated in this Section 7.3(b), no such supplemental disclosure will be deemed to cure any breach as of the date of this Agreement of any representation or warranty contained herein.  If Seller supplements its Disclosure Schedules between the date hereof and the Closing Date pursuant to this Section 7.3(b) and such matters so disclosed would cause the condition set forth in Section 9.2 not to be

- 13 -

CONFIDENTIAL INFORMATION OMITTED

(TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION)

ASTERISKS DENOTE SUCH OMMISSION

met, then, notwithstanding anything herein to the contrary, Buyer shall have the option to elect either:  (i) to terminate this Agreement in accordance with Section 11.1; or (ii) to proceed to close the transactions contemplated by this Agreement, in which event Seller shall have no liability whatsoever with respect to such matters and such disclosure shall be deemed to cure any misrepresentation or breach of warranty that might have otherwise existed under this Agreement by reason of the failure to have disclosed such items as of the date hereof.

7.4

Exclusive Dealings.

  From the date hereof until the earlier of the Closing Date and the termination of this Agreement in accordance with its terms, Seller and each QOL Member shall not, and shall cause Seller’s directors, officers, employees, agents, Affiliates not to, directly or indirectly, solicit or initiate the submission of proposals from, or solicit, encourage, entertain or enter into any arrangement, agreement, letter of intent or understanding with, or engage in any negotiations with, or furnish any information to, any Person, other than Buyer or any representative(s) or agent(s) thereof, with respect to any encumbrance or the direct or indirect acquisition of the Acquired Assets or any material portion thereof (including any proposed acquisition of Seller), except in connection with the sale of inventory in the ordinary course consistent with Seller’s past practice.  Should Seller, any QOL Member or any of their respective Affiliates or representatives, during such period, receive any offer or inquiry relating to any such encumbrance or acquisition, or obtain information that such an offer is likely to be made, Seller shall provide the Buyer with immediate written notice thereof.

7.5

Reasonable Best Efforts.

  Each Party shall use its Reasonable Best Efforts to take, or cause to be taken, all action, or to do, or cause to be done, all things necessary, proper or advisable under applicable Laws to consummate and make effective the transactions contemplated by this Agreement and to cause the conditions to the obligations of the Parties to consummate the transactions contemplated hereby to be satisfied (but not waived), including obtaining all consents and approvals of all Persons and Governmental or Regulatory Authorities and removing any injunctions or other impairments or delays that are necessary, proper or advisable to the consummation of the transactions contemplated by this Agreement.

7.6

Cooperation and Transition.

(a)

Subject to Section 7.10, each Party shall cooperate with the other in preparing and filing all notices, applications, submissions, reports and other instruments and documents (including post-Closing new drug application supplements or annual reports necessary for Buyer to manufacture, market, distribute and sell the Product in the United States and South Korea) that are necessary, proper or advisable under applicable Laws to consummate and make effective the transactions contemplated by this Agreement.  Without limiting the generality of the foregoing, Seller shall use commercially reasonable efforts to cooperate with Buyer in respect of Buyer’s efforts to obtain any consents and approvals of any Governmental or Regulatory Authority required for Buyer to be able to own and operate the Acquired Assets in the United States and South Korea, including providing data and information related to the

- 14 -

CONFIDENTIAL INFORMATION OMITTED

(TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION)

ASTERISKS DENOTE SUCH OMMISSION

Regulatory Approvals, Regulatory Documentation and the Product upon request of any Governmental or Regulatory Authority in the United States and South Korea.

(b)

The Parties shall cooperate to complete the transition of any applicable support services from Seller and its service providers to Buyer and its service providers at or as soon as practicable following the Closing Date.  Notwithstanding the foregoing, the Parties shall cooperate to agree upon terms for the provision by Seller and/or its service providers of any transition services required by Buyer until such services have been transitioned to Buyer and its service providers, including, if and as applicable, product supply provisions.

(c)

Seller shall cause (i) all Restrictive Contracts listed on Schedule 7.6(c)(i) to be terminated or amended to remove any application or effect with respect to the Acquired Assets at no cost to Buyer prior to the Closing Date and (ii) all Restrictive Contracts listed on Schedule 7.6(c)(ii) to be terminated or amended to remove any application or effect with respect to the Acquired Assets at no cost to Buyer as soon as reasonably practicable after the Closing Date.

(d)

Seller shall cause Ventiv Commercial Services, LLC to cease detailing the Product as of the Closing Date and thereafter.  Upon receipt of the acknowledgement of the filing of the renewal application for the Nascobal trademark registered in Japan as Registration # 4190179 and issued on March 18, 1998, Seller shall cause the assignment of such trademark by MDRNA Inc. (formerly Nastech Pharmaceutical Company, Inc.) to Seller to be filed with the appropriate Governmental and Regulatory Authority in Japan.

7.7

Public Announcements.

  Buyer and Seller each agrees that, prior and subsequent to the Closing, it and its representatives and members shall keep the terms of this Agreement confidential and shall not disclose such information to any other Person (except as necessary to carry out the express terms of this Agreement or to the extent such information becomes public information or generally available to the public through no fault of such Party or its Affiliates) without the prior written consent of the other Party (which shall not be unreasonably withheld), unless such Party reasonably believes that disclosure is required to be made under applicable Law or the requirements of a national securities exchange or another similar regulatory body (in which event such Party shall, upon request of any non-disclosing Party, exercise its Reasonable Best Efforts to obtain a protective order or other reliable assurance that confidential treatment will be accorded to the information so disclosed).

7.8

Bulk Sales.

  Buyer hereby waives compliance by Seller with the provisions of any so-called “bulk transfer law” of any jurisdiction in connection with the sale of the Acquired Assets to Buyer.  Seller will indemnify Buyer against, and pay and reimburse Buyer for, any and all costs, Liabilities and obligations that may be asserted by third parties against Buyer as a result of noncompliance with any such bulk transfer law.

- 15 -

CONFIDENTIAL INFORMATION OMITTED

(TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION)

ASTERISKS DENOTE SUCH OMMISSION

7.9

NDC Numbers; Marketing Materials.

(a)

Buyer may use Seller’s labeling, including Seller’s National Drug Code number (“NDC Number”) for the Product existing as of the date hereof (the “Current NDC Number”) and Corporate Names, to sell or sample any lots of the Product in Inventory.  Buyer shall apply for and initiate applicable processes to obtain and establish its own NDC Number for the Product.  

(b)

Buyer shall notify Seller reasonably in advance of the date it expects to cease sales of Product using the Current NDC Number (the “NDC Number Termination Date”).  Seller shall not discontinue the Current NDC Number prior to the NDC Number Termination Date.  Following the NDC Number Termination Date, Seller shall discontinue the use of the Current NDC Number other than with respect to Rebates, allowances and adjustments for Product sold prior to the Closing Date; provided, however, that Seller shall (i) not seek from any customer any type of cross-referencing of Buyer’s NDC Numbers with any of Seller’s products and (ii) provide Buyer with draft notifications to any of Seller’s customers regarding the use or discontinued use of such numbers by Seller prior to such notifications being disseminated to the customers.

(c)

Buyer may use any Marketing Materials included in the Acquired Assets following Closing; provided that Buyer uses its own name on such materials and completely removes all Corporate Names from, or completely covers all Corporate Names on, such materials (except as provided in Section 7.9(a) above).

7.10

Regulatory Matters.

(a)

On the Closing Date, Seller shall transfer the Regulatory Documentation to Buyer.

(b)

Subject to Section 7.10(a), from and after the Closing, Buyer, at its cost, shall be solely responsible and liable for (i) taking all actions, paying all fees and conducting all communication with the appropriate Governmental or Regulatory Authority required by Law in respect of the Regulatory Approvals or the Regulatory Documentation, including preparing and filing all reports (including adverse drug experience reports) with the appropriate Governmental or Regulatory Authority, (ii) taking all actions and conducting all communication with third parties in respect of the Product (whether sold before or after Closing), including responding to (A) complaints in respect thereof, including complaints related to tampering or contamination, and (B) all medical information requests, and (iii) investigating all complaints and adverse drug experiences in respect of the Product (whether sold before or after Closing).  From the Closing Date and for three (3) years thereafter, Buyer shall (1) provide a copy of any annual report with respect to the Product and filed with the FDA by Buyer and (2) provide Seller with a copy of any 15-day reportable adverse drug experience reports that are identified with a lot number for Product sold by Seller before the Closing Date within two (2) Business Days after Buyer’s submission thereof to the FDA.  From and after the Closing Date, Seller shall provide Buyer with prompt written notice (within two Business Days) in the that event Seller becomes aware of any complaints, medical information requests, investigations or

- 16 -

CONFIDENTIAL INFORMATION OMITTED

(TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION)

ASTERISKS DENOTE SUCH OMMISSION

adverse drug experiences in respect of the Product and shall cooperate with Buyer in investigating and responding thereto.

(c)

Seller shall prepare the annual report in respect of the Product due April 1, 2009 (the “Filing Deadline”) and shall use commercially reasonably efforts to file such report prior to the Closing Date, but in all events shall file such report no later than the Filing Deadline, and shall provide Buyer with copies of the same; provided, however, that if the Closing occurs prior to the Filing Deadline and Seller has not filed the report prior to Closing, Seller shall provide such report to Buyer at the Closing.

7.11

Post-Closing Orders and Payments.

  From and after 12:01 A.M. Eastern Daylight Savings Time on the day of the Closing Date, (a) Seller will promptly deliver to Buyer any payments received by Seller from third parties for Product purchased by the third parties from Buyer on or after the Closing Date, and refer all inquiries it receives with respect to the Product, to Buyer or its designee and (b) Buyer will promptly deliver to Seller any payments received by Buyer from third parties for the Products purchased by third parties from Seller or its Affiliates prior to the Closing Date.  To the extent Seller receives any collections of amounts due Buyer resulting from sales of Product by Buyer on or after the Closing Date, Seller shall promptly (but in no event beyond 10 days) forward such payments to Buyer (and in the event any of such receipts are inadvertently deposited by Seller, Seller shall promptly pay all such amounts over to Buyer).  To the extent Buyer receives any collections of amounts resulting from sales of Product by Seller prior to the Closing Date, Buyer shall promptly (but in no event beyond ten (10) days) forward such payments to Seller (and in the event any of such receipts are inadvertently deposited by Buyer, Buyer shall promptly (but in no event beyond ten (10) days) pay all such amounts over to Seller).  

