UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                ----------------

                                    FORM 10-Q

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

                  For the quarterly period ended: July 4, 2004

                         COMMISSION FILE NUMBER: 1-10827


                       PAR PHARMACEUTICAL COMPANIES, INC.
             (Exact name of registrant as specified in its charter)


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


ONE RAM RIDGE ROAD, SPRING VALLEY, NEW YORK                                10977
 (Address of principal executive offices)                             (Zip Code)


       Registrant's telephone number, including area code - (845) 425-7100



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

     Indicate by check mark whether the registrant is an  accelerated  filer (as
defined in Rule 12b-2 of the Exchange Act): Yes   X       No
                                                -----        -----


       Number of shares of Common Stock outstanding as of August 9, 2004:
                                   33,945,956

<PAGE>

<TABLE>
<CAPTION>
                               PART I - FINANCIAL INFORMATION
                                ITEM 1. FINANCIAL STATEMENTS

                             PAR PHARMACEUTICAL COMPANIES, INC.
                                CONSOLIDATED BALANCE SHEETS
                             (In Thousands, Except Share Data)
                                        (Unaudited)


                                                                  JULY 4,       DECEMBER 31,
                   ASSETS                                          2004             2003
                   ------                                          ----             ----
<S>                                                              <C>              <C>
Current assets:
  Cash and cash equivalents                                      $51,088          $162,549
  Available-for-sale securities                                  198,955           195,500
  Accounts receivable, net of allowances of
   $41,958 and $40,357                                           178,578           157,707
  Inventories, net                                                73,713            66,713
  Prepaid expenses and other current assets                        9,619            10,033
  Unallocated purchase price                                     142,960                 -
  Deferred income tax assets                                      37,419            34,473
                                                                  ------            ------
   Total current assets                                          692,332           626,975

Property, plant and equipment, at cost less
 accumulated depreciation and amortization                        53,411            46,813
Investment - Advancis                                              7,420             7,500
Intangible assets, net                                            32,860            35,564
Goodwill                                                          24,662            24,662
Deferred charges and other assets                                  6,261             6,899
Non-current deferred income tax assets, net                       15,012            14,399
                                                                  ------            ------
   Total assets                                                 $831,958          $762,812
                                                                 =======           =======

                   LIABILITIES AND STOCKHOLDERS' EQUITY
                   ------------------------------------
Current liabilities:
  Current portion of long-term debt                                 $206              $122
  Accounts payable                                                26,987            20,157
  Payables due to distribution agreement partners                 94,881            88,625
  Accrued salaries and employee benefits                           5,401             7,363
  Accrued expenses and other current liabilities                  18,783            24,654
  Income taxes payable                                            38,922            26,252
                                                                  ------            ------
     Total current liabilities                                   185,180           167,173
 Long-term debt, less current portion                            200,360           200,211
 Other long-term liabilities                                         347               347
 Commitments and contingencies
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: 34,608,947 and 34,318,163
    shares                                                           346               343
  Additional paid-in capital                                     183,744           171,931
  Retained earnings                                              284,546           224,480
  Accumulated other comprehensive loss                            (2,488)           (1,673)
  Treasury stock at cost: 500,000 shares                         (20,077)                -
                                                                  ------          --------
    Total stockholders' equity                                   446,071          395,081
                                                                 -------          -------
 Total liabilities and stockholders' equity                     $831,958         $762,812
                                                                 =======          =======

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

                                             2
</TABLE>
<PAGE>

<TABLE>
<CAPTION>
                             PAR PHARMACEUTICAL COMPANIES, INC.
                         CONSOLIDATED STATEMENTS OF OPERATIONS AND
                                     RETAINED EARNINGS
                          (In Thousands, Except Per Share Amounts)
                                        (Unaudited)


                                          SIX MONTHS ENDED            THREE MONTHS ENDED
                                          ----------------            ------------------
                                         JULY 4,     JUNE 29,        JULY 4,     JUNE 29,
                                          2004        2003            2004        2003
                                          ----        ----            ----        ----
<S>                                    <C>          <C>             <C>          <C>
Revenues:
  Net product sales                    $422,099     $209,485        $211,060     $108,801
  Other product related revenues          2,199       12,788           1,471        7,060
                                          -----       ------           -----        -----
Total revenues                          424,298      222,273         212,531      115,861
Cost of goods sold                      280,629      106,000         139,414       54,891
                                        -------      -------         -------       ------
  Gross margin                          143,669      116,273          73,117       60,970
Operating expenses (income):
  Research and development               16,662       11,120          10,184        4,651
  Selling, general and administrative    30,736       30,105          16,481       18,215
  Settlements                            (2,846)           -          (2,846)           -
                                          -----       ------           -----       ------

  Total operating expenses               44,552       41,225          23,819       22,866

      Operating income                   99,117       75,048          49,298       38,104

Other expense, net                          (75)         (44)            (53)         (10)
Interest (expense) income, net             (573)         333            (294)         164
                                            ---          ---             ---          ---

Income before provision for income
  taxes                                  98,469       75,337          48,951       38,258
Provision for income taxes               38,403       29,758          19,091       15,112
                                         ------       ------          ------       ------

Net income                               60,066       45,579          29,860       23,146
Retained earnings, beginning of
  period                                224,480      101,947         254,686      124,380
                                        -------      -------         -------      -------

Retained earnings, end of period       $284,546     $147,526        $284,546     $147,526
                                        =======      =======         =======      =======

Net income per share of common stock:
  Basic                                   $1.75        $1.38            $.87         $.70
                                           ====         ====             ===          ===
  Diluted                                 $1.70        $1.34            $.85         $.68
                                           ====         ====             ===          ===

Weighted average number of common
  shares outstanding:
  Basic                                  34,359       33,021          34,267       33,153
                                         ======       ======          ======       ======
  Diluted                                35,247       33,953          34,930       34,197
                                         ======       ======          ======       ======



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

                                             3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                              PAR PHARMACEUTICAL COMPANIES, INC.
                             CONSOLIDATED STATEMENTS OF CASH FLOWS
                                        (In Thousands)
                                          (Unaudited)

                                                                         SIX MONTHS ENDED
                                                                         ----------------
                                                                        JULY 4,      JUNE 29,
                                                                         2004         2003
                                                                         ----         ----
<S>                                                                   <C>         <C>
Cash flows provided by operating activities:
  Net income                                                           $60,066     $45,579

  Adjustments to reconcile net income
  to net cash provided by operating activities:
    Deferred income taxes                                               (3,528)      2,186
    Depreciation and amortization                                        5,681       3,916
    Inventory reserves                                                     196         602
    Allowances against accounts receivable                               1,601      (4,492)
    Stock option activity                                                  397       2,961
    Gain on sale of property                                            (2,812)          -
    Other                                                                   77           -

  Changes in assets and liabilities:
    Increase in accounts receivable                                    (22,472)    (39,338)
    Increase in inventories                                             (7,196)     (6,587)
    Increase in prepaid expenses and other assets                       (1,514)     (1,024)
    Increase in accounts payable                                         6,755       8,017
    Increase in payables due to distribution agreement partners          6,256       2,278
    (Decrease) increase in accrued expenses and other liabilities       (7,833)      3,504
    Increase in income taxes payable                                    15,437      25,988
                                                                        ------      ------
      Net cash provided by operating activities                         51,111      43,590
                                                                        ------      ------

Cash flows from investing activities:
  Capital expenditures                                                 (11,243)    (11,727)
  Acquisition of Kali Laboratories, Inc., net of cash acquired        (138,366)          -
  Acquisition of available-for-sale securities                        (252,871)          -
  Proceeds from sale of available-for-sale securities                  248,650           -
  Proceeds from sale of fixed assets                                     4,980           -
                                                                         -----      ------
      Net cash used in investing activities                           (148,850)    (11,727)
                                                                       --------     ------

Cash flows from financing activities:
  Proceeds from issuances of common stock                                6,122      11,212
  Repurchases of common stock                                          (20,077)          -
  Issuance of debt                                                         399           -
  Principal payments under long-term debt and other borrowings            (166)     (1,073)
                                                                           ---       -----
      Net cash (used in) provided by financing activities              (13,722)     10,139
                                                                        ------      ------

Net (decrease) increase in cash and cash equivalents                  (111,461)     42,002
Cash and cash equivalents at beginning of period                       162,549      65,121
                                                                       -------      ------
Cash and cash equivalents at end of period                             $51,088    $107,123
                                                                        ======     =======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
  Taxes                                                                $26,492      $1,583
                                                                        ======       =====
  Interest                                                              $2,962         $58
                                                                         =====          ==

Non-cash transactions:
  Tax benefit from exercise of stock options                            $2,767      $5,940
                                                                         =====       =====
  Issuance of warrants                                                  $2,530          $-
                                                                         =====
  Decrease in fair value of available-for-sale securities                $(815)         $-
    and investments                                                        ===           =

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

                                              4
</TABLE>
<PAGE>

                       PAR PHARMACEUTICAL COMPANIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JULY 4, 2004
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)



     Par  Pharmaceutical  Companies,  Inc.  (the  "Company"  or "PRX")  operates
primarily through its wholly owned subsidiary, Par Pharmaceutical, Inc. ("Par"),
in  one  business   segment,   the  manufacture  and   distribution  of  generic
pharmaceuticals,  principally  in the United  States.  In addition,  the Company
develops  and  manufactures,  in  small  quantities,  complex  synthetic  active
pharmaceutical  ingredients  through  its  wholly  owned  subsidiary,   FineTech
Laboratories  Ltd.  ("FineTech"),  based in Haifa,  Israel,  and sells a limited
number  of  mature  brand  name  drugs  through  an  agreement  between  Par and
Bristol-Myers  Squibb Company ("BMS").  Marketed products are principally in the
solid oral dosage form (tablet,  caplet and two-piece hard-shell  capsule).  The
Company also  distributes  one product in the semi-solid form of a cream and one
product in oral  suspension  form.  On June 9, 2004,  the Company  acquired Kali
Laboratories,  Inc. ("Kali"), a generic pharmaceutical  research and development
company  located in  Somerset,  New Jersey,  for  $140,430 in cash and $2,530 in
warrants.  Under the terms of the  agreement,  the Company  purchased all of the
capital  stock of Kali.  The  acquisition  did not require the approval of PRX's
stockholders. The transaction will be accounted for using the purchase method.

