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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q/A

Amendment No. 1

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: July 1, 2006
Commission file number: 1-10827

PAR PHARMACEUTICAL COMPANIES, INC.

(Exact name of registrant as specified in its charter)


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

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 þ Accelerated filer o Non-accelerated filer o

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

Number of shares of the Registrant’s common stock outstanding as of June 29, 2007: 35,491,141.

Explanatory Note

Par Pharmaceutical Companies, Inc. (the “Company”) is amending its Quarterly Report on Form 10-Q for the quarterly period ended July 1, 2006 (the “Original 10-Q”) because the Company was not able to finalize the condensed consolidated financial statements for inclusion in its Original 10-Q. At the time of filing the Original 10-Q, the Company was in the process of restating certain of its financial information included in the Company’s originally filed Annual Report on Form 10-K for the year ended December 31, 2005, and for the Company’s Quarterly Report on Form 10-Q for the quarter ended April 1, 2006 (the “Restatement”) due to the discovery of certain accounting errors. The Original 10-Q was filed without Part I, Items 1 and 2, and the Rule 13a-14 (a) and Section 906 certifications by its President and Chief Executive Officer and by its Chief Financial Officer (the “Omitted Sections”), as indicated in the Company’s Notification of Late Filing on Form 12b – 25, filed with the Commission on August 11, 2006.

As previously disclosed, the Audit Committee of the Board of Directors of the Company concluded that due to accounting errors the Company’s previously issued condensed consolidated financial statements for the three-month and six-month periods ended July 2, 2005 need to be restated. The more significant errors related to accounts receivable reserves and inventory valuation and existence issues. The Company also restated its condensed consolidated financial statements to correct additional errors identified in its assessment of historical accounting matters relating to its accounting for a lease acquired in a business combination, accounting for the Company’s investment in a joint venture, and certain other items. A description of the restatement errors and the related impact on the Company’s previously issued condensed consolidated financial statements for the three-month and six-month periods ended July 2, 2005 is contained in the Notes to Condensed Consolidated Financial Statements.

The Company has not modified or updated the disclosures in the Original 10-Q other than as required to include the Omitted Sections, to reflect the effects of the Restatement, and to update the Legal Proceedings in Item 1 of Part II. This Form 10-Q/A amends and restates Items 1, 2, 3 and 4 of Part I and Items 1A, 2 and 6 of Part II of the Original 10-Q and no other information included in the Original 10-Q is amended hereby. The Company has not amended and does not anticipate amending its Annual Reports on Form 10-K for any of the years prior to the year ended December 31, 2005, nor does it anticipate amending any Quarterly Reports on Form 10-Q that were originally filed for any of the quarterly periods prior to (or including) the year ended December 31, 2005. The information that has been previously filed or otherwise reported for these periods is superseded by the information in the previously filed Form 10-K/A and this 10-Q/A. Accordingly, the consolidated financial statements and related financial information contained in those previously filed reports should no longer be relied upon.

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PAR PHARMACEUTICAL COMPANIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share Data)

(Unaudited)


	July 1,			December 31,
	2006			2005
ASSETS
Current assets:
Cash and cash equivalents	$	65,024		$	93,477
Available for sale debt and marketable equity securities		98,121			103,066
Accounts receivable, net		125,924			62,362
Inventories		109,305			96,393
Prepaid expenses and other current assets		12,016			18,759
Deferred income tax assets		75,678			69,256
Income taxes receivable		18,859			18,859
Assets held for sale		—			1,944

Total current assets		504,927			464,116

Property, plant and equipment, at cost less accumulated depreciation and amortization		89,419			87,570
Available for sale debt and marketable equity securities		4,151			3,741
Investment in joint venture		4,224			4,153
Other investments		19,558			21,741
Intangible assets, net		42,443			36,235
Goodwill		58,729			58,729
Deferred charges and other assets		16,324			8,828
Non-current deferred income taxes, net		50,507			50,917

Total assets	$	790,282		$	736,030


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Short-term and current portion of long-term debt	$	833		$	3,011
Accounts payable		45,740			56,412
Payables due to distribution agreement partners		103,935			46,937
Accrued salaries and employee benefits		10,378			12,780
Accrued expenses and other current liabilities		17,058			25,739
Income taxes payable		15,057			9,683
Liabilities held for sale		—			1,944

Total current liabilities		193,001			156,506

Long-term debt, less current portion		201,908			202,001
Other long-term liabilities		345			335

Stockholders’ equity:
Preferred Stock, par value $.0001 per share, authorized 6,000,000 shares; none issued and outstanding		—			—
Common Stock, par value $.01 per share, authorized 90,000,000 shares, issued 35,903,728 and 35,114,026 shares		359			351
Additional paid-in-capital		237,412			217,403
Retained earnings		190,824			193,515
Accumulated other comprehensive loss		(822	)		(1,903	)
Treasury stock, at cost 869,845 and 848,588 shares		(32,745	)		(32,178	)

Total stockholders’ equity		395,028			377,188

Total liabilities and stockholders’ equity	$	790,282		$	736,030

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

PAR PHARMACEUTICAL COMPANIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands, Except Per Share Data)

(Unaudited)


	Three months ended						Six months ended
	July 1,			July 2,			July 1,			July 2,
	2006			2005			2006			2005
				(Restated						(Restated
				see Note 2)						see Note 2)
Revenues:
Net product sales	$	190,583		$	127,473		$	359,620		$	220,802
Other product related revenues		4,655			4,127			7,937			13,772

Total revenues		195,238			131,600			367,557			234,574
Cost of goods sold		140,471			67,886			263,621			133,565

Gross margin		54,767			63,714			103,936			101,009
Operating expenses:
Research and development		17,557			18,032			31,409			33,416
Selling, general and administrative		42,941			24,946			71,283			45,323

Total operating expenses		60,498			42,978			102,692			78,739


Operating (loss) income		(5,731	)		20,736			1,244			22,270

Other expense, net		(1,108	)		(181	)		(1,146	)		(207	)
Equity loss from joint venture		(225	)		(106	)		(479	)		(142	)
Net investment loss		(3,773	)		(6,477	)		(3,773	)		(5,124	)
Interest income		1,973			1,110			3,956			2,441
Interest expense		(1,693	)		(1,719	)		(3,388	)		(3,434	)

(Loss) income from continuing operations before (benefit) provision for income taxes		(10,557	)		13,363			(3,586	)		15,804
(Benefit) provision for income taxes		(3,352	)		5,311			(896	)		6,096


(Loss) income from continuing operations		(7,205	)		8,052			(2,690	)		9,708

Discontinued operations:
Loss from discontinued operations		—			(1,338	)		—			(2,494	)
Benefit for income taxes		—			(508	)		—			(947	)

Loss from discontinued operations		—			(830	)		—			(1,547	)


Net (loss) income	$	(7,205	)	$	7,222		$	(2,690	)	$	8,161


Basic earnings (loss) per share of common stock:
(Loss) income from continuing operations	$	(0.21	)	$	0.24		$	(0.08	)	$	0.28
Loss from discontinued operations		—			(0.03	)		—			(0.04	)

Net (loss) income	$	(0.21	)	$	0.21		$	(0.08	)	$	0.24


Diluted earnings (loss) per share of common stock:
(Loss) income from continuing operations	$	(0.21	)	$	0.23		$	(0.08	)	$	0.28
Loss from discontinued operations		—			(0.02	)		—			(0.04	)

Net (loss) income	$	(0.21	)	$	0.21		$	(0.08	)	$	0.24


Weighted average number of common shares outstanding:
Basic		34,454			34,186			34,368			34,081

Diluted		34,454			34,467			34,368			34,487

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

PAR PHARMACEUTICAL COMPANIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)


	Six Months Ended
				July 2, 2005
	July 1, 2006			(Restated see Note 2)
Cash flows from operating activities:
Net (loss) income	$	(2,690	)	$	8,161
Deduct: (Loss) from discontinued operations, net of tax		—			(1,547	)

(Loss) income from continuing operations		(2,690	)		9,708
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income taxes		(6,720	)		17,053
Depreciation and amortization		10,777			6,050
Investment impairment		3,773			8,280
Equity in net loss of joint venture		479			142
Allowances against accounts receivable		37,893			(65,410	)
Share-based compensation expense		10,453			1,788
Loss on disposal of fixed assets		220			—
Gain on sale of investments		—			(3,156	)
Tax benefit on exercise of nonqualified stock options		691			398
Excess tax benefit on exercise of nonqualified stock options		(676	)		—
Other		(25	)		(2	)
Changes in assets and liabilities, net of the effects of divestitures:
(Increase) decrease in accounts receivable		(101,455	)		6,186
Increase in inventories		(12,912	)		(10,388	)
Decrease in prepaid expenses and other assets		8,247			5,619
Decrease in accounts payable		(4,316	)		(5,181	)
Increase in payables due to distribution agreement partners		56,999			2,194
(Decrease) increase in accrued expenses and other liabilities		(8,611	)		9,818
Increase (decrease) in income taxes payable/receivable		5,374			(12,174	)

Net cash used in operating activities		(2,499	)		(29,075	)
Net cash used in operating activities from discontinued operations		—			(3,747	)

Cash flows from investing activities:
Capital expenditures		(11,235	)		(12,384	)
Purchases of intangibles		(14,137	)		—
Acquisition of subsidiary, net of cash acquired		—			98
Purchases of long-term investments		—			(12,000	)
Purchases of available for sale debt and marketable equity securities		(268	)		(36,087	)
Proceeds from sale of available for sale debt and marketable equity securities		5,000			90,189
Proceeds from sale of long-term investments		—			4,310
Acquisition of subsidiary, contingent payment		(2,500	)		(2,500	)
Capital contributions to joint venture		(550	)		(1,370	)
Advance for product rights		(9,000	)		—
Other		—			2
Net cash (used in) provided by investing activities		(32,690	)		30,258
Net cash used in investing activities from discontinued operations		—			(298	)

Cash flows from financing activities:
Proceeds from issuances of common stock upon exercise of stock options		8,898			1,925
Excess tax benefits on exercise of nonqualified stock options		676			—
Borrowings related to financed insurance premium liabilities		—			43
Purchase of treasury stock		(567	)		(152	)
Payments of short-term debt related to financed insurance premiums		(2,118	)		(3,394	)
Principal payments under long-term and other borrowings		(153	)		(149	)

Net cash provided by (used in) financing activities		6,736			(1,727	)

PAR PHARMACEUTICAL COMPANIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

July 1, 2006

(In thousands, except per share amounts or as otherwise noted)

(Unaudited)

Par Pharmaceutical Companies, Inc. (the “Company”) operates, primarily through its wholly-owned subsidiary, Par Pharmaceutical, Inc. (“Par”), in two business segments, the manufacture and distribution of generic pharmaceuticals and branded pharmaceuticals, principally in the United States. The Company also wholly owns Kali Laboratories, Inc. (“Kali”), a generic pharmaceutical research and development company located in Somerset, New Jersey. Marketed products are principally in the solid oral dosage form (tablet, caplet and two-piece hard-shell capsule). The Company also distributes several oral suspension products and certain products in the semi-solid form of a cream.

In January 2006, the Company announced the divestiture of FineTech Laboratories, Ltd. (“FineTech”), effective December 31, 2005. The Company transferred FineTech to a former officer and director of the Company for no consideration.

Note 1 - Basis of Presentation:

The accompanying condensed consolidated financial statements at July 1, 2006 and for the three-month and six-month periods ended July 1, 2006 and July 2, 2005 are unaudited; in the opinion of the Company’s management, however, such statements include all adjustments necessary to present fairly the information presented therein. The condensed consolidated balance sheet at December 31, 2005 was derived from the Company’s audited consolidated financial statements included in the Company’s 2005 Annual Report on Form 10-K/A.

The Company corrected the date of the fiscal quarter ended July 1, 2006. The Company previously reported that its fiscal quarters ended on the Sunday closest to each quarter end. However, the Company’s accounting systems cut-off on the Saturday closest to the fiscal quarter end. The Company corrected the fiscal quarter end date to reflect a Saturday ending date. The correction of the quarter end date did not impact the amounts presented for the fiscal quarter.

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 the Company’s 2005 Annual Report on Form 10-K/A. Results of operations for interim periods are not necessarily indicative of those that may be achieved for full fiscal years.

As more fully discussed below in Note 3, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123R, Share-Based Payment (“SFAS No. 123R”), effective January 1, 2006. The Company adopted the modified prospective transition method provided under SFAS No. 123R and, consequently, has not retroactively adjusted results for prior periods.

Note 2 – Restatement of Previously Issued Financial Statements:

Accounts Receivable Reserves and Revenues

The accounts receivable reserves and related revenue errors resulted from (i) delays in recognizing customer credits and (ii) the utilization of methodologies that did not contemplate all necessary components to estimate reserves that impacted the accuracy of recorded amounts for chargebacks, rebates, product returns and other accounts receivable reserves.

The Company records estimated customer credits for chargebacks, rebates, product returns, cash discounts and other credits at the time of sale. Customers often take deductions for these items from their payment of invoices. The Company validates the customer deductions and for valid deductions a credit is issued. For invalid deductions the Company pursues collection from its customers. The Company experienced a delay in processing customer credits and the effects of such delay were not recognized by the Company in their estimates. To the extent deductions taken or claims made by customers were valid; the Company restated its

accounts receivable reserves and related revenues in the appropriate prior period. For deductions that were not valid; the Company sought collection from the customer. In the second quarter of 2006, the Company determined that approximately $10 million of invalid customer deductions would not be pursued for collection. Accordingly, the related $10 million will be written off in the second quarter of 2006.

In addition to the Company’s processing delays, the Company determined that due to an oversight of facts that existed at the time, its methodologies did not include all necessary components for estimating future chargebacks, rebates, and product returns. The Company’s chargeback reserve did not include processing time lags for outstanding chargeback claims. The Company also determined that its rebate reserve had not been capturing the portion of the liability associated with product inventory in the distribution channel and had not considered processing time lags for outstanding rebates related to customers that purchase its products indirectly through wholesalers. The processing time lag refers to the period of time between when inventory in the distribution channel is sold by the wholesaler and when the information is received and processed by the Company. Inventory in the distribution channel represents the Company’s product held by its customers. The Company’s product returns reserve methodology underestimated the period between the date of the financial statements and the date of product return due to product expiration as well as specific return exposures at each period end. These errors resulted in an understatement of its accounts receivable reserves and overstatement of related revenues for the periods presented in previously issued condensed consolidated financial statements.

The Company’s corrected chargeback and rebate methodologies are designed to appropriately estimate its liability for (1) the processing time lag associated with incurred-but-uninvoiced chargebacks and rebates, and (2) future chargebacks and rebates associated with product inventory held in the distribution channel at period end. The Company’s corrected product returns reserve methodology considers average remaining product expiry on product sales, historical product returns experience, and specific return exposures to estimate the potential risk of returns of inventory in the distribution channel at the end of each period.

For the three-month and six-month periods ended July 2, 2005, the Company recorded restatement adjustments that decreased total accounts receivable reserves and increased revenues to reflect their recognition in the correct periods.

Inventory Valuation and Existence

The Company maintains inventories for raw materials, supplies, work in process, and finished goods. The restatements of inventory and cost of goods sold relate to errors in the assessment of inventory valuation and existence during the periods presented. Inventory restatement adjustments resulted from (i) the Company’s determination that excess inventory existed where estimated future sales demand for certain products was less than the inventory on hand, at that time, and (ii) from the identification of recorded inventory amounts for which no underlying product existed. For such items, the Company identified the underlying transactions that had not been properly recorded and corrected them in the appropriate period. Also, the Company had not historically adjusted inventory and cost of sales for manufacturing variances. Previously, the Company recorded manufacturing variances as cost of goods sold in the period in which they were generated, which was not in compliance with GAAP. The Company corrected this error in the restated financial statements to recognize manufacturing variances as a component of inventory cost and as cost of goods sold, as appropriate.

Investment in Joint Venture

On April 15, 2002, Rhodes Technology (“Rhodes”) and the Company created a joint venture, SVC Pharma (“SVC”), to research, develop, commercialize and market pharmaceutical preparations for human therapy. The parties agreed to capitalize the joint venture with equal contributions and agreed that all profits or losses are to be shared equally between Rhodes and the Company. The Company had previously capitalized certain contributions made to SVC as property, plant and equipment and directly expensed certain contributions it made to the joint venture. The Company has restated its accounting for this joint venture to appropriately apply the equity method of accounting in accordance with Accounting Principles Board Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock” by recording its share of losses of the joint venture in the equity loss from joint venture line item in the condensed consolidated statements of operations for the three-month and six-month periods ended July 2, 2005 and recording the Company’s share of the net equity in the investment in joint venture line item on the condensed consolidated balance sheet.

Accounting for a Lease Acquired in a Business Combination

On June 10, 2004, the Company acquired all of the capital stock of Kali Laboratories, Inc. (“Kali”). The Company acquired the physical facilities, in-process research and development and intellectual property of Kali. In connection with the acquisition, the Company assumed a building lease. The Kali lease was initially accounted for as an operating lease. Since, the Kali lease contained a bargain purchase option, accounting for this lease as an operating lease was not in compliance with GAAP. The Company restated its accounting to classify the Kali lease as a capital lease, which included the recording of the related fixed asset and capital lease obligation, the removal of the favorable leasehold interest recorded as an intangible asset and the restatement of the related amount of goodwill.

Sales Cut-Off

The Company recorded restatement adjustments for certain sales cut-off errors that resulted in certain revenues being recorded in the incorrect period. The correction affected revenues, cost of sales, accounts receivable, inventory and payables due to distribution agreement partners for the six-month period ended July 2, 2005.

Accounts Payable Error

The Company recorded a restatement adjustment to record a previously unaccrued invoice. This error resulted in an understatement of accounts payable and the related understatement of research and development expense for the three-month and six-month periods ended July 2, 2005.

Other Errors

The Company recorded other immaterial restatement adjustments for errors made in the application of GAAP. These errors included adjustments related to the accounting of a curtailed defined benefit plan, accounts payable corrections and other miscellaneous items related to prior periods. For the six-month period ended July 2, 2005, Other Errors includes the reversal of amounts related to accounts receivable reserves (chargebacks) and an amount related to inventory valuation. These amounts have been correctly recorded in periods prior to the six-month period ended July 2, 2005 as part of the restatement of the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2005.

Presentation Restatement Items — Condensed Consolidated Statements of Operations

The Company restated the presentation of interest expense and interest income by stating each individually on the face of the condensed consolidated statements of operations for the three-month and six-month periods ended July 2, 2005, as required by GAAP. The Company restated the presentation of amortization of debt issuance costs by including the amortization of these costs in interest expense for the three-month and six-month periods ended July 2, 2005, as required by GAAP. Previously, the amortization of debt issuance costs were included in the line item labeled “Selling, general and administrative” under the “Operating expenses” section of the condensed consolidated statements of operations for the three-month and six-month periods ended July 2, 2005. The Company restated the presentation of certain licensing and royalty related revenues that had previously been included in “Net product sales”, in error, on the condensed consolidated statements of operations by including these amounts in “Other product related revenues” on the condensed consolidated statements of operations for the three-month and six-month periods ended July 2, 2005, as required by GAAP.

Presentation Restatement Items — Condensed Consolidated Statements of Cash Flows

The Company restated the Cash flows for the six-month period ended July 2, 2005 to include totals for cash flows from discontinued operations. The Company corrected the presentation of “Tax benefit on exercise of nonqualified stock options” for the six-month period ended July 2, 2005 in the Cash flows from operating activities section, as required by GAAP. Previously, this line item was displayed as supplemental disclosure under the caption of “Non-cash transactions”, which was not in compliance with GAAP. The Company has presented borrowings and payments related to debt for financed insurance premiums as individual line items in the Cash flows from financing activities section of the condensed consolidated statements of cash flows for the six-month period ended July 2, 2005, as required by GAAP. Previously the payments related to debt for financed insurance premiums were netted with “Principal payments under long-term and other borrowings” in the Cash flows from financing activities section of the condensed consolidated statements of cash flows. The Company also added supplemental disclosure of “Capital expenditures incurred but not yet paid” amounts to its condensed consolidated statements of cash flows for the six-month period ended July 2, 2005, as required by GAAP.