7.12

Rebates; Government Price Reporting Obligations.

(a)

Seller shall be responsible for and pay all Rebates relating to Product sold by Seller before the Closing.  Buyer shall be responsible for and pay all Rebates relating to Product sold by Buyer after the Closing.

(b)

Buyer and Seller shall provide each other with all information relating to the Product and the prices thereof that the other Party reasonably requires in order to comply with the foregoing and the applicable rules and regulations relating to Medicaid rebates, including State supplemental Medicaid rebates and will cooperate with each other in settlement (and reimbursement to each other if applicable) of any Rebates owed by one party that were set off against accounts receivable of the other party in error by a customer or other third party.

7.13

Insurance.

  On or prior to the Closing Date, Seller shall obtain product liability “tail” or “continuum” insurance policy that covers the Product for a four-year period with coverage levels not less than $10 million.  Seller shall cause Buyer to be named as an additional insured thereunder and shall provide Buyer with written proof of such insurance to Buyer at the Closing

- 17 -

CONFIDENTIAL INFORMATION OMITTED

(TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION)

ASTERISKS DENOTE SUCH OMMISSION

and upon request.  Buyer agrees to maintain its own insurance policies with respect to the Buyer’s ownership, development, manufacture, sale and distribution of the Product and any other uses of the Acquired Assets.  Buyer and Seller shall cooperate in seeking insurance coverage with respect to any matter for which such coverage may be available.

7.14

Sales Tax Certificate.

  On or prior to the Closing Date, Buyer shall deliver to Seller either (a) the Multistate Tax Commissions “Uniform Sales & Use Tax Certificate – Multijurisdiction,” or (b) a Kentucky “Resale Certificate,” Form 51A105 (either (a) or (b) the “Sales Tax Certificate”).  

7.15

Further Assurances.

(a)

On and after the Closing, Seller shall from time to time, at the request of Buyer, execute and deliver, or cause to be executed and delivered, such other instruments of conveyance and transfer and take such other actions as Buyer may reasonably request, in order to more effectively consummate the transactions contemplated hereby and to vest in Buyer good and marketable title to the Acquired Assets (including assistance in the acquiring possession or control of any of the Acquired Assets).

(b)

On and after the Closing, Buyer shall from time to time, at the request of Seller, take such actions as Seller may reasonably request, in order to more effectively consummate the transactions contemplated hereby, including Buyer’s assumption of the Assumed Liabilities.

7.16

Product Returns.

(a)

The Seller and Buyer have negotiated regarding responsibility for returns received following the Closing with respect to Product sold by Seller prior to the Closing Date and Seller and Buyer have resolved all issues relating to responsibility for returns through an agreed-upon reduction in the Purchase Price (which adjustment has been taken into account in the Purchase Price contained herein).  In exchange for such Purchase Price reduction, Buyer has agreed to accept all responsibility for the handling, processing and payment of all returns of Product received on or after the Closing Date, but excluding Product returns received by or on behalf of Seller before the Closing Date but not yet fully processed, irrespective of whether such Product was sold by Seller prior to the Closing or by Buyer after the Closing.  Seller shall forward to Buyer any claims or notices it receives on or after the Closing Date from third parties regarding Product returns.  As Seller and Buyer have each made their own estimates of the potential returns for Product sold prior to the Closing that will ultimately be returned after the Closing, Buyer shall not have any obligation to Seller if actual returns are less than the Purchase Price adjustment agreed upon by the parties and Seller shall not have any obligation to Buyer if actual returns are greater than the Purchase Price adjustment agreed upon by the parties.  On the Closing Date, Buyer and Seller shall jointly instruct, in writing, (a) McKesson Corp. (“McKesson”) and Cardinal Health Inc. (“Cardinal”) and other customers identified by the Parties (collectively, the “Wholesalers”) to send all future Product returns to a third party designated by Buyer and (b) ICS to return to each Wholesaler all Product returns sent

- 18 -

CONFIDENTIAL INFORMATION OMITTED

(TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION)

ASTERISKS DENOTE SUCH OMMISSION

on or after the Closing Date by such Wholesaler.  In the event any amounts relating to returns of Product made after the Closing are deducted from amounts due Seller from third parties within thirty (30) days of the Closing Date, Seller shall bill Buyer for such amounts, accompanied by an accounting, and the reimbursement from Buyer shall be due within ten (10) days of receipt of such billings.  On the Closing Date, Seller shall obtain from ICS and deliver to Buyer in Microsoft Excel format (i) a full lot expiration file relating to Product sold prior to the Closing Date and (ii) a full shipping history of Product sold prior to the Closing Date, including invoice date (i.e., shipping date), NDC Number, lot number, customer, quantity and price.

7.17

Cooperation relating to Non-Indemnifiable Claims.

  In the event that Seller or Buyer (“Defending Party”) becomes party to any suit, claim, action or proceeding initiated by a third party that relates to any Acquired Asset and Damages (if any) relating to such matter would not be indemnifiable under Section 10, the other party shall cooperate in connection therewith to the extent that it  possesses records and information relating to such Acquired Asset and shall use commercially reasonable efforts to make available personnel and provide such testimony and access to  such records and information as may be reasonably requested by Defending Party in connection therewith at the sole cost of the Defending Party.  In the event that Buyer requests Seller to remain a party to the Litigation Matter or the court requires Seller remain a party to the Litigation Matter, (a) Buyer shall pay all of Seller’s fees, costs and expenses incurred in connection with the Litigation Matter, provided, that Seller uses Buyer’s legal counsel and Buyer controls the Litigation Matter, and (b) Seller shall cooperate with Buyer in connection with the Litigation Matter.

7.18

Release of Liens of Company Creditors.

  Prior to the Closing, Seller shall cause to be delivered to Buyer a payoff letter (the “Payoff Letter”) from the Company Creditors, which letter shall specify the aggregate amount required to be paid in order to obtain the release of the security interests of the Company Creditors in all of the Acquired Assets and payment instructions on the projected Closing Date.  The Payoff Letter shall be in a form reasonably satisfactory to Buyer and will include customary undertakings to release in full, upon receipt of payment the amounts reflected in such Payoff Letter, any and all Liens securing the Company Indebtedness related to such Payoff Letter and to authorize Seller and Buyer to terminate all UCC financing statements filed by the Company Creditors against Seller without signature of the Company Creditors.  Within two (2) Business Days after the Closing, Seller shall file all UCC termination statements that are necessary to terminate such UCC financing statements.

8.

Conditions to the Obligations of Seller.

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

8.1

Agreements and Conditions.

- 19 -

CONFIDENTIAL INFORMATION OMITTED

(TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION)

ASTERISKS DENOTE SUCH OMMISSION

  On or before the Closing Date, Buyer shall have complied with and duly performed, in all material respects, all agreements and covenants on its part to be complied with and performed pursuant to or in connection with this Agreement on or before the Closing Date.

8.2

Representations and Warranties.

  The representations and warranties of Buyer contained in this Agreement qualified as to materiality shall be true and correct in all respects, and those not so qualified shall be true and correct in all material respects, as of the Closing Date (except that any representation and warranty made as of a specified date shall continue to be true and correct on and as of such date).

8.3

No Legal Proceedings.

  No court or governmental suit, action or proceeding shall have been instituted or overtly threatened to restrain or prohibit the transactions contemplated hereby.

8.4

Officer’s Certificate.

  Seller shall have received a certificate dated the Closing Date and executed by an authorized officer of Buyer to the effect that the conditions set forth in Sections 8.1, 8.2 and 8.3 shall have been satisfied.

8.5

Secretary’s Certificate.

  Seller shall have received a certificate, dated the Closing Date and executed by the Secretary of Buyer, certifying the incumbency and signatures of the officers of Buyer authorized to act on behalf of Buyer in connection with the transactions contemplated hereby and attaching and certifying as true and complete copies of the resolutions duly adopted by the Board of Directors of Buyer authorizing and approving the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby.

8.6

Purchase Price.

  Buyer shall have delivered the Purchase Price in accordance with Section 3.1.

8.7

Ancillary Agreements.

  Seller shall have received the Ancillary Agreements, duly executed and delivered by Buyer.

8.8

Sales Tax Certificate.

  Seller shall have received a copy of the Sales Tax Certificate.

9.

Conditions to the Obligations of Buyer.

- 20 -

CONFIDENTIAL INFORMATION OMITTED

(TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION)

ASTERISKS DENOTE SUCH OMMISSION

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

9.1

Agreements and Conditions.

  On or before the Closing Date, Seller shall have complied with and duly performed, in all material respects, all agreements and covenants on their part to be complied with and performed pursuant to or in connection with this Agreement on or before the Closing Date.

9.2

Representations and Warranties.

  The representations and warranties of Seller and the QOL Members contained in this Agreement qualified as to materiality or Material Adverse Effect and those contained in Section 5.9 shall be true and correct in all respects, and those not so qualified shall be true and correct in all material respects, as of the Closing Date (except that any representation and warranty made as of a specified date shall continue to be true and correct on and as of such date).

9.3

No Legal Proceedings.

  No court or governmental suit, action or proceeding shall have been instituted or overtly threatened to restrain or prohibit the transactions contemplated hereby and, as of the Closing Date, there will be no court or governmental action or proceeding pending or threatened against or affecting Seller, the Product or the Acquired Assets that involves a demand for any judgment or Liability, whether or not covered by insurance, that could reasonably be expected to have a Material Adverse Effect.

9.4

Officer’s Certificate.

  Buyer shall have received a certificate dated the Closing Date and executed by a duly elected officer of Seller to the effect that the conditions set forth in Sections 9.1, 9.2 and 9.3 shall have been satisfied.

9.5

Secretary’s Certificate.