     On  May  26,  2004,  the  Company  changed  its  name  from  Pharmaceutical
Resources,   Inc.  to  Par  Pharmaceutical   Companies,  Inc.  by  amending  its
Certificate  of  Incorporation,  following  approval  of the name  change by the
Company's  stockholders  at the Company's  annual  stockholders  meeting on that
date.

NOTE 1 - BASIS OF PREPARATION:

     The accompanying  consolidated financial statements at July 4, 2004 and for
the six-month and  three-month  periods ended July 4, 2004 and June 29, 2003 are
unaudited; in the opinion of the Company's management,  however, such statements
include all adjustments (consisting only of normal recurring accruals) necessary
to present fairly the information  presented therein.  The consolidated  balance
sheet at December 31, 2003 was derived from the Company's  audited  consolidated
financial statements at such date.

     Pursuant  to  accounting   requirements  of  the  Securities  and  Exchange
Commission (the "Commission")  applicable to quarterly reports on Form 10-Q, the
accompanying  consolidated  financial  statements and these notes do not include
all  disclosures  required by accounting  principles  generally  accepted in the
United States for audited financial  statements.  Accordingly,  these statements
should be read in conjunction with the Company's most recent annual consolidated
financial statements.

     Results of operations for interim periods are not necessarily indicative of
those to be achieved for full fiscal years.  Certain  items in the  consolidated
financial  statements for the prior period have been  reclassified to conform to
the current period's financial statement presentation.

NOTE 2 - STOCK-BASED COMPENSATION:

     The Company accounts for stock-based employee compensation  arrangements in
accordance  with the provisions of Accounting  Principles  Board ("APB") Opinion
No. 25,  "Accounting  for Stock Issued to Employees"  ("APB  Opinion  25"),  and
complies with the  disclosure  provisions  of Statement of Financial  Accounting
Standards  ("SFAS") No. 123,  "Accounting for Stock-Based  Compensation"  ("SFAS
123"). Under APB Opinion 25, compensation expense is based on any difference, as
of the date of a stock  option  grant,  between the fair value of the  Company's
common stock and the option's per share exercise price.

     In December 2002, the Financial  Accounting Standards Board ("FASB") issued
SFAS  No.  148,  "Accounting  for  Stock-Based  Compensation  -  Transition  and
Disclosure - an Amendment of FASB  Statement No. 123" ("SFAS  148"),  to provide
alternative methods of transition for a voluntary change to the fair value-based
method of accounting for stock-based employee compensation.  SFAS 148 amends the
disclosure  requirements  of SFAS 123 to require  prominent  disclosure  in both
annual and  interim  financial  statements  about the method of  accounting  for
stock-based employee compensation and the effects of the method used on reported
results.

                                       5
<PAGE>

                       PAR PHARMACEUTICAL COMPANIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JULY 4, 2004
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)



     The following  table  illustrates  the effects on net income and net income
per share of common stock if the Company had applied the fair value  recognition
provisions of SFAS 123 to its stock-based employee compensation:
<TABLE>
<CAPTION>
                                                SIX MONTHS ENDED         THREE MONTHS ENDED
                                                ----------------         ------------------
                                               JULY 4,     JUNE 29,       JULY 4,    JUNE 29,
                                                2004         2003          2004        2003
                                                ----         ----          ----        ----
<S>                                           <C>         <C>            <C>         <C>
Net income, as reported                       $60,066     $45,579        $29,860     $23,146

Add: Stock-based employee compensation
  expense included in reported net income,
  net of related tax effects                        -       1,263              -       1,263

Deduct: Stock-based employee compensation
  expense determined under the fair value
  based method, net of related tax effects    (11,185)     (5,311)        (3,551)     (2,672)
                                               ------       -----          -----       -----
Pro forma net income                          $48,881     $41,531        $26,309     $21,737
                                               ======      ======         ======      ======

Net income per share of common stock:

  As reported -Basic                            $1.75       $1.38           $.87        $.70
                                                 ====        ====            ===         ===
  As reported -Diluted                          $1.70       $1.34           $.85        $.68
                                                 ====        ====            ===         ===

  Pro forma -Basic                              $1.42       $1.26           $.77        $.66
                                                 ====        ====            ===         ===
  Pro forma -Diluted                            $1.39       $1.22           $.75        $.64
                                                 ====        ====            ===         ===
</TABLE>

     As permitted  under SFAS 123, the Company has elected to follow APB Opinion
25 and related interpretations in accounting for stock-based compensation to its
employees.  Pro forma information  regarding net income is required by SFAS 123,
as amended by SFAS 148. This required  information is to be determined as if the
Company had accounted for its  stock-based  compensation  to employees under the
fair  value-based  method of SFAS 148.  The fair  value of the  options  granted
during each of the six and three-month periods has been estimated at the date of
grant using the Black-Scholes stock option pricing model, based on the following
assumptions:

                                 SIX MONTHS ENDED         THREE MONTHS ENDED
                                 ----------------         ------------------
                                JULY 4,    JUNE 29,       JULY 4,     JUNE 29,
                                 2004        2003          2004         2003
                                 ----        ----          ----         ----
Risk-free interest rate           4.0%        4.0%          4.0%        4.0%
Expected term                 4.9 years    4.8 years     4.9 years    3.5 years
Expected volatility              62.1%       63.6%         61.9%       64.0%

     It is also assumed that no dividends will be paid during the entire term of
the  options.  The  weighted  average  fair  values of  options  granted  in the
six-month  periods  ended July 4, 2004 and June 29, 2003 were $33.27 and $18.42,
respectively.  The  weighted  average  fair  values of  options  granted  in the
three-month periods ended July 4, 2004 and June 29, 2003 were $24.46 and $23.51,
respectively.

NOTE 3 - AVAILABLE-FOR-SALE SECURITIES:

     At July 4, 2004 and December 31, 2003, all of the Company's  investments in
marketable  securities were classified as  available-for-sale  and, as a result,
were  reported  at fair  value.  The  following  is a summary  of the  Company's
available-for-sale securities at July 4, 2004:
<TABLE>
<CAPTION>
                                                           UNREALIZED
                                                           ----------        FAIR
                                                COST     GAIN      LOSS     VALUE
                                                ----     ----      ----     -----
<S>                                           <C>         <C>    <C>      <C>
Debt securities issued by various state
  and local municipalities and agencies       $128,900    $-     $(128)   $128,772
Securities issued by United States
  government and agencies                       70,851     -      (668)     70,183
                                                ------     -       ----     ------
Total                                         $199,751     -     $(796)   $198,955
                                               =======     =       ===     =======

                                         6
</TABLE>
<PAGE>

                       PAR PHARMACEUTICAL COMPANIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JULY 4, 2004
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)



     The following is a summary of the Company's  available-for-sale  securities
at December 31, 2003:

                                                     UNREALIZED
                                                     ----------      FAIR
                                            COST     GAIN   LOSS     VALUE
                                            ----     ----   ----     -----
Debt securities issued by various state
  and local municipalities and agencies   $185,450    $-      $-    $185,450
Securities issued by United States
  government and agencies                   10,080     -     (30)     10,050
                                            ------     -      --      ------
Total                                     $195,530     -    $(30)   $195,500
                                           =======     =      ==     =======

     All of the  securities  are  available  for  immediate  sale and have  been
classified  as  short-term.  The  following  table  summarizes  the  contractual
maturities of debt securities at July 4, 2004 and December 31, 2003:

                                 JULY 4, 2004              DECEMBER 31, 2003
                                 ------------              -----------------
                                            FAIR                        FAIR
                              COST          VALUE         COST          VALUE
                              ----          -----         ----          -----
Less than one year          $70,851        $70,183       $10,080        $10,050
Due in 1-2 years                  -              -             -              -
Due in 2-5 years             10,600         10,600             -              -
Due after 5 years           118,300        118,172       185,450        185,450
                            -------        -------       -------        -------
Total                      $199,751       $198,955      $195,530       $195,500
                            =======        =======       =======        =======

     In addition to the short-term investments described above, the Company paid
$10,000 to purchase 1,000 shares of the common stock of Advancis  Pharmaceutical
Corporation   ("Advancis"),   a  pharmaceutical  company  based  in  Germantown,
Maryland,  at $10 per share in its initial  public  offering of 6,000  shares on
October 16, 2003.  The  transaction  closed on October 22, 2003.  The  Company's
investment  represented an ownership  position of 4.4% of the outstanding common
stock  of  Advancis.  As of  July 4,  2004,  the  fair  value  of the  Company's
investment in Advancis was $7,420, based on the market value of the common stock
of Advancis at that date. To date,  the Company has recorded an unrealized  loss
on the investment of $2,580 that was charged to accumulated other  comprehensive
loss, net of taxes of $1,006, at July 4, 2004.

NOTE 4 - ACCOUNTS RECEIVABLE:
                                                 JULY 4,      DECEMBER 31,
                                                  2004            2003
                                                  ----            ----
Trade accounts receivable, net of customer
  rebates and chargebacks                       $218,344        $196,888
Other accounts receivable                          2,192           1,176
                                                   -----           -----
                                                 220,536         198,064
                                                 -------         -------
Allowances:
Doubtful accounts                                  1,847           1,756
Returns                                           13,506          13,256
Price adjustments and allowances                  26,605          25,345
                                                  ------          ------
                                                  41,958          40,357
                                                  ------          ------
Accounts receivable,
  net of allowances                             $178,578        $157,707
                                                 =======         =======

     The trade accounts  receivable  amounts presented above at July 4, 2004 and
December  31, 2003 are net of  provisions  for  customer  rebates of $18,883 and
$23,793,  and of  chargebacks  of $143,919 and $75,598,  respectively.  Customer
rebates are price  reductions  generally  given to  customers as an incentive to
increase  sales volume.  Rebates are generally  based on a customer's  volume of
purchases  made  during an  applicable  monthly,  quarterly  or  annual  period.
Chargebacks are price  adjustments  provided to wholesale  customers for product
that  they  resell  to  specific  healthcare  providers  on the  basis of prices
negotiated between the Company and the providers. The increase in the chargeback
reserve  is  primarily  attributable  to  ribavirin,   the  generic  version  of
Schering-Plough Corporation's ("Schering's") Rebetol(R), which the Company began
selling in April 2004.