Presentation Restatement Items — Notes to Condensed Consolidated Financial Statements

The Company restated its Segment Information Note by expanding the disclosure of top selling product sales in a tabular format and other changes to comply with the requirements of Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information.” Previously, the disclosure of top selling products was not complete for the three-month or six-month periods ended July 2, 2005.

The following tables set forth the effects of the restatement adjustments on the applicable line items within the Company’s condensed consolidated statement of operations for the three-month period ended July 2, 2005:


				Discontinued
				operations
	As previously			reclassification			Restatement
	reported			adjustments			adjustments			As restated
(Amounts in thousands, except per share amounts)				(1)
Revenues:
Net product sales	$	116,727			(2	)	$	10,748		$	127,473
Other product related revenues		313			—			3,814			4,127
Total revenues		117,040			(2	)		14,562			131,600
Cost of goods sold		68,203			(748	)		431			67,886

Gross margin		48,837			746			14,131			63,714
Operating expenses:
Research and development		17,398			(382	)		1,016			18,032
Selling, general and administrative		25,154			(221	)		13			24,946
Total operating expenses		42,552			(603	)		1,029			42,978

Operating income		6,285			1,349			13,102			20,736
Other income (expense), net		1,528			—			(1,709	)		(181	)
Equity loss from joint venture		—			—			(106	)		(106	)
Interest income		—			—			1,110			1,110
Interest expense		—			—			(1,719	)		(1,719	)
Interest expense, net		(368	)		(11	)		379			—
Investment impairment		(8,280	)		—			8,280			—
Net investment loss		—			—			(6,477	)		(6,477	)
Income from continuing operations before provision for income taxes		(835	)		1,338			12,860			13,363
Provision for income taxes		(214	)		508			5,017			5,311
Income from continuing operations		(621	)		830			7,843			8,052
Loss from discontinued operations		—			(1,338	)		—			(1,338	)
Benefit for income taxes		—			(508	)		—			(508	)
Loss from discontinued operations		—			(830	)		—			(830	)
Net (loss) income	$	(621	)		—		$	7,843		$	7,222

Basic earnings (loss) per share of common stock :
Income from continuing operations	$	(0.02	)	$	0.03		$	0.23		$	0.24
Loss from discontinued operations		—		$	(0.03	)		—		$	(0.03	)
Net income	$	(0.02	)		—		$	0.23		$	0.21

Diluted earnings (loss) per share of common stock :
Income from continuing operations	$	(0.02	)	$	0.02		$	0.23		$	0.23
Loss from discontinued operations		—		$	(0.02	)		—		$	(0.02	)
Net income	$	(0.02	)		—		$	0.23		$	0.21

Weighted average number of common shares outstanding Diluted		34,186			—			281			34,467


(1)		— Refer to Note 14 — Discontinued Operations — Related Party Transaction


				Discontinued
				operations
	As previously			reclassification			Restatement
	reported			adjustments			adjustments			As restated
(Amounts in thousands, except per share amounts)				(1)
Revenues:
Net product sales	$	207,815			(53	)	$	13,040		$	220,802
Other product related revenues		6,726			—			7,046			13,772
Total revenues		214,541			(53	)		20,086			234,574
Cost of goods sold		126,552			(1,241	)		8,254			133,565

Gross margin		87,989			1,188			11,832			101,009
Operating expenses:
Research and development		33,387			(852	)		881			33,416
Selling, general and administrative		46,506			(471	)		(712	)		45,323
Total operating expenses		79,893			(1,323	)		169			78,739

Operating income		8,096			2,511			11,663			22,270
Other expense, net		2,851			—			(3,058	)		(207	)
Equity loss from joint venture		—			—			(142	)		(142	)
Interest income		—			—			2,441			2,441
Interest expense		—			—			(3,434	)		(3,434	)
Interest expense, net		(514	)		(17	)		531			—
Investment impairment		(8,280	)		—			8,280			—
Net investment loss		—			—			(5,124	)		(5,124	)
Income from continuing operations before provision for income taxes		2,153			2,494			11,157			15,804
Provision for income taxes		797			947			4,352			6,096
Income from continuing operations		1,356			1,547			6,805			9,708
Loss from discontinued operations		—			(2,494	)		—			(2,494	)
Benefit for income taxes		—			(947	)		—			(947	)
Loss from discontinued operations		—			(1,547	)		—			(1,547	)
Net income	$	1,356			—		$	6,805		$	8,161

Basic earnings (loss) per share of common stock :
Income from continuing operations	$	0.04		$	0.04		$	0.20		$	0.28
Loss from discontinued operations		—		$	(0.04	)		—		$	(0.04	)
Net income	$	0.04			—		$	0.20		$	0.24

Diluted earnings (loss) per share of common stock :
Income from continuing operations	$	0.04		$	0.04		$	0.20		$	0.28
Loss from discontinued operations		—		$	(0.04	)		—		$	(0.04	)
Net income	$	0.04			—		$	0.20		$	0.24

(1) — Refer to Note 14 — Discontinued Operations — Related Party Transaction

The following tables set forth the effects of the restatement adjustments on the applicable line items within the Company’s consolidated statements of cash flows for the six-month period ended July 2, 2005:


				Discontinued
	As			operations
	previously			reclassification			Restatement			As
	reported			adjustments			adjustments			restated
(Amounts in thousands)				(1)
Cash flows from operating activities:
Net income	$	1,356			—		$	6,805		$	8,161
(Loss) from discontinued operations, net of tax		—			(1,547	)		—			(1,547	)
Income from continuing operations		—			1,547			8,161			9,708
Deferred income taxes		14,691			2,310			52			17,053
Depreciation and amortization		7,120			(693	)		(377	)		6,050
Equity in net loss of joint venture		—			—			142			142
Inventory reserves		2,873			—			(2,873	)		—
Allowances against accounts receivable		(14,410	)		—			(51,000	)		(65,410	)
Tax benefit on exercise of nonqualified stock options		—			—			398			398
Gain on sale of investments		(2,841	)		—			(315	)		(3,156	)
Stock compensation expense		1,785			—			3			1,788
Other		(58	)		—			56			(2	)
Changes in assets and liabilities:					—
Increase in accounts receivable		(25,626	)		—			31,812			6,186
Increase in inventories		(17,831	)		—			7,443			(10,388	)
Decrease (increase) in prepaid expenses and other assets		5,439			48			132			5,619
(Decrease) in accounts payable		(248	)		888			(5,821	)		(5,181	)
(Decrease) in payables due to distribution agreement partners		(3,141	)		—			5,335			2,194
Increase in accrued expenses and other liabilities		2,862			(353	)		7,309			9,818
(Decrease) in income taxes payable		(15,898	)					3,724			(12,174	)
Net cash used in operating activities	$	(35,647	)	$	3,747		$	2,825		$	(29,075	)
Net cash used in operating activities from discontinued operations	$	—		$	(3,747	)	$	—		$	(3,747	)


Cash flows from investing activities:
Capital expenditures		(13,138	)		298			456			(12,384	)
Purchases of available for sale debt securities		(36,577	)		—			490			(36,087	)
Acquisition of subsidiary, contingent payment		—			—			(2,500	)		(2,500	)
Capital contributions to joint venture		—			—			(1,370	)		(1,370	)
Proceeds from sale of fixed assets		2			—			(2	)		—
Other		98			—			(96	)		2
Acquisition of subsidiary, net of cash acquired		—			—			98			98
Net cash provided by investing activities	$	32,884		$	298		$	(2,924	)	$	30,258
Net cash used in investing activities from discontinued operations	$	—		$	(298	)	$	—		$	(298	)


Cash flows from financing activities:
Proceeds from issuances of common stock upon exercise of stock options		1,928			—			(3	)		1,925
Payments of short-term debt related to financed insurance premiums		—			—			(3,394	)		(3,394	)
Borrowings related to financed insurance premium liabilities		—			—			43			43
Principal payments under long-term debt and other borrowings		(3,454	)		—			3,305			(149	)
Net cash used in financing activities	$	(1,678	)	$	—		$	(49	)	$	(1,727	)

Net decrease in cash and cash equivalents		(4,441	)		—			(148	)		(4,589	)

Cash and cash equivalents at beginning of period	$	36,534		$	—		$	148		$	36,682


			Discontinued
	As		operations
	previously		reclassification		Restatement			As
	reported		adjustments		adjustments			restated
			(1)
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes	$	1,998	$	—	$	81		$	2,079
Interest	$	2,955	$	—	$	(11	)	$	2,944

Non-cash transactions:
Tax benefit from exercise of stock options	$	398	$	—	$	(398	)	$	—

Capital expenditures incurred but not yet paid	$	—			$	1,460		$	1,460

Increase in fair value of available for sale debt and marketable equity securities	$	7,257	$	—	$	8,685		$	15,942


(1)		— Refer to Note 14 — Discontinued Operations — Related Party Transaction

Note 3 — Share-Based Compensation:

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) 123(R), “Share-Based Payment” (“SFAS 123R”). SFAS 123R requires all share-based payments made to employees, including grants of employee stock options and shares issued pursuant to employee stock purchase plans, to be recognized in a Company’s income statement based on their grant-date fair values. Effective January 1, 2006, the Company adopted the provisions of SFAS 123R using the modified prospective method. Under this method, compensation expense is recorded for all nonvested options over the related vesting period beginning in the quarter of adoption. The Company previously applied the intrinsic value based method prescribed in Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) in accounting for employee stock-based compensation and complied with the disclosure provisions of SFAS No. 123, “Accounting For Stock-Based Compensation” (“SFAS 123”). Under SFAS 123R, the Company will recognize share-based compensation ratably over the service period applicable to the award. In March 2005, the SEC issued Staff Accounting Bulletin (“SAB”) No. 107 (“SAB 107”) regarding the Staff’s interpretation of SFAS 123R. This interpretation provides the Staff’s views regarding interactions between SFAS 123R and certain SEC rules and regulations and provides interpretations of the valuation of share-based payments for public companies. The interpretive guidance is intended to assist companies in applying the provisions of SFAS 123R and investors and users of the financial statements in analyzing the information provided. The Company followed the guidance prescribed by SAB 107 in connection with its adoption of SFAS 123R.

Prior to 2006, compensation costs related to stock options granted at fair value under plans were not recognized in the Company’s consolidated statements of operations. Compensation costs related to restricted stock and restricted stock units were recognized in the statements of operations.

Under the modified prospective approach, SFAS 123R applies to new awards and to awards that were outstanding on January 1, 2006 that are subsequently modified, repurchased or cancelled. Under the modified prospective approach, compensation cost recognized for the first quarter of 2006 includes compensation cost for all share-based payments granted prior to, but not yet vested on January 1, 2006, based on their grant-date fair values estimated in accordance with the provisions of SFAS 123. Prior periods have not been restated to reflect the impact of adopting the new Standard. SFAS 123R also amends 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. As a result of the adoption of SFAS 123R, $676 of excess tax benefits for the six months ended July 1, 2006 has been classified as both an operating cash outflow and financing cash inflow.

The Company grants share-based awards under its various plans, which provide for the granting of non-qualified stock options, restricted stock and restricted stock units to the employees of the Company and others. Stock options generally vest ratably over four years and have a maximum term of ten years.

As of July 1, 2006, there were approximately 3.8 million shares of common stock available for future grant. The Company issues new shares of common stock when stock option awards are exercised. Stock option awards outstanding under the Company’s current plans have been granted at exercise prices that were equal to the market value of the Company’s common stock on the date of grant.

The following table illustrates the effects on net income and net income per share of common stock had the Company accounted for stock-based compensation in accordance with SFAS 123 for the three-month and six-month periods ended July 2, 2005:


	Three Months			Six Months
	Ended			Ended
	July 2,			July 2,
	2005			2005
	(Restated)			(Restated)
Net income	$	7,222		$	8,161
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects		450			833
Deduct: Stock-based employee compensation expense determined under the fair-value based method, net of related taxes		(3,242	)		(23,976	)

Pro forma net income (loss)	$	4,430		$	(14,982	)


Net income (loss) per share of common stock :

As restated — basic	$	0.21		$	0.24
As restated — diluted	$	0.21		$	0.24

Pro forma — basic	$	0.13		$	(0.44	)
Pro forma — diluted	$	0.13		$	(0.44	)

In February 2005, the Company accelerated the vesting of 820 outstanding, non-vested stock options, which represented all of its stock option grants with per share exercise prices exceeding $60. The fair value of these options, using the Black-Scholes stock option pricing model and the Company’s stock option assumptions at the date of their grant, was approximately $27,869. This action increased pro forma compensation expense in the first quarter of 2005 by approximately $16,552, net of related tax effects. In September 2005, the Company accelerated the vesting of an additional 424 outstanding, non-vested stock options. The fair value of these options, using the Black-Scholes stock option pricing model and the Company’s stock option assumptions at the date of their grants, was approximately $7,333. The Company considered a number of factors in making this decision, including the issuance and anticipated implementation of SFAS 123R. In the quarter ended April 1, 2006, the Company accelerated the vesting of 50 outstanding non-vested stock options in connection with the termination of certain executives. The effect of these accelerations resulted in additional compensation expense of $415 in the quarter ended April 1, 2006. The Company also modified 172 vested and non-vested options in connection with revised employment agreements for certain executives. The Company will record compensation expense of $1,115, of which $695 was recorded in the quarter ended April 1, 2006. The remaining $420 will be amortized over the remaining vesting period of the modified options, of which $59 was recorded in the quarter ended July 1, 2006.

As part of the FineTech divestiture, the Company also accelerated the vesting of 6 shares of nonvested restricted stock and approximately 139 outstanding non-vested stock options, effective December 31, 2005. The Company recorded pre-tax expense of $179 in loss on the sale of discontinued operations in fiscal 2005 due to the acceleration of the restricted stock. The exercise prices of 120 of the accelerated stock options were below the closing price of the Company’s common stock on December 31, 2005 and, as such, the Company recorded pre-tax expense of $1,118 in loss on sale of discontinued operations, which represented the difference between the closing price of the Company’s common stock on December 31, 2005 and the exercise price. The Company also accelerated approximately 19 stock options whose exercise price was above the then closing price. The acceleration of these options increased pro forma compensation expense by approximately $271, net of related tax expense.

Stock Options

The Company 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
	July 1,			July 2,			July 1,			July 2,
	2006			2005			2006			2005
Risk-free interest rate		5.0	%		4.0	%		4.4	%		3.7	%
Expected life (in years)		6.2			5.0			6.2			4.9
Expected Volatility		56.9	%		57.7	%		58.2	%		58.6	%
Dividend		0	%		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. The Company 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 the Company’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, the Company opted to use the “simplified” method for “plain vanilla” options described in SAB 107. The “simplified method” calculation is the average of the vesting term plus the original contractual term divided by 2. The Company anticipates that most grants in the future will be four-year graded vesting; however, Outside Directors will continue to have one-year vesting. The Company 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 the Company’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 the Company’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 values of options granted in the three month period ended July 1, 2006 and July 2, 2005 were $15.79 and $17.38, respectively. The weighted average per share fair value of options granted in the six month period ended July 1, 2006 and July 2, 2005 were $19.11 and $20.95, respectively.

Set forth below is the impact on the Company’s results of operations of recording share-based compensation from its stock options for the three-month and six-month periods ended July 1, 2006:


	Three Months			Six Months
	Ended			Ended
	July 1,			July 1,
	2006			2006
Cost of sales	$	271		$	575
Research and development		678			1,437
Selling, general and administrative		2,499			5,382

Total, pre-tax	$	3,448		$	7,394
Tax benefit of share-based compensation		(1,345	)		(2,884	)

Total, net of tax	$	2,103		$	4,510

The incremental stock based compensation expense decreased both basic and diluted earnings per share by $0.06 per share for the three-month period ended July 1, 2006 and by $0.13 per share for the six-month period ended July 1, 2006.

The following is a summary of the Company’s stock option activity:


				Weighted		Weighted		Aggregate
				Average		Average		Intrinsic
	Shares			Exercise Price		Remaining Life		Value
Balance at December 31, 2005		5,134		$	37.86
Granted		1,019			31.91
Exercised		(392	)		21.63
Forfeited		(355	)		33.71

Balance at July 1, 2006		5,406		$	37.32		6.92	$	3,117

Exercisable at July 1, 2006		3,437		$	39.01		5.78	$	3,117

Vested and expected to vest at July 1, 2006		5,117		$	36.82		6.75	$	3,117

The total fair value of shares vested during the three-month and six-month periods ended July 1, 2006 was $1,348 and $5,540, respectively. As of July 1, 2006, the total compensation cost related to all nonvested stock options granted to employees but not yet recognized was approximately $32,605. This cost will be amortized on a straight-line basis over the remaining weighted average vesting period of 2.7 years.

Restricted Stock/Restricted Stock Units

Restricted stock and restricted stock units 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 the Company’s common stock on the date of grant.

The impact on the Company’s results of operations of recording share-based compensation from restricted stock for the three-month and six-month periods ended July 1, 2006 and July 2, 2005 was as follows:


	For the three months ended						For the six months ended
	July 1,			July 2,			July 1,			July 2,
	2006			2005			2006			2005
Cost of sales	$	114		$	53		$	203		$	106
Research and development		285			134			813			264
Selling, general and administrative		1,032			481			1,981			952

Total, pre-tax	$	1,431		$	668		$	2,997		$	1,322
Tax benefit of stock-based compensation		(558	)		(247	)		(1,169	)		(489	)

Total, net of tax	$	873		$	421		$	1,828		$	833

The following is a summary of the Company’s restricted stock activity (shares in thousands):


				Weighted		Aggregate
				Average		Intrinsic
	Shares			Grant Price		Value
Nonvested balance at December 31, 2005		256		$	40.03
Granted		411			32.88
Vested		(71	)		41.38
Forfeited		(30	)		35.13

Nonvested balance at July 1, 2006		566		$	34.93	$	10,461

The following is a summary of the Company’s restricted stock unit activity (shares in thousands):


				Weighted		Aggregate
				Average		Intrinsic
	Shares			Grant Price		Value
Nonvested balance at December 31, 2005		17		$	42.08
Granted		20			31.77
Vested		(7	)		38.16
Forfeited		—			—

Nonvested balance at July 1, 2006		30		$	36.20	$	554

As of July 1, 2006, the total compensation cost related to all nonvested restricted stock and restricted stock units granted to employees but not yet recognized was approximately $16,095; this cost will be amortized on a straight-line basis over the remaining weighted average vesting period of approximately three years.

Employee Stock Purchase Program:

The Company 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 the Company’s common stock at a discount of 15% of the fair market value. An aggregate of 1,000 shares of Common Stock has been reserved for sale to employees under the Program. Employees purchased 9 shares and 15 shares during the three-month and six-month periods ended July 1, 2006 and the Company recorded an expense of $31 and $58, respectively, reflecting their 15% discount from fair market value.

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

At July 1, 2006 and December 31, 2005, all of the Company’s investments in debt and marketable equity securities were classified as available for sale and, as a result, were reported at their fair values on the condensed consolidated balance sheets. The following is a summary of amortized cost and estimated fair value of the Company’s debt and marketable equity securities available for sale at July 1, 2006:


								Estimated
			Unrealized					Fair
	Cost		Gain		Loss			Value
Securities issued by U.S. government and agencies	$	75,790	$	—	$	(1,021	)	$	74,769
Debt securities issued by various state and local municipalities and agencies		13,945		—		(277	)		13,668
Other marketable debt securities		14,697		—		(862	)		13,835

Available for sale debt securities		104,432		—		(2,160	)		102,272

Marketable equity securities available for sale (see Note 5)		1,720		1,250		—			2,970


Total	$	106,152	$	1,250	$	(2,160	)	$	105,242

The following is a summary of amortized cost and estimated fair value of the Company’s investments in debt and marketable equity securities available for sale at December 31, 2005:


								Estimated
			Unrealized					Fair
	Cost		Gain		Loss			Value
Securities issued by U.S. government and agencies	$	80,778	$	—	$	(892	)	$	79,886
Debt securities issued by various state and local municipalities and agencies		13,947		—		(226	)		13,721
Other marketable debt securities		14,440		—		(1,240	)		13,200

Available for sale debt securities		109,165		—		(2,358	)		106,807

Marketable equity securities available for sale (see Note 5)		1,720		—		(340	)		1,380


Total	$	110,885	$	—	$	(2,698	)	$	108,187

Of the $2,160 of unrealized loss as of July 1, 2006, $2,062 has been in an unrealized loss position for greater than a year. The Company believes that these losses are not other-than-temporary as defined by EITF 03-01 due to its ability and intent to hold the related available for sale debt securities for a reasonable period of time sufficient for a recovery of fair value up to (or beyond) the cost of the investment.