  Buyer shall have received a certificate, dated the Closing Date and executed by the Secretary of Seller, certifying the incumbency and signatures of the officers of Seller authorized to act on behalf of Seller in connection with the transactions contemplated hereby and attaching and certifying as true and complete copies of (a) the resolutions duly adopted by the Members of Seller authorizing and approving the execution and delivery of this Agreement and the Ancillary Agreements and the consummation of the transactions contemplated hereby and thereby and (b) Seller’s organizational documents, all as may have been amended up through the Closing Date.

9.6

Ancillary Agreements.

- 21 -

CONFIDENTIAL INFORMATION OMITTED

(TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION)

ASTERISKS DENOTE SUCH OMMISSION

  Buyer shall have received the Ancillary Agreements, duly executed and delivered by the Parties thereto (other than Buyer).

9.7

Certificates of Status.

  Buyer shall have received a certificate from the Secretary of State of the State of Delaware, stating that Seller has filed its most recent annual reports, has not filed a certificate of dissolution or withdrawal and is in good standing in such jurisdiction.

9.8

Consents.

  All Seller Consents set forth on Schedule 5.3(a) and Schedule 5.3(b) shall have been obtained and delivered to the Buyer.

9.9

Liens.

  Seller shall have delivered satisfactory evidence that all Liens set forth on Schedule 9.9 shall be discharged at or prior to Closing.

9.10

Restrictive Contracts.

  Buyer shall have received evidence reasonably satisfactory to it that all Restrictive Contracts set forth on Schedule 7.6(c)(i) have been, at no cost to Buyer, either irrevocably terminated or amended to remove any application or effect with respect to the Product or the Acquired Assets.

9.11

Standstill Agreement.

  Buyer, Seller, Velos Global Limited (“Velos”) and ANU Global Limited (“ANU”) shall have entered into the Standstill Agreement.

9.12

Consummation of MDRNA Transaction.

  All conditions to the Closing of the MDRNA Transaction shall have been satisfied or waived and the parties to the MDRNA Transaction shall be prepared to close such transaction concurrently with the Closing under this Agreement.

9.13

Authorization Letters from DMF Holders.

  Buyer shall have received (a) a copy of the revised Letters of Access from the holders of the Drug Master Files relating to the Product, which letters authorize Buyer to incorporate by reference into the Seller NDAs the specific information contained in such Drug Master Files or (b) evidence reasonably satisfactory to Buyer that each holder of a Drug Master File relating to the Product does not object to providing such revised Letter of Access.

9.14

Wholesaler Inventories.

- 22 -

CONFIDENTIAL INFORMATION OMITTED

(TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION)

ASTERISKS DENOTE SUCH OMMISSION

  Buyer shall have received evidence reasonably satisfactory to it that the inventory levels of the Product held by each of McKesson and Cardinal and on behalf of Seller do not exceed a twenty-one (21)-day supply on hand as of a date no more than five (5) Business Days prior to the Closing Date.

9.15

Returns Report.

  Buyer shall have received a report dated as of the day before the Closing Date showing Product returns received by or on behalf of Seller, as reported by ICS, (detailing number of units and dollar amounts) for the month that includes the Closing Date for the portion of such month up to the Business Day before the Closing Date.

10.

Indemnification.

10.1

Termination of Representations and Warranties.

  All representations, warranties and covenants (other the covenant in Section 12.4) of Seller and Buyer contained herein or made pursuant hereto shall survive the Closing Date and shall remain operative and in full force and effect for a period of thirty-six (36) months following the Closing Date and shall then terminate and be of no further effect; provided, however, that any indemnity claim with respect to such representations, warranties and covenants shall survive the time(s) that they would otherwise terminate with respect to claims of which written notice in reasonable specificity has been given as provided in this Agreement prior to such termination.  Subject to Section 14.3, any limitation or qualification set forth in any one representation and warranty contained in Sections 5 and 6 and Annexes 1 and 2 shall not limit or qualify any other representation and warranty contained in such Section or Annex.  Each representation and warranty included in this Agreement is independent and shall be interpreted without regard to any other representation or warranty contained herein (including any more inclusive representation or warranty).

10.2

Indemnification Obligations of Seller.

  Subject to the exclusions and limitations in Sections 10.1 and 10.5, from and after the Closing, Seller shall indemnify, reimburse, defend and hold harmless Buyer, its Affiliates, and their respective officers, directors, employees, agents, successors and assigns (the “Buyer Indemnified Parties”) from and against any and all costs, losses, Liabilities, damages, lawsuits, deficiencies, claims, fines, penalties, interest and expenses (including fees and disbursements of attorneys actually incurred) (collectively, “Damages”), incurred by a Buyer Indemnified Party arising out of, or resulting from (a) any breach of any covenant or agreement of Seller in this Agreement, (b) the breach of any representation or warranty made by Seller in this Agreement, (c) the failure of Seller to pay, perform and discharge any Excluded Liabilities, and (d) the enforcement by the Buyer Indemnified Parties of their rights under this Section 10.2.

10.3

Indemnification Obligations of Buyer.

  From and after the Closing, Buyer shall indemnify, defend and hold harmless Seller, its Affiliates and their respective officers, directors, employees, agents,

- 23 -

CONFIDENTIAL INFORMATION OMITTED

(TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION)

ASTERISKS DENOTE SUCH OMMISSION

successors and assigns (the “Seller Indemnified Parties”) from and against any and all Damages incurred by a Seller Indemnified Party arising out of, or resulting from (a) any breach of any covenant or agreement of Buyer herein, (b) the breach of any representation or warranty made by Buyer in this Agreement, (c) the failure of Buyer to assume, pay, perform and discharge any Assumed Liabilities and (d) the enforcement by the Seller Indemnified Parties of their rights under this Section 10.3.

10.4

Procedures for Indemnification; Defense.

(a)

If any Party (the “Indemnitee”) receives notice of any claim or the commencement of any action or proceeding with respect to which any other Party (or Parties) is obligated to provide indemnification (the “Indemnifying Party”) pursuant to Sections 10.2 or 10.3, the Indemnitee shall give the Indemnifying Party written notice thereof promptly following the Indemnitee’s receipt of such notice.  Such notice shall describe the claim in reasonable detail and shall indicate the amount (estimated if appropriate) of the Damages that have been or may be sustained by the Indemnitee.  The failure to so provide such notice shall not affect the Indemnifying Party’s obligations hereunder, unless to the extent such Party is materially prejudiced as a result thereof.  

(b)

Provided that the Indemnitee undertakes and pursues such conduct and control in a reasonable and diligent manner, the Indemnitee shall have the right to conduct and control, through counsel of its choosing, the defense, compromise or settlement of any third party claim, action or suit against such Indemnitee as to which indemnification will be sought by such Indemnitee hereunder, and in any such case the Indemnifying Party shall cooperate in connection therewith and shall furnish such records, information and testimony and attend such conferences, discovery proceedings, hearings, trials and appeals as may be reasonably requested by the Indemnitee in connection therewith.  The Indemnifying Party may participate, through counsel chosen by it and at its own expense, in the defense of any such claim, action or suit as to which the Indemnitee has so elected to conduct and control the defense thereof.  The Indemnitee shall be entitled to pay, compromise or settle any such claim, action or suit, with or without the consent of the Indemnifying Party, unless the Indemnitee is acting unreasonably or in bad faith (reasonableness with respect to a settlement or compromise shall be based upon all the facts and circumstances of the third party claim).  Notwithstanding the foregoing, (i) if the Indemnitee fails to conduct and control the defense, compromise or settlement of any such matter in a reasonable and diligent matter, the Indemnifying Parties shall have the right, upon written notice to the Indemnitee, to take control of such defense at its sole cost and (ii) on or before the date that is six (6) months from the date that the Indemnitee gave notice to the Indemnifying Party of a claim or commencement  of an action or proceeding under Section 10.4(a), the Indemnifying Party shall give written notice to the Indemnitee either (A) acknowledging that such claim, action or proceeding is indemnifiable under this Agreement, in which case, subject to the limitations set forth in Section 10.5, it shall pay to the Indemnitee within two (2) Business Days all Damages previously incurred by the Indemnitee in respect of such claim, action or proceeding and shall directly pay all other Damages of the Indemnitee in connection with such claim, action or proceeding within the time period that such payment is due or (B) denying or reserving its right to deny that such claim, action or proceeding is indemnifiable under this Agreement, in which case the Indemnifying Party shall no longer be

- 24 -

CONFIDENTIAL INFORMATION OMITTED

(TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION)

ASTERISKS DENOTE SUCH OMMISSION

entitled to participate in the defense of any such claim, action or proceeding; provided, that the foregoing shall not in any way limit the Indemnitee’s right to commence an action or proceeding against the Indemnifying Party seeking indemnification under this Agreement.  Seller’s failure to give written notice in accordance with the previous sentence shall be deemed a notice denying or reserving its rights to deny that such claim, action or proceeding is indemnifiable under this Agreement.

10.5

Limitations.

(a)

Subject to Section 10.4, notwithstanding any provision contained in this Agreement or in any Ancillary Agreement (other than the Escrow Agreement), or in any schedule, certificate, instrument, agreement or document delivered in connection herewith or therewith to the contrary, in no event shall the Seller be liable for (i) any claim for Damages under this Agreement or under any Ancillary Agreement (other than the Escrow Agreement), or in any schedule, certificate, instrument, agreement or document delivered in connection herewith or therewith until such time as all Damages suffered by all Buyer Indemnified Parties hereunder that are otherwise indemnifiable under this Agreement or under any Ancillary Agreement (other than the Escrow Agreement), or in any schedule, certificate, instrument, agreement or document delivered in connection herewith or therewith shall exceed a threshold of * * * * in the aggregate (the “Deductible”), after which point only claims in excess of the Deductible shall be recoverable and (ii) all indemnification obligations of Seller in respect of Damages under this Agreement or under any Ancillary Agreement (other than the Escrow Agreement), or in any schedule, certificate, instrument, agreement or document delivered in connection herewith or therewith shall not in the aggregate exceed * * * * (the “Claims Limitation”), which amounts shall be paid first from the Escrow Account; provided, however, that the Deductible and the Claims Limitation shall not apply * * * *.  For purposes of clarity, the Deductible shall not reduce Seller’s indemnification obligation hereunder to less than * * * *.