                                       7
<PAGE>

                       PAR PHARMACEUTICAL COMPANIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JULY 4, 2004
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)


     The  accounts   receivable   allowances  include  provisions  for  doubtful
accounts,  returns  and price  adjustments  and  allowances.  Price  adjustments
include cash discounts,  sales promotions and shelf-stock  adjustments.  Cash or
terms  discounts  are given to customers  that pay within a specified  period of
time.  The Company may conduct  sales or  trade-show  promotions  through  which
additional  discounts may be given on a new product or certain existing products
as an added  incentive  for the  customer to purchase  the  Company's  products.
Shelf-stock  adjustments  are typically  provided to a customer when the Company
lowers its invoice pricing and provides a credit for the difference  between the
old and new invoice  prices for the  inventory  that the customer has on hand at
the time of the price reduction.

     The Company will generally offer price  protection for sales of new generic
drugs  for  which it has  market  exclusivity  periods.  Such  price  protection
accounts  for the fact that the prices of such  drugs  typically  will  decline,
sometimes  substantially,  when additional generic  manufacturers  introduce and
market a comparable  generic product  following the expiration of an exclusivity
period. Such price protection plans, which are common in the Company's industry,
generally  provide for shelf-stock  adjustments to customers with respect to the
customer's  remaining  inventory at the expiration of the exclusivity period for
the  difference  between  the  Company's  new  price  and the price at which the
Company  originally sold the product to the customer.  In addition,  the Company
may offer  price  protection  with  respect to  existing  products  for which it
anticipates significant price erosion through increases in competition.

     The Company's exclusivity period for megestrol acetate oral suspension, the
generic version of BMS's Megace(R) Oral Suspension, expired in mid-January 2002.
Two generic  competitors  have since been  granted  United  States Food and Drug
Administration  ("FDA") approval to market generic versions of megestrol acetate
oral  suspension  and have  launched  products  that compete with the  Company's
product.  In July 2004,  Par  entered  into a legal  settlement  with one of the
competitors,  Teva Pharmaceuticals USA, Inc. ("Teva USA"), pursuant to which Par
will  grant a  license  to Teva USA for a  limited  number of units and Par will
receive a royalty on Teva USA's net sales of megestrol  acetate oral  suspension
(see "Note 12 -Commitments,  Contingencies and Other Matters-Legal  Proceedings"
and "Note 13 - Subsequent Events"). Sales and gross margins on megestrol acetate
oral  suspension  continued to decline in fiscal year 2004 due to the effects of
competition;  however the  product is  expected to continue to be a  significant
contributor to the Company's  overall  results in future  periods.  Net sales of
megestrol  acetate oral  suspension  were  approximately  $18,300 for the second
quarter of 2004,  decreasing  $3,700 from  approximately  $22,000 for the second
quarter of 2003.  Megestrol acetate oral suspension net sales were approximately
$37,000 for the six-month  period ended July 4, 2004 compared to $42,600 for the
same six-month period in 2003. The Company will continue to evaluate the effects
of competition  and will record a price  protection  reserve when, if and to the
extent that it deems necessary.

     As a result of generic  competition  beginning in the first quarter of 2002
following the expiration of the Company's 180-day marketing  exclusivity period,
the sales  price  for  fluoxetine  10 mg and 20 mg  tablets  and 40 mg  capsules
substantially  declined  from the price that the Company had charged  during the
exclusivity  period.  Despite pricing declines,  fluoxetine 40 mg capsules was a
significant sales and gross margin contributor in fiscal years 2002 and 2003. In
the first  quarter  of 2004,  however,  competitive  factors  led to  additional
pricing pressure on fluoxetine 40 mg capsules,  resulting in lower net sales and
gross margins.  Net sales of fluoxetine were  approximately  $8,400 and $23,200,
respectively, for the three and six-month periods ended July 4, 2004 compared to
approximately $24,600 and $44,500,  respectively,  for the corresponding periods
of 2003.  The Company will continue to evaluate the effects of  competition  and
will record a price protection  reserve when, if and to the extent that it deems
necessary.

     In fiscal year 2003, Par obtained the marketing  rights to paroxetine,  the
generic  version of  GlaxoSmithKline's  ("GSK")  Paxil(R),  in connection with a
litigation  settlement  (the "GSK  Settlement")  between  the  Company,  GSK and
certain of its affiliates, and Pentech Pharmaceuticals,  Inc. ("Pentech").  As a
result of the GSK  Settlement,  Par and GSK entered into an agreement  (the "GSK
Supply Agreement")  pursuant to which Par began marketing  paroxetine,  supplied
and licensed  from GSK, in the  Commonwealth  of Puerto Rico in May 2003 and the
United States in September 2003. The marketing  exclusivity period in respect of
paroxetine  ended on  March 8,  2004  and two  additional  competitors  launched
competing  paroxetine  products in the second  quarter of 2004.  The  additional
competition  had an adverse  effect on the Company's  revenues and gross margins
derived from  paroxetine in the second  quarter of 2004,  which will continue in
subsequent  periods.  As a result  of the  competition,  the  Company  had price

                                       8
<PAGE>

                       PAR PHARMACEUTICAL COMPANIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JULY 4, 2004
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)




protection reserves of approximately  $5,900 for paroxetine at July 4, 2004. The
Company  will  continue to evaluate the effects of  competition  and will record
additional  price  protection  reserves when, if and to the extent that it deems
necessary.

NOTE 5 -INVENTORIES, NET:
                                                     JULY 4,     DECEMBER 31,
                                                      2004           2003
                                                      ----           ----
      Raw materials and supplies, net               $24,104        $21,551
      Work-in-process and finished goods, net        49,609         45,162
                                                     ------         ------
                                                    $73,713        $66,713
                                                     ======         ======

NOTE 6 - ACQUISITION OF KALI:

     On June 9, 2004, the Company completed its acquisition of Kali for $140,430
in cash and $2,530 in warrants.  The purchase price included forgiving a $10,000
loan  made  by the  Company  to Kali in  March  2004.  Under  the  terms  of the
agreement,  the  Company  purchased  all of the capital  stock of Kali.  With 25
products in  development,  another 14 filed and  awaiting  FDA  approval,  and a
research and development  organization of 55 employees,  the acquisition of Kali
expands the Company's research and development capabilities. Included as part of
the  Company's  purchase  of Kali  is a  lease,  with a  purchase  option,  of a
45,000-square foot manufacturing facility in Somerset, New Jersey. The Company's
results for the six months  ended July 4, 2004  include the results of Kali from
the acquisition date.

     The pro forma  adjustments  in the tables  below are based  upon  available
information  and  assumptions  that the Company  believes  are  reasonable.  The
unaudited condensed  consolidated pro forma financial  statements do not purport
to represent  what the  consolidated  results of operations of the Company would
actually  have been if the  acquisition  had  occurred on the dates  referred to
below,  nor do they purport to project the results of  operations of the Company
for any future period.

     The unaudited  condensed  consolidated  pro forma  statements of operations
data were prepared by combining the  Company's  statement of operations  for the
twelve  months ended  December 31, 2003 and for the six and three month  periods
ended July 4, 2004 and June 29, 2003 with Kali's  statements of  operations  for
the same  periods,  giving  effect to the  acquisition  as though it occurred on
January 1, 2003. The unaudited  condensed  consolidated  pro forma statements of
operations do not give effect to any  restructuring  costs or any potential cost
savings or other operating  efficiencies that could result from the acquisition,
or any  non-recurring  charges or credits resulting from the transaction such as
in-process research and development charges.

     The unaudited condensed  consolidated pro forma financial statements should
be read in conjunction with the historical  financial  statements of the Company
included in its Annual Report on Form 10-K for the year ended December 31, 2003.
<TABLE>
<CAPTION>
                                              Condensed Consolidated Pro Forma Statement of Operations Data

                                                              Six Months Ended        Three Months Ended
                                              Twelve Months   ----------------        ------------------
                                              Ended Dec. 31,   July 4,   June 29,    July 4,    June 29,
                                                 2003            2004      2003        2004       2003
                                                 ----            ----      ----        ----       ----
<S>                                            <C>            <C>        <C>         <C>        <C>
Total revenue                                  $662,695       $425,082   $223,907    $212,989   $116,700
Net income                                     $121,125        $56,990    $45,540     $27,511    $23,052

Net income per basic share of common stock        $3.62          $1.66      $1.38        $.80       $.70
                                                   ====           ====       ====         ===        ===
Net income per diluted share of common stock      $3.50          $1.62      $1.34        $.79       $.67
                                                   ====           ====       ====         ===        ===

                                                     9
</TABLE>
<PAGE>

                       PAR PHARMACEUTICAL COMPANIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JULY 4, 2004
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)



NOTE 7 - UNALLOCATED PURCHASE PRICE:

     The  estimated  fair  value of the Kali  assets  acquired  was not  readily
determinable  at July 4,  2004.  Therefore,  the net  purchase  price of Kali is
currently being  reflected on Par's balance sheet as unallocated  purchase price
of  $142,960.  A valuation  is being  performed by  independent  specialists  to
determine the fair value of Kali's research and  development  organization as of
the date of acquisition.  The Company believes that a substantial portion of the
unallocated purchase price will be valued as in-process research and development
and will be written  off in 2004 in  accordance  with  purchase  accounting  for
acquisitions.