The following table summarizes the contractual maturities of the Company’s available for sale debt securities at July 1, 2006:


	July 1, 2006
			Estimated
			Fair
	Cost		Value
Less than one year	$	34,555	$	34,278
Due between 1-2 years		23,628		23,244
Due between 2-5 years		26,430		25,891
Due after 5 years		10,203		9,173
Other		9,616		9,686

Total	$	104,432	$	102,272

Other includes preferred equities and an investment in a fund that invests in various floating rate structured finance securities. They do not have a specific maturity dates.

Note 5 - Other Investments:


			Unrealized
Balance at July 1, 2006	Cost		Gain		Loss		Fair Value
Advancis Pharmaceutical Corporation	$	1,720	$	1,250	$	—	$	2,970
Abrika Pharmaceuticals, LLLP		4,588		—		—		4,588
Optimer Pharmaceuticals, Inc.		12,000		—		—		12,000

Total other investments	$	18,308	$	1,250	$	—	$	19,558


			Unrealized
Balance at December 31, 2005	Cost		Gain		Loss			Fair Value
Advancis Pharmaceutical Corporation	$	1,720	$	—	$	(340	)	$	1,380
Abrika Pharmaceuticals, LLLP		8,361		—		—			8,361
Optimer Pharmaceuticals, Inc.		12,000		—		—			12,000

Total other investments	$	22,081	$	—	$	(340	)	$	21,741

The Company holds investments in Advancis Pharmaceutical Corporation (“Advancis”), Abrika Pharmaceuticals, LLLP (“Abrika”) and Optimer Pharmaceuticals, Inc. (“Optimer”). The Company assesses whether temporary or other-than-temporary losses on its investments have occurred due to declines in fair value or other market conditions. Because the Company has determined that its investment in Advancis is available for sale, unrealized gains and losses are reported as a component of accumulated other comprehensive income (loss) in stockholders’ equity.

In April 2005, the Company acquired 3,333 shares of the Series C preferred stock of Optimer, a then privately-held biotechnology company located in San Diego, California, for $12,000. The 3,333 shares represented, as of July 1, 2006, approximately 13% equity ownership in Optimer. In February 2007, Optimer became a public company via an initial public offering. The Company and Optimer also have signed a collaboration agreement where the Company receives a license to develop, market and distribute the antibiotic compound known as PAR-101 and the option to expand the agreement to cover up to three additional products. Refer to Note 16 for further details. Because Optimer was privately-held and accounted for under the cost method, the Company had monitored its investment periodically to evaluate whether any declines in fair value had become other-than-temporary prior to Optimer becoming a public company.

In December 2004, the Company acquired a 5% limited partnership interest in Abrika, a privately-held specialty generic pharmaceutical company located in Sunrise, Florida for $8,361, including costs. Additionally, the Company has entered into an agreement with Abrika to collaborate on the marketing of five products to be developed by Abrika. The first product is expected to be a transdermal fentanyl patch for the management of chronic pain. This patch is a generic version of Duragesic^® marketed by Janssen Pharmaceutica Products, L.P., a division of Johnson & Johnson. Pursuant to the agreement, the Company was required to pay up to $9,000 to Abrika at the time of the commercial launch of this product, subject to the attainment of certain profit targets. In February 2006, the Company and Abrika amended their collaboration agreement and the Company advanced Abrika $9,000. Abrika will earn the funds only upon the Food and Drug Administration’s (“FDA”) final and unconditional approval of the transdermal fentanyl patch. Abrika has agreed to repay the advance if it does not receive FDA approval within two years of the amendment. The Company also holds a convertible promissory note in the principal amount of $3,000, plus interest accruing at 8.0% annually for money loaned to Abrika. Both the $9,000 advance and the $3,000 promissory note are recorded in deferred charges and other assets. Because Abrika is privately-held and accounted for under the cost method, the Company monitors the investment on a periodic basis to evaluate whether any declines in value becomes other-than-temporary. In November 2006, Abrika agreed to be purchased by a wholly-owned subsidiary of the Actavis group. Based on the terms of the merger agreement the Company is to receive approximately $4.6 million for its equity stake in Abrika. The Company wrote down its investment by approximately $3.8 million in the second quarter of 2006 based on the terms of the merger agreement between Abrika and Actavis that indicated that its investment was impaired. The merger transaction was completed in 2007.

In October 2003, the Company paid $10,000 to purchase 1,000 shares of the common stock of Advancis, a pharmaceutical company based in Germantown, Maryland, at $10 per share in its initial public offering of 6,000 shares. In the second quarter of 2005, the Company recorded an investment impairment of $8,280 related to its investment in Advancis. In June and July 2005, Advancis announced that it had failed to achieve the desired microbiological and clinical endpoints in its Amoxicillin PULSYS phase III clinical trials for the treatment of pharyngitis/tonsillitis. Due to the results of the clinical trials and the continued significant decline in the stock price of Advancis, the Company determined that the decline in fair market value of its investment was other-than-temporary and, as such, wrote the investment down to its fair market value as of July 2, 2005, which was $1,720 based on the market value of the common stock of Advancis at that date. As of July 1, 2006, the fair market value of the Advancis common stock held by the Company was $2,970 based on the market value of Advancis’s common stock at that date. The Company included an unrealized gain of $1,250 through the second quarter of 2006, which was included in other comprehensive income. As of December 31, 2005, the fair market value of the Advancis common stock held by the Company was $1,380 based on the market value of Advancis’s common stock at that date. The Company included an unrealized loss of $340 for 2005 based on the value of the common stock at December 31, 2005.

Note 6 - Accounts Receivable:

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


	July 1,			December 31,
	2006			2005
Gross trade accounts receivable	$	367,137		$	265,682
Chargebacks		(87,949	)		(102,256	)
Rebates and incentive programs		(83,843	)		(50,991	)
Returns		(43,395	)		(32,893	)
Cash discounts and other		(15,425	)		(15,333	)
Doubtful accounts		(10,601	)		(1,847	)

Accounts receivable, net	$	125,924		$	62,362

Allowance for doubtful accounts


	For the six month period ended
	July 1, 2006			July 2, 2005
Balance at beginning of period	$	(1,847	)	$	(1,847	)
Additions – charge to expense		(10,442	)(a)		—
Adjustments and/or deductions		1,688			—

Balance at end of period	$	(10,601	)	$	(1,847	)


(a)		The Company records estimated customer credits for chargebacks, rebates, product returns, cash discounts and other credits at the time of sale. Customers often take deductions for these items from their payment of invoices. The Company validates the customer deductions and for valid deductions a credit is issued. For invalid deductions the Company pursues collection from its customers. In the second quarter of 2006, the Company determined that approximately $10 million of invalid customer deductions would not be pursued for collection. Accordingly, the related $10 million was written off in the second quarter of 2006.

The following tables summarize the activity for the six months ended July 1, 2006 and July 2, 2005, respectively, in the accounts affected by the estimated provisions described below:


	For the six months ended July 1, 2006
				Provision			(Provision)
				recorded			reversal recorded
	Beginning			for current			for prior period			Credits		Ending
Accounts receivable reserves	balance			period sales			sales			processed		balance

Chargebacks	$	(102,256	)	$	(191,301	)	$	—	(1)	$	205,608	$	(87,949	)
Rebates and incentive programs		(50,991	)		(111,987	)		—			79,135		(83,843	)
Returns		(32,893	)		(17,959	)		(7,686	)		15,143		(43,395	)
Cash discounts and other		(15,333	)		(24,566	)		—			24,474		(15,425	)

Total	$	(201,473	)	$	(345,813	)	$	(7,686	)	$	324,360	$	(230,612	)


Accrued liabilities

Medicaid rebates	$	(9,040	)	$	(8,934	)	$	85		$	11,328	$	(6,561	)


	For the six months ended July 2, 2005 (Restated)
				Provision			(Provision)
				recorded			reversal recorded
	Beginning			for current			for prior period			Credits		Ending
Accounts receivable reserves	balance			period sales			sales			processed		balance

Chargebacks	$	(91,986	)	$	(270,047	)	$	—	(1)	$	299,551	$	(62,482	)
Rebates and incentive programs		(49,718	)		(51,725	)		1,489			66,775		(33,179	)
Returns		(61,986	)		(13,283	)		(5,568	)		33,867		(46,970	)
Cash discounts and other		(13,287	)		(26,736	)		—			26,561		(13,462	)

Total	$	(216,977	)	$	(361,791	)	$	(4,079	)	$	426,754	$	(156,093	)


Accrued liabilities

Medicaid rebates	$	(8,755	)	$	(11,914	)	$	—		$	11,165	$	(9,504	)


(1)		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 analysis of activity in subsequent periods, the Company has determined that its chargeback estimates remain reasonable.

The Company 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. The Company has entered into agreements at negotiated contract prices with those health care providers that purchase products through the Company’s wholesale customers at those contract prices. Chargeback credits are issued to wholesalers for the difference between the Company’s invoice price to the wholesaler and the contract price through which the product is resold to health care providers. Approximately 49% of the Company’s net product sales were derived from the wholesale distribution channel for the six months ended July 1, 2006 and July 2, 2005, respectively. The information that the Company 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 wholesale customers. The Company’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 to carry the Company’s products or replace competing products in their distribution channels with those products sold by the Company. Rebate programs are based on a customer’s dollar purchases made during an applicable monthly, quarterly or annual period. The Company also provides indirect rebates, which are rebates paid to indirect customers that have purchased our products from a wholesaler under a contract with the Company. 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 the Company’s products. The Company 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 the Company 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. The Company 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. The Company 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 and similar supplemental agreements with various states, the Company provides such states with a rebate on drugs dispensed under the Medicaid program. The Company determines its estimate of 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 the Company’s provision for Medicaid rebates. In determining the appropriate accrual amount the Company considers historical payment rates; processing lag for outstanding claims and payments; and levels of inventory in the distribution channel. The Company reviews the accrual and assumptions on a quarterly basis against actual claims data to help ensure that the liability is fairly stated.

The Company accepts returns of product according to the following criteria: (i) the product returns must be approved by authorized personnel in writing or by telephone with the lot number and expiration date accompanying any request; and (ii) the Company 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. The Company records a provision for product returns based on historical experience, including actual rate of expired and damaged returns, average remaining shelf-lives of products sold, which generally range from 12 to 36 months, and estimated return dates. Additionally, the Company 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.

The Company 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. The Company accounts for cash discounts by reducing accounts receivable by the full amount of the discounts that the Company expects its customers to take. In addition to the significant gross-to-net sales adjustments described above, the Company periodically makes other sales adjustments. The Company 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.

The Company may at its discretion provide price adjustments, which are common in the Company’s industry, due to various competitive factors, through shelf-stock adjustments or lower contract pricing through the wholesalers, which could result in an increased chargeback per unit on existing inventory levels. There are circumstances under which the Company may not provide price adjustments to certain customers and consequently, as a matter of business strategy, may lose future sales volume to competitors rather than reduce its pricing.

As detailed above, the Company 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 the Company 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 the Company’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. The Company 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

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

Change in Accounting Estimate

In the second quarter of 2006, the Company implemented a change in accounting estimate in the accrued liability for Medicaid rebates related to the volume of fluticasone revenues in the Medicaid market and for the shift in patient enrollment from Medicaid to Medicare under Medicare Part D. The change in accounting estimate in the second quarter reflects the actual impact of Medicare Part D legislation on the Company’s related rebates, and an adjustment for the less than expected penetration for fluticasone into the Medicaid market during the first quarter of 2006. This resulted in $5.4 million decrease in the accrued liability for Medicaid rebates and a related increase in net product sales for the second quarter of 2006. This change in accounting estimate decreased loss from continuing operations and net loss by approximately $3.3 million ($0.10 per diluted share) for the three months ended July 1, 2006. This change in accounting estimate had no net impact on income from continuing operations or net income for the six months ended July 1, 2006.

Major Customers

The amounts due from the Company’s four largest customers, Cardinal Health Inc., McKesson Drug Co., AmerisourceBergen Corporation and Walgreen Co., accounted for approximately 24%, 23%, 14% and 11%, respectively, of the gross accounts receivable balance at July 1, 2006 and approximately 18%, 32%, 17%, and 9%, respectively, of the gross accounts receivable balance at December 31, 2005.

Note 7 - Inventories:


	July l,		December 31,
	2006		2005
Raw materials and supplies	$	38,419	$	35,190
Work-in-process		7,278		8,830
Finished goods		63,608		52,373

	$	109,305	$	96,393

Note 8 – Property, Plant and Equipment, net


	July 1,		December 31,
	2006		2005
Land	$	2,434	$	2,434
Buildings		31,895		33,938
Machinery and equipment		52,417		50,318
Office equipment, furniture and fixtures		6,389		7,027
Computer software and hardware		27,060		24,690
Leasehold improvements		11,420		7,486

		131,615		125,893
Less accumulated depreciation and amortization		42,196		38,323

	$	89,419	$	87,570

Depreciation and amortization expense related to property, plant and equipment was $2,433 and $1,959 for the three months ended July 1, 2006 and July 2, 2005, respectively, and $4,849 and $3,935 for the six months ended July 1, 2006 and July 2, 2005, respectively.

Note 9 - Intangible Assets, net:


	July 1,		December 31,
	2006		2005
Teva Pharmaceutical Industries, Inc. Asset Purchase Agreement, net of accumulated amortization of $804 and $0	$	7,683	$	—
Ivax License Agreement, net of accumulated amortization of $1,104 and $132		6,895		7,868
FSC Laboratories Agreement, net of accumulated amortization of $2,449 and $2,143		3,373		3,679
Trademark licensed from Bristol-Myers Squibb Company, net of accumulated amortization of $517 and $115		9,482		9,885
Bristol-Myers Squibb Company Asset Purchase Agreement, net of accumulated amortization of $7,243 and $6,407		4,457		5,293
Product license fees, net of accumulated amortization of $5,207 and $4,172		801		1,834
Genpharm, Inc. Distribution Agreement, net of accumulated amortization of $5,777 and $5,416		5,056		5,417
Intellectual property, net of accumulated amortization of $531 and $431		2,159		2,259
Other intangible assets, net of accumulated amortization of $1,113 and $0		2,537		—

	$	42,443	$	36,235

The Company acquired the right to market certain cephalosporin and non-cephalosporin products including cephalexin tablets and cefprozil (Cefzil^®) products in the fourth quarter of 2005 for $2 million, which was capitalized as product license fees. The Company introduced these products into the market in the fourth quarter of 2005. In June 2007, the Company terminated the agreements related to these products. The Company accelerated the amortization of the related intangible asset based on actual gross margin generated from sales of these products to fully amortize the intangible asset as of December 31, 2006. There were no significant gross margins generated from these products in 2007.

The Company recorded amortization expense related to intangible assets of $5,929 and $2,115, respectively, for the six month periods ended July 1, 2006 and July 2, 2005. In January 2006, the Company reached agreement with Teva Pharmaceutical Industries Ltd. (“Teva”) and Ivax Corporation (“Ivax”) to purchase eight products that are currently marketed in the United States by Ivax or Teva for $8,487. Also, in January 2006, the Company paid Dr. Arie Gutman, president and chief executive officer of FineTech and a former member of the Board of Directors, $1,500 for the rights to three products that the Company was marketing to which Dr. Gutman was entitled to royalties under a prior agreement with FineTech. This asset was recorded in other intangible assets.

Amortization expense related to the intangible assets currently being amortized is expected to total approximately $5,870 for the remainder of 2006, $10,356 in 2007, $9,019 in 2008, $4,895 in 2009, $4,450 in 2010 and $7,853 thereafter.

Note 10 - Income Taxes:

The Company accounts for income taxes in accordance with the provisions of SFAS No. 109, “Accounting for Income Taxes,” which requires the Company to recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Current deferred income tax assets at July 1, 2006 and December 31, 2005 consisted of temporary differences, primarily related to accounts receivable reserves, and non-current deferred income tax assets at both such dates included the tax benefit related to purchased call options and acquired in-process research and development. The Company’s effective tax rates for the three months ended July 1, 2006 and July 2, 2005 were 32% and 40%, respectively. The Company’s effective tax rates for the six months ended July 1, 2006 and July 2, 2005 were 25% and 39%, respectively. The tax rate for the six months ended July 1, 2006 was impacted by estimated full year 2006 income amounts taxable in different state jurisdictions and other permanent items.

Note 11 - Changes in Stockholders’ Equity:

Changes in the Company’s Common stock, Additional paid-in capital and Accumulated other comprehensive income (loss) accounts during the six-month period ended July 1, 2006 were as follows:


									Accumulated
						Additional			Other
	Common Stock					Paid-In			Comprehensive
	Shares			Amount		Capital			Income (loss)
Balance, December 31, 2005		35,114		$	351	$	217,403		$	(1,903	)
Unrealized gains on marketable securities, net of tax		—			—		—			1,081
Exercise of stock options		393			4		8,502			—
Tax benefit from exercise of stock options		—			—		691			—
Forfeitures of restricted stock		(30	)		—		—			—
Issuances of restricted stock		412			4		—			—
Employee stock purchase program		15			—		392			—
Compensatory arrangements		—			—		10,449			—
Other		—			—		(25	)		—

Balance, July 1, 2006		35,904		$	359	$	237,412		$	(822	)


	Three months ended					Six months ended
	July 1,			July 2,		July 1,			July 2,
	2006			2005		2006			2005
				(Restated)					(Restated)
Comprehensive Income:
Net (loss) income	$	(7,205	)	$	7,222	$	(2,690	)	$	8,161
Other comprehensive income:
Unrealized (loss) gain on marketable securities, net of tax		(316	)		4,975		1,081			9,725

Comprehensive income	$	(7,521	)	$	12,197	$	(1,609	)	$	17,886

In April 2004, the Company’s Board of Directors (the “Board”) authorized the repurchase of up to $50.0 million of the Company’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. The Company has repurchased 849 shares of its common stock for approximately $32.2 million pursuant to the program. The Company may still repurchase up to approximately $17.8 million of its common stock under the above plan. In the six-month period ended July 1, 2006, 21 shares were surrendered to the Company to satisfy tax withholding obligations in connection with the vesting of restricted stock issued to employees.

Note 12 - 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
	July 1, 2006			July 2, 2005			July 1, 2006			July 2, 2005
				(Restated)						(Restated)
(Loss) income from continuing operations	$	(7,205	)	$	8,052		$	(2,690	)	$	9,708
Loss from discontinued operations		—			(830	)		—			(1,547	)

Net (loss) income	$	(7,205	)	$	7,222		$	(2,690	)	$	8,161
Basic:

Weighted average number of common shares outstanding		34,454			34,186			34,368			34,081

Income from continuing operations	$	(0.21	)	$	0.24		$	(0.08	)	$	0.28
Loss from discontinued operations		—			(0.03	)		—			(0.04	)

Net (loss) income per share of common stock	$	(0.21	)	$	0.21		$	(0.08	)	$	0.24

Assuming dilution:
Weighted average number of common shares outstanding		34,454			34,186			34,368			34,081
Effect of dilutive securities		—			281			—			406

Weighted average number of common shares outstanding		34,454			34,467			34,368			34,487

Income from continuing operations	$	(0.21	)	$	0.23		$	(0.08	)	$	0.28
Loss from discontinued operations		—			(0.02	)		—			(0.04	)

Net (loss) income per share of common stock	$	(0.21	)	$	0.21		$	(0.08	)	$	0.24

Outstanding options of 5,143 and 2,554 as of July 1, 2006 and July 2, 2005, respectively, 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. Also, certain other outstanding options and restricted shares totaling 126 and 304 shares were not included in the computation of diluted earnings per share for the three-month and six-month periods ended July 1, 2006, respectively, because the Company reported a net loss for each period and their inclusion would have been anti-dilutive. In addition, outstanding warrants sold concurrently with the sale of senior subordinated convertible notes in September 2003 were not included in the computation of diluted earnings per share as of July 1, 2006 and July 2, 2005. The warrants are exercisable for an aggregate of 2,253 shares at an exercise price of $105.20 per share.