(b)

The amount of any Damages for which indemnification is provided under this Article X shall be (i) reduced by any amounts actually received by the Indemnitee under insurance policies with respect to such Damages and (ii) deemed adjustments to the Purchase Price.

(c)

Seller agrees that its and all Seller Indemnified Parties’ sole and exclusive remedies at law or in equity for Damages for any matters arising from this Agreement, the Ancillary Agreements (other than the Escrow Agreement) and any schedule, certificate, instrument, agreement or document delivered pursuant hereto or thereto shall be the rights to indemnification set forth in this Article X.  Buyer agrees that its and all Buyer Indemnified Parties’ sole and exclusive remedies at law and in equity for Damages for any matters relating to or arising from this Agreement (other than injunctive relief under Section 12 and Annexes 1 and 2) the Ancillary Agreements (other than the Escrow Agreement) and any schedule, certificate, instrument, agreement or document delivered pursuant hereto or thereto shall be the rights to indemnification set forth in this Article X.  

- 25 -

CONFIDENTIAL INFORMATION OMITTED

(TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION)

ASTERISKS DENOTE SUCH OMMISSION

(d)

Buyer shall look first to the Escrow Account for recovery for Damages subject to indemnification hereunder until such time as the Escrow Amount is exhausted by claims or distributed to the Seller.

(e)

Neither Buyer nor Seller shall be liable to the other for punitive damages in connection with direct claims against the other (i.e., claims other than those asserted by a third party).  Buyer and Seller acknowledge and agree that punitive damages awarded in connection with a third party claim that is indemnifiable hereunder are direct damages of the Indemnitee and are fully recoverable hereunder subject to the limitations above.

11.

Termination and Abandonment.

11.1

Methods of Termination.

  The transactions contemplated herein may be terminated or abandoned at any time prior to the Closing:

(a)

by mutual written agreement of Seller and Buyer;

(b)

by Seller if any of the conditions set forth in Section 8 shall have become incapable of fulfillment and shall not have been waived by Seller;

(c)

by Buyer if any of the conditions set forth in Section 9 shall have become incapable of fulfillment and shall not have been waived by Buyer; or

(d)

by either Seller or Buyer if the Closing shall not have occurred by April 10, 2009; provided that the terminating Party is not then in material breach of its representations, warranties, or obligations hereunder.

11.2

Procedure upon and Effect of Termination.

  In the event of termination and abandonment under Section 11.1, written notice thereof shall forthwith be given to the other Party and the transactions, conveyances, and other actions contemplated by this Agreement shall be terminated and abandoned, without further action by the Parties; provided, that no Party shall be relieved of any Damages occurring or sustained as a result of a breach of any of such Party’s representations, warranties, covenants or agreements contained herein.  Notwithstanding any termination of this Agreement, the provisions of Section 7.7 and 13 and this Section 11.2 shall survive.

12.

Non-Competition; Confidentiality.

12.1

Non-Competition.

  Seller acknowledges that (a) Buyer would not have entered into this Agreement but for the agreements and covenants contained in this Section 12 and (b) the agreements and covenants contained in this Section 12 are essential to protect the value and goodwill of the Acquired Assets.  To induce Buyer to enter into this Agreement, Seller hereby

- 26 -

CONFIDENTIAL INFORMATION OMITTED

(TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION)

ASTERISKS DENOTE SUCH OMMISSION

agrees that, following the Closing Date and for a period of three (3) years thereafter (the “Restricted Period”), without the prior consent of Buyer, it shall not, directly or indirectly, own, manage, operate, join, control or participate in the ownership, management, operation or control of, or be employed or retained by, render services to, provide financing (equity or debt) or advice to, or otherwise be connected in any manner with any business that at any time markets, sells, commercializes or develops or manufactures for sale or distribution (or takes any other action related to any of the foregoing) any pharmaceutical product that contains vitamin B12 to treat B12 deficiencies or maintain B12 levels, anywhere in the world; provided, however, that nothing contained herein shall prevent the purchase or ownership by Seller of less than three (3%) percent of the outstanding equity securities of any class of securities of a company registered under Section 12 of the Securities and Exchange Act of 1934, as amended.

12.2

No-Competing Interests.

  Seller hereby represents and warrants to Buyer that it does not have any ownership or other interest in any business that markets, sells, commercializes or develops or manufactures for sale or distribution (or takes any other action related to any of the foregoing) any pharmaceutical product that contains vitamin B12 to treat B12 deficiencies or maintain B12 levels, anywhere in the world.  Seller hereby represents and warrants to Buyer that, from and after the Closing, neither it nor any of its Affiliates has or shares with Seller any ownership or other interest in any Acquired Asset.

12.3

Non-Disruption.

  During the Restricted Period, neither Seller nor Buyer shall intentionally, directly or indirectly, interfere with, disrupt or attempt to disrupt any present (including the relationships included in the Acquired Assets) relationship, contractual or otherwise, between the other Party, on the one hand, and any of such other Party’s customers, contractees, suppliers or employees, on the other hand.  For clarification purposes, the selling of competitive products by Seller (if permitted by Section 12.1) or Buyer shall not constitute a violation of the provisions of this Section 12.3.

12.4

Confidentiality.

  From and after the Closing Date, Seller shall not, at any time, directly or indirectly, communicate, disclose or disseminate any Confidential Information to a third party in any manner whatsoever, except disclosure to its personal financial, tax or legal advisors, lenders and members, and as may be required under legal process by subpoena or other court order; provided, that Seller takes reasonable steps to provide Buyer with sufficient prior written notice in order to contest such requirement or order.

12.5

Remedies for Breach.

  Seller and Buyer each acknowledges and agrees that: (a) the other Party would be irreparably injured in the event of its breach of any of the obligations under Section 1.2 or this Article 12; (b) monetary damages would not be an adequate remedy for such breach; (c) the other Party shall be entitled (without the need to post any bond) to injunctive relief, in

- 27 -

CONFIDENTIAL INFORMATION OMITTED

(TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION)

ASTERISKS DENOTE SUCH OMMISSION

addition to any other remedy that it may have, in the event of any such breach; and (d) the existence of any claims that it may have against the other Party, whether under this Agreement, any Ancillary Agreement or otherwise, shall not be a defense to (or reason for the delay of) the enforcement by the other Party  of any of its rights or remedies under Section 1.2 or this Article 12.

13.

Miscellaneous

13.1

Notices.

  All notices, requests, demands and other communications that are required or may be given pursuant to the terms of this Agreement shall be in writing and shall be delivered personally, sent by facsimile transmission, delivered by a recognized overnight courier or express mail service for next Business Day delivery (and requiring proof or delivery or receipt) or posted in the United States mail by registered or certified mail, with postage pre-paid, return receipt requested, and shall be deemed given when so delivered personally, sent by facsimile transmission with electronic confirmation of receipt (if receipt is before 5:00 p.m. local time on a Business Day, and otherwise it shall be deemed given on the subsequent Business Day), the next day after delivered to such overnight courier or express mail service or three (3) Business Days after the date of mailing, as follows:  

If to Buyer to:

Par Pharmaceutical, Inc
300 Tice Boulevard
Woodcliff Lake, NJ 07677
Attn:  General Counsel
Tel. No.:  201-802-4215
Fax No.:  201-802-4225

With copies to (which shall not constitute notice):

K&L Gates LLP
599 Lexington Avenue
New York, NY  10022
Attn:  Whitney John Smith, Esq.
Tel. No.:  212-536-3930
Fax No.:  212-536-3901

If to Seller or to a QOL Member, to:

QOL Medical, LLC
5400 Carillon Point
Kirkland, WA 98033
Attn: Edwin Hernandez
Tel. No.:  866-469-3773
Fax No.:  775-640-2736

- 28 -

CONFIDENTIAL INFORMATION OMITTED

(TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION)

ASTERISKS DENOTE SUCH OMMISSION

With copies to (which shall not constitute notice):

William Bryant

325 Five Acre Road

Alpharetta, GA 30004

Tel. No.:  678-366-9382

Fax No.:  678-669-2265

And to:

Jones Day

1420 Peachtree Street, N. E.

Suite 800,

Atlanta, GA 30309

Attn: Milford B. Hatcher, Jr. Esq.

Tel. No.: 404-521-3939

Fax No.: 404-581-8330

And to:

PELICAN MEDICAL, LLC
P.O. Box 6359
Vero Beach, FL  32961
Attn: Derick Cooper
Tel No.:772-231-3715
Fax No.:772-365-3375

And to:

Ballast Point Ventures, L.P.

880 Carillon Parkway

St. Petersburg, FL 33716

Attn:  Drew Graham

Tel.  No.: 727-567-1500

Fax No.: 727-567-1515

Any Party may, by notice given in accordance with the provisions of this Section 13.2 to the other Parties, designate another address or individual for receipt of notices hereunder.

13.2

Entire Agreement.

  This Agreement (and all annexes, exhibits and schedules attached hereto and the Ancillary Agreements and all other documents delivered in connection herewith) contains the sole and entire agreement between the Parties with respect to the subject matter hereof and supersedes all prior discussions and agreements between the Parties with respect to the subject matter hereof.

- 29 -

CONFIDENTIAL INFORMATION OMITTED

(TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION)

ASTERISKS DENOTE SUCH OMMISSION

13.3

Waiver.

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

13.4

Amendment.

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

13.5

Third Party Beneficiaries.

  The terms and provisions of this Agreement are intended solely for the benefit of each Party and its respective successors or permitted assigns and it is not the intention of the Parties to confer third party beneficiary rights upon any other Person, except as provided in Sections 10.2 and 10.3 and Annex 2.

13.6

Assignment; Binding Effect.

  This Agreement shall be binding upon and inure to the benefit of the Parties named herein and their respective successors and assigns.  This Agreement may not be assigned or transferred (by merger or otherwise) by Seller or any QOL Member without the prior written consent of Buyer.  Any transfer in violation of this Section 13.6 shall be null and void.   Buyer may assign or delegate any or all rights or obligations hereunder without the consent of Seller or any QOL Member; provided that Buyer shall remain liable for any such obligations assigned.

13.7

Headings.

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

13.8

Severability.