NOTE 8 - INTANGIBLE ASSETS, NET:
                                                        JULY 4,     DECEMBER 31,
                                                          2004          2003
                                                          ----          ----
Trademark licensed from BMS                              $5,000        $5,000
BMS Asset Purchase Agreement, net of accumulated
  amortization of $3,900 and $3,064                       7,800         8,636
Product license fees, net of accumulated amortization
  of $2,449 and $1,135                                    8,356         9,170
Genpharm Distribution Agreement, net of accumulated
  amortization of $4,333 and $3,972                       6,500         6,861
Intellectual property, net of accumulated amortization
  of $1,563 and $1,202                                    5,017         5,378
Genpharm Profit Sharing Agreement, net of accumulated
  amortization of $2,313 and $1,981                         187           519
                                                            ---           ---
                                                        $32,860       $35,564
                                                         ======        ======

     The Company recorded  amortization  expense related to intangible assets of
$3,204 and  $2,457,  respectively,  for the  six-month  periods,  and $1,692 and
$1,448,  respectively,  for the three-month periods, ended July 4, 2004 and June
29, 2003.  Amortization expense related to the intangible assets currently being
amortized  is expected to total  approximately  $5,647 in 2004,  $3,773 in 2005,
$3,115 in 2006, $3,115 in 2007, $3,115 in 2008 and $5,300 thereafter. Intangible
assets not being  amortized  at July 4, 2004 and  December 31, 2003 were product
license fees of $6,999 and a trademark licensed from BMS of $5,000.

     The product license fees of $6,999 consist of payments made by Par pursuant
to  agreements  with  Breath Ltd. of the Arrow  Group  ("Breath")  and  FineTech
related to latanoprost  ophthalmic  solution 0.005%,  the generic  equivalent of
Pharmacia  Corporation's  Xalatan(R),  a glaucoma  medication.  Breath  filed an
Abbreviated New Drug Application  ("ANDA")  (currently pending with the FDA) for
latanoprost, which was developed by Breath pursuant to a joint manufacturing and
marketing  agreement  with  the  Company,  seeking  approval  to  engage  in the
commercial  manufacture,  sale and use of one  latanoprost  drug  product in the
United States. Par subsequently acquired ownership of the ANDA, which includes a
Paragraph  IV  certification  that the  patents in  connection  with  Xalatan(R)
identified in "Approved Drug Products with Therapeutic Equivalence  Evaluations"
are invalid, unenforceable and/or will not be infringed by Par's generic version
of Xalatan(R). Par believes that its ANDA is the first to be filed for this drug
with a  Paragraph  IV  certification.  As a result  of the  filing  of the ANDA,
Pharmacia Corporation,  Pharmacia AB, Pharmacia Enterprises, S.A., Pharmacia and
Upjohn  Company  (collectively,   "Pharmacia")  and  the  Trustees  of  Columbia
University in the City of New York ("Columbia"),  filed a lawsuit against Par on
December 21, 2001 in the United  States  District  Court for the District of New
Jersey,  alleging patent infringement.  In July 2004, the District Court for the
District  of New  Jersey  issued an  Opinion  and Order  dismissing  Pharmacia's
Corporation's claim of infringement on one patent; however, the Court also ruled
that two other patents  included in the  litigation are valid,  enforceable  and
infringed by Par. Par intends to appeal certain portions of the Court's decision
and if unsuccessful in that appeal,  Par will reevaluate the  recoverability  of
the product  license fees  related to  latanoprost  (see "Note 12  -Commitments,
Contingencies  and Other  Matters-Legal  Proceedings"  and "Note 13  -Subsequent
Events").

NOTE 9 - 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

                                       10

<PAGE>

                       PAR PHARMACEUTICAL COMPANIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JULY 4, 2004
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)



attributable to differences  between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Current deferred
income tax assets in both periods consisted  primarily of temporary  differences
related to accounts  receivable  reserves,  and non-current  deferred income tax
assets in both  periods  included  the tax  benefit  related to  purchased  call
options.

NOTE 10 - CHANGES IN STOCKHOLDERS' EQUITY:

     Changes  in the  Company's  common  stock and  additional  paid-in  capital
accounts during the six-month period ended July 4, 2004 were as follows:
<TABLE>
<CAPTION>
                                                                 ACCUMULATED
                                      COMMON STOCK    ADDITIONAL    OTHER        TREASURY STOCK
                                      ------------     PAID-IN   COMPREHENSIVE   --------------
                                    SHARES    AMOUNT   CAPITAL       LOSS        SHARES   AMOUNT
                                    ------    ------   -------       ----        ------   ------
<S>                                  <C>       <C>    <C>          <C>             <C> <C>
Balance, January 1, 2004             34,318    $343   $171,931     $(1,673)          -        -
  Comprehensive loss:
    Unrealized loss on marketable
    securities, net of tax                -       -          -        (815)          -        -
  Exercise of stock options             242       3      5,965           -           -        -
  Issuance of warrants                    -       -      2,530           -           -        -
  Tax benefit from exercise of stock
  options                                 -       -      2,767           -           -        -
  Employee stock purchase program         4       -        154           -           -        -
  Compensatory arrangements              45       -        397           -           -        -
  Common stock acquired for treasury      -       -          -           -         500  (20,077)
                                     ------    ----   --------       -----         ---   ------
Balance, July 4, 2004                34,609    $346   $183,744     $(2,488)        500 $(20,077)
                                     ======     ===    =======       =====         ===   ======
</TABLE>
<TABLE>
<CAPTION>
COMPREHENSIVE LOSS:
                                          SIX MONTHS ENDED          THREE MONTHS ENDED
                                          ----------------          ------------------
                                        JULY 4,     JUNE 29,       JULY 4,      JUNE 29,
                                         2004         2003          2004          2003
                                         ----         ----          ----          ----
<S>                                     <C>         <C>            <C>         <C>
Net income                              $60,066     $45,579        $29,860     $23,146
Other comprehensive loss:
Unrealized loss on
marketable securities, net of tax          (815)          -         (1,885)          -
                                            ---   ---------          -----   ---------
Comprehensive loss                      $59,251     $45,579        $27,975     $23,146
                                         ======      ======         ======      ======
</TABLE>

     In April 2004, the Company's  board of directors  (the "board")  authorized
the purchase of up to $50,000 worth of the Company's common stock. The purchases
are made,  subject to compliance with applicable  securities  laws, from time to
time in the open market or in privately  negotiated  transactions.  Common stock
acquired  through the buyback  program will be available  for general  corporate
purposes.  At July 4, 2004,  the Company had  purchased 500 shares of its common
stock for approximately  $20,077 pursuant to the buyback program.  The following
table sets forth (a) the number of shares purchased,  (b) the average price paid
per  share,  (c) the  total  number of shares  purchased  as part of a  publicly
announced  plan and (d) the  approximate  dollar value that may yet be purchased
under the plan.
<TABLE>
<CAPTION>
                                      TOTAL                         TOTAL NUMBER OF       APPROXIMATE DOLLAR
                                    NUMBER OF       AVERAGE        SHARES PURCHASED         VALUE THAT MAY
                                     SHARES        PRICE PAID    AS PART OF A PUBLICLY     YET BE PURCHASED
                                  PURCHASED (a)   PER SHARE (b)    ANNOUNCED PLAN (c)      UNDER THE PLAN (d)
                                  -------------   -------------  ---------------------    -------------------
<S>                                    <C>           <C>                <C>                    <C>
May 2, 2004 through May 29, 2004       406           $40.08             406                    $33,712
May 30, 2004 through July 4, 2004       94           $40.49              94                    $29,922
                                        --                               --
  For the three-month
  period ended July 4, 2004            500                              500
                                       ===                              ===
                                                      11
</TABLE>
<PAGE>

                       PAR PHARMACEUTICAL COMPANIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JULY 4, 2004
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)



NOTE 11 - EARNINGS PER SHARE:

     The following is a  reconciliation  of the amounts used to calculate  basic
and diluted earnings per share:
<TABLE>
<CAPTION>
                                                SIX MONTHS ENDED          THREE MONTHS ENDED
                                                ----------------          ------------------
                                              JULY 4,      JUNE 29,      JULY 4,      JUNE 29,
                                               2004          2003         2004          2003
                                               ----          ----         ----          ----
<S>                                           <C>         <C>            <C>         <C>
Net income                                    $60,066     $45,579        $29,860     $23,146

Basic:
Weighted average number of common
  shares outstanding                           34,359      33,021         34,267      33,153

Net income per share of common stock            $1.75       $1.38           $.87        $.70
                                                 ====        ====            ===         ===
Assuming dilution:
Weighted average number of common
  shares outstanding                           34,359      33,021         34,267      33,153
Effect of dilutive options                        888         932            663       1,044
                                                  ---         ---            ---       -----
Weighted average number of common
   shares outstanding                          35,247      33,953         34,930      34,197

Net income per share of common stock            $1.70       $1.34           $.85        $.68
                                                 ====        ====            ===         ===
</TABLE>

     Outstanding  options  and  warrants  of  1,270  and  110 at the  end of the
six-month periods ended July 4, 2004 and June 29, 2003, respectively,  and 1,420
and 105 at the end of the  three-month  periods  ended July 4, 2004 and June 29,
2003, respectively, were not included in the computation of diluted earnings per
share because the exercise  prices were greater than the average market price of
the common  stock  during  the  respective  periods.  In  addition,  outstanding
warrants  sold  concurrently   with  the  prior  sale  of  senior   subordinated
convertible  notes in  September  2003 were not included in the  computation  of
diluted  earnings per share as of July 4, 2004. The warrants are exercisable for
an aggregate of 2,253 shares at an exercise price of $105.20 per share.

NOTE 12 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS:

  LEGAL PROCEEDINGS:
     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 is in breach of its  contract  with  Pentech  relating  to the
supply  and  marketing  of  paroxetine.  The  Company  believes  that  it  is in
compliance with its agreement with Pentech and intends to vigorously defend this
action.

     On March 9, 2004,  the  Congress of  California  Seniors  brought an action
against GSK and the Company  concerning  the sale of  paroxetine in the State of
California. On April 28, 2004, GSK, with the consent of the Company, removed the
action from state court to federal court in California.  The Company  intends to
defend vigorously the claims set forth in the complaint.