Note 13 - Commitments, Contingencies and Other Matters:

Pension Plan:

The Company maintained a defined benefit plan (the “Pension Plan”) that covered eligible employees, as defined in the Pension Plan. The Pension Plan has been frozen since October 1, 1989. Since the benefits under the Pension Plan are based on the participants’ length of service and compensation (subject to the Employee Retirement Income Security Act of 1974 and Internal Revenue Service limitations), service costs subsequent to October 1, 1989 are excluded from benefit accruals under the Pension Plan.

The Company, upon the recommendation of the Audit Committee of its Board, determined that it was in the best interests of the Company to terminate the Pension Plan, effective as of December 31, 2005, in accordance with its terms and conditions and with the rules and regulations promulgated by the Pension Benefit Guaranty Corporation and by the Internal Revenue Service.

The Pension Plan has been settled in the second quarter of 2007. During the second quarter of 2007, the Company received a favorable determination on the termination of the Pension Plan from the Internal Revenue Service and has filed the appropriate notice with the Pension Benefit Guaranty Corporation. Concurrent with the approval of the termination, the Company distributed benefits or purchased annuities to cover each of the participants in the Pension Plan. Finally, the Company has met the advance notification requirements set forth in the Single-Employer Pension Plan Amendment Act of 1986 (the “SEPPAA”) and has notified each party affected by this termination, as required by the SEPPAA. The Company anticipates that a settlement loss of $87 will be recorded in 2007.

Legal Proceedings:

The Company cannot predict with certainty the outcome or the effects on the Company 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. Accordingly, no assurances can be given that such litigations will not have a material adverse effect on the Company’s financial condition, results of operations, prospects or business.

As previously disclosed in the Company’s Current Report on Form 8-K, filed July 24, 2006, the Company and certain of its executive officers have been named as defendants in several purported stockholder class action lawsuits filed on behalf of purchasers of common stock of the Company between April 29, 2004 and July 5, 2006. The lawsuits followed the Company’s July 5, 2006 announcement that it will restate certain of its financial statements and allege that the Company and certain members of its management engaged in violations of the Securities Exchange Act of 1934, as amended, by issuing false and misleading statements concerning the Company’s financial condition and results. The class actions have been consolidated and are pending in the United States District Court, District of New Jersey. The Court has appointed co-lead plaintiffs and co-lead counsel. Co-lead plaintiffs filed a Consolidated Amended Complaint on April 30, 2006, purporting to represent purchasers of common stock of the Company between July 23, 2001 and July 5, 2006. Defendants must answer, move, or otherwise respond no later than June 29, 2007. The Company intends and the members of management named as defendants have stated their intentions to vigorously defend the lawsuits and any additional lawsuits that may hereafter be filed with respect to the restatement. Additionally, the Company has been informed by a letter from the Staff of the SEC dated July 7, 2006, that the SEC is conducting an informal investigation of the Company related to its proposed restatement. The Company intends to fully cooperate with and assist the SEC in this investigation. The letter from the SEC states that the investigation should not be construed as an indication by the SEC or its Staff that any violation of law has occurred or as a reflection upon any person, entity or security. In addition, on September 6, 2006, in connection with this informal investigation, the SEC also requested certain information with respect to the Company’s internal review of its accounting for historical stock option grants. The Company has provided the information that the SEC has requested.

On August 14, 2006, individuals claiming to be stockholders of the Company filed a derivative action in the U.S. District Court for the Southern District of New York, purportedly on behalf of the Company, against the current and certain former directors and certain current and former officers of the Company as a nominal defendant. The plaintiffs in this action allege that, among other things, the named defendants breached their fiduciary duties to the Company based on substantially the same factual allegations as the class action lawsuits referenced above. The plaintiffs also alleged that certain of the defendants have been unjustly enriched based on their receipt of allegedly backdated options to purchase shares of common stock of the Company, and seek to require those defendants to disgorge any profits made in connection with their exercise of such options and additional attendant damages relating to allegedly backdated options during the period from January 1, 1996 to the present. The action has been transferred to the United States District Court, District of New Jersey. According to the current scheduling order, plaintiffs amended complaint is due no later than June 30, 2007. Defendants must answer, move, or otherwise respond no later than August 30, 2007. On June 29, 2007, the plaintiffs filed their amended complaint and in connection therewith, dropped their claims related to allege stock option backdating. The Company intends and each of the individuals named as defendants have stated their intentions to vigorously defend against the remaining allegations.

On September 1, 2006, the Company received a notice of default from the Trustee of the Company’s 2.875% Senior Subordinated Convertible Notes due 2010 (the “Notes”). The Trustee claims, in essence, that the Company’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 the Company, as issuer, and American Stock Transfer & Trust Company, as trustee (the “Trustee”), relating to the Notes. The notice of default asserted that if the purported default continued unremedied for 30 days after the receipt of the notice, an “event of default” would occur under the Indenture. Under the Indenture, the occurrence of an event of default would give the Trustee or certain holders of the Notes the right to declare all unpaid principal and accrued interest on the Notes immediately due and payable. On October 2, 2006, the Company received a notice of acceleration from the Trustee purporting to accelerate payment of the Notes.

The Company believes that it has complied with its obligations under the Indenture relating to the Notes. Therefore, the Company believes that the above-mentioned notice of default and notice of acceleration are invalid and without merit. While the indentures of some public companies specifically require those companies to provide trustees with copies of their annual and quarterly reports within 15 days of the date that those reports are due to be filed with the SEC, the Company’s Indenture does not. Rather, under the Indenture, the Company 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 Securities Exchange Act of 1934, as amended, within 15 calendar days after it files such annual and other reports with the SEC. Moreover, the Company’s Indenture specifically contemplates providing the Trustee with portions of reports. On August 24, 2006 (within 15 days of filing with the SEC), the Company provided to the Trustee a copy of its Quarterly Report on Form 10-Q for the second quarter of 2006. The Company’s Form 10-Q did not include the Company’s financial statements for the second quarter of 2006 and related Management’s Discussion and Analysis due to the Company’s ongoing work to restate certain of its past financial statements, and, therefore, in accordance with SEC rules, the Company filed a Form 12b-25 Notification of Late Filing disclosing the omissions. The Company’s Form 12b-25 also was provided to the Trustee on August 24, 2006. Accordingly, the Company believes that it complied with the Indenture provision in question.

After the Company 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 demands, among other things, that the Company 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, of the Notes 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 million. The Company filed a Notice of Removal to remove the lawsuit to the U.S. District Court for the Southern District of New York and has filed its answer to the complaint in that Court. On January 19, 2007, the Trustee filed a motion for summary judgment along with supporting documentation. On February 16, 2007, the Company filed its response to the Trustee’s motion for summary judgment and cross-moved for summary judgment in its favor. The Court has not yet ruled on the motions. In the event that the Court in the matter were to (i) rule against the Company’s position and (ii) determine that the appropriate remedy would be the accelerated payment of the convertible notes, the Company may seek to finance all or a portion of such payment with additional debt and/or equity issuances or a loan facility.

Contractual Matters

On May 3, 2004, Pentech filed an action against the Company in the United States District Court for the Northern District of Illinois. This action alleges that the Company breached its contract with Pentech relating to the supply and marketing of paroxetine (PaxilÒ) and that the Company breached fiduciary duties allegedly owed to Pentech. The Company and Pentech are in dispute over the amount of gross profit share due to them. Discovery in this case has concluded. The Court denied cross motions for summary judgment relating to the construction of the contract, and denied Pentech’s motion for summary judgment against the Company’s fraudulent inducement counterclaim. The Company also filed a motion for summary judgment against Pentech’s breach of fiduciary duty claim, and that motion is pending. A trial date has not yet been set. The Company intends to defend vigorously this action.

The Company and Genpharm Inc., (“Genpharm”) are parties to several contracts relating to numerous products currently being sold or under development. Genpharm had alleged that the Company was in violation of those agreements and brought an arbitration alleging those violations and seeking to terminate its agreements with the Company. The Company denied any violation of such agreements and asserted counterclaims against Genpharm for Genpharm’s alleged violations of its agreements with Par. In August 2006, the Company and Genpharm entered into a settlement agreement pursuant to arbitration proceedings to resolve ongoing disputes between the two parties. The Company and Genpharm had previously entered into a distribution agreement with respect to a number of generic pharmaceutical products. The Company recorded approximately $1.5 million of expenses in the second quarter of 2006 as a result of this settlement.

Patent Related Matters

On July 7, 2004, Xcel Pharmaceuticals, Inc. (now known as Valeant Pharmaceuticals, North America (“Valeant”)) filed a lawsuit against Kali Laboratories, Inc. (“Kali”), a wholly owned subsidiary of the Company, in the United States District Court for the District of New Jersey. Valeant alleged that Kali infringed U.S. Patent No. 5,462,740 (the “’740 patent”) by submitting a Paragraph IV certification to the FDA for approval of a generic version of Diastat brand of diazepam rectal gel. Kali has denied Valeant’s allegation, asserting that the ‘740 patent was not infringed and is invalid and/or unenforceable. Kali also has counterclaimed for declaratory judgments of non-infringement, invalidity and unenforceability of the ‘740 patent as well as a judgment that the ‘740 patent was unenforceable due to patent misuse. The parties conducted fact and expert discovery through April 2006. The parties submitted their proposed final pretrial order in June 2006 and appeared before the Court for pretrial conferences on June 13 and November 16, 2006. Under applicable law and regulations, the filing of the lawsuit triggered an automatic 30-month stay of FDA approval of the Kali ANDA. That stay expired on November 29, 2006. The parties appeared before the Court for settlement conferences on May 17, 2007 and June 28, 2007. At the June 28 settlement conference the parties entered into an agreement in principle to settle the action. Immediately thereafter, the Court entered an order dismissing the action without prejudice to its being reinstated if the parties have not finalized their settlement agreement within 60 days. The Company intends to defend vigorously this action and pursue its counterclaims against Valeant, if the settlement agreement is not finalized within the allotted time period.

On November 1, 2004, Morton Grove Pharmaceuticals, Inc. (“Morton Grove”) filed a lawsuit against the Company in the United States District Court for the Northern District of Illinois, seeking a declaratory judgment that four Par patents relating to megestrol acetate oral suspension are invalid, unenforceable and not infringed by a Morton Grove product that was launched in the fourth quarter of 2004. Morton Grove acknowledges that its product is covered by the registrant’s patent claims. The Company is asserting counterclaims that the Morton Grove product infringes three patents and that such infringement was willful. Morton Grove amended its complaint to allege antitrust violations. Certain of the registrant’s claims of infringement by Morton Grove’s product are subject to the finding of non-enablement in the Roxane lawsuit discussed below, while others are not. On Par’s motion the Court entered a partial stay on issues related to the Roxane decision, pending final resolution of the Roxane appeal. Discovery is proceeding on issues unaffected by Roxane. The Company intends to defend vigorously this action and pursue its counterclaims against Morton Grove including its infringement claims affected by the Roxane lawsuit once its appeal is resolved.

and that the infringement was willful. Roxane has denied these allegations and has counterclaimed for declaratory judgments of non-infringement and invalidity of both patents. On September 8, 2006, the Court issued a claim construction ruling on certain claim terms in dispute between the parties. Based on that construction, the Court ruled in favor of the Company and dismissed Roxane’s motion for summary judgment of non-infringement. On November 8, 2006, the Court ruled that the claims at issue in these patents were invalid as non-enabled on summary judgment. On December 8, 2006, Par appealed the ruling to the Federal Circuit Court of Appeals, highlighting the district court’s failure to apply its own claim construction and to consider the testimony of Par’s experts before awarding summary judgment to Roxane. The parties have fully briefed the appeal, and are awaiting a date for oral argument.

On November 25, 2002, Ortho-McNeil Pharmaceutical, Inc. (“Ortho-McNeil”) filed a lawsuit against Kali, a wholly owned subsidiary of the Company, in the United States District Court for the District of New Jersey (the “2002 Litigation”). Ortho-McNeil alleged that Kali infringed U.S. Patent No. 5,336,691 (the “‘691 patent”) by submitting a Paragraph IV certification to the FDA for approval of tablets containing tramadol HCl and acetaminophen. Kali denied Ortho-McNeil’s allegation, asserting that the ‘691 patent was not infringed and is invalid and/or unenforceable, and that the lawsuit is barred by unclean hands. Kali also counterclaimed for declaratory judgments of non-infringement, invalidity and unenforceability of the ‘691 patent. Ortho-McNeil amended its complaint on July 27, 2005 to assert infringement against the Company, and to include a claim for damages against the Company and Kali. The Company and Kali have answered and counterclaimed, alleging that the ‘691 patent is not infringed, and is invalid and unenforceable for inequitable conduct. On August 1, 2006, the Patent and Trademark Office reissued the ‘691 patent as U.S. Patent No. RE 39,221 (the “‘221 Patent”), containing original claim 6 from the ‘691 Patent and several additional new claims. On August 1 and August 4, 2006, Ortho-McNeil filed a complaint and then an amended complaint against Kali, the Company, and two other companies, Barr Laboratories, Inc. (“Barr”) and Caraco Pharmaceutical Laboratories, Ltd. (“Caraco”) (the “2006 Litigation”). Ortho-McNeil alleged infringement and willful infringement of the claims of the re-issue patent (other than claim 6, which is the subject of the 2002 Litigation) against the Company through the Company’s marketing of its tramadol HCl and acetaminophen tablets. Ortho-McNeil made similar allegations against Barr and Caraco. On April 4, 2007, the United States District Court for the District of New Jersey granted Kali’s and Par’s motions for summary judgment that claim 6 of the ‘221 Patent, the only claim at issue in the 2002 Litigation, was invalid and was not infringed by Par’s ANDA product. Ortho-McNeil filed a motion requesting permission to immediately appeal this decision, and the Court denied Ortho-McNeil’s motion and entered an order consolidating the 2002 and 2006 litigations. Par has requested permission from the Court to file immediate summary judgment motions as to all of the remaining ‘221 Patent claims at issue, and also has requested that the Court proceed to trial on Par’s counterclaims for invalidity, unenforceability and intervening rights as to the ‘221 Patent. Ortho-McNeil has opposed Par’s requests, and the parties are awaiting a decision by the Court on these requests. The Company intends to defend vigorously this action.

The Company 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, the Company 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 the Company. Paddock has filed an Abbreviated New Drug Application (“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. The Company 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 November 18, 2003, Paddock answered the complaint and filed a counterclaim, seeking a declaration that the patent-in-suit is invalid and/or not infringed by Paddock’s product. On September 13, 2006, the Company 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 settlement. The settlement and license agreement terminates all on-going litigation. The settlement and license agreement also permits the Company to launch the generic version of the product no later than February 28, 2016, assuring the Company’s ability to market a generic version of Androgel^® well before the expiration of the patents at issue. On March 7, 2007, the Company 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. The Company believes it has complied with all applicable laws in connection with the court-approved settlement and it intends to co-operate with the FTC in this matter.

On March 10, 2005, Apotex Inc. and Apotex Corp. (“Apotex”) filed a lawsuit against the Company in the United States District Court for New Jersey, seeking a declaratory judgment that four of the Company’s patents relating to megestrol acetate oral suspension are invalid, unenforceable and not infringed by an Apotex product that was launched in the third quarter of 2006. The Company has moved for a preliminary injunction against Apotex pending resolution of the litigation and has asserted counterclaims that the Apotex product infringes at least one claim of United States Patent 6,593,318. However, as a result of a ruling of non-enablement of that claim in the Roxane lawsuit, the Company has withdrawn its motion for a preliminary injunction. The Company was granted a stay and the action was terminated without prejudice pending final resolution of the Roxane appeal.

Inc. et al., (Civil Action Nos. 06-CV-1970, 1999 (DRD)(ES)). CIMA and Schwarz Pharma each have alleged that the Company 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, the Company 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. The parties have exchanged written discovery. All 40 claims in the ’981 patent were rejected in a non-final office action in a reexamination proceeding at the United States Patent and Trademark Office (“PTO”) on February 24, 2006. The PTO again rejected all 40 claims in a second non-final office action dated February 24, 2007. The ‘392 patent is also the subject of a reexamination proceeding. The Company will continue to monitor these ongoing reexamination proceedings. 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., (Civil Action No. 07-CV-0893 (DRD0(ES)). A hearing on these motions was held on May 30, 2007. The Company intends to vigorously defend this lawsuit and pursue its counterclaims.

In February 2006, Par entered into a collaborative agreement with Spectrum Pharmaceuticals, Inc. to develop and market generic drugs, including sumatriptan succinate injection. In 2004, Spectrum filed an ANDA containing a paragraph IV certification with the FDA seeking marketing clearance for sumatriptan injection. On February 18, 2005, GlaxoSmithKline (“GSK”) filed a lawsuit against Spectrum Pharmaceuticals, Inc. (“Spectrum”) in the United States District Court for the District of Delaware. GSK alleged that Spectrum’s October 2004 ANDA for sumatriptan succinate injection 6mg/0.5mL infringed GSK’s U.S. Patent No. 5,037,845 and that the infringement was willful. Spectrum denied the allegations and counterclaimed for declaratory judgments of invalidity, non-infringement and unenforceability. The non-infringement counterclaim was subsequently withdrawn. The lawsuit was resolved by settlement in November 2006. The confidential terms of the settlement, which remain subject to government review, permit Par to sell generic versions of certain sumatriptan injection products with an expected launch date during GSK’s sumatriptan pediatric exclusivity period which begins on August 6, 2008, but with the launch occurring no later than November 2008.

On October 4, 2006, Novartis Corporation, Novartis Pharmaceuticals Corporation, and Novartis International AG (collectively “Novartis”) filed a lawsuit against the Company in the United States District Court for the District of New Jersey. Novartis alleged that Par Pharmaceutical Companies, Inc., Par Pharmaceutical Inc., and Kali Laboratories, Inc. (collectively “Par”) infringed U.S. Patent No. 6,162,802 (the “’802 patent”) by submitting a Paragraph IV certification to the FDA for approval of amlodipine and benazepril hydrochloride combination capsules. Par denies Novartis’ allegation, asserting that the ’802 patent is not infringed and is invalid. Par also counterclaimed for declaratory judgments of non-infringement and invalidity of the ’802 patent. The parties are currently engaged in discovery regarding the claims. It is anticipated that a trial date will be scheduled for the summer of 2008. The Company intends to defend vigorously this action and pursue its counterclaims against Novartis.

On April 10, 2007, Abbott Laboratories (“Abbott”) and Astellas Pharma Inc.(“Astellas”), filed an amended complaint against Par Pharmaceutical Companies, Inc. and Par Pharmaceutical (collectively “Par”) and six other defendants, seeking judgment alleging that U.S. Patent Nos. 4,599,334 (the “’334 patent”) and 4,935,507 (the “’507 patent”) are, or will be, infringed by the defendants’ planned production of cefdinir products. Par denies Abbott and Astellas’ allegations, asserting that the ’334 and ’507 patents are not infringed and are invalid. Par counterclaimed for declaratory judgments of non-infringement and invalidity of the patents. The Company intends to defend vigorously this action and pursue its counterclaims against Abbott and Astellas.