  If in any jurisdiction any term or provision hereof is determined to be invalid or unenforceable, (a) the remaining terms and provisions hereof shall be unimpaired, (b) any such invalidity or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction, and (c) the invalid or unenforceable term or provision shall, for purposes of such jurisdiction, be deemed replaced by a term or provision that is valid and enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision.

- 30 -

CONFIDENTIAL INFORMATION OMITTED

(TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION)

ASTERISKS DENOTE SUCH OMMISSION

13.9

Governing Law.

  This Agreement and the legal relations among the parties shall be governed by and construed in accordance with the laws of the State of New York (without giving effect to the conflict of laws thereof other than Section 5-1401 of the New York General Obligations Law).  

13.10

Consent to Jurisdiction and Forum Selection.

  The Parties hereby consent to the jurisdiction of the federal and New York State courts located in Manhattan (NYC) and agree that service of process by certified mail, return receipt requested, shall, in addition to any other methods permitted by applicable Law, constitute personal service for all purposes.

EACH OF THE PARTIES IRREVOCABLY WAIVES ANY OBJECTION THAT SUCH PARTY MAY HAVE BASED ON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM NON CONVENIENS AND HEREBY IRREVOCABLY WAIVES THE RIGHT TO A TRIAL BY JURY IN ANY ACTION, SUIT, PROCEEDING OR COUNTERCLAIM OF ANY KIND ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE ANCILLARY AGREEMENTS.

13.11

Expenses.

  Except as otherwise expressly provided in this Agreement, each Party shall pay its own expenses and costs incidental to the preparation of this Agreement and to the consummation of the transactions contemplated hereby.

13.12

Counterparts.

  This Agreement may be executed in any number of counterparts and by facsimile or other electronic transmission, each of which will be deemed an original, but all of which together will constitute one and the same instrument.

14.

Definitions.

14.1

Defined Terms.

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

“Acquired Assets” means all properties, assets and rights owned, licensed or leased by Seller of whatever kind and nature, tangible or intangible, primarily related to the Product, including the following:

(a)

the Regulatory Approvals;

- 31 -

CONFIDENTIAL INFORMATION OMITTED

(TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION)

ASTERISKS DENOTE SUCH OMMISSION

(b)

the Books and Records;

(c)

the Marketing Materials;

(d)

the Product Intellectual Property;

(e)

the Assumed Contracts;

(f)

all causes of action arising out of or related to the Product or any Acquired Asset or infringement thereof, including the Litigation Matter;

(g)

all prepayments made to third parties with respect to the Product, including any unused prepayments to Patheon, Inc. in connection with the contemplated technology transfer of Product manufacturing to Patheon, Inc.;

(h)

the Inventory; and

(i)

any and all tooling specific to the manufacture of the Product that is owned by Seller;

provided, however, that Acquired Assets do not include licenses or continuing contractual rights pursuant to (A) that certain Asset Purchase Agreement, dated as of October 14, 2005, by and between Seller and Questcor Pharmaceuticals, Inc. (“Questcor”), (B) that certain Clarification Agreement, dated as of September 23, 2005, by and between MDRNA Inc. (formerly Nastech Pharmaceutical Company, Inc.) (“MDRNA”) and Seller, (C) that certain Asset Purchase Agreement, dated as of June 16, 2003, by and between MDRNA and Questcor, together with the Assignment Agreement, dated as of October 14, 2005, by and between Questcor and Seller, or (D) that certain Amended and Restated Supply Agreement, dated as of October 14, 2005, by and between MDRNA and Seller.

“Affiliate” means, with respect to any Person, any Person that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, the Person specified.

“Agreement” has the meaning set forth in the preamble to this Agreement.

“Ancillary Agreements” means the Escrow Agreement, the Assignment and Assumption Agreement, the Trademark Assignment Agreement, the Patent Assignment Agreement, the Standstill Agreement and any other agreement, certificate or document between the Parties and executed or delivered pursuant to or in connection with the Closing hereunder.

“ANU” has the meaning set forth in Section 9.11.

“Assets and Properties” of any Person means all assets and properties of any kind, nature, character and description (whether real, personal or mixed, whether tangible or intangible, whether absolute, accrued, contingent, fixed or otherwise and wherever situated), including the goodwill related thereto, operated, owned or leased by such Person, including cash,

- 32 -

CONFIDENTIAL INFORMATION OMITTED

(TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION)

ASTERISKS DENOTE SUCH OMMISSION

cash equivalents, accounts and notes receivable, chattel paper, documents, instruments, general intangibles, real estate, equipment, inventory, goods and intellectual property.

“Assignment and Assumption Agreement” means the Bill of Sale and Assignment and Assumption Agreement, dated the Closing Date, between Seller and Buyer, substantially in the form of Exhibit C.

“Assumed Contract” means each Contract designated as an Assumed Contract on the list of Contracts set forth on Schedule 5.7(b)(ii), excluding any Excluded Rights under any such Contract.

“Assumed Liabilities” means (a) all Liabilities and obligations under or pursuant to the Assumed Contracts arising or relating to periods after the Closing Date, (b) all Liabilities and obligations relating to recalls or product liability claims or threatened claims or injuries caused by Product manufactured, marketed, sold or delivered by Buyer after the Closing, except to the extent that such Product was included in Inventory and was defective when delivered by Seller to Buyer hereunder, (c) Product returns for sales of Product made by Seller prior to, or by Buyer after, the Closing in accordance with Section 7.16, and (d) all costs, expenses and claims associated with the continuation of the Litigation Matter after the Closing, but excluding the costs and expenses incurred by Seller after the Closing Date associated with a prompt dismissal of Seller from the Litigation Matter; provided, however, if either the court does not permit Seller to be dismissed promptly from such matter or Buyer requests Seller to continue as a party to such matter, Assumed Liabilities shall include all attorney’s fees and all other costs and expenses of Seller thereafter related to the Litigation Matter, provided, that Seller uses Buyer’s legal counsel and Buyer controls the Litigation Matter.

“Books and Records” means all files, documents, instruments, papers, books and records (including all technological, scientific, chemical, biological, pharmacological, toxicological, developmental, distribution, marketing, regulatory or other materials and information) owned by Seller and relating primarily to the Product, including any pricing lists, customer lists, vendor lists, financial data, items set forth on Schedule 5.9(b),  Regulatory Documentation, clinical data, safety data, litigation materials, adverse claims or demands, investigation information or files, Trademark registration certificates, Trademark renewal certificates, and other documentation relating primarily to the Product or any Acquired Asset, but excluding any such items (a) to the extent that any applicable Law prohibits their transfer and (b) to the extent such items are included in the definition of “Marketing Materials”.  The Parties acknowledge and agree that (i) to the extent that any books and records contain information of the above nature that relates primarily to the Product but also relates secondarily to any product other than the Product, Seller shall provide to Buyer the originals of such books and records and keep a copy; provided, however, that some or all of the information therein relating to any product other than the Product may be redacted to delete such information and (ii) to the extent that any books and records contain information of the above nature that relates primarily to any product other than the Product relates secondarily to the Product, Seller shall provide to Buyer copies of such books and records; provided, however, that some or all of the information therein relating to any product other than the Product may be redacted to delete such information.

- 33 -

CONFIDENTIAL INFORMATION OMITTED

(TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION)

ASTERISKS DENOTE SUCH OMMISSION

“Business Day” means a calendar day other than Saturday, Sunday or any other calendar day on which banks located in New York are authorized or obligated to close.

“Buyer” has the meaning set forth in the preamble to this Agreement.

“Buyer Governmental Consents” has the meaning set forth in Section 6.3.

“Buyer Indemnified Parties” has the meaning set forth in Section 10.2(a).

“Cardinal” has the meaning set forth in Section 7.16.

“Claims Limitation” has the meaning set forth in Section 10.5(b).

“Closing” has the meaning set forth in Section 4.1.

“Closing Date” means the date that the Closing actually occurs as provided in Section 4.1.

“Code” means the Internal Revenue Code of 1986, as amended.

“Company Creditors” means FCC, LLC and Full Circle Partners, LP.

“Company Indebtedness” means the indebtedness and other obligations of the Company for amounts owing under that certain Loan and Security Agreement, by and among Seller and the Company Creditors, dated November 30, 2007, and the other Loan Documents (as defined therein).

“Confidential Information” means any and all information (oral or written) relating exclusively to  the Product or any Acquired Asset  including to the extent exclusively related to the Product, the terms of this Agreement, information relating to the Product Intellectual Property, the Marketing Materials, the Regulatory Documentation, pricing techniques, procurement and sales activities and procedures, proprietary information, business methods and strategies (including acquisition strategies), customer and supplier lists, data processing reports, customer sales analyses, invoice, price lists or information, and information pertaining to any lawsuits or governmental investigation, except such information that is in the public domain (such information not being deemed to be in the public domain merely because it is embraced by more general information that is in the public domain) other than as a result of a breach of any of the provisions.

“Contract” means any and all legally binding commitments, contracts, purchase orders, leases, licenses, security agreements or other agreements, whether written or oral.

“Corporate Names” means all NDC numbers of Seller and all Trademarks owned by, licensed to, controlled by or used by Seller, whether or not registered, including the name “QOL”, but excluding the Trademarks of the Product.

“Current NDC Number” has the meaning set forth in Section 7.9(a).

- 34 -

CONFIDENTIAL INFORMATION OMITTED

(TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION)

ASTERISKS DENOTE SUCH OMMISSION

“Damages” has the meaning set forth in Section 10.2(a).

“Deductible” has the meaning set forth in Section 10.5(a).

“Defending Party” has the meaning set forth in Section 7.17.

“Escrow Account” has the meaning set forth in Section 3.1(b)(i).

“Escrow Agent” means TD Bank, National Association.

“Escrow Agreement” means the Escrow Agreement by and among Buyer, Seller and the Escrow Agent, substantially in the form attached as Exhibit D.

“Escrow Amount” has the meaning set forth in Section 3.1(b)(i).

“Escrow Release Date” has the meaning set forth in Section 3.1(c).

“Excluded Assets” means all Assets and Properties of Seller other than the Acquired Assets.  It is specifically noted that Seller’s accounts receivable and cash collected by Seller with respect to Products (or any other products of Seller) sold prior to Closing and, subject to Section 7.13, any prepayments with respect to Seller’s insurance policies are Excluded Assets.