     On  September  25,  2003,  the  Office  of  the  Attorney  General  of  the
Commonwealth  of  Massachusetts  filed a complaint in federal  district court in
Boston  against  Par and 12  other  leading  generic  pharmaceutical  companies,
alleging  principally that Par 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.  Par has  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. In addition,  on
September 25, 2003,  Par and a number of other generic and brand  pharmaceutical
companies were sued by a New York county,  which 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;  a constructive
trust and  restitution;  attorneys'  and experts' fees and costs.  This case was

                                       12
<PAGE>

                       PAR PHARMACEUTICAL COMPANIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JULY 4, 2004
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)



transferred to the District of  Massachusetts  for coordinated and  consolidated
pre-trial  proceedings.  Par and the other defendants involved in the litigation
filed a motion to dismiss  on January  29,  2004.  On August 4, 2004,  Par 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 related to participation
in its Medicaid program. Par intends to defend vigorously the claims asserted in
such  complaints.  The Company  cannot  predict with  certainty at this time the
outcome or the  effects  on the  Company of such  litigations.  Accordingly,  no
assurance can be given that such litigations or any other similar  litigation by
other states or jurisdictions,  if instituted,  will not have a material adverse
effect on the Company's financial condition, results of operations, prospects or
business.

     In October 2003, Apotex Pharmaceutical Healthcare,  Inc. ("Apotex") filed a
complaint  against  Par in the  United  States  District  Court for the  Eastern
District of  Pennsylvania,  alleging  violations of state and federal  antitrust
laws as a  result  of the  Company's  settlement  with  GSK  and the GSK  Supply
Agreement.  Par filed a motion to dismiss the action in its entirety in December
2003 and a briefing on that motion was  completed in April 2004.  Par intends to
defend vigorously this action, and may assert  counterclaims  against Apotex and
claims against third parties.

     In August 2003, Teva USA filed a lawsuit against the Company and Par in the
United States  District Court for the District of Delaware after having received
approval  from the FDA to launch a generic  version  of BMS's  Megace(R),  which
generic product  competes with the Company's  megestrol  acetate oral suspension
product. In the lawsuit,  Teva USA sought a declaration that its product has not
infringed and will not infringe any of Par's four patents  relating to megestrol
acetate oral  suspension.  On August 22, 2003, Par filed a counterclaim  against
Teva USA  alleging  willful  infringement  of one of Par's  four  patents in the
lawsuit,  U.S. Patent No.  6,593,318 (the "`318 patent").  In July 2004, Par and
Teva USA entered  into a  settlement  of the lawsuit  (see "Note 13  -Subsequent
Events").

     On July 15,  2003,  the  Company  and Par  filed a lawsuit  against  Roxane
Laboratories,  Inc.  ("Roxane")  in the  United  States  District  Court for the
District of New Jersey.  The Company and Par alleged  that Roxane had  infringed
Par's U.S.  Patents  numbered  6,593,318  and  6,593,320  relating to  megestrol
acetate  oral   suspension.   Roxane  has  denied  these   allegations  and  has
counterclaimed for declaratory  judgments of non-infringement  and invalidity of
both patents.

     On May 28,  2003,  Asahi  Glass  Company  ("Asahi  Glass")  filed a lawsuit
against Par and several other parties in the United  States  District  Court for
the Northern District of Illinois  alleging,  among other things,  violations of
state and federal  antitrust  laws  relating to the  settlement  of GSK's patent
action against Pentech in respect of paroxetine.  Pentech had granted Par rights
under  Pentech's ANDA for paroxetine  capsules.  Pursuant to the GSK Settlement,
reached between the parties on April 18, 2003, Pentech and Par acknowledged that
the  patent  held by GSK is valid  and  enforceable  and would be  infringed  by
Pentech's  proposed capsule product and GSK agreed to allow Par to distribute in
Puerto Rico substitutable  generic paroxetine immediate release tablets supplied
and licensed from GSK for a royalty payable to GSK. In addition, Par was granted
the right under the GSK  Settlement to distribute  the drug in the United States
if another generic version fully  substitutable for Paxil(R) became available in
the United States.  Par denied any wrongdoing in connection with the Asahi Glass
antitrust  action and it filed a motion to dismiss the  complaint  on August 22,
2003.  In  October  2003,  the court  dismissed  all of the  state  and  federal
antitrust  claims  against Par.  Subsequent  to the October 2003 decision in the
District Court, the remaining state law claims were dismissed with prejudice and
Asahi  filed an appeal with the United  States  Court of Appeals for the Federal
Circuit.  Par and Asahi  entered into a  settlement  agreement on June 18, 2004,
pursuant to which Par and Pentech paid Asahi $1,100.

     In February  2003,  Abbott,  Fornier  Industrie  et Sante and  Laboratoires
Fournier  S.A.  filed a complaint in the United  States  District  Court for the
District of New Jersey  against  Par,  alleging  that Par's  generic  version of
TriCor(R)  (fenofibrate)  infringes  one or more  claims of their  patents.  The
Company had filed an ANDA for the product in October 2002. Par intends to defend
vigorously  this  lawsuit and has filed an answer and a  counterclaim,  alleging
non-infringement and patent invalidity. At this time, it is not possible for the
Company to predict the outcome of this litigation with any certainty.

                                       13
<PAGE>


                       PAR PHARMACEUTICAL COMPANIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JULY 4, 2004
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)



     On November 25, 2002, Ortho-McNeil  Pharmaceutical,  Inc.  ("Ortho-McNeil")
filed a  lawsuit  against  Kali in the  United  States  District  Court  for the
District of New Jersey. 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 hydrochloride and acetaminophen.
Par is Kali's  exclusive  marketing  partner for these tablets.  Kali has 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   has   counterclaimed   for   declaratory   judgments   of
non-infringement,  invalidity and  unenforceability of the `691 patent.  Summary
judgment papers were served on opposing  counsel on May 28, 2004;  however under
New Jersey practice the summary judgment papers will not be filed with the Court
until the briefing is complete.

     As a result of Par's  filing  of the ANDA for  latanoprost,  Pharmacia  and
Columbia  filed a lawsuit  against Par on December 21, 2001 in the United States
District  Court for the District of New Jersey,  alleging  patent  infringement.
Pharmacia and Columbia sought an injunction  enjoining approval of the Company's
ANDA and the marketing of its generic  product prior to the  expiration of their
patents.   On  February  8,  2002,  Par  answered  the  complaint  and  filed  a
counterclaim,  which sought a declaration that the  patents-in-suit are invalid,
unenforceable  and/or not infringed by Par's  products and that the extension of
the term of one of the patents was invalid.  All parties sought to recover their
respective  attorneys' fees. The trial concluded in March 2004 and in July 2004,
the District  Court for the  District of New Jersey  issued an Opinion and Order
dismissing  Pharmacia's  Corporation's  claim  of  infringement  on one  patent;
however,  the Court also ruled that two other patents included in the litigation
are valid,  enforceable  and  infringed  by Par.  Par intends to appeal  certain
portions  of the  Court's  decision.  Pursuant  to  agreements  with  Breath and
FineTech  related to latanoprost,  the Company had recorded product license fees
of $6,999,  which are included in intangible assets on its consolidated  balance
sheets. If unsuccessful in its appeal, Par will reevaluate the recoverability of
these product license fees (see "Note 13 -Subsequent Events").

     Par entered into a licensing agreement with developer Paddock  Laboratories
("Paddock")  to  market  testosterone  1%  gel,  a  generic  version  of  Unimed
Pharmaceuticals,   Inc.'s  ("Unimed")  product  Androgel(R).   The  product,  if
successfully brought to market, would be manufactured by Paddock and marketed by
Par. Paddock has filed an ANDA (which is currently pending with the FDA) for the
testosterone 1% gel product.  As a result of the filing of the ANDA,  Unimed and
Laboratories  Besins Iscovesco  ("Besins"),  co-assignees of the patent-in-suit,
filed a lawsuit  against  Paddock in the United  States  District  Court for the
Northern  District of Georgia  alleging patent  infringement on August 22, 2003.
Par has an economic  interest in the outcome of this litigation by virtue of its
licensing agreement with Paddock. Unimed and Besins are seeking an injunction to
prevent Paddock from  manufacturing  the generic product.  On November 18, 2003,
Paddock  answered  the  complaint  and  filed  a  counterclaim,  which  seeks  a
declaration that the patent-in-suit is invalid and/or not infringed by Paddock's
product.  This case is currently in discovery.  At this time, the Company is not
able to predict with any certainty the outcome of this litigation.

     The Company  and/or Par are parties to certain  other  litigation  matters,
including product liability and patent actions;  the Company believes that these
actions are  incidental  to the conduct of its business and that their  ultimate
resolution  thereof  will not have a material  adverse  effect on its  financial
condition, results of operations or liquidity. The Company intends to vigorously
defend or, in cases where the Company is plaintiff, to prosecute these actions.

  OTHER MATTERS:
     In June 2003, the Company  received notice from the U.S.  Congress that the
Committee on Energy and Commerce (the  "Committee")  had begun an  industry-wide
(brand and generic product) investigation into pharmaceutical reimbursements and
rebates under Medicaid, to which the Company has responded.  In order to conduct
the   investigation,   the  Committee   requested   certain  pricing  and  other
information,  which the Company  delivered in August  2003,  relating to certain
drugs produced by these pharmaceutical manufacturers.  Because the investigation
has only recently begun,  it is premature to speculate what action,  if any, the
federal  government  may take and what impact any such action  could have on the
Company's business, prospects or financial condition.