On December 19, 2006, Reliant Pharmaceuticals, Inc. (“Reliant”) filed a lawsuit against the Company in the United States District Court for the District of Delaware (Reliant Pharmaceuticals, Inc. v. Par Pharmaceutical Inc., (Civil Action Nos. 06-CV-774-JJF)). Reliant alleged, in its Complaint, that the Company 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 the Company 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. The Company has answered and counterclaimed denying Reliant’s infringement allegations, and asserting that the ’588 patent is invalid and unenforceable. A scheduling order has been entered under which all fact and expert discovery will be completed by May 30, 2008. The parties have begun discovery and Reliant has filed a motion to disqualify Par’s counsel. The Company intends to vigorously defend this lawsuit and pursue its counterclaims.

On May 9, 2007, Purdue Pharma Products L.P., Napp Pharmaceutical Group Ltd., Biovail Laboratories International SRL, and Ortho-McNeil, Inc. filed a lawsuit against Par Pharmaceutical, Inc. 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 extended release tablets containing tramadol hydrochloride. Par is preparing to answer and counterclaim and will assert all available defenses in addition to seeking a declaration of noninfringement and invalidity of the ‘887 patent.

Industry Related Matters

(including the Racketeer Influenced and Corrupt Organizations Act, common law fraud and obtaining funds by false statements) related to participation in the Medicaid program. The complaint seeks declaratory relief; actual, statutory and treble damages, with interest; punitive damages; an accounting and disgorgement of any illegal profits; a constructive trust and restitution; and attorneys’ and experts’ fees and costs. This case was transferred to the United States District Court for the District of Massachusetts for coordinated and consolidated pre-trial proceedings. On June 15, 2005, a consolidated complaint was filed on behalf of a number of the New York counties and the City of New York. The complaint filed by Erie County in New York was not included in the consolidated complaint and has been removed to federal district court. In addition, on September 25, 2003, the Office of the Attorney General of the Commonwealth of Massachusetts filed a complaint in the District of Massachusetts against the Company and 12 other leading generic pharmaceutical companies, alleging principally that the Company and such other companies violated, through their marketing and sales practices, state and federal laws, including allegations of common law fraud and violations of Massachusetts false statements statutes, by inflating generic pharmaceutical product prices paid for by the Massachusetts Medicaid program. The Company waived service of process with respect to the complaint. The complaint seeks injunctive relief, treble damages, disgorgement of excessive profits, civil penalties, reimbursement of investigative and litigation costs (including experts’ fees) and attorneys’ fees. On January 29, 2004, the Company and the other defendants involved in the litigation brought by the Office of the Attorney General of the Commonwealth of Massachusetts filed a motion to dismiss, which was denied on August 15, 2005. The Commonwealth of Massachusetts subsequently filed an amended complaint, and the defendants, including the Company, have filed a motion to dismiss the amended complaint. On August 4, 2004, the Company and a number of other generic and brand pharmaceutical companies were also sued by the City of New York, which has alleged violations of laws (including common law fraud and obtaining funds by false statements) related to participation in its Medicaid program. The complaint seeks declaratory relief; actual, statutory and treble damages, with interest; punitive damages; an accounting and disgorgement of any illegal profits; a constructive trust and restitution; and attorneys’ and experts’ fees and costs. This case was transferred to the United States District Court for the District of Massachusetts for coordinated and consolidated pre-trial proceedings. In addition to Massachusetts, the Commonwealth of Kentucky, the State of Illinois and the State of Alabama have filed similar suits in their respective jurisdictions, all of which have been removed to federal district court. The lawsuit brought by the State of Alabama was remanded to the Alabama state court on August 11, 2005. Following the remand, on October 13, 2005, the Court denied the defendants’ motion to dismiss, but granted in part the defendants’ motion for a more definite statement, and further ruled that the State may amend its complaint within 90 days. On October 20, 2005, the State of Mississippi filed in the Chancery Court for Hinds County, Mississippi a complaint naming the Company (among other companies) as a defendant. The Company intends to defend vigorously these actions.

On April 27, 2006, the State of Hawaii filed a complaint naming the Company as a defendant that has alleged violations of laws related to participation in the Medicaid program. The Hawaii complaint pleads causes of action for (i) false claims; (ii) unfair or deceptive acts or practices; (iii) unfair competition; (iv) violation of the Deceptive Trade Practices Act; (v) non-disclosure; and (vi) unjust enrichment. The complaint seeks general and special damages; treble damages, or in the alternative, punitive damages; costs, pre-judgment and post-judgment interest, and attorneys’ fees; injunctive relief; and such other and further relief or equitable relief as the court deems just and proper. The Company intends to defend this action vigorously.

On May 8, 2006, the County of Oswego filed a complaint against the Company and certain other pharmaceutical companies. This complaint pleads causes of action for (i) fraud; (ii) violation of New York Social Services Law § 366-b; (iii) violation of New York Social Services Law § 145-b; (iv) violation of New York General Business Law § 349; (v) unjust enrichment; and (vi) fraudulent concealment. The County of Schenectady filed a similar complaint on May 9, 2006. The Company intends to defend this action vigorously.

With respect to the Erie action, on September 7, 2006, the New York Supreme Court for the County of Erie granted the defendants’ joint motion to dismiss in part and denied it in part. The defendants then removed the Erie action for a second time to the United States District Court for the Western District of New York on October 11, 2006, and the case was subsequently transferred to the United States District Court for the District of Massachusetts for coordinated and consolidated pre-trial proceedings. A motion to remand is currently pending.

The County of Nassau, New York filed a Second Amended Complaint in its action against a number of other generic and brand pharmaceutical companies, naming the Company as a defendant on January 30, 2006. The case has been consolidated, for purposes of discovery and briefing, with the action filed by a number of other New York counties and the City of New York. The matters are presently in the United States District Court for the District of Massachusetts for coordinated and consolidated pre-trial proceedings. On March 3, 2006, the Company and the other defendants filed motions to dismiss the Second Amended Complaint filed by Nassau County and the consolidated complaint brought by the other counties and the City of New York. These motions were granted in part and denied in part on April 2, 2007.

With respect to the Oswego and Schenectady matters, the cases have been transferred to the United States District Court for the District of Massachusetts for coordinated and consolidated pre-trial proceedings.

The Company’s motion to dismiss the Commonwealth of Massachusetts’ First Amended Complaint was denied on August 15, 2005. The Company answered the Commonwealth’s First Amended Complaint on November 14, 2005.

With respect to the Alabama action, the Company filed an answer to the Second Amended Complaint on January 30, 2006. On October 11, 2006, the defendants for the second time removed the case to the United States District Court for the Middle District of Alabama. On November 2, 2006, the matter was again remanded to State court.

With respect to the Illinois action, after removing the action brought by the State of Illinois, the defendants filed a motion to dismiss the State’s First Amended Complaint on October 18, 2006. This motion is currently pending, as is a motion to remand that has been filed by the State. The action has been transferred to the United States District Court for the District of Massachusetts for coordinated and consolidated pre-trial proceedings.

The court denied the defendants’ motions to dismiss in the action brought by the Commonwealth of Kentucky on June 23, 2006. The Company answered the First Amended Complaint on July 19, 2006.

With respect to the Mississippi action, the Special Masters assigned to the case recommended the denial of the defendants’ motion to dismiss on September 22, 2006. On October 2, 2006, the defendants objected to the Special Masters’ recommendation. The Court had not ruled on this objection at the time the case was removed to federal district court. Also, after removal, the matter was transferred to the United States District Court for the District of Massachusetts for coordinated and consolidated pre-trial proceedings, where the State’s motion to remand is pending.

With respect to the Hawaii matter, the State’s motion to remand the action was granted on November 30, 2006. On January 12, 2007, the defendants filed a joint motion to dismiss the State’s First Amended Complaint. This motion was denied on April 11, 2007, and the Company answered the First Amended Complaint on April 23, 2007.

The State of Alaska filed an Amended Complaint on October 17, 2006, naming the Company and other pharmaceutical companies as defendants. The Alaska complaint pleads causes of action for (i) violation of the Alaska Unfair Trade Practices and Consumer Protection Act and (ii) unjust enrichment. The complaint seeks monetary damages; declarative relief; injunctive relief; compensatory, restitution, and/or disgorgement damages; civil penalties; punitive damages; costs, attorneys’ fees, and prejudgment interest; and other relief deemed just and equitable by the Court. The defendants filed a joint motion to dismiss the State’s Amended Complaint on January 5, 2007. This motion was denied on May 7, 2007. The Company intends to defend this action vigorously.

The State of South Carolina filed two related actions against the Company on December 1, 2006. One of these Complaints seeks relief on behalf of the South Carolina Medicaid Agency and the other seeks relief on behalf of the South Carolina State Health Plan. Both South Carolina Complaints plead causes of action for (i) violation of the South Carolina Unfair Trade Practices Act; (ii) unjust enrichment; and (iii) injunctive relief. Both Complaints seek monetary damages and prejudgment interest; treble damages, attorneys’ fees, and costs; civil penalties; disgorgement; injunctive relief; and other relief deemed just and equitable by the Court. On January 26, 2007, the Company moved to dismiss each Complaint or, in the alternative, for a more definite statement with respect to each Complaint. These motions are currently pending.

The State of Idaho filed a Complaint against the Company and various other pharmaceutical companies on January 26, 2007. The Idaho Complaint pleads causes of action for (i) violation of the Idaho Consumer Protection Act; and (ii) unjust enrichment. The State seeks declaratory and injunctive relief; monetary damages; civil penalties; disgorgement; attorneys’ fees and costs; and other relief deemed just and equitable by the Court. On March 30, 2007, the defendants filed a joint motion to dismiss the State’s Complaint. This motion is currently pending.

Finally, on April 5, 2007, the County of Orange, New York, filed a Complaint against the Company and various other pharmaceutical companies. The Orange County Complaint pleads causes of action for (i) violations of the Racketeer Influenced and Corrupt Practices Act; (ii) violation of various federal and state Medicaid laws; (iii) unfair trade practices; and (iv) common law claims for breach of contract, unjust enrichment, fraud, fraudulent concealment. The County seeks actual, statutory, and treble damages, including interest; declaratory relief; disgorgement; restitution; attorneys’ fees, experts’ fees, and costs; and other relief deemed just and equitable by the Court.

The Company is, from time to time, a party to certain other litigations, including product liability and patent litigations. The Company 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. The Company intends to defend or, in cases where the Company is plaintiff, to prosecute these litigations vigorously.

Note 14- Discontinued Operations – Related Party Transaction:

In January 2006, the Company announced the divestiture of FineTech, effective December 31, 2005. The Company transferred the business for no proceeds to Dr. Arie Gutman, president and chief executive officer of FineTech. Dr. Gutman also resigned from the Company’s Board. The transfer included all the assets and liabilities of FineTech, including $2,652 of cash. The transfer resulted in a pre-tax loss on sale of $38,018, due primarily to the write-off of goodwill and intangibles, and the impairment of fixed assets. Also included in the loss were severance payments of $642, which were made in January 2006, and the acceleration of restricted stock and stock options that resulted in an additional loss of $1,297. The results of FineTech operations have been classified as discontinued for all periods presented. All expenses incurred by FineTech from January 1, 2006 through the date of transfer were the responsibility of the acquirer.

The following table shows revenues and pre-tax loss from discontinued operations for the three-month and six-month periods ended July 2, 2005:


	For the three months ended			For the six months ended
	July 2, 2005			July 2, 2005
Revenues	$	2		$	53
Pre-tax loss from operations	$	(1,338	)	$	(2,494	)

The following table shows the carrying amount of the assets and liabilities of FineTech as of December 31, 2005:


	December 31,
	2005
Inventory	$	838
Other current assets		134
Property, plant and equipment, net		972

Total assets held for sale		1,944

Accounts payable		1,381
Accrued expenses		563

Total liabilities		1,944

Net assets held for sale	$	—

Note 15 – Investment in Joint Venture:

On April 15, 2002, Rhodes Technology (“Rhodes”) and the Company created a joint venture, SVC Pharma (“SVC”), to research, develop, commercialize and market pharmaceutical preparations for human therapy. The parties agreed to capitalize the joint venture with equal contributions and all profits or losses are to be shared equally between Rhodes and the Company. The Company accounts for this investment under the equity method of accounting in accordance with APB No. 18, the Equity Method of Accounting for Investments in Common Stock. As of July 1, 2006, the Company’s net investment in SVC totaled approximately $4,224. The investment in SVC is reviewed for impairment each reporting period. Any impairment deemed to be “other-than temporary” will be recognized in the appropriate period and the basis will be adjusted.

Note 16 – Subsequent Events:

In an agreement dated September 7, 2006, the Company and Three Rivers Pharmaceuticals, LLC (“Three Rivers”) terminated their relationship related to certain agreements, licenses and other undertakings pertaining to the development, manufacture, and distribution of pharmaceutical products containing ribavirin as an active ingredient (Riba-Pak and the generic equivalents of Rebetol and Copegus — Ribasphere). The Company sold, transferred and conveyed the Company’s rights associated with ribavirin products, including, certain assets and the assumption of certain liabilities to Three Rivers for $6.6 million. The Company will recognize a pre-tax gain of approximately $3 million in the third quarter of 2006. As a result of the agreement, a wholesaler returned inventory to the Company, which resulted in a pre-tax loss of approximately $1.9 million in the third quarter of 2006. The agreement provides for certain milestone payments on future sales of ribavirin related products, up to $3 million. In the first quarter of 2007, the Company earned a $1 million milestone payment based on sales of ribavirin related products.

Effective as of the third and fourth quarters of 2006, the Company entered into separation and release agreements with certain executive officers of the Company. These executive officers included the former Executive Chairman, the former President and Chief Executive Officer, the former Chief Financial Officer, the former Chief Scientific Officer, and the former President of the Generic Products Division. In connection with these separation and release agreements, the Company will record expenses of approximately $7.0 million and $4.0 million in the third and fourth quarters of 2006, respectively.

In September 2006, the Company entered into an extended-reach agreement with Solvay Pharmaceuticals that provides for the Company’s branded sales force to co-promote Androgel^®, as well as future versions of the product, for a period of six years. The Company commenced pre-launch activities in the fourth quarter of 2006 and began to co-promote Androgel^® in the first quarter of 2007. As compensation for its marketing and sales efforts, the Company will receive $10 million annually, paid quarterly, for the six-year period.

In October 2006, the Company sold its investment in Advancis for approximately $5 million and will recognize a pre-tax gain of $3.0 million in the fourth quarter of 2006.

In November 2006, the Company and Spectrum amended their Development and Marketing Agreement dated February 22, 2006. The Company agreed to purchase and distribute sumatriptan products and certain GSK supplied products on behalf of Spectrum. The Company paid Spectrum $5 million in conjunction with the amendment. Spectrum granted the Company an exclusive royalty-free irrevocable license to market, promote, distribute, and sell sumatriptan products and certain GSK supplied products.

In the fourth quarter of 2006, the Company made the decision to restructure its business operations and as a result, terminate approximately 10% of its workforce. The Company will record related restructuring costs of approximately $1 million in the fourth quarter of 2006, mainly for severance pay and benefits. The restructuring plan met the criteria outlined in SFAS 146 Accounting for Costs Associated with Exit or Disposal Activities and was executed during the first half of 2007.

In February 2007, the Company returned the marketing rights to Difimicin (antibiotic compound also known as PAR-101), an investigational drug to treat Clostridum difficile-associated diarrhea (CDAD), to Optimer. The Company and Optimer had entered into a joint development and collaboration agreement with respect to this drug in May 2005, and subsequently amended the agreement on January 19, 2007. Optimer will continue to develop Difimicn. In connection with the returned marketing rights, the Company received $20 million in February 2007 from Optimer and is also to receive a $5 million milestone payment upon the earliest to occur of either the successful completion by Optimer of a Phase III study, the grant by Optimer of marketing and sales rights to a third party or the submission to the FDA of a new drug application for a product subject to the collaboration agreement. Additionally, the Company is to receive royalty payments for a period of seven years assuming successful commercialization of the drug. In February 2007, the Company sold approximately 1.1 million shares of its investment in Optimer stock for approximately $6.8 million and will recognize a pre-tax gain of approximately $1.4 million, in the first quarter of 2007. The Company continues to hold approximately 1.26 million shares of Optimer common stock.

In June 2007, the Company’s investment in a fund that invests in various floating rate structured finance securities, included as part of available for sale debt securities, experienced a severe reduction in value. The recoverability of this investment is uncertain. If the Company determines that this loss is other-than-temporary as defined by EITF 03-01 it will record a realized investment loss. As of July 1, 2006, this investment had a cost basis and an associated market value of approximately $5.9 million.

In June 2007, the Company announced it entered into an exclusive licensing agreement under which it will receive commercialization rights in the U.S. to Immtech Pharmaceuticals’ (“Immtech”) lead oral drug candidate, pafuramidine maleate, for the treatment of pneumocystis pneumonia in AIDS patients. The Company made an initial payment of $3 million. The Company will also pay Immtech as much as $29 million in development milestones if pafuramidine advances through ongoing Phase III clinical trials and U.S. regulatory review and approval. In addition to royalties on sales, Immtech may receive milestone payments on future sales and will retain the right to co-market pafuramidine in the U.S.

In July 2007, the Company announced it entered into an exclusive licensing agreement under which the Company will receive commercialization rights in the U.S. to BioAlliance Pharma’s Loramyc (miconazole Lauriad^®), an antifungal therapy currently in Phase III 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, the Company paid BioAlliance an initial payment of $15 million. The Company will also pay BioAlliance $20 million upon FDA approval. In addition to royalties on sales, BioAlliance may receive milestone payments on future sales.

Note 17 - Segment Information:

Starting in the third quarter of 2005, the Company 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. 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 the Company 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.” The Company 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. The Company’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). The Company’s generic products are produced using similar processes and standards mandated by the FDA, and the Company’s generic products are sold to similar customers. Based on the economic characteristics, production processes and customers of the Company’s generic products, the Company has determined that its generic pharmaceuticals are a single reportable business segment. The Company’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 the Company’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 the Company’s management.

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


	Three months ended						Six months ended
	July 1,			July 2,			July 1,			July 2,
	2006			2005			2006			2005
				(Restated)						(Restated)
Revenues:
Generic	$	185,711		$	131,600		$	349,827		$	234,574
Brand		9,527			—			17,730			—

Total revenues	$	195,238		$	131,600		$	367,557		$	234,574

Gross margin:
Generic	$	47,950		$	63,714		$	91,074		$	101,009
Brand		6,817			—			12,862			—

Total gross margin	$	54,767		$	63,714		$	103,936		$	101,009

Operating income (loss):
Generic	$	5,083		$	37,947		$	21,296		$	48,891
Brand		(10,814	)		(17,211	)		(20,052	)		(26,621	)

Total operating (loss) income	$	(5,731	)	$	20,736		$	1,244		$	22,270
Other (expense) income, net		(1,108	)		(181	)		(1,146	)		(207	)
Equity loss from joint venture		(225	)		(106	)		(479	)		(142	)
Net investment loss		(3,773	)		(6,477	)		(3,773	)		(5,124	)
Interest income		1,973			1,110			3,956			2,441
Interest expense		(1,693	)		(1,719	)		(3,388	)		(3,434	)
(Benefit) provision for income taxes		(3,352	)		5,311			(896	)		6,096

Income from continuing operations	$	(7,205	)	$	8,052		$	(2,690	)	$	9,708

The Company’s chief operating decision maker does not review the Company’s 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. In the first three and six months of 2006 and 2005, total revenues of the Company’s top selling products were as follows:


	For the three		For the three		For the six		For the six
	months ended		months ended		months ended		months ended
Product	July 1, 2006		July 2, 2005		July 1, 2006		July 2, 2005

Generic
Fluticasone (Flonase^® )	$	77,244	$	—	$	133,508	$	—
Cabergoline (Dostinex^®)		11,859		—		14,410		—
Various amoxicillin products (Amoxil^®)		8,255		—		25,901		—
Fluoxetine (Prozac^®)		5,080		7,629		9,198		14,054
Megestrol acetate oral suspension ( Megace^{^®})		5,027		8,059		8,131		16,188
Ibuprofen Rx (Advil^®, Nuprin^®, Motrin^®)		4,791		5,431		8,658		9,350
Lovastatin (Mevacor^®)		4,383		7,886		8,178		10,704
Quinapril (Accupril^®)		4,275		2,604		9,425		7,077
Tramadol HCl and acetaminophen tablets (Ultracet^®)		3,838		34,557		12,789		34,557
Mercaptopurine (Purinethol^®)		2,962		5,597		5,104		9,560
Cefprozil (Cefzil^®)		2,793		—		7,884		—
Minocycline (Minocin^®)		2,325		1,602		4,287		7,669
Paroxetine (Paxil^®)		709		11,276		6,562		22,290
Other product related revenues (2)		4,655		4,127		7,937		13,772
Other (1)		47,515		42,832		87,855		89,353

Total generic revenues	$	185,711	$	131,600	$	349,827	$	234,574

Branded
Megace^® ES	$	8,543	$	—	$	16,325	$	—
Other		984		—		1,405		—

Total Branded Revenues	$	9,527	$	—	$	17,730	$	—


(1)		The further detailing of revenues of the Company’s other approximately 100 generic products 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 the three-month or six-month periods ended July 1, 2006 or July 2, 2005.