“Excluded Liabilities” means all Liabilities of Seller other than the Assumed Liabilities.

“Excluded Rights” means, with respect to any Assumed Contract, any rights of any Seller Indemnified Party to seek and obtain defense and indemnification thereunder from any indemnifying party pursuant to the terms and conditions of the applicable Assumed Contract based on any Damages incurred by any Seller Indemnified Party, whether prior to, on or after the Closing Date, that (a) are attributable to occurrences and circumstances arising prior to the Closing, and (b) are otherwise subject, prior to the Closing, to an obligation of defense or indemnity by any indemnifying party.

“FDA” means the United States Food and Drug Administration and any successor agency thereto.

“Filing Deadline” has the meaning set forth in Section 5.10(c).

“Final Payoff Amount” means the amounts necessary to obtain the release of the Liens of the Company Creditors in the Acquired Assets as provided in the Payoff Letter.

“GAAP” has the meaning set forth in Section 5.6.

“Governmental or Regulatory Authority” means any court, tribunal, arbitrator, authority, agency, commission, official or other instrumentality of the United States or South Korea, or any supra-national organization, state, county, city or other political subdivision thereof.

- 35 -

CONFIDENTIAL INFORMATION OMITTED

(TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION)

ASTERISKS DENOTE SUCH OMMISSION

“ICS” has the meaning set forth in Section 5.6

“Indemnifying Party” has the meaning set forth in Section 10.4(a).

“Indemnitee” has the meaning set forth in Section 10.4(a).

“Inventory” means all finished, work in progress and raw material inventory of Product owned as of the Closing by Seller, whether held at a location or facility of Seller (or of any other Person on behalf of Seller), or in transit to or from Seller (or any such other Person), as all set forth on Schedule 14.1(a), which shall be updated by Seller as of the Closing Date, excluding lot numbers 8002, 8003 and 8004.

“Knowledge of Seller” means facts or other information actually known by either of the two senior managers of Seller or which a prudent individual in such position could be expected to discover in the course of conducting a reasonably comprehensive investigation of the relevant subject matter.

“Law” means any federal, state or local law, statute or ordinance, or any rule, regulation, or published guidelines or pronouncements having the effect of law promulgated by any Governmental or Regulatory Authority.

“Legacy IP” means, to the extent not included on Schedule 14.1(b), (a) all data, information and methods associated at any time with the Product and its ingredients but not found in the Regulatory Documentation, (b) all data and methods associated at any time with testing of the Product and its ingredients but not found in the Regulatory Documentation, (c) all formulations of the Product that in the past have been used in the manufacture of the Product, and (d) all methods of manufacturing that in the past have been used in manufacturing the Product, in each case, to the extent owned or controlled by Seller.

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

“Liens” has the meaning set forth in Section 5.8.

“Litigation Matter” means the suit styled QOL Medical, LLC v. Fleming & Company, Pharmaceuticals, Case No. 3:2009cv00001, filed on January 2, 2009 in the Southern District Court of California.

“Marketing Materials” means all market research, marketing plans and strategies, media plans, advertising, branding, messages, form letters, sales force training materials, advertising, promotional and marketing data, advertising and promotional materials and literature, in each case developed by or on behalf of Seller with respect solely to the Product; provided, that “Marketing Materials” shall exclude the labeling of the Product, which shall be deemed part of the Regulatory Approvals.

- 36 -

CONFIDENTIAL INFORMATION OMITTED

(TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION)

ASTERISKS DENOTE SUCH OMMISSION

“Material Adverse Effect” means a material development with respect to the Product and the Acquired Assets that, taken as a whole, materially threatens the ability of Buyer to manufacture, market or sell the Product or have the Product manufactured (other than the financial condition of MDRNA Inc. (formerly Nastech Pharmaceutical Company, Inc.)), marketed or sold or otherwise threatens the commercial viability of the Product; provided, that none of the following shall be deemed to constitute a Material Adverse Effect: any adverse change, event, development, or effect arising from or relating to (a) general business or economic conditions, including such conditions related to the business of Seller, (b) national or international political or social conditions, including the engagement by the United States in hostilities, whether or not pursuant to the declaration of a national emergency or war, or the occurrence of any military or terrorist attack upon the United States, or any of its territories, possessions, or diplomatic or consular offices or upon any military installation, equipment or personnel of the United States, (c) financial, banking, or securities markets (including any disruption thereof and any decline in the price of any security or any market index), (d) changes in United States generally accepted accounting principles or (e) the taking of any action expressly required by this Agreement and Ancillary Agreements, in each case, so long as the Product and the Acquired Assets, taken as a whole, are not disproportionately affected thereby.

“McKesson” has the meaning set forth in Section 7.16.

“MDRNA Transaction” means the transactions described in that certain Asset Purchase Agreement by and between MDRNA Inc. (formerly Nastech Pharmaceutical Company, Inc.) and Buyer, dated as of the date hereof.

“McKesson” has the meaning set forth in Section 7.16.

“NDC” means the unique identifying number assigned to a drug product, including the labeler code, product code and package code, in connection with the drug listing requirements of section 510(j) of the Federal Food, Drug, and Cosmetic Act and applicable FDA rules and regulations.

“NDC Number” has the meaning set forth in Section 7.9(a).

“NDC Number Termination Date” has the meaning set forth in Section 8.9(b).

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

“Party” or “Parties” has the meaning set forth in the preamble.

“Patents” means United States Patents Nos. 7,229,636 and 7,404,489, United States Patent Applications Nos. 12/079,875 and 12/142,240 and international patent application No. PCT/US06/024685 as well as (a) any continuations, continuations in part, divisional, national phase application or foreign counterpart of any of the foregoing (including all patents issuing thereon), (b) the rights to any and all extensions, and supplementary protection certificates related to all of the foregoing and (c) the right to file for any and all extensions,

- 37 -

CONFIDENTIAL INFORMATION OMITTED

(TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION)

ASTERISKS DENOTE SUCH OMMISSION

exclusivities, and supplementary protection certificates that may appertain to any and all of the foregoing.

“Patent Assignment” means the Patent Assignment, dated the Closing Date, between Seller and Buyer, substantially in the form of Exhibit E.

“Payoff Letter” has the meaning set forth in Section 7.18.

“Person” means any natural person, corporation, general partnership, limited partnership, limited liability company, proprietorship, other business organization, trust, union, association or Governmental or Regulatory Authority.

“Product” means the pharmaceutical products that were approved pursuant to the Seller NDAs prior to Closing.

“Product Intellectual Property” means

(a)

the items set forth on Schedule 14.1(b);

(b)

the Legacy IP;

(c)

the technology, trade secrets, know-how, and other proprietary information, including any such chemical, pharmacological, toxicological, pharmaceutical, physical, analytical, safety, efficacy, bioequivalency, quality assurance, quality control and clinical data, that is owned by Seller and related primarily to Product or the manufacture, validation, packaging, release testing, stability or shelf life of the Product, including any such information contained or embodied in the product formulations, research records, product specifications, manufacturing, engineering and other manuals and drawings, standard operating procedures, flow diagrams, annual product reviews, process validation reports, analytical method validation reports, specifications for stability trending and process controls, testing and reference standards for impurities in and degradation of the Product, technical data packages, chemical and physical characterizations, dissolution test methods and results, formulations for administration, clinical trial reports, regulatory communications, regulatory filings and data generated in connection with the testing of the Product, and labeling;  

(d)

the Trademarks; and

(e)

the Patents.  

Additionally, the Product Intellectual Property shall include the right to file for, maintain, and enforce any available intellectual property protection or rights that may pertain to any individual item within the Product Intellectual Property.

“Purchase Price” shall have the meaning set forth in Section 3.1(a).

“QOL Members” has the meaning set forth in the preamble.

- 38 -

CONFIDENTIAL INFORMATION OMITTED

(TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION)

ASTERISKS DENOTE SUCH OMMISSION

“Reasonable Best Efforts” means such prompt, substantial and reasonably persistent efforts as a prudent Person desirous of achieving a result would use in similar circumstances; provided that the Parties shall be required to expend only such efforts and  resources to achieve such results as are commercially reasonable in similar circumstances without the requirement of any action or expenditure that is clearly disproportionate or clearly unduly burdensome.

“Rebate” means any rebate, discount, reimbursement, administrative fee, chargeback or other payment payable pursuant to (a) state Medicaid, Medicare or other state and governmental pharmaceutical assistance programs, including with respect to any program of the U.S. Department of Veterans Affairs or (b) Contracts between Seller or Buyer and managed care organizations (including pharmacy benefit management companies, health plans and insurance companies) or other customers, in each case relating to utilization or sale of the Product during any particular period.

“Regulatory Approvals” means (a) the Seller NDAs and (b) all current manufacturing and marketing authorizations and regulatory approvals relating to the manufacturing or marketing of the Product outside of the United States, to the extent that Seller has ownership or control thereof or rights thereto (including all additions, supplements, extensions and modifications thereto and the official regulatory files relating thereto).

“Regulatory Documentation” means (a) registrations or applications for, or other filings or submissions with respect to, the Regulatory Approvals to the extent made by Seller or in the possession or control of Seller, including reports, data and other written materials filed by Seller or in the possession or control of Seller as part of or referenced in, the Regulatory Approvals, and the Seller’s risk management plan (or any other risk management plan in the possession or control of Seller) with respect to the Product, (b) any other filings or submissions with respect to the Product made by (or in the possession or control of) Seller with any Governmental or Regulatory Authority other than the FDA, (c) compliance documentation, including complaint history, compliance history (including any field alerts, market withdrawals and recalls), pharmacovigilance, requests for additional scientific information with respect to the Product, manufacturing change controls, process/lab investigations, stability protocols and test data and product development packages and (d) written communications, and written summaries and minutes of other communications, with the FDA or other Governmental or Regulatory Authorities to the extent relating to any of the foregoing, in each case, that are owned by Seller or in the possession or control of Seller as of the Closing Date.

“Restrictive Contract” has the meaning set forth in Section 5.7(a).

“Restricted Period” has the meaning set forth in Section 12.1.

“Sales Tax Certificate” has the meaning set forth in Section 7.14.