     L.  William  Seidman  and Joseph E. Smith were  selected  to the  Company's
board,  effective  April 15, 2004 and May 26, 2004,  respectively.  Mr.  Seidman
served as Chairman of the Federal  Deposit  Insurance  Corporation  from October
1985 to October 1991 and Chairman of the  Resolution  Trust Company from 1989 to
October  1991.  From 1982 to 1985,  he was Dean of the  College of  Business  at

                                       14
<PAGE>

                       PAR PHARMACEUTICAL COMPANIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JULY 4, 2004
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)



Arizona State University, Tempe, Arizona. For more than the past five years, Mr.
Seidman has been Chief  Commentator  for  CNBC-TV,  Publisher  of Bank  Director
magazine and an independent  consultant in the financial services industry.  Mr.
Smith  possesses  over  thirty  years  of  experience  as an  executive  in  the
pharmaceutical  industry and, prior to his retirement in 1997, served in various
leadership positions with Warner-Lambert Company since 1989.

     In June  2004,  Par  named  Shankar  Hariharan,  Ph.D.  as  executive  vice
president and chief  scientific  officer ("CSO").  Dr.  Hariharan  becomes Par's
first CSO and will be responsible for research and  development,  scientific and
regulatory  affairs and quality  assurance.  Dr. Hariharan joins Par from Forest
Laboratories,  Inc.  where he most  recently  served as senior  vice  president,
Forest Research Institute.

NOTE 13 - SUBSEQUENT EVENTS:

     The trial  related to  latanoprost  following  the  Pharmacia  and Columbia
(collectively, the "Plaintiffs") lawsuit against Par on December 21, 2001 in the
United States  District  Court for the District of New Jersey,  alleging  patent
infringement,  concluded  in March 2004 and on July 6, 2004 the Court  issued an
Opinion and Order  ordering that judgment be entered in favor of the  Plaintiffs
on their claims of infringement of U.S. Patent Nos.  4,599,353 (expires July 28,
2006)  and  5,296,504  (expires  March 22,  2011);  that the  effective  date of
approval  of Par's ANDA shall be a date which is not  earlier  than the dates of
expiration  of those  patents;  and that Par is  enjoined  from  engaging in the
commercial manufacture, use, offer to sell, or sale within the United States, or
importation  into the United States,  of any drug product covered by, or the use
of which is covered by,  those two patents.  As to the third patent  asserted by
the Plaintiffs,  U.S. Patent No. 5,422,368,  the Court dismissed the Plaintiffs'
infringements  claims  and  declared  that the  patent is  unenforceable  due to
inequitable  conduct.  The Court  further  dismissed  all  parties'  claims  for
attorneys'  fees. Both Par and the Plaintiffs have filed notices of appeal.  Par
is appealing the Court's  decision only insofar as it relates to U.S. Patent No.
5,296,504.

     In July 2004,  Par and Teva USA entered  into a  settlement  of the lawsuit
regarding  megestrol acetate oral suspension.  As part of the judgment and order
of permanent  injunction entered by the parties,  Teva USA acknowledged that the
claims of the `318 patent are valid and  enforceable  in all  respects  and that
Teva USA's product infringes the `318 patent. As part of the settlement, Par has
granted a license to Teva USA for a limited number of units, and in return,  Par
will receive a royalty on Teva USA's sales of megestrol acetate oral suspension.

     On August 5, 2004, the Company  purchased 875 shares of common stock of New
River  Pharmaceuticals  Inc. ("New River") in an initial public  offering for $8
per share.  Par's investment of $7,000  represents an ownership  position of 4.9
percent  of the  outstanding  common  stock of New River.  New  River,  based in
Radford,  Virginia, is a specialty  pharmaceutical company focused on developing
novel  pharmaceuticals that are safer and improved versions of widely-prescribed
drugs,   including   amphetamines   and  opioids.   Utilizing  its   proprietary
Carrierwave(TM)  technology,  New  River is  currently  developing  versions  of
amphetamines and opioids that are designed to provide overdose protection, abuse
resistance and less potential for addiction while providing efficacy  comparable
to the active pharmaceutical ingredients on which they are based.

                                       15
<PAGE>

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

     CERTAIN  STATEMENTS  IN  THIS  DOCUMENT  MAY  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 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, TRENDS
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 TYPICALLY BY
USE OF WORDS OR PHRASES SUCH AS "ESTIMATE," "PLANS," "PROJECTS,"  "ANTICIPATES,"
"CONTINUING,"  "ONGOING,"  "EXPECTS,"  "BELIEVES," OR SIMILAR WORDS AND PHRASES.
FACTORS  THAT MIGHT  AFFECT SUCH  FORWARD-LOOKING  STATEMENTS  SET FORTH IN THIS
DOCUMENT INCLUDE (i) INCREASED COMPETITION FROM NEW AND EXISTING COMPETITORS AND
PRICING   PRACTICES  FROM  SUCH  COMPETITORS   (ESPECIALLY  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 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 ON PRODUCTS
AND (x) GENERAL INDUSTRY AND ECONOMIC CONDITIONS. ANY FORWARD-LOOKING STATEMENTS
INCLUDED  IN THIS  DOCUMENT  ARE  MADE  ONLY AS OF THE  DATE  HEREOF,  BASED  ON
INFORMATION  AVAILABLE  TO THE COMPANY AS OF THE DATE  HEREOF,  AND,  SUBJECT TO
APPLICABLE LAW TO THE CONTRARY,  THE COMPANY ASSUMES NO OBLIGATION TO UPDATE ANY
FORWARD-LOOKING STATEMENTS.

     THE FINANCIAL DATA CONTAINED IN THIS SECTION IS IN THOUSANDS.

OVERVIEW

     For the six and  three-month  periods  ended  July  4,  2004,  the  Company
increased  total revenues and earnings over the  corresponding  periods of 2003;
however, due to competition involving certain key products, including paroxetine
tablets,  fluoxetine 40 mg capsules and megestrol  acetate oral suspension,  and
lower than expected sales of ribavirin,  the Company could not match its results
for the third and  fourth  quarters  of 2003.  Net  sales of the  Company's  top
selling  product,  paroxetine,  which the  Company  began  selling in the United
States through a distribution  agreement  with GSK in September  2003,  began to
receive pricing  pressure in the second quarter 2004, as additional  competition
entered the market  following the  marketing  exclusivity  period.  In addition,
several  market  factors  contributed  to  a  less  than  successful  launch  of
ribavirin,  which the  Company had  anticipated  replacing a portion of the lost
revenues from  competition on other products in fiscal year 2004. The Company is
making an effort to introduce  new products  during the remainder of fiscal year
2004 and  beyond  to  offset  sales and gross  margin  declines  resulting  from
competition involving certain of its significant products.  The Company seeks to
reduce its dependence on its top selling products, by adding additional products
through  its  internal  development  program,  new  and  existing   distribution
agreements or acquisitions of complementary products or businesses.

     Net sales and gross margin  derived from  generic  pharmaceutical  products
often follow a pattern based on regulatory and competitive  factors  believed by
management to be unique to the generic pharmaceutical industry. As the patent(s)
for a brand name product and the related  exclusivity period expires,  the first
generic  manufacturer to receive regulatory approval for a generic equivalent of
the product is often able to capture a substantial share of the market. However,
as other  generic  manufacturers  receive  regulatory  approvals  for  competing
products,  the market  share,  and the price,  of that product,  will  typically
decline, 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.  A large portion of the Company's  historical revenues has been
derived from the sales of generic drugs during the 180-day marketing exclusivity
period and from the sale of generic products where there is limited competition.

     In April 2004, the Company's marketing partner, Three Rivers Pharmaceutical
LLC ("Three Rivers"),  received final approval from the FDA for ribavirin 200 mg
capsules, the generic version of Schering's  Rebetol(R),  which is indicated for
the treatment of chronic hepatitis.  Three Rivers was awarded 180 days of shared
marketing exclusivity, commencing at launch, for being the first to file an ANDA
containing a Paragraph IV  certification.  Under the terms of its agreement with
Three Rivers, Par has exclusive marketing rights to sell Three Rivers' ribavirin
product,  which Par launched in early April 2004. In addition to the  competitor
with shared exclusivity, Warrick Pharmaceuticals, a subsidiary of Schering, also

                                       16
<PAGE>

launched a generic  ribavirin  product in the United  States in April 2004. As a
result of launching the product,  Schering will not receive a royalty from Three
Rivers on net sales of Three  Rivers' and Par's  generic  ribavirin.  Due to the
additional  competition,  the pricing  pressure on  ribavirin at launch was more
substantial  than the  Company had  previously  anticipated.  Additionally,  the
market size for Rebetol has  declined  due to the success of  Copegus(R),  a new
product introduced by Hoffman La-Roche Inc. in 2003, which has taken significant
market share from Rebetol(R).

     In fiscal year 2003,  Par obtained the  marketing  rights to  paroxetine in
connection with the GSK Settlement.  As a result of the GSK Settlement,  Par and
GSK entered into the GSK Supply Agreement, pursuant to which Par began marketing
paroxetine,  supplied and licensed  from GSK, in the United  States in September
2003  and the  Commonwealth  of  Puerto  Rico in May  2003.  The GSK  Settlement
provides that the Company's right to distribute paroxetine will be suspended if,
at any time, there is not another generic version fully  substitutable for Paxil
available  for purchase in the United  States.  On  September  8, 2003,  another
generic drug manufacturer,  Apotex,  launched a generic version of Paxil(R).  In
April 2002, GSK launched a  longer-lasting,  newly patented version of the drug,
Paxil CR(R).  The Company expects Paxil CR(R)'s market share to continue to grow
in fiscal year 2004, which may cause the total market for paroxetine  tablets to
decrease.  The marketing  exclusivity  period in respect of paroxetine  ended on
March 8,  2004 and two  additional  competitors  launched  competing  paroxetine
products  in the  second  quarter of 2004.  The  additional  competition  had an
adverse  effect  on the  Company's  revenues  and  gross  margins  derived  from
paroxetine  in the second  quarter of 2004,  which will  continue in  subsequent
periods.