(2)		Other product related revenues represent licensing and royalty related revenues from profit sharing agreements related to products such as doxycycline monohydrate, the generic version of Adoxa^® and omeprazole, the generic version of PrilosecÒ. For the six-month period ended July 2, 2005, other product related revenues also included a $6,000 payment from a business partner to compensate the Company for lost revenue on a terminated product manufacturing and supply agreement.

Note 18 - Recent Accounting Pronouncements:

In February 2007, the FASB issued SFAS No. 159 The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115 (SFAS 159), which becomes effective for fiscal periods beginning after November 15, 2007. Under SFAS 159, companies may elect to measure specified financial instruments and warranty and insurance contracts at fair value on a contract-by-contract basis, with changes in fair value recognized in earnings each reporting period. This election, called the “fair value option”, will enable some companies to reduce volatility in reported earnings caused by measuring related assets and liabilities differently. The Company is currently evaluating the potential impact of adopting SFAS 159 on its Condensed Consolidated Financial Statements.

In September 2006, the FASB issued SFAS No. 158 Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans (SFAS 158). SFAS 158 amends SFAS 87 Employers’ Accounting for Pension (SFAS 87), SFAS 88 Employers’ Accounting for Settlements and Curtailments of Defined Benefit Plans and for Benefits and for Termination Benefits (SFAS 88), and SFAS 132R Employers’ Disclosures about Pensions and Other Postretirement Benefits. Effective for fiscal years ending after December 15, 2006, SFAS 158 requires balance sheet recognition of the funded status for all pension and postretirement benefit plans. The impact of adoption will be recorded as an adjustment of other accumulated comprehensive income upon adoption in the fourth quarter of 2006.

In September 2006, the FASB issued SFAS No. 157 Fair Value Measurements (SFAS No. 157). SFAS No. 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 No. 157 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the expected impact of the provisions of SFAS No. 157 on its results of operations and its financial position.

In September 2006, the SEC issued Staff Accounting Bulletin No. 108 Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (SAB 108). SAB 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. The SEC staff believes that registrants should quantify errors using both a balance sheet and income statement approach and evaluate whether either approach results in quantifying a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. SAB 108 is effective for fiscal years ending on or after November 15, 2006, with early application encouraged. The Company does not believe that there will be any impact of the provisions of SAB 108 on its results of operations and its financial position due to its recent restatement disclosed in its Form 10-Q/A for the quarterly period ended April 1, 2006 and its Form 10-K/A for the fiscal year ended December 31, 2005.

In June 2006, the FASB issued Interpretation (FIN) No. 48 Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109 Accounting for Income Taxes. This Interpretation prescribes a recognition threshold and measurement attribute for financial statement recognition, measurement and disclosure of tax positions that a company has taken or expects to be taken on a tax return. Additionally, FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006, with early adoption permitted. The Company is currently evaluating whether the adoption of FIN 48 will have a material effect on its consolidated results of operations and financial condition.


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

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 introduction of new manufactured and distributed products. Such statements involve known and unknown risks, uncertainties and contingencies, many of which are beyond the control of the Company, which could cause actual results and outcomes to differ materially from those expressed herein. 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. Factors that might affect such forward-looking statements set forth in this Report include: (i) increased competition from new and existing competitors, and pricing practices from such competitors (particularly upon completion of exclusivity periods), (ii) pricing pressures resulting from the continued consolidation by the Company’s distribution channels, (iii) the amount of funds available for internal research and development, and research and development joint ventures, (iv) research and development project delays or delays and unanticipated costs in obtaining regulatory approvals, (v) continuation of distribution rights under significant agreements, (vi) the continued ability of distributed product suppliers to meet future demand, (vii) the costs, delays involved in and outcome of any threatened or pending litigations, including patent and infringement claims, (viii) unanticipated costs, delays and liabilities in integrating acquisitions, (ix) obtaining or losing 180-day marketing exclusivity periods on products, (x) general industry and economic conditions and (xi) the extent and impact of the accounting and restatement issues, as discussed herein and in the Company’s Current Reports on Form 8-K filed with the SEC on July 6, 2006, July 24, 2006, August 28, 2006, September 6, 2006, September 26, 2006 and October 2, 2006. To the extent that any statements made in this Report contain information that is not historical, such statements are essentially forward-looking and are subject to certain risks and uncertainties, including the risks described above as well as the risks and uncertainties discussed from time to time in other of the Company’s filings with the SEC, including its Annual Report on Form 10-K/A, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. Any forward-looking statements included in this Quarterly Report on Form 10-Q/A are made as of the date hereof only, based on information available to the Company as of the date hereof, and, subject to any applicable law to the contrary, the Company assumes no obligation to update any forward-looking statements. The Company can make no assurance as to the potential effects of the restatement, including the effects of any investigations, informal or otherwise, conducted by the SEC or other entities or lawsuits filed against the Company in connection therewith.

The financial data contained in this section is in thousands or as otherwise noted.

The following discussion should be read in conjunction with the Company’s Condensed Consolidated Financial Statement and related Notes to Condensed Consolidated Financial Statements contained elsewhere in this Form 10-Q/A. For a further discussion of the corrections and restatements, see Note 2 in the accompanying Notes to Condensed Consolidated Financial Statements. Effects of the restatement of the consolidated financial statements are reflected in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” below.

OVERVIEW

Critical to the growth of the Company is its introduction of new manufactured and distributed products at selling prices that generate adequate gross margins. The Company, through its internal development program and various strategic alliances and relationships, seeks to introduce new products and to broaden its product list. The Company plans to continue to invest in its internal research and development efforts, brand marketing strategy and its strategic alliances and relationships throughout fiscal year 2006 and beyond. Also, the Company will continue seeking additional 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 its products in the marketplace. The Company pays a percentage of the gross profits or sales to its strategic partners on sales of products covered by its distribution agreements. Generally, products that the Company develops internally, and to which it is not required to split any profits with strategic partners, contribute higher gross margins than products covered by distribution agreements.

These efforts resulted in higher sales in the first six months of 2006 from new product introductions, including fluticasone pursuant to a supply and distribution agreement with GlaxoSmithKline (“GSK”), several other products pursuant to agreements with Teva, Ivax, and Orchid Chemicals & Pharmaceuticals Ltd., including amoxicillin products and cefprozil, and the launch of cabergoline in December of 2005.

The Company’s business plan includes developing and marketing branded drugs as part of its effort to add products with longer life cycles and higher profitability to the Company’s product line. In July 2005, the Company received FDA approval for its 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 (“BMS”).

In addition to the substantial costs of product development, the Company 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 are increasingly suing companies that produce generic forms of their patented brand name 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 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 the Company’s 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 the Company’s business, financial condition, prospects and results of operations.

Sales and gross margins of the Company’s products depend principally on the: (i) introduction of other generic drug manufacturers’ products in direct competition with the Company’s significant products; (ii) ability of generic competitors to quickly enter the market after patent or exclusivity period expirations, or during exclusivity periods with authorized generic products, diminishing the amount and duration of significant profits to the Company 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 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 and introduction of new manufactured products; (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 the Company’s recently introduced branded product.

The Company divested FineTech effective December 31, 2005 and, as such, its results are being reported as discontinued operations for all periods presented (see Notes to Condensed Consolidated Financial Statements — Note 14 – “Discontinued Operations-Related Party Transaction”).

Effective January 1, 2006, the Company adopted SFAS 123R, which requires the Company to measure and recognize compensation expense for all stock-based payments at their fair-value. SFAS 123R is being applied on the modified prospective basis. Prior to its adoption of SFAS 123R, the Company accounted for its stock-based compensation plans in accordance with provisions of APB 25, “Accounting for Stock Issued to Employees,” as permitted by SFAS 123. Prior to 2006, compensation costs related to stock options granted at fair value under those plans were not recognized in the consolidated statements of operations. Compensation costs related to restricted stock and restricted stock units were recognized in the statements of operations (see Notes to Condensed Consolidated Financial Statements — Note 3 – “Share-Based Compensation”).

The following table shows the revenues, gross margin and operating income by segment for the three and six months ended July 1, 2006 and July 2, 2005:


	Three months ended						Six months ended
	July 1,			July 2,			July 1,			July 2,
	2006			2005			2006			2005
				(Restated)						(Restated)
Revenues:
Generic	$	185,711		$	131,600		$	349,827		$	234,574
Brand		9,527			—			17,730			—

Total revenues	$	195,238		$	131,600		$	367,557		$	234,574

Gross margin:
Generic	$	47,950		$	63,714		$	91,074		$	101,009
Brand		6,817			—			12,862			—

Total gross margin	$	54,767		$	63,714		$	103,936		$	101,009

Operating income (loss):
Generic	$	5,083		$	37,947		$	21,296		$	48,891
Brand		(10,814	)		(17,211	)		(20,052	)		(26,621	)

Total operating (loss) income	$	(5,731	)	$	20,736		$	1,244		$	22,270

Total revenues increased 48.4% while gross margin dollars decreased 14.0% for the three months ended July 1, 2006 from the three months ended July 2, 2005. Generic revenues increased 41.1% while gross margins decreased by 24.7% for the three months ended July 1, 2006 from the three months ended July 2, 2005. Increased generic sales in 2006 were primarily due to new product launches including the first quarter 2006 launches of fluticasone and cefprozil, and fourth quarter 2005 launches of cabergoline and amoxicillin products, partly offset by lower sales of tramadol HC1 and acetaminophen tablets, and paroxetine. The decline in gross margin for the generic business was driven primarily by lower margin partnered product launches of fluticasone, amoxicillin and cefprozil, lower sales of higher margin tramadol HC1 and acetaminophen tablets, and included higher inventory write-offs of finished products for which inventory levels exceed forecasted sales and intangibles amortization on new product acquisitions, tempered by gross margin on higher sales of cabergoline in the quarter. Branded revenues and gross margin dollars for the second quarter of 2006 were primarily driven by the July 2005 launch of the Company’s first branded product, with sales and gross margin of Megace^® ES of $9,527 and $6,817, respectively.

Total revenues and gross margin dollars increased 56.7% and 2.9%, respectively, for the six months ended July 1, 2006 from the six months ended July 2, 2005. Generic revenues increased 49.1% while gross margins decreased by 9.8 % for the six months ended July 1, 2006 from the six months ended July 2, 2005. Increased generic sales in 2006 were primarily due to product launches of fluticasone, cabergoline, amoxicillin products and cefprozil, partly offset by lower sales of tramadol HC1 and acetaminophen tablets, paroxetine, and megestrol oral solution. Lower gross margin for the generic business was driven by higher sales of lower margin fluticasone and amoxicillin partnered products, lower sales of higher margin tramadol HC1 and acetaminophen tablets and megestrol oral solution, and included higher inventory write-offs of finished products for which inventory levels exceed forecasted sales and intangibles amortization on new product acquisitions, tempered by gross margin on higher sales of cabergoline. Branded revenues and gross margin dollars for the first six months of 2006 of $17,730 and $12,862, respectively, were primarily driven by the July 2005 launch of Megace^® ES.

Net sales and gross margins derived from generic pharmaceutical products often follow a pattern based on regulatory and competitive factors that are believed by the Company’s 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.

Operating income from the generic business was impacted in the first six months of 2006 by the sales and gross margins discussed above, including the higher inventory write-offs of $8.2 million driven by a delayed product launch for clonidine for $1.8 million and the write-offs of finished products for which inventory levels exceed forecasted sales, as well as by higher research and development ($6.0 million), and the Company’s determination not to pursue the collection of invalid customer deductions ($10 million). Branded operating loss was favorably impacted in the first six months of 2006 due to higher gross margin on higher sales and the termination of an outside development program with Advancis ($5.5 million), tempered by higher costs, mainly driven by field force expansion ($11.3 million), incurred in 2006 to promote and support the Company’s July 2005 launch of its first branded product, Megace^{^®}ES. The total impact on the Company for the implementation of FAS 123R totaled $7.4 million for the six months ended July 1, 2006.

RESULTS OF OPERATIONS

Revenues

Total revenues for the three months ended July 1, 2006 were $195,238, increasing $63,638, or 48.4%, from total revenues of $131,600 for the three months ended July 2, 2005. Revenues for generic products for the three months ended July 1, 2006 were $185,711, increasing $54,111, or 41.1%, from generic revenues of $131,600 for the three months ended July 2, 2005, due primarily to the introduction of new products. Among the top selling products in 2006 that did not have sales in the corresponding three-month period of 2005 were fluticasone (net sales of $77,244), various amoxicillin products (net sales of $8,255), cefprozil (net sales of $2,793), and cabergoline (net sales of $11,859). Partially offsetting these increases were lower sales in 2006 of certain existing products due to competitive pressures, including tramadol HC1 and acetaminophen tablets, which decreased by $30,719, and paroxetine, which decreased by $10,567, from the second quarter of 2005. Net sales of distributed products were approximately $135,025 or 69.2% of the Company’s total revenues in the second quarter of 2006, and $61,870, or 47.0% of the Company’s total revenues in the second quarter of 2005. The Company is substantially dependent upon distributed products for its overall sales and any inability by its suppliers to meet demand could adversely affect the Company’s future sales. Revenues for the Company’s branded segment were $9,527 for the three months ended July 1, 2006, driven by the July 2005 launch of the Company’s first branded product, Megace^{^®}ES.

Revenues – Six Months Ended July 1, 2006

Total revenues for the six months ended July 1, 2006 were $367,557, increasing $132,983, or 56.7%, from total revenues of $234,574 for the six months ended July 2, 2005. Revenues for generic products for the six months ended July 1, 2006 were $349,827, increasing $115,253, or 49.1%, from generic revenues of $234,574 for the six months ended July 2, 2005, due primarily to the introduction of new products. Among the top selling products in 2006 that did not have sales in the corresponding six-month period of 2005 were fluticasone (net sales of $133,500), various amoxicillin products (net sales of $25,901), cefprozil (net sales of $7,884), and cabergoline (net sales of $14,410). Partially offsetting these increases were lower sales in 2006 of certain existing products, including tramadol HCl and acetaminophen tablets, which decreased by $21,768, paroxetine, which decreased by $15,728, and megestrol oral solution, which decreased $8,057 from the first half of 2005. Increased competition adversely affected both the volume and pricing on these existing products. Product revenues in the six months ended July 2, 2005 also included a $6,000 payment from a business partner to compensate the Company for lost revenues on a terminated product manufacturing and supply agreement. Net sales of distributed products, which consist of products manufactured under contract and licensed products, were approximately $258,416, or 70.3% of the Company’s total revenues for the six months ended July 1, 2006, and $112,230, or 47.8% of the Company’s total revenues for the six months ended July 2, 2005. The Company is substantially dependent upon distributed products for its overall sales and any inability by its suppliers to meet demand could adversely affect the Company’s future sales. Revenues for the branded segment were $17,730 for the six months ended July 1, 2006, primarily due to sales of Megace^{^®}ES, which was launched in the third quarter of 2005.

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

The Company’s 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 $729,904 for the six months ended July 1, 2006 compared to $612,358 for the six months ended July 2, 2005. Deductions from gross revenues were $362,348 for the six months ended July 1, 2006 and $377,784 for the six months ended July 2, 2005. These deductions are discussed in the Notes to Condensed Consolidated Financial Statements – Note 6 – “Accounts Receivable.” The total gross-to-net sales adjustments as a percentage of gross sales decreased to 49.6% for the six months ended July 1, 2006 compared to 61.7% for the six months ended July 2, 2005, primarily due to less competition for certain new products, mainly fluticasone, introduced in 2006 and reductions of wholesale invoice prices on certain of the Company’s existing products. Among the top selling products that did not have sales in the corresponding prior year six-month period were fluticasone, cabergoline, various amoxicillin products, cefprozil, and Megace^® ES.

As detailed above, the Company 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 the Company for certain of its estimates are based on information received from third parties, such as wholesale customer inventory data and market data, or other market factors beyond the Company’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 expected contract sales volumes, average contract pricing, customer inventories and return levels. The Company regularly reviews the information related to these estimates and adjusts its reserves accordingly, if, as 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-month to four-month period, on average.

The Company recognizes revenue for product sales when title and risk of loss have transferred to its customers and when collectibility is reasonably assured. This is generally at the time that products are received by the customers. Upon recognizing revenue from a sale, the Company records estimates for chargebacks, rebates and incentives, returns, cash discounts and other sales reserves that reduce accounts receivable.

The following tables summarize the activity for the six months ended July 1, 2006 and July 2, 2005 in the accounts affected by the estimated provisions described below:


	For the six months ended July 1, 2006
				Provision			(Provision)
				recorded			reversal recorded
	Beginning			for current			for prior period			Credits		Ending
	balance			period sales			sales			processed		balance
Accounts receivable reserves
Chargebacks	$	(102,256	)	$	(191,301	)	$	—	(1)	$	205,608	$	(87,949	)
Rebates and incentive programs		(50,991	)		(111,987	)		—			79,135		(83,843	)
Returns		(32,893	)		(17,959	)		(7,686	)		15,143		(43,395	)
Cash discounts and other		(15,333	)		(24,566	)		—			24,474		(15,425	)

Total	$	(201,473	)	$	(345,813	)	$	(7,686	)	$	324,360	$	(230,612	)


Accrued liabilities

Medicaid rebates	$	(9,040	)	$	(8,934	)	$	85		$	11,328	$	(6,561	)


	For the six months ended July 2, 2005 (Restated)
				Provision			(Provision)
				recorded			reversal recorded
	Beginning			for current			for prior period			Credits		Ending
	balance			period sales			sales			processed		balance
Accounts receivable reserves
Chargebacks	$	(91,986	)	$	(270,047	)	$	—	(1)	$	299,551	$	(62,482	)
Rebates and incentive programs		(49,718	)		(51,725	)		1,489			66,775		(33,179	)
Returns		(61,986	)		(13,283	)		(5,568	)		33,867		(46,970	)
Cash discounts and other		(13,287	)		(26,736	)		—			26,561		(13,462	)

Total	$	(216,977	)	$	(361,791	)	$	(4,079	)	$	426,754	$	(156,093	)


Accrued liabilities

Medicaid rebates	$	(8,755	)	$	(11,914	)	$	—		$	11,165	$	(9,504	)


(1)		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 analysis of activity in subsequent periods, the Company has determined that its chargeback estimates remain reasonable.

Use of Estimates in Reserves

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

Change in Accounting Estimate

In the second quarter of 2006, the Company recorded a change in the estimate for accrued liability for Medicaid rebates related to the volume of fluticasone revenues in the Medicaid market and for the shift in patient enrollment from Medicaid to Medicare under Medicare Part D. The change in accounting estimate in the second quarter reflects the impact of Medicare Part D legislation on the Company’s related rebates, and an adjustment for the less than expected penetration for fluticasone into the Medicaid market during the first quarter of 2006. This resulted in a $5.4 million decrease in the accrued liability for Medicaid rebates and a related increase in net product sales in the second quarter of 2006. This change in accounting estimate decreased loss from continuing operations and net loss by approximately $3.3 million ($0.10 per diluted share) for the three months ended July 1, 2006. This change in accounting estimate had no net impact on income from continuing operations or net income for the six months ended July 1, 2006.