“Seller” has the meaning set forth in the preamble to this Agreement.

“Seller Consents” has the meaning set forth in Section 5.3(b).

- 39 -

CONFIDENTIAL INFORMATION OMITTED

(TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION)

ASTERISKS DENOTE SUCH OMMISSION

“Seller Governmental Consents” has the meaning set forth in Section 5.3(a).

“Seller NDAs” means New Drug Application #21-642, New Drug Application #19-722 and Investigative New Drug Application #25,696 filed pursuant to Section 505(b) of the Federal Food, Drug, and Cosmetic Act, including all periods of exclusivity awarded or attached thereto, and applicable FDA rules and regulations for marketing authorization within the United States (including all additions, supplements, extensions and modifications thereto and the official regulatory files relating thereto).

“Seller Third Party Consents” has the meaning set forth in Section 5.3(b).

“Seller Indemnified Parties” has the meaning set forth in Section 10.2(b).

“Standstill Agreement” means the Standstill Agreement, dated as of March 31, 2009, by and among Buyer, Seller, Velos and ANU.

“Tax” or “Taxes” means any federal, state, local or foreign income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, windfall profits, environmental (including taxes under Section 59A Code), customs duties, capital stock, franchise, profits, withholding, social security (or similar), unemployment, disability, real property, personal property, sales, use, transfer, registration, recording, value added, alternative or add-on minimum, estimated, or other tax of any kind whatsoever, including any interest, penalty or addition thereto, whether disputed or not.

“Tax Allocation” has the meaning set forth in Section 3.2.

“Tax Return” means any return (including any information return), report, statement, schedule, notice, form, or other document or information filed with or submitted to, or required to be filed with or submitted to, any Governmental or Regulatory Authority in connection with the determination, assessment, collection, or payment of any Tax or in connection with the administration, implementation, or enforcement of or compliance with any Law relating to any Tax.  

“Trade Dress” means the current packaging and labeling of the Product as currently approved by the FDA.

“Trademark” means those items listed on Schedule 5.10(c) and all goodwill associated therewith.

“Trademark Assignment” means the Trademark Assignment, dated the Closing Date, between Seller and Buyer, substantially in the form of Exhibit F.

“Velos” has the meaning set forth in Section 9.11.

“Wholesalers” has the meaning set forth in Section 7.16.

14.2

Construction of Certain Terms and Phrases.

- 40 -

CONFIDENTIAL INFORMATION OMITTED

(TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION)

ASTERISKS DENOTE SUCH OMMISSION

(a)

When the context in which words are used in this Agreement indicates that such is the intent, words used in the singular shall have a comparable meaning when used in the plural, and vice versa; pronouns stated in the masculine, feminine or neuter shall include each other gender.

(b)

The section headings contained in this Agreement are solely for the purpose of reference, are not part of the agreement of the Parties and shall not in any way affect the meaning or interpretation of this Agreement.

(c)

The term “including” is not limiting and means “including, without limitation.”

(d)

Unless otherwise expressly provided herein, (i) references to agreements (including this Agreement) and other contractual instruments shall be deemed to include all subsequent amendments and other modifications thereto, but only to the extent such amendments and other modifications are disclosed to Buyer, (ii) references to any statute or regulation shall be construed as including all statutory and regulatory provisions amending, replacing, supplementing or interpreting such statute or regulation, except that for purposes of determining the accuracy of any representation and warranty, such reference shall only be to such statute or regulation as in effect on the date the representation and warranty was made and (iii) references to “Sections,” “Schedules”, “Exhibits” or “Annexes” are to sections, schedules, exhibits or annexes, as applicable, of this Agreement.

14.3

Disclosure Schedules.

  The schedules referred to herein and delivered pursuant to and attached to this Agreement (collectively, “Disclosure Schedules”) are integral parts of this Agreement.  The disclosure of an item on a particular Disclosure Schedule as an exception to a specific representation or warranty will be deemed adequately disclosed as an exception with respect to all other representations or warranties, notwithstanding the presence or absence of an appropriate cross reference thereto, to the extent that the relevance of such item to such other representations or warranties is reasonably apparent on the face of such item and such item describes the relevant facts in reasonable detail.  Without limiting the generality of the foregoing, the mere listing, or inclusion of a copy, of a document or other item shall not be deemed adequate to disclose an exception to a representation or warranty made herein, unless the representation or warranty is being made as to the existence of the document or other item itself.  Seller is responsible for preparing and arranging the Disclosure Schedules corresponding to the lettered and numbered sections of Section 5.  

[Signature Page Follows]

- 41 -

CONFIDENTIAL INFORMATION OMITTED

(TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION)

ASTERISKS DENOTE SUCH OMMISSION

IN WITNESS WHEREOF, this Agreement has been executed by the Parties as of the date first above written.

BUYER

PAR PHARMACEUTICAL, INC.

By: /s/ John A. MacPhee

Name:  John A. MacPhee

Title:   President, Strativa Pharmaceuticals, a division

      of Par Pharmaceutical, Inc.

SELLER

QOL MEDICAL, LLC

By: /s/ Edwin B. Hernandez

Name: Edwin B. Hernandez

Title:  Chief Operating Officer

42

NY666325v.5

CONFIDENTIAL INFORMATION OMITTED

(TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION)

ASTERISKS DENOTE SUCH OMMISSION

IN WITNESS WHEREOF, this Agreement has been executed by the Parties as of the date first above written.

QOL MEMBER

For purposes of Annexes 1 and 2 only.

/s/ Trevor Blake

Trevor Blake

QOL MEMBER

For purposes of Annexes 1 and 2 only.

/s/ Edwin Hernandez

Edwin Hernandez

43

NY666325v.5

CONFIDENTIAL INFORMATION OMITTED

(TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION)

ASTERISKS DENOTE SUCH OMMISSION

IN WITNESS WHEREOF, this Agreement has been executed by the Parties as of the date first above written.  

QOL MEMBER

For purposes of Annex 2 only.

BALLAST POINT VENTURES L.P.

By: Ballast Point Venture Partners, L.P., its general partner

By: RJ Ventures, LLC, its general partner

By:

/s/ Drew Graham

Name: Drew Graham

Title:  Managing Member

QOL MEMBER

For purposes of Annex 2 only.

BALLAST POINT VENTURES E.F., LP

By: Ballast Point Venture Partners, L.P., its general partner

By: RJ Ventures, LLC, its general partner

By:

/s/ Drew Graham

Name: Drew Graham

Title:  Managing Member

QOL MEMBER

For purposes of Annex 2 only.

H III PRIVATE EQUITY, LLC

By:/s/ James A. Haskin, III

Name:  James A. Haskin, III

Title:   Managing Member

44

NY666325v.5

CONFIDENTIAL INFORMATION OMITTED

(TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION)

ASTERISKS DENOTE SUCH OMMISSION

IN WITNESS WHEREOF, this Agreement has been executed by the Parties as of the date first above written.  

QOL MEMBER

For purposes of Annex 2 only.

PELICAN MEDICAL, LLC

By:/s/ Frederick E. Cooper

Name: Frederick E. Cooper

Title:   Manager

QOL MEMBER

For purposes of Annex 2 only.

CONIFER PARTNERS I, LLC

By: /s/ C.Bradford Jackson

Name:  C. Bradford Jackson

Title:  President, Southwest Asset Advisors, Inc.

Member Manager, Conifer Advisors, LLC

Member Manager, Conifer Partners I, LLC

45

NY666325v.5

CONFIDENTIAL INFORMATION OMITTED

(TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION)

ASTERISKS DENOTE SUCH OMMISSION

Annex 1

NON-COMPETITION PROVISIONS

This Annex 1 is part of the Asset Purchase Agreement, dated March __, 2009 (the “Purchase Agreement”), by and among Par Pharmaceutical, Inc., a Delaware corporation (“Buyer”), QOL Medical, LLC, a Delaware limited liability company (“Seller”), and the members of Seller who are signatories to the Purchase Agreement (each, a “QOL Member”).  Buyer, Seller and the QOL Members are sometimes referred to in this Agreement individually as a “Party” and collectively as the “Parties”.  Capitalized terms used and not otherwise defined herein shall have the respective meanings ascribed to them in the Purchase Agreement.

ARTICLE I

NON-COMPETITION; REMEDY

Section 1.1

Non-Competition.  Trevor Blake and Edwin Hernandez each acknowledges with respect solely to himself that (a) Buyer would not have entered into the Purchase Agreement but for the agreements and covenants contained in this Article 1 and (b) the agreements and covenants contained in this Article 1 are essential to protect the value and goodwill of the Acquired Assets.  To induce Buyer to enter into the Purchase Agreement, Mr. Blake and Mr. Hernandez each separately hereby agrees that, following the Closing Date and for a period of three (3) years thereafter (the “Restricted Period”), without the prior consent of Buyer, he shall not, directly or indirectly, own, manage, operate, join, control or participate in the ownership, management, operation or control of, or be employed or retained by, render services to, provide financing (equity or debt) or advice to, or otherwise be connected in any manner with any business that at any time markets, sells, commercializes or develops or manufactures for sale or distribution (or takes any other action related to any of the foregoing) any pharmaceutical product that contains vitamin B12 to treat B12 deficiencies or maintain B12 levels, anywhere in the world; provided, however, that nothing contained herein shall prevent (i) the purchase or ownership by Mr. Blake or Mr. Hernandez of less than three (3%) percent of the outstanding equity securities of any class of securities of a company registered under Section 12 of the Securities and Exchange Act of 1934, as amended or (ii) the employment or provision of services by Mr. Blake or Mr. Hernandez with a third party which markets, sells, commercializes or develops or manufactures for sale or distribution pharmaceutical products that contain vitamin B12 to treat B12 deficiencies or maintain B12 levels, provided that such products constitute less than 15% of such third party’s business and neither Mr. Blake nor Mr. Hernandez takes any part in the efforts of such third party with respect to such products.