     The Company's exclusivity period for megestrol acetate oral suspension, the
generic version of BMS's Megace(R) Oral Suspension, expired in mid-January 2002.
Two generic  competitors  have since been granted FDA approval to market generic
versions of megestrol  acetate oral  suspension and have launched  products that
compete  with the  Company's  product.  In July 2004,  Par entered  into a legal
settlement  with one of the  competitors,  Teva USA,  pursuant to which Par will
grant a license to Teva USA for a limited number of units and Par will receive a
royalty on Teva USA's net sales of megestrol acetate oral suspension.  Sales and
gross  margins on  megestrol  acetate  oral  suspension  continued to decline in
fiscal  year 2004 due to the  effects of  competition;  however  the  product is
expected to continue to be a significant  contributor  to the Company's  overall
results in future periods.  Net sales of megestrol  acetate oral suspension were
approximately  $18,300 for the second  quarter of 2004,  decreasing  $3,700 from
approximately  $22,000 for the second  quarter of 2003.  Megestrol  acetate oral
suspension net sales were  approximately  $37,000 for the six-month period ended
July 4, 2004 compared to $42,600 for the same six-month period in 2003.

     As a result of generic  competition  beginning in the first quarter of 2002
following the expiration of the Company's 180-day marketing  exclusivity period,
the sales prices for  fluoxetine  10 mg and 20 mg tablets and 40 mg capsules had
substantially  declined from the prices that the Company had charged  during the
exclusivity  period.  Despite pricing declines,  fluoxetine 40 mg capsules was a
significant sales and gross margin contributor in fiscal years 2002 and 2003. In
the first  quarter  of 2004,  however,  competitive  factors  led to  additional
pricing pressure on fluoxetine 40 mg capsules,  resulting in lower net sales and
gross margins.  Net sales of fluoxetine were  approximately  $8,400 and $23,200,
respectively, for the three and six-month periods ended July 4, 2004 compared to
approximately $24,600 and $44,500,  respectively,  for the corresponding periods
of 2003.

     Critical  to  the  growth  of  the  Company  is  the  introduction  of  new
manufactured   and   distributed   products  at  selling  prices  that  generate
significant gross margins. The Company, through its internal development program
and  strategic  alliances  and  relationships,  is committed to  developing  new
products  that have limited  competition  and longer  product  life  cycles.  In
addition to expected new product  introductions as part of its various strategic
alliances   and   relationships,   the  Company  plans  to  continue  to  invest
significantly  in its internal  research and  development  efforts while, at the
same  time,  seeking  additional  products  for sale  through  new and  existing
distribution   agreements  or   acquisitions  of   complementary   products  and
businesses,   additional   first-to-file   opportunities,   selective   vertical
integration with raw material suppliers and unique dosage forms to differentiate
its products in the marketplace.

     In addition to its own product development program, the Company has several
strategic alliances through which it co-develops and distributes products. These
strategic  alliances  afford the Company many advantages,  including  additional
resources  for  increased   activity,   expertise  for  dissimilar  products  or
technologies,  and a  sharing  of  both  the  costs  and  risks  of new  product
development.  As a result of its internal program,  including the integration of
Kali,  and these  strategic  alliances,  the  Company's  pipeline  of  potential
products  includes  38 ANDAs  (five of which  have been  tentatively  approved),
pending with, and awaiting approval from, the FDA.  The Kali ANDAs include those

                                       17
<PAGE>

for  potential  products  that  would be  marketed  by other  companies  through
licensing  agreements  entered into before the  Company's  acquisition  of Kali,
where the Company would be due royalty income.  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,  without  having to split any profits  with its  strategic
partners,   contribute   higher  gross  margins  than  products   covered  under
distribution  agreements.  The  Company is engaged  in  efforts,  subject to FDA
approval and other factors,  to introduce new products  through its research and
development  efforts and  distribution  and  development  agreements  with third
parties.

     In June 2004, the Company  acquired Kali for $140,430 in cash and $2,530 in
warrants.  Under the terms of the  agreement,  the Company  purchased all of the
capital stock of Kali.  The Company  believes its  acquisition of Kali fits into
its business plan by expanding  its research and  development  capabilities  and
increasing the size of its product  portfolio.  The acquisition also diversifies
the Company's  development  pipeline and provides four additional  first-to-file
product  opportunities,  enhancing the prospects for sustained long-term growth.
Kali's  operation  includes  25 products  in  development,  another 14 filed and
awaiting  FDA  approval,  and a  research  and  development  organization  of 55
employees. Kali's 14 ANDAs include three potential products the Company plans to
market and other  potential  products from which the Company will be due royalty
income,  if  successfully  launched  by third  parties.  Included as part of the
Company's   purchase  of  Kali  is  a  lease,  with  a  purchase  option,  of  a
45,000-square foot manufacturing facility in Somerset, New Jersey.

     In June 2004, the Company submitted its first New Drug Application  ("NDA")
for a next-generation  megestrol acetate oral suspension product. If cleared for
marketing, the product will utilize the Megace(R) brand name, which Par licensed
from BMS. In addition,  a second  505(b)(2)  NDA  submission is planned for 2005
through  Advancis.  The Company has an  agreement  with  Advancis to develop and
market  a low  dose  pulsatile  form of the  antibiotic  amoxicillin,  utilizing
Advancis'  proprietary   PULSYS(TM)  technology.   If  successfully   developed,
amoxicillin   PULSYS(TM)  would  be  a  once-daily  version  of  the  antibiotic
amoxicillin  that is  administered  for  fewer  days with  improved  therapeutic
effect.

RESULTS OF OPERATIONS

GENERAL

     The Company's net income of $60,066 for the six-month  period ended July 4,
2004 increased  $14,487,  from $45,579,  for the six-month period ended June 29,
2003.  Total  revenues  of $424,298 in the  six-month  period of 2004  increased
$202,025,  or 91%, from $222,273 in the first six months of 2003,  primarily due
to additional net sales of new products.  The revenue growth  resulted in higher
gross margin dollars,  which increased to $143,669, or 34% of total revenues, in
the  most  recent  period,  from  $116,273,  or 52% of  total  revenues,  in the
corresponding  period of 2003.  Research  and  development  spending  in 2004 of
$16,662  increased 50% from $11,120 in the prior year and the Company expects to
continue to  significantly  increase its research and development  spending over
the remainder of 2004.  Selling,  general and administrative  costs were $30,736
compared  to $30,105 in the  corresponding  six-month  period of 2003.  Selling,
general and administrative costs in 2004 are net of a $2,812 gain on the sale of
the Company's  facility in Congers,  New York and 2003 costs include a charge of
$3,635 in the second  quarter of 2003  related to a  retirement  package for the
Company's former chairman,  president and chief executive  officer.  Included in
the six-month  operating expenses was net settlement income of $2,846,  recorded
in the second quarter of 2004, resulting primarily from the settlement of claims
against Akzo Nobel NV and Organon USA Inc. relating to anticompetitive practices
that delayed the availability of mirtazapine, a generic version of Remeron(R).

     Net  income  for the  three-month  period  ended  July 4, 2004 was  $29,860
compared to $23,146 for the  corresponding  period of the prior year  reflecting
both revenue and gross margin  increases,  primarily  from new products.  Second
quarter  2004  revenues  and gross  margin of $212,531 and $73,117 (34% of total
revenues), respectively,  improved over the prior year's second quarter revenues
and gross margin of $115,861 and $60,970 (53% of total  revenues).  Research and
development  spending of $10,184 in the second  quarter of 2004  increased  119%
from  $4,651 in the prior year,  primarily  due to a payment to Advancis to fund
the development of a potential new product.  Selling, general and administrative
costs were  $16,481 in the second  quarter of 2004  compared to  $18,215,  which
included a charge for a  retirement  package,  in the  corresponding  quarter of
2003.

     Included in the second quarter 2004 gross margin is income of $6,200, which
reflects a change in accounting  estimate used in the  calculation of the profit
split due to  Pentech  on  paroxetine.  The change in  accounting  estimate  has

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<PAGE>

effectively  reduced payables due under Par's agreement with Pentech relating to
the supply and  marketing  of  paroxetine.  The  change in  accounting  estimate
follows  Pentech's  filing of an action against Par during the second quarter of
2004. Par believes that it is in compliance  with its agreement with Pentech and
intends to vigorously defend this action.

     Sales and gross margins of the Company's products are principally dependent
upon (i) the pricing  practices  of  competitors  and any  removal of  competing
products  from  the  market,   (ii)  the  introduction  of  other  generic  drug
manufacturers'  products in direct  competition  with the Company's  significant
products,  (iii) the ability of generic  competitors to quickly enter the market
after  patent or  exclusivity  period  expirations,  diminishing  the amount and
duration of  significant  profits to the Company from any one product,  (iv) the
continuation of existing  distribution  agreements,  (v) the introduction of new
distributed products,  (vi) the consolidation among distribution outlets through
mergers,  acquisitions and the formation of buying groups, (vii) the willingness
of generic drug customers,  including wholesale and retail customers,  to switch
among  generic  pharmaceutical  manufacturers,  (viii) the approval of ANDAs and
introduction  of new  manufactured  products,  (ix) the  granting  of  potential
marketing  exclusivity  periods,  (x) the extent of market  penetration  for the
existing product line and (xi) the level and amount of customer service.

REVENUES

     Total  revenues for the six-month  period ended July 4, 2004 were $424,298,
increasing  $202,025,  or 91%, from revenues of $222,273 for the same  six-month
period of 2003,  primarily due to additional sales from paroxetine and other new
products. Net sales of paroxetine,  which the Company launched in September 2003
in the United  States and is sold  through  the GSK  Supply  Agreement,  totaled
approximately $181,900 in 2004.  Additionally,  net sales of other new products,
including glyburide and metformin hydrochloride  (Glucovance(R)),  introduced in
May  2004,  metformin  ER  (Glucophage  XR(R)),  introduced  in  December  2003,
mercaptopurine   (Purinethol(R)),   introduced  in  February  2004,   ribavirin,
introduced in April 2004, and torsemide  (Demadex(R)),  introduced in the second
quarter of 2003,  contributed  to the growth of revenues  in 2004 and  partially
offset lower sales of certain  existing  products,  particularly  fluoxetine and
tizanidine  (Zanaflex(R)).  The sales growth also benefited from increased sales
of lovastatin  (Mevacor(R)).  Net sales of fluoxetine and megestrol acetate oral
suspension were approximately  $23,200 and $37,000,  respectively,  for the most
recent six-month period, decreasing $21,300 and $5,600,  respectively,  compared
to the first  six-months of the prior year. The Company's  other product related
revenues  in 2004 of $2,199,  generated  from a profit  sharing  agreement  with
Genpharm  related to omeprazole and royalties  received on Three Rivers sales of
ribavirin,  decreased $10,589 from $12,788 in the corresponding  period of 2003.
Net sales of distributed products,  which consist of products manufactured under
contract and licensed products, were approximately 79% and 54%, respectively, of
the Company's  total  revenues in the first  six-months of fiscal years 2004 and
2003.  Presently,  the  Company  is  substantially  dependent  upon  distributed
products for its overall  sales and, as the Company  continues to introduce  new
products under its distribution agreements, it expects that this dependence will
continue. Any inability by its suppliers to meet expected demand could adversely
affect the Company's future sales.