Gross Margin – Three Months Ended July 1, 2006

The Company’s gross margin of $54,767 (28.1% of total revenues) in the second quarter of 2006 decreased $8,947 from $63,714 (48.4% of total revenues) in the corresponding period of 2005. The generic products gross margin of $47,950 (25.8% of generic revenues) in the three months ended July 1, 2006 decreased $15,764 from $63,714 (48.4% of generic revenues) in the corresponding second quarter of 2005 due primarily to the introduction of fluticasone, amoxicillin products and cefprozil, which have significantly lower gross margin percentages after profit splits with partners, lower sales of higher margin tramadol HCl and acetaminophen tablets, and due to higher inventory write-offs of $3.2 million related to write-offs of finished products for which inventory levels exceed forecasted sales, and higher intangibles amortization on new product acquisitions of $2 million, including fluticasone pursuant to a supply and distribution agreement with GSK, and several other products pursuant to agreements with Teva, Ivax and Orchid Chemicals & Pharmaceuticals Ltd, including amoxicillin products and certain cephalosporin and non-cephalosporin products including cephalexin tablets and cefprozil (Cefzil^®) products, tempered by gross margin from higher cabergoline sales in the quarter. The branded products contributed gross margins of $6,817 for the three months ended July 1, 2006 due primarily to Megace^{^®}ES, which was launched in the third quarter of 2005.

Gross Margin – Six Months Ended July 1, 2006

The Company’s gross margin of $103,936 (28.3% of total revenues) in the first six months of 2006 increased $2,927 from $101,009 (43.1% of total revenues) in the corresponding period of 2005. Generic product gross margins of $91,074 (26.0% of generic revenues) in the six months ended July 1, 2006 decreased $9,935 from $101,009 (43.1% of generic revenues) in the corresponding period of 2005. The decrease in generic gross margins was due primarily to the introduction of fluticasone and the amoxicillin products, which, after profit splits with partners, have significantly lower gross margin percentages than other products, lower sales of higher margin tramadol HC1 and acetaminophen tablets and megestrol oral solution, and due to higher inventory write-offs of $8.2 million driven by a delayed product launch for clonidine for $1.8 million and the write-offs of finished products for which inventory levels exceed forecasted sales, and higher intangibles amortization on new product acquisitions of $2.9 million, including fluticasone pursuant to a supply and distribution agreement with GSK, and several other products pursuant to agreements with Teva, Ivax and Orchid Chemicals & Pharmaceuticals Ltd, including amoxicillin products and certain cephalosporin and non-cephalosporin products including cephalexin tablets and cefprozil (Cefzil^®) products, tempered by gross margin from higher sales of cabergoline. Gross margin from branded products was $12,862 for the six months ended July 1, 2006 due primarily to Megace^{^®}ES, which was launched in the third quarter of 2005.

Operating Expenses

Research and Development – Three months ended July 1, 2006

The Company’s research and development expenses of $17,557 for the three months ended July 1, 2006 decreased $475, or 2.6%, from the three months ended July 2, 2005. The decrease was primarily attributable to lower expenses for outside development projects of $5,513, primarily due to the termination of an agreement with Advancis, partially offset by increased clinical trials and employment costs of $4,786 primarily driven by the launch of the Company’s branded business in 2005. Also included in the three months ended July 1, 2006 was the impact of the Company’s implementation of FAS 123R ($678).

Research and Development – Six months ended July 1, 2006

The Company’s research and development expenses of $31,409 for the six months ended July 1, 2006 decreased $2,007, or 6.0%, from the six months ended July 2, 2005. The decrease was primarily attributable to lower expenses for outside development projects of $10,479, primarily due to the termination of an agreement with Advancis, partially offset by increased clinical trials and employment costs of $8,220 primarily associated with the launch of the Company’s branded business in 2005. Also included in the six months ended July 1, 2006 is the impact of the Company’s implementation of FAS 123R ($1,437).

Selling, General and Administrative Expenses – Three months ended July 1, 2006

Total selling, general and administrative expenses of $42,941 (22.0% of total revenues) for the three months ended July 1, 2006 increased $17,995, or 72.1%, from $24,946 (19.0% of total revenues) for the three months ended July 2, 2005. The increase in 2006 was primarily attributable to higher selling and marketing costs of $5,914 due to the Company’s launch of its first branded product, Megace^{^®}ES, in the third quarter of 2005 and increased general and administrative costs of $11,674, primarily due to the write-off of approximately $10 million in bad debts for invalid customer deductions that would not be pursued for collection. Also included in selling, general and administrative expense was increased stock compensation expense, driven by the Company’s implementation of FAS 123R, of $2.5 million.

Selling, General and Administrative Expenses – Six months ended July 1, 2006

Total selling, general and administrative expenses of $71,283 (19.4% of total revenues) for the six months ended July 1, 2006 increased $25,960, or 57.2%, from $45,323 (19.3% of total revenues) for the six months ended July 2, 2005. The increase in 2006 was primarily attributable to higher selling and marketing costs of $12,197 due to the Company’s launch of its first branded product, Megace^{^®}ES, in the third quarter of 2005 and increased general and administrative costs of $12,346, primarily due to the write-off of approximately $10 million in bad debts for invalid customer deductions that would not be pursued for collection. Also included in selling, general and administrative expense was increased stock compensation expense, driven by the implementation of FAS 123R, of $5.4 million.

Although there can be no such assurance, selling, general and administrative expenses in the fiscal year 2006 are expected to be higher by up to 60% to 65% from fiscal year 2005 primarily due to continued promotional support behind the Company’s branded business activities, the write-off of bad debt, higher stock compensation expense driven by the impact of the 2006 implementation of FAS 123R, severance costs related to former executive officers, and restructuring expenses.

Other Expense, net

Other expense, net for the second quarter was $1,108 and $181 for the three months ended July 1, 2006 and July 2, 2005, respectively, and $1,146 and $207 for the six months ended July 1, 2006 and July 2, 2005, respectively. The increase for each period is primarily due the settlement with Genpharm that resolved disputes related to distribution and other agreements between the companies. The Company recorded approximately $1.5 million of expenses in the second quarter of 2006 as a result of the settlement, of which $1.25 million was recorded in other expense, net. The remaining $0.25 million was recorded in research and development expenses.

Net Investment Loss

In November 2006, Abrika agreed to be purchased by a wholly-owned subsidiary of the Actavis group. Based on the terms of the merger agreement, the Company is to receive approximately $4.6 million for its equity stake in Abrika. The Company wrote down its investment in Abrika by approximately $3.8 million in the second quarter of 2006 based on the terms of the merger agreement between Abrika and Actavis that indicated that our investment was impaired. During the second quarter ended July 2, 2005, the Company sold 82 shares of New River Pharmaceuticals, Inc. (“New River”) common stock and recorded a gain on the sale of $1,804. In the first of six months of 2005, the Company sold 144 shares of New River common stock for $4,310 and recorded a gain on the sale of $3,156. During the second quarter of 2005, the Company also recorded an investment impairment of $8,280 related to its investment in Advancis. The Company determined that the significant decline in Advancis’ stock price was other than temporary and wrote down the investment to its fair market value as of July 2, 2005.

Equity Loss in Joint Venture

Equity loss in joint venture for the second quarter was $225 and $106 for the three months ended July 1, 2006 and July 2, 2005, respectively, and $479 and $142 for the six months ended July 1, 2006 and July 2, 2005, respectively. The amount represents the Company’s share of loss in the SVC joint venture, which primarily related to research and development costs incurred by the joint venture to develop ANDAs.

Interest Income

Interest income was $1,973 and $1,110 for the three months ended July 1, 2006 and July 2, 2005, respectively, and $3,956 and $2,441 for the six months ended July 1, 2006 and July 2, 2005, respectively. Interest income is principally derived from money market and other short-term investments.

Interest Expense

Interest expense was $1,693 and $1,719 for the three months ended July 1, 2006 and July 2, 2005, respectively, and $3,388 and $3,434 for the six months ended July 1, 2006 and July 2, 2005, respectively. Interest expense for 2006 and 2005 principally includes interest payable on the Company’s convertible notes.

Income Taxes

The Company recorded a benefit for income taxes of $3,352 and a provision for income taxes of $5,311 for the three months ended July 1, 2006 and July 2, 2005, respectively. The Company’s effective tax rates for the three months ended July 1, 2006 and

July 2, 2005 were 32% and 40%, respectively. For the six-month periods ended July 1, 2006 and July 2, 2005, the Company recorded a benefit for income taxes of $896 and a provision for income taxes of $6,096, respectively. The Company’s effective tax rates for the six months ended July 1, 2006 and July 2, 2005 were 25% and 39%, respectively. The tax rate for the six months ended July 1, 2006 was impacted by estimated full year 2006 income amounts taxable in different state jurisdictions and other permanent items.

Discontinued Operations

In January 2006, the Company announced the divestiture of FineTech, effective as of December 31, 2005. As a result, this business is being reported as a discontinued operation for all periods presented. The Company transferred the business for no proceeds to Dr. Arie Gutman, president and chief executive officer of FineTech. Dr. Gutman also resigned from the Company’s Board. The Company had pre-tax losses from discontinued operations for the three-month and six-month periods ended July 2, 2005 of $1,338 and $2,494, respectively.

FINANCIAL CONDITION

Liquidity and Capital Resources

Cash and cash equivalents of $65,024 at July 1, 2006 decreased by $28,453 from $93,477 at December 31, 2005, primarily due to capital expenditures ($11.2 million) and the purchases of intangibles ($14.1 million). In the six-month period ended July 1, 2006, cash used in operations was $2,499, primarily due to the increase in the Company’s accounts receivable from higher sales in the six-month period, and an increase in inventory, partially offset by an increase in payables to distribution agreement partners for profit splits owed as of July 1, 2006, driven by the 2006 launch of fluticasone pursuant to a supply and distribution agreement with GSK, and other products launched pursuant to agreements with Teva, Ivax, and Orchid Chemicals & Pharmaceuticals Ltd, including amoxicillin products and cefprozil. Slower collections experienced in the first quarter of 2006 returned to normal levels as of July 1, 2006. Cash flows used in investing activities were $32,690 for the six months ended July 1, 2006, principally due to the purchase of intangibles of $14,137, including the Teva asset purchase agreement, a $9,000 advance for product rights paid to Abrika and capital expenditures of $11,235. The capital expenditures included the expansion of the Company’s quality control and research and development laboratories. Cash provided by financing activities was $6,736 as the Company obtained $8,898 from the issuance of shares of its common stock upon the exercise of stock options, partially offset by principal payments under long-term debt and other borrowings of $2,271.

The Company’s working capital, current assets minus current liabilities, of $311,926 at July 1, 2006 increased $4,316, from $307,610 at December 31, 2005. The working capital ratio, which is calculated by dividing current assets by current liabilities, was 2.62x at July 1, 2006 compared to 2.97x at December 31, 2005. The Company believes that its working capital ratio indicates the ability to meet its ongoing and foreseeable obligations for the next 12 fiscal months.

In 2004, the Board authorized the repurchase of up to $50,000 of the Company’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. Shares of common stock acquired through the repurchase program are available for general corporate purposes. The authorized amount remaining for stock repurchases under the repurchase program is $17.8 million.

Available for sale debt securities of $98,121 included in current assets at July 1, 2006 were all available for immediate sale. The Company intends to continue to use its current liquidity to support the expansion of its business, entering into product license arrangements, potentially acquiring complementary businesses and products and for general corporate purposes.

As of July 1, 2006, the Company had payables due to distribution agreement partners of $103,935 related primarily to amounts due under profit sharing agreements, particularly including amounts owed to GlaxoSmithKline (“GSK”) with respect to fluticasone and to Pentech and GSK with respect to paroxetine. The Company expects to pay these amounts, with the exception of the payables due to Pentech as a result of current litigation with them out of its working capital during the third quarter of 2006. In 2004, Pentech filed a legal action against the Company alleging that the Company breached its contract with Pentech. The Company and Pentech are in dispute over the amount of gross profit share.

There have been no material changes to the Company’s contractual obligations table presented as of December 31, 2005 in its Form 10-K/A for the 2005 fiscal year, except as disclosed in “Subsequent Events”.

In addition to its internal research and development costs, the Company, from time to time, enters into agreements with third parties for the development of new products and technologies. To date, the Company has entered into agreements and advanced funds

and has commitments or contingent liabilities with several non-affiliated companies for products in various stages of development. These contingent payments or commitments are generally dependent on the third party achieving certain milestones or the timing of third-party research and development or legal expenses. Due to the uncertainty of the timing and/or realization of such contingent commitments, these obligations are not included in the contractual obligations table presented as of December 31, 2005 in the Company’s Form 10-K/A. Payments made pursuant to these agreements are either capitalized or expensed in accordance with the Company’s accounting policies. The total amount that ultimately could be due under agreements with contingencies is approximately $15,000 as of July 1, 2006.

As part of the consideration for the acquisition of Kali, the former Kali stockholders were entitled to up to $10,000 from the Company if certain product-related performance criteria were met over a four-year period. As of December 31, 2005, the former Kali stockholders had earned $5,000 of this contingent payout, of which $2,500 was paid in January 2005 and an additional $2,500 was paid in January 2006. Subsequent to December 31, 2005, the Kali stockholders earned the remaining $5,000 of these contingent payments, which was paid in January 2007.

The Company expects to continue to fund its operations, including its research and development activities, capital projects and obligations under its existing distribution and development arrangements discussed herein, out of its working capital. Implementation of the Company’s business plan may require additional debt and/or equity financing; there can be no assurance that the Company will be able to obtain any such additional financing when needed on terms acceptable or favorable to it.

Financing

At July 1, 2006, the Company’s total outstanding short and long-term debt, including the current portion, was $202,741. The amount consisted primarily of senior subordinated convertible notes, financing for product liability insurance and capital leases of computer equipment. In 2003, the Company sold an aggregate principal amount of $200,000 of senior subordinated convertible notes 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 of the Company at an initial conversion price of $88.76 per share, only upon the occurrence of certain events. Upon redemption, the Company 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, accelerated or repurchased. The Company may not redeem the notes prior to the maturity date. The Trustee under the Indenture governing the Notes has alleged that the Company has defaulted in the performance of its obligations under the Indenture and has initiated a lawsuit in connection therewith. See Notes to Condensed Consolidated Financial Statements – Note 13 – “Commitments, Contingencies and Other Matters.”

Critical Accounting Policies and Use of Estimates

The Company’s critical accounting policies are set forth in its Annual Report on Form 10-K/A for the fiscal year ended December 31, 2005. There has been no change, update or revision to the Company’s critical accounting policies subsequent to the filing of the Company’s Form 10-K/A for the fiscal year ended December 31, 2005.

Subsequent Events

Refer to Notes to Condensed Consolidated Financial Statements – Note 13 – “Commitments, Contingencies and Other Matters” and Item 1 of Part II – “Legal Proceedings.”

Products Division. In connection with these separation and release agreements, the Company will record expenses of approximately $7.0 million and $4.0 million in the third and fourth quarters of 2006, respectively.

In October 2006, the Company sold its investment in Advancis for approximately $5 million and will recognize a pre-tax gain of $3.0 million in the fourth quarter of 2006.

In February 2007, the Company returned the marketing rights to Difimicin, an investigational drug to treat Clostridum difficile-associated diarrhea (CDAD), to Optimer. The Company and Optimer had entered into a joint development and collaboration agreement with respect to this drug in May 2005, and subsequently amended the agreement on January 19, 2007. Optimer will continue to develop Difimicin. In connection with the returned marketing rights, the Company received $20 million in February 2007 from Optimer and is also to receive a $5 million milestone payment upon the earliest to occur of either the successful completion by Optimer of a Phase III study, the grant by Optimer of marketing and sales rights to a third party or the submission to the FDA of a new drug application for a product subject to the collaboration agreement. Additionally, the Company is to receive royalty payments for a period of seven years assuming successful commercialization of the drug. In February 2007, the Company sold approximately 1.1 million shares of its investment in Optimer stock for approximately $6.8 million and will recognize a pre-tax gain of approximately $1.4 million, in the first quarter of 2007. The Company continues to hold approximately 1.26 million shares of Optimer common stock.

In June 2007, the Company’s investment in a fund that invests in various floating rate structured finance securities, included as part of available for sale debt securities, experienced a severe reduction in value. The recoverability of this investment is uncertain. At the time the Company determines that this loss is other-than-temporary as defined by EITF 03-01 it will record a realized investment loss. As of July 1, 2006, this investment had a cost basis and an associated market value of approximately $5.9 million.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is subject to market risk primarily from changes in the market values of its investments in marketable debt and governmental agency securities. These instruments are classified as available for sale securities for financial reporting purposes and have minimal or no interest risk due to their short-term natures. Professional portfolio managers managed 100% of these available for sale securities at July 1, 2006. Additional investments are made in overnight deposits and money market funds. These instruments are classified as cash and cash equivalents for financial reporting purposes and also have minimal or no interest risk due to their short-term natures.

The following table summarizes the available for sale securities that subject the Company to market risk at July 1, 2006 and December 31, 2005:


	July 1,		Dec. 31,
	2006		2005
Securities issued by U.S. government and agencies	$	74,769	$	79,886
Debt securities issued by various state and local municipalities and agencies		13,668		13,721
Other marketable debt securities		13,835		13,200


Total	$	102,272	$	106,807

Available for Sale Securities and Other Investments:

The primary objectives for the Company’s investment portfolio are liquidity and safety of principal. Investments are made with the intention to achieve a relatively high rate of return while, at the same time, retaining safety of principal. The Company’s investment policy limits investments to certain types of instruments issued by institutions and U.S. governmental agencies with investment-grade credit ratings. A significant change in prevailing interest rates could affect the market value of the portion of the $102,272, as of July 1, 2006, in available for sale securities that have a maturity greater than one year.

In addition to the investments described above, the Company is also subject to market risk in respect to its investments in Advancis, Abrika and Optimer, as described below.

In April 2005, the Company acquired 3,333 shares of the Series C preferred stock of Optimer, a then privately-held biotechnology company located in San Diego, California, for $12,000. The 3,333 shares represented, as of July 1, 2006, approximately 13% equity ownership in Optimer. Subsequently, Optimer became a public company via an initial public offering. Refer to Notes to the Condensed Consolidated Financial Statements – Note 16 – “Subsequent Events” for further details. The Company and Optimer also have signed a collaboration agreement where the Company receives a license to develop, market and distribute the antibiotic compound known as PAR-101 and the option to expand the agreement to cover up to three additional products. Because Optimer was privately-held and accounted for under the cost method, the Company had monitored its investment periodically to evaluate whether any declines in fair value had become other-than-temporary prior to Optimer becoming a public company.

In December 2004, the Company acquired a 5% limited partnership interest in Abrika, a privately-held specialty generic pharmaceutical company located in Sunrise, Florida, for $8,361, including costs. Additionally, the Company has entered into an agreement with Abrika to collaborate on the marketing of five products to be developed by Abrika. The first product is expected to be a transdermal fentanyl patch for the management of chronic pain. This patch is a generic version of Duragesic ^{^®}, marketed by Janssen Pharmaceutica Products, L.P., a division of Johnson & Johnson. Pursuant to this agreement, the Company was required to pay up to $9,000 to Abrika at the time of the commercial launch of this product, subject to the attainment of certain profit targets. In February 2006, the Company and Abrika amended their collaboration agreement and the Company advanced Abrika the $9,000. Abrika has agreed to repay the advance if it does not obtain the FDA’s final and unconditional approval of the transdermal fentanyl patch within two years of the amendment. The Company also holds a convertible promissory note in the principal amount of $3,000 with interest accruing at 8.0% annually for monies loaned to Abrika. Because Abrika is privately-held and accounted for under the cost method, the Company monitors the investment on a periodic basis to evaluate whether any declines in value becomes other-than temporary. In November 2006, Abrika agreed to be purchased by a wholly-owned subsidiary of the Actavis group. Based on the terms of the merger agreement, the Company is to receive approximately $4.6 million for its equity stake in Abrika. The Company wrote down its investment by approximately $3.8 million in the second quarter of 2006 based on the terms of the merger agreement between Abrika and Actavis that indicated that its investment was impaired. The merger transaction was completed in 2007.