Section 1.2

No Competing Interests.  Mr. Blake and Mr. Hernandez each hereby represents and warrants to Buyer with respect to himself only that he does not have any ownership or other interest in any business that markets, sells, commercializes or develops or manufactures for sale or distribution (or takes any other action related to any of the foregoing) any pharmaceutical product that contains vitamin B12 to treat B12 deficiencies or maintain B12 levels, anywhere in the world. Mr. Blake and Mr. Hernandez each with respect to himself only hereby represents and warrants to Buyer that neither he nor any of his Affiliates has or shares

46

NY666321v.1

CONFIDENTIAL INFORMATION OMITTED

(TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION)

ASTERISKS DENOTE SUCH OMMISSION

with Seller any ownership or other interest in any Acquired Asset (other than indirectly through membership interest in the Seller).

Section 1.3

Remedies for Breach.  Mr. Blake and Mr. Hernandez each acknowledges and agrees with respect to himself only that: (a) Buyer would be irreparably injured in the event of a breach by him of any of the obligations imposed on him under this Article 1; (b) monetary damages would not be an adequate remedy for such breach by him; (c) Buyer shall be entitled (without the need to post any bond) to injunctive relief, in addition to any other remedy that it may have, in the event of any such breach; and (d) the existence of any claims that he may have against Buyer, whether under this Agreement, any Ancillary Agreement or otherwise, shall not be a defense to (or reason for the delay of) the enforcement by Buyer of any of their rights or remedies under this Article 1.

Section 1.4

Separate Obligations.  For avoidance of doubt, all covenants and obligations contained in this Annex 1 are separate and distinct with respect to Mr. Blake and Mr. Hernandez and neither undertakes (nor shall he be liable for breaches with respect to) any covenants or obligations with respect to the other person.  Buyer shall look solely to the person to with the breach relates with respect to any breach of any covenant or obligation by Mr. Blake or Mr. Hernandez under this Annex 1.

[Remainder of Page Intentionally Left Blank]

47

NY666321v.1

CONFIDENTIAL INFORMATION OMITTED

(TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION)

ASTERISKS DENOTE SUCH OMMISSION

Annex 2

CERTAIN PROVISIONS APPLICABLE TO QOL MEMBERS

This Annex 2 is part of the Asset Purchase Agreement, dated March __, 2009 (the “Purchase Agreement”), by and among Par Pharmaceutical, Inc., a Delaware corporation (“Buyer”), QOL Medical, LLC, a Delaware limited liability company (“Seller”), and the members of Seller who are signatories to the Purchase Agreement (each, a “QOL Member”).  Buyer, Seller and the QOL Members are sometimes referred to in this Agreement individually as a “Party” and collectively as the “Parties”.  Capitalized terms used and not otherwise defined herein shall have the respective meanings ascribed to them in the Purchase Agreement.

ARTICLE II

REPRESENTATIONS AND WARRANTIES OF THE QOL MEMBERS

Each of the QOL Members represents and warrants, solely with respect to himself or itself and not with respect to any other QOL Member or the Seller, to Buyer as of the date of the Purchase Agreement and as of the Closing Date, as follows:

Section 2.1

Capacity; Authority; Organization; Good Standing; Power.

(a)

In the case of a QOL Member who is an individual, such QOL Member has the legal capacity to execute and deliver this Agreement and to perform the obligations required of it under this Annex 2.  In the case of a QOL Member that is an entity, (i) such QOL Member is duly organized, validly existing and, to extent applicable, in good standing under the Laws of the jurisdiction under which it was formed, and has all requisite entity power and authority to enter into this Agreement  and to perform the obligations required of it under this Annex 2, and (ii) the execution and delivery by such QOL Member of this Agreement and the performance of its obligations under this Annex 2, have been duly authorized by all necessary action on the part of such QOL Member, and such QOL Member has all necessary entity power with respect thereto.

(b)

This Agreement has been duly executed and delivered by such QOL Member and the obligations imposed on him or it in this Annex 2 are  the valid and binding obligations of such QOL Member, enforceable against him/it in accordance with  the terms of this Annex 2, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors rights generally, and (ii) as limited by general principles of equity.

Section 2.2

Non-Contravention.

  The execution and delivery by such QOL Member of this Agreement does not, and the performance by him/it of his/its obligations under this Annex 2 will not:

(a)

conflict with or violate any provisions of the organizational documents of such QOL Member, if applicable; or

48

CONFIDENTIAL INFORMATION OMITTED

(TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION)

ASTERISKS DENOTE SUCH OMMISSION

(b)

conflict with or result in a violation or breach of any term or provision of any Law applicable to such QOL Member or the property or assets of such QOL Member.

Section 2.3

Disclaimer of Other Representations and Warranties.

  Except as expressly set forth in this Article 1, no QOL Member makes any representation or warranty, express or implied, at law or in equity, in respect of any of its or Seller’s assets (including, without limitation, the Acquired Assets and the Assumed Liabilities), liabilities or operations, including, without limitation, with respect to merchantability or fitness for any particular purpose, and any such other representations or warranties are hereby expressly disclaimed.  

ARTICLE III

COVENANTS

Section 3.1

Non-Disruption.

  Following the Closing Date and for a period of three (3) years thereafter (the “Restricted Period”), each QOL Member, with respect only to himself or itself, agrees that he or it shall not intentionally, directly or indirectly, interfere with, disrupt or attempt to disrupt any present(including the present relationships included in the Acquired Assets) relationship, contractual or otherwise, between the Buyer, on the one hand, and any of its customers, contractees, suppliers or employees, on the other hand.  For clarification purposes, the selling of competitive products by such QOL Member shall not constitute a violation of the provisions of this Section 12.3.

Section 3.2

Confidentiality.

  From and after the Closing Date, each QOL Member, with respect only to himself or itself, agrees that he or it shall not, at any time communicate, disclose or disseminate any Confidential Information to a third party in any manner whatsoever, except disclosure to their personal financial, tax or legal advisors, lenders and (for any QOL Member that is an entity) its owners or partners and as may be required under legal process by subpoena or other court order; provided, that such Party takes reasonable steps to provide Buyer with sufficient prior written notice in order to contest such requirement or order.

Section 3.3

Remedies for Breach.

Each QOL Member acknowledges and agrees with respect solely to himself or itself and with respect solely to the covenants of such QOL Member (and not with respect to the covenants of any other QOL Member) that: (a) Buyer would be irreparably injured in the event of a breach by such QOL Member of any of the obligations of such QOL Member under this Article 2; (b) monetary damages would not be an adequate remedy for such breach; (c) Buyer shall be entitled (without the need to post any bond) to injunctive relief, in addition to any other remedy that it may have, in the event of any such breach by such QOL Member; and (d) the existence of any claims that any QOL Member may have against Buyer, whether under this Agreement, any Ancillary Agreement or otherwise, shall not be a defense to (or reason for the delay of) the enforcement by Buyer of any of its rights or remedies under this Article 2.

14.4

ARTICLE III

49

CONFIDENTIAL INFORMATION OMITTED

(TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION)

ASTERISKS DENOTE SUCH OMMISSION

SEPARATE OBLIGATIONS; SURVIVAL

Section 3.1

For avoidance of doubt, all representations, warranties, covenants and obligations contained in this Annex 2 are separate and distinct with respect to each QOL Member and no QOL Member undertakes (nor shall he or it be liable for breaches with respect to) any representations, warranties, covenants or obligations with respect to any other QOL Member.  Buyer shall look solely to the individual QOL Member to which the breach relates with respect to any breach of any representation, warranty, covenant or obligation by such QOL Member.

Section 3.2

All representations, warranties and covenants of each QOL Member contained in this Annex 2 shall survive the Closing Date and shall remain operative and in full force and effect for a period of thirty-six (36) months following the Closing Date and shall then terminate and be of no further effect; provided, however, that (a) any claims with respect to breach of such representations, warranties and covenants shall survive the time(s) that the representation, warranty or covenant would otherwise terminate with respect to claims of which written notice in reasonable specificity has been given as provided in the Agreement prior to such termination and (b) the covenant contained in Section 2.2 shall survive the Closing Date until the Confidential Information covered by Section 2.2 enters the public domain (such information not being deemed to be in the public domain merely because it is embraced by more general information that is in the public domain) other than as a result of a breach of Section 2.2.

50

EX-31.1

Exhibit 31.1

Certification Pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934

I, Patrick G. LePore, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of Par Pharmaceutical Companies, Inc.;

2.

Based on my knowledge, this quarterly 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;

a

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 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 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 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:

a)

All significant deficiencies and material weaknesses in the design or operation of internal controls 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: August 4, 2009	/s/ Patrick G. LePore
	Patrick G. LePore Chairman, President and Chief Executive Officer

EX-31.2

Exhibit 31.2

Certification Pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934

I, Lawrence A. Kenyon, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of Par Pharmaceutical Companies, Inc.;

2.

Based on my knowledge, this quarterly 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 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 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 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:

a)

All significant deficiencies and material weaknesses in the design or operation of internal controls 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: August 4, 2009	/s/ Lawrence A. Kenyon
	Lawrence A. Kenyon Executive Vice President and Chief Financial Officer

EX-32.1

Exhibit  32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Par Pharmaceutical Companies, Inc. (the “Company”) for the quarterly period ended June 27, 2009, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Patrick G. LePore, Chairman, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

(1)

The Report fully complies with the requirements of Section 13(a) 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.

This certification accompanies the Report and shall not be deemed filed with the Securities and Exchange Commission and shall not be incorporated by reference into any filing of the Company under the Securities Act of 1933 or Securities Exchange Act of 1934 (whether made before or after the date of the Report), irrespective of any general incorporation language contained in such filing.

/s/ Patrick G. LePore

Patrick G. LePore

Chairman, President and Chief Executive Officer

August 4, 2009

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Par Pharmaceutical Companies, Inc. (the “Company”) for the quarterly period ended June 27, 2009, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Lawrence A. Kenyon, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

(1)

The Report fully complies with the requirements of Section 13(a) 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.

This certification accompanies the Report and shall not be deemed filed with the Securities and Exchange Commission and shall not be incorporated by reference into any filing of the Company under the Securities Act of 1933 or Securities Exchange Act of 1934 (whether made before or after the date of the Report), irrespective of any general incorporation language contained in such filing.

/s/ Lawrence A. Kenyon

Lawrence A. Kenyon

Executive Vice President and Chief Financial Officer

August 4, 2009