     Total revenues in the second quarter 2004 of $212,531 increased $96,670, or
83%,  from revenues in the second  quarter of 2003,  primarily due to additional
sales from paroxetine and other new products, and increased sales of lovastatin.
Second quarter 2004 net sales of paroxetine totaled approximately $77,300, while
net sales of megestrol acetate oral suspension  decreased $3,700 to $18,300 from
$22,000 in the same  period a year ago,  and net sales of  fluoxetine  decreased
$16,200 to $8,400 from  $24,600 in the second  quarter of 2004.  Second  quarter
sales of fluoxetine reflect the impact of increased generic  competition and its
corresponding effect on pricing and market share. Net sales of ribavirin,  which
was launched  during the most recent  quarter,  totaled  $12,600.  The Company's
other  product  related  revenues  of $1,471  in the  second  quarter  2004 also
decreased  from  $7,060  in the  corresponding  period  of  2003.  Net  sales of
distributed  products  were  approximately  78% and  52%,  respectively,  of the
Company's total revenues in the second quarter of fiscal years 2004 and 2003.

     Pursuant to an agreement with Genpharm,  the Company  receives a portion of
the  profits,  as  defined  in  the  agreement,  generated  from  Kremers  Urban
Development Co.'s ("KUDCo"), a subsidiary of Schwarz Pharma AG of Germany, sales
of omeprazole,  the generic version of Astra Zeneca's Prilosec(R).  In the third
quarter of 2003, two generic  competitors began selling forms of omeprazole that
also compete with the prescription form of Prilosec(R),  significantly  reducing
the Company's share of profits related to omeprazole from approximately  $12,800
for the first six months of fiscal  year 2003 to $2,900 for the last  six-months

                                       19
<PAGE>

of 2003. The Company expects that the impact of this  competition  will continue
to have an adverse effect on its omeprazole revenues in future periods.

GROSS MARGIN

     The  Company's  gross margin of $143,669  (34% of total  revenues)  for the
first  six-month  period of 2004  increased  $27,396 from $116,273 (52% of total
revenues) for the same period a year ago. The gross margin  dollar  increase was
achieved primarily as a result of contributions  from sales of new products.  In
accordance  with  the  GSK  Settlement  and the  Pentech  Supply  and  Marketing
Agreement, Par pays profit splits to GSK and Pentech on sales of paroxetine.  In
addition,  Par pays profit  splits on glyburide  and  metformin  HCl tablets and
metformin  HCl  extended-release  tablets  pursuant to  agreements  with BMS and
Genpharm Inc. of Toronto, Canada. As a result of these agreements, the Company's
gross  margin as a  percentage  of its total  revenues  declined as net sales of
these products  after the  allocation of profit splits  yielded a  significantly
lower gross  margin  percentage  than the  Company's  average  gross margin as a
percentage of total revenues of its other products in the  corresponding  period
of 2003.  In addition,  Par's gross  margin was also  impacted by the decline in
royalty revenue from omeprazole.

     The gross margin of $73,117 (34% of total  revenues) in the second  quarter
of 2004  increased  $12,147 from $60,970 (53% of total  revenues) for the second
quarter of 2003.  The gross margin dollar  increase was achieved  primarily as a
result of  contributions  from sales of new products,  particularly  paroxetine,
partially  offsetting  increased  competition  on certain of the  Company's  key
products.  The gross  margin in the second  quarter of 2004  included  income of
$6,200 related to a change in accounting estimate used in the calculation of the
profit share due to Pentech on paroxetine.

     As discussed above, the Company  experienced  lower sales and gross margins
for  fluoxetine  and  megestrol  acetate oral  suspension in each of the periods
reported above. The Company's gross margin contribution from paroxetine has also
declined due to additional  manufacturers  introducing and marketing  comparable
generic  products.  Despite  existing  market  conditions and the possibility of
additional  competition on these  products,  the Company  anticipates  all three
products will remain  significant  contributors  to its overall  performance  in
fiscal year 2004.

     Inventory  write-offs  of $5,036 and $3,056,  respectively,  in the six and
three-month  periods ended July 4, 2004,  increased  from $1,317 and $905 in the
corresponding  periods of 2003.  The inventory  write-offs,  taken in the normal
course of business,  were related primarily to the disposal of finished products
due to short shelf lives and work-in-process inventory not meeting the Company's
quality  control  standards.  The  increase  write-offs  in each of the  current
periods  included  the  write-off of  inventory  for a product  whose launch was
delayed,  as well as normally  occurring  write-offs  resulting  from  increased
production  required  to meet higher  sales and  inventory  levels.  The Company
maintains  inventory  levels that it believes  are  appropriate  to optimize its
customer service.

OPERATING EXPENSES

  RESEARCH AND DEVELOPMENT
     The  Company's  research  and  development  expenses  of  $16,662  for  the
six-month  period  ended  July  4,  2004  increased  $5,542,  or 50%,  from  the
comparable  period  of  the  prior  fiscal  year.  The  increase  was  primarily
attributable to a payment to Advancis to fund the development of a potential new
product  and higher  biostudy  costs.  The  Company  expects  its  research  and
development  spending to increase  substantially  over the last two  quarters of
2004 with the addition of Kali and other  planned  expenditures.  As  previously
discussed,  the  Company  acquired  Kali in June 2004.  The  Company  expects to
utilize Kali to develop products  principally for its own new product  pipeline.
Although there can be no such assurance,  the Company believes that its research
and  development  expenses  could  approach  $50,000  for fiscal  year 2004.  In
addition  to the  $50,000,  Par  believes  that  a  substantial  portion  of the
unallocated  purchase  price for Kali will be valued as in-process  research and
development  and  will  be  written  off in  2004 in  accordance  with  purchase
accounting for acquisitions.

     Research  and  development  expenses  for the  second  quarter of 2004 were
$10,184,  increasing $5,533 from $4,651 for the  corresponding  quarter of 2003.
The increase was primarily due to higher costs for outside development  projects
and biostudies.

                                       20
<PAGE>

     In addition to ANDAs filed by Kali for potential  products that are subject
to  licensing  agreements  with other  companies  entered  into  before the Kali
acquisition,  the Company  currently  has 11 ANDAs for  potential  products (two
tentatively  approved)  pending with,  and awaiting  approval from, the FDA as a
result of its own product development program. The Company expects that at least
eight of the potential  products in active  development  will be the subjects of
biostudies during the remainder of fiscal year 2004.

     The Company and Genpharm have entered into a  distribution  agreement  (the
"Genpharm 11 Product  Agreement"),  dated April 2002, pursuant to which Genpharm
is developing  products and submitting the  corresponding  ANDAs to the FDA and,
subsequently, has agreed to manufacture the potential products covered under the
Agreement. Par is to serve as the exclusive U.S. marketer and distributor of the
products,  pay a share of the costs,  including  development  and legal expenses
incurred to obtain final regulatory  approval,  and pay Genpharm a percentage of
the gross profits on all sales of products covered by this Agreement. Currently,
there are three ANDAs for potential  products covered by the Genpharm 11 Product
Agreement  pending with, and awaiting approval from, the FDA. Under the Genpharm
11 Product  Agreement,  the  Company is  currently  marketing  one  product  and
receiving royalties on another product marketed by an unaffiliated company.

     The Company and Genpharm  have also entered into a  distribution  agreement
(the  "Genpharm  Distribution  Agreement"),  dated  March  25,  1998.  Under the
Genpharm  Distribution  Agreement,  Genpharm  pays the research and  development
costs  associated  with  the  products  covered  by  the  Genpharm  Distribution
Agreement.  Currently,  there are  eight  ANDAs for  potential  products  (three
tentatively  approved) that are covered by the Genpharm  Distribution  Agreement
pending  with,  and awaiting  approval  from,  the FDA. The Company is currently
marketing 20 products under the Genpharm Distribution Agreement.

     Genpharm and the Company  share the costs of  developing  products  covered
under an agreement (the "Genpharm Additional Product Agreement"), dated November
27, 2000.  Currently,  there is one ANDA for a potential  product covered by the
Genpharm  Additional Product Agreement pending with, and awaiting approval from,
the FDA. The Company is  currently  marketing  two  products  under the Genpharm
Additional Product Agreement.

  SELLING, GENERAL AND ADMINISTRATIVE
     Total  selling,  general and  administrative  expenses were $30,736 for the
first  six-months  of 2004,  which  included a gain of $2,812 on the sale of the
Company's  facility in  Congers,  New York.  In the prior  year,  total costs of
$30,105  included a charge of $3,635  related to a  retirement  package  for the
Company's  former  chairman,  president and chief executive  officer.  Excluding
these  items,  current  year costs of $33,548 (8% of total  revenues)  increased
$7,078, or 27%, from $26,470 (12% of total revenues) in the corresponding period
of last  year.  The  increase  in 2004  was  primarily  attributable  to  higher
personnel costs of $2,166,  including those for information systems assessments,
marketing  costs of  $2,509,  legal  fees of $1,824,  and,  to a lesser  extent,
product  liability  insurance of $732 and facility  costs of $617.  Distribution
costs  include those  related to shipping  product to the  Company's  customers,