In October 2003, the Company paid $10,000 to purchase 1,000 shares of the common stock of Advancis, a pharmaceutical company based in Germantown, Maryland, at $10 per share, in its initial public offering of 6,000 shares. In the second quarter of 2005, the Company recorded an investment impairment of $8,280 related to its investment in Advancis. In June and July 2005, Advancis announced that it had failed to achieve the desired microbiological and clinical endpoints in its Amoxicillin PULSYS Phase III clinical trials for the treatment of pharyngitis/tonsillitis. Due to the results of the clinical trials, and the continued significant decline in the stock price of Advancis, the Company determined that the decline in fair market value of its investment was other-than temporary and, as such, wrote the investment down to its fair market value as of July 2, 2005, which was $1,720, based on the market value of the common stock of Advancis at that date. As of July 1, 2006, the fair market value of the Advancis common stock held by the Company was $2,970, based on the market value of such common stock at that date. As of December 31, 2005, the fair market value of the Advancis common stock held by the Company was $1,380, based on the market value of such common stock at that date.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s 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 management, including the Company’s 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, the Company has 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 its controls and procedures. An evaluation was performed under the supervision and with the participation of Company management, including its CEO and its CFO, to assess the effectiveness of the design and operation of its disclosure controls and procedures (as defined under the Exchange Act) as of July 1, 2006. Based on that evaluation, the Company’s management, including its CEO and the CFO, concluded that the Company’s disclosure controls and procedures were not effective as of July 1, 2006 because it has not yet concluded that the material weaknesses in the Company’s internal control over financial reporting reported as of December 31, 2005 in the Company’s Form 10-K/A and as of April 1, 2006 in the Company’s Form 10-Q/A no longer exist.

Changes in Internal Control over Financial Reporting

There have been no significant changes in the Company’s internal control over financial reporting identified during the quarter ended July 1, 2006, except for the implementation of measures described below under Remediation of Material Weaknesses.

Remediation of Material Weaknesses

The Company has implemented, or plans to implement, certain measures to remediate the material weaknesses identified in the Company’s 10-K/A for the fiscal year 2005 and to enhance the Company’s internal control over its quarterly and year-end financial reporting processes. As of the date of the filing of this Quarterly Report on Form 10-Q/A, the Company has implemented the following measures:

•		Increased the size, expertise and training of the finance and accounting staff to include adequate resources for ensuring GAAP compliance, particularly in the areas of accounts receivable reserves, inventory valuation and existence and the accounting for certain of the Company’s non-routine transactions.

•		Assigned individuals with significant industry experience and increased the involvement of its senior finance team members in the preparation and review of accounts receivable reserves and inventory valuation and existence.

•		Enhanced the accounting policies and procedures to provide adequate, sufficient and useful guidance to its staff in the area of accounts receivable reserves and inventory valuation and existence.

•		Corrected its methodologies with respect to estimating accounts receivable reserves for chargebacks, rebates, and product returns.

•		Increased the level of interdepartmental communication in a way that will foster information sharing between the Company’s finance staff and operational personnel.

The Company anticipates that these remediation actions represent ongoing improvement measures. The Company believes these actions are reasonably likely to materially affect the Company’s internal control over financial reporting and will provide reasonable assurance that the identified deficiencies in the design and operation of certain of the Company’s controls with respect to the process of preparing and reviewing the annual and interim financial statements that resulted in the identification of the material weaknesses previously disclosed in the Annual Report on Form 10-K/A for the fiscal year ended December 31, 2005 and in the Quarterly Report on Form 10-Q/A for the quarterly period ended April 1, 2006 will be addressed. While the significant enhancements in the Company’s internal control over financial reporting described above represent improvements, such enhancements have been in place only for a short period of time. The Company has not yet had sufficient opportunity to assess whether the above internal control enhancements are operating effectively and will be sufficient to remediate the material weaknesses in internal control over financial reporting previously reported. The effectiveness of its remediation efforts will not be known until the Company can test those controls in connection with the management tests of internal controls over financial reporting that the Company will perform as part of its process to prepare the Company’s Annual Report on Form 10-K for the fiscal year ended and as of December 31, 2006.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

second quarter of 2006 and related Management’s Discussion and Analysis due to the Company’s ongoing work to restate certain of its past financial statements, and, therefore, in accordance with SEC rules, the Company filed a Form 12b-25 Notification of Late Filing disclosing the omissions. The Company’s Form 12b-25 also was provided to the Trustee on August 24, 2006. Accordingly, the Company believes that it complied with the Indenture provision in question.

Contractual Matters

Patent Related Matters

On July 7, 2004, Xcel Pharmaceuticals, Inc. (now known as Valeant Pharmaceuticals, North America (“Valeant”)) filed a lawsuit against Kali Laboratories, Inc. (“Kali”), a wholly owned subsidiary of the Company, in the United States District Court for the District of New Jersey. Valeant alleged that Kali infringed U.S. Patent No. 5,462,740 (“the ‘740 patent”) by submitting a Paragraph IV certification to the FDA for approval of a generic version of Diastat brand of diazepam rectal gel. Kali has denied Valeant’s allegation, asserting that the ‘740 patent was not infringed and is invalid and/or unenforceable. Kali also has counterclaimed for declaratory judgments of non-infringement, invalidity and unenforceability of the ‘740 patent as well as a judgment that the ‘740 patent was unenforceable due to patent misuse. The parties conducted fact and expert discovery through April 2006. The parties submitted their proposed final pretrial order in June 2006 and appeared before the court for pretrial conferences on June 13 and November 16, 2006. Under applicable law and regulations, the filing of the lawsuit triggered an automatic 30-month stay of FDA approval of the Kali ANDA. That stay expired on November 29, 2006. The parties appeared before the court for settlement conferences on May 17, 2007 and June 28, 2007. At the June 28 settlement conference the parties entered into an agreement in principle to settle the action. Immediately thereafter, the Court entered an order dismissing the action without prejudice to its being reinstated if the parties have not finalized their settlement agreement within 60 days. The Company intends to defend vigorously this action and pursue its counterclaims against Valeant, if the settlement agreement is not finalized within the allotted time period.

amended its complaint to allege antitrust violations. Certain of the registrant’s claims of infringement by Morton Grove’s product are subject to the finding of non-enablement in the Roxane lawsuit discussed below, while others are not. On Par’s motion the court entered a partial stay on issues related to the Roxane decision, pending final resolution of the Roxane appeal. Discovery is proceeding on issues unaffected by Roxane. The Company intends to defend vigorously this action and pursue its counterclaims against Morton Grove including its infringement claims affected by the Roxane lawsuit once its appeal is resolved.

On July 15, 2003, the Company filed a lawsuit against Roxane Laboratories, Inc. (“Roxane”) in the United States District Court for the District of New Jersey. The Company alleged that Roxane had infringed Par’s U.S. Patents numbered 6,593,318 and 6,593,320 and that the infringement was willful. Roxane has denied these allegations and has counterclaimed for declaratory judgments of non-infringement and invalidity of both patents. On September 8, 2006, the Court issued a claim construction ruling on certain claim terms in dispute between the parties. Based on that construction, the Court ruled in favor of the Company and dismissed Roxane’s motion for summary judgment of non-infringement. On November 8, 2006, the Court ruled that the claims at issue in these patents were invalid as non-enabled on summary judgment. On December 8, 2006, Par appealed the ruling to the Federal Circuit Court of Appeals, highlighting the district court’s failure to apply its own claim construction and to consider the testimony of Par’s experts before awarding summary judgment to Roxane. The parties have fully briefed the appeal, and are awaiting a date for oral argument.

On November 25, 2002, Ortho-McNeil Pharmaceutical, Inc. (“Ortho-McNeil”) filed a lawsuit against Kali, a wholly owned subsidiary of the Company, in the United States District Court for the District of New Jersey (the “2002 Litigation”). Ortho-McNeil alleged that Kali infringed U.S. Patent No. 5,336,691 (the “‘691 patent”) by submitting a Paragraph IV certification to the FDA for approval of tablets containing tramadol HCl and acetaminophen. Kali denied Ortho-McNeil’s allegation, asserting that the ‘691 patent was not infringed and is invalid and/or unenforceable, and that the lawsuit is barred by unclean hands. Kali also counterclaimed for declaratory judgments of non-infringement, invalidity and unenforceability of the ‘691 patent. Ortho-McNeil amended its complaint on July 27, 2005 to assert infringement against the Company, and to include a claim for damages against the Company and Kali. The Company and Kali have answered and counterclaimed, alleging that the ‘691 patent is not infringed, and is invalid and unenforceable for inequitable conduct. On August 1, 2006, the Patent and Trademark Office reissued the ‘691 patent as U.S. Patent No. RE 39,221 (the “‘221 Patent”), containing original claim 6 from the ‘691 Patent and several additional new claims. On August 1 and August 4, 2006, Ortho-McNeil filed a complaint and then an amended complaint against Kali, the Company, and two other companies, Barr Laboratories, Inc. (“Barr”) and Caraco Pharmaceutical Laboratories, Ltd. (“Caraco”) (the “2006 Litigation”). Ortho-McNeil alleged infringement and willful infringement of the claims of the re-issue patent (other than claim 6, which is the subject of the 2002 Litigation) against the Company through the Company’s marketing of its tramadol HCl and acetaminophen tablets. Ortho-McNeil made similar allegations against Barr and Caraco. On April 4, 2007, the United States District Court for the District of New Jersey granted Kali’s and Par’s motions for summary judgment that claim 6 of the ‘221 Patent, the only claim at issue in the 2002 Litigation, was invalid and was not infringed by Par’s ANDA product. Ortho-McNeil filed a motion requesting permission to immediately appeal this decision, and the court denied Ortho-McNeil’s motion and entered an order consolidating the 2002 and 2006 litigations. Par has requested permission from the court to file immediate summary judgment motions as to all of the remaining ‘221 Patent claims at issue, and also has requested that the Court proceed to trial on Par’s counterclaims for invalidity, unenforceability and intervening rights as to the ‘221 Patent. Ortho-McNeil has opposed Par’s requests, and the parties are awaiting a decision by the Court on these requests. The Company intends to defend vigorously this action.

On April 28, 2006, CIMA Labs, Inc. (“CIMA”) and Schwarz Pharma, Inc. (“Schwarz Pharma”) filed separate lawsuits against the Company in the United States District Court for the District of New Jersey (CIMA Labs, Inc. et al. v. Par Pharmaceutical Companies, Inc. et al., (Civil Action Nos. 06-CV-1970, 1999 (DRD)(ES)). CIMA and Schwarz Pharma each have alleged that the Company 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, the Company 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. The parties have exchanged written discovery. All 40 claims in the ’981 patent were rejected in a non-final office action in a reexamination proceeding at the United States Patent and Trademark Office (“PTO”) on February 24, 2006. The PTO again rejected all 40 claims in a second non-final office action dated February 24, 2007. The ‘392 patent is also the subject of a reexamination proceeding. The Company will continue to monitor these ongoing reexamination proceedings. 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., (Civil Action No. 07-CV-0893 (DRD0(ES)). A hearing on these motions was held on May 30, 2007. The Company intends to vigorously defend this lawsuit and pursue its counterclaims.

by May 30, 2008. The parties have begun discovery and Reliant has filed a motion to disqualify Par’s counsel. The Company intends to vigorously defend this lawsuit and pursue its counterclaims.

Industry Related Matters

On September 10, 2003, the Company and a number of other generic and brand pharmaceutical companies were sued by Erie County in New York State (the suit has since been joined by additional New York counties) that has alleged violations of laws (including the Racketeer Influenced and Corrupt Organizations Act, common law fraud and obtaining funds by false statements) related to participation in the Medicaid program. The complaint seeks declaratory relief; actual, statutory and treble damages, with interest; punitive damages; an accounting and disgorgement of any illegal profits; a constructive trust and restitution; and attorneys’ and experts’ fees and costs. This case was transferred to the United States District Court for the District of Massachusetts for coordinated and consolidated pre-trial proceedings. On June 15, 2005, a consolidated complaint was filed on behalf of a number of the New York counties and the City of New York. The complaint filed by Erie County in New York was not included in the consolidated complaint and has been removed to federal district court. In addition, on September 25, 2003, the Office of the Attorney General of the Commonwealth of Massachusetts filed a complaint in the District of Massachusetts against the Company and 12 other leading generic pharmaceutical companies, alleging principally that the Company and such other companies violated, through their marketing and sales practices, state and federal laws, including allegations of common law fraud and violations of Massachusetts false statements statutes, by inflating generic pharmaceutical product prices paid for by the Massachusetts Medicaid program. The Company waived service of process with respect to the complaint. The complaint seeks injunctive relief, treble damages, disgorgement of excessive profits, civil penalties, reimbursement of investigative and litigation costs (including experts’ fees) and attorneys’ fees. On January 29, 2004, the Company and the other defendants involved in the litigation brought by the Office of the Attorney General of the Commonwealth of Massachusetts filed a motion to dismiss, which was denied on August 15, 2005. The Commonwealth of Massachusetts subsequently filed an amended complaint, and the defendants, including the Company, have filed a motion to dismiss the amended complaint. On August 4, 2004, the Company and a number of other generic and brand pharmaceutical companies were also sued by the City of New York, which has alleged violations of laws (including common law fraud and obtaining funds by false statements) related to participation in its Medicaid program. The complaint seeks declaratory relief; actual, statutory and treble damages, with interest; punitive damages; an accounting and disgorgement of any illegal profits; a constructive trust and restitution; and attorneys’ and experts’ fees and costs. This case was transferred to the United States District Court for the District of Massachusetts for coordinated and consolidated pre-trial proceedings. In addition to Massachusetts, the Commonwealth of Kentucky, the State of Illinois and the State of Alabama have filed similar suits in their respective jurisdictions, all of which have been removed to federal district court. The lawsuit brought by the State of Alabama was remanded to the Alabama state court on August 11, 2005. Following the remand, on October 13, 2005, the Court denied the defendants’ motion to dismiss, but granted in part the defendants’ motion for a more definite statement, and further ruled that the State may amend its complaint within 90 days. On October 20, 2005, the State of Mississippi filed in the Chancery Court for Hinds County, Mississippi a complaint naming the Company (among other companies) as a defendant. The Company intends to defend vigorously these actions.

On April 27, 2006, the State of Hawaii filed a complaint naming the Company as a defendant that has alleged violations of laws related to participation in the Medicaid program. The Hawaii complaint pleads causes of action for (i) false claims; (ii) unfair or deceptive acts or practices; (iii) unfair competition; (iv) violation of the Deceptive Trade Practices Act; (v) non-disclosure; and (vi) unjust enrichment. The complaint seeks general and special damages; treble damages, or in the alternative, punitive damages; costs, pre-judgment and post-judgment interest, and attorneys’ fees; injunctive relief; and such other and further relief or equitable relief as the Court deems just and proper. The Company intends to defend this action vigorously.

States District Court for the District of Massachusetts for coordinated and consolidated pre-trial proceedings. A motion to remand is currently pending.

The court denied the defendants’ motions to dismiss in the action brought by the Commonwealth of Kentucky on June 23, 2006. The Company answered the First Amended Complaint on July 19, 2006.

Corrupt Practices Act; (ii) violation of various federal and state Medicaid laws; (iii) unfair trade practices; and (iv) common law claims for breach of contract, unjust enrichment, fraud, fraudulent concealment. The County seeks actual, statutory, and treble damages, including interest; declaratory relief; disgorgement; restitution; attorneys’ fees, experts’ fees, and costs; and other relief deemed just and equitable by the Court.

ITEM 1A. RISK FACTORS

There are no material changes from the risk factors set forth in Part I, Item 1A, “Risk Factors,” of the Company’s 2005 Annual Report on Form 10-K/A. Please refer to that section for disclosures regarding certain risks and uncertainties related to the Company’s business and operations.

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

Issuer Purchases of Equity Securities⁽¹⁾
Quarter Ending July 1, 2006

Total Number of

Shares of

Average

Common Stock

Maximum Number of

Total Number of

Price Paid

Purchased as Part

Shares of Common

Shares of

per Share of

of Publicly

Stock that May Yet Be

Common Stock

Common

Announced Plans

Purchased Under the

Period

Purchased ⁽³⁾

Stock

or Programs

Plans or Programs ⁽²⁾

April 2, 2006 through April 29, 2006

—

N/A

—

965,438

April 30, 2006 through May 27, 2006

—

N/A

—

965,438

May 28, 2006 through July 1, 2006

3,803

N/A

—

965,438

Total

3,803

N/A

—


(1)		In April 2004, the Board authorized the repurchase of up to $50,000 of the registrant’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. The authorized amount remaining for stock repurchases under the repurchase program is $17.8 million. The repurchase program has no expiration date.

(2)		Based on the closing price of the Company’s common stock on The New York Stock Exchange of $18.46 at June 30, 2006.

(3)		The total number of shares purchased represents shares surrendered to the Company to satisfy tax withholding obligations in connection with the vesting of restricted stock issued to employees.


		PAGE
PART I	FINANCIAL INFORMATION

	Explanatory Note		3

Item 1.	Condensed Consolidated Financial Statements (unaudited)

	Condensed Consolidated Balance Sheets as of July 1, 2006 and December 31, 2005		4

	Condensed Consolidated Statements of Operations for the three months and six months ended July 1, 2006 and July 2, 2005 (Restated)		5

	Condensed Consolidated Statements of Cash Flows for the six months ended July 1, 2006 and July 2, 2005 (Restated)		6

	Notes to Condensed Consolidated Financial Statements		8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		37

Item 3.	Quantitative and Qualitative Disclosures about Market Risk		46

Item 4.	Controls and Procedures		48

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings		49

Item 1A.	Risk Factors		55

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		55

Item 6.	Exhibits		56

SIGNATURES			57
Certification by the President and Chief Executive Officer
Certification by the Chief Financial Officer
Certification by the President and Chief Executive Officer, pursuant to Section 906
Certification by the Chief Financial Officer, pursuant to Section 906


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.)


	PAR PHARMACEUTICAL COMPANIES, INC. (Registrant)
July 10, 2007	/s/ Patrick G. LePore
	Patrick G. LePore
	President and Chief Executive Officer


July 10, 2007	/s/ Gerard A. Martino
	Gerard A. Martino
	Executive Vice President and Chief Operating Officer


July 10, 2007	/s/ Veronica A. Lubatkin
	Veronica A. Lubatkin
	Executive Vice President and Chief Financial Officer


Exhibit Number		Description

31.1		Certification by the President and Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act.

31.2		Certification by the Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act.

32.1		Certification by the President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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.


	For the three			For the six
	months ended			months ended
(Amounts in thousands)	July 2, 2005			July 2, 2005
Net (loss) income — as previously reported	$	(621	)	$	1,356

Pre-tax restatement adjustments:
Accounts receivable reserves
Decrease in chargebacks		3,368			2,463
Decrease in rebates		4,276			1,716
Decrease in product returns		6,203			4,829
Decrease (increase) in cash discounts and other		686			(420	)

Total Accounts Receivable Reserves		14,533			8,588
Inventory Valuation and Existence		(854	)		(1,077	)

Investment in Joint Venture		(32	)		(28	)
Accounting for a Lease Acquired in a Business Combination		126			251

Other Errors
Sales cut-off		—			1,380
Accounts payable error		(825	)		(825	)
Other		(88	)		2,868

Total pre-tax restatement adjustments		12,860			11,157
Tax effect of restatement adjustments		5,017			4,352

After tax effect of restatement adjustments		7,843			6,805

Net income — as restated	$	7,222		$	8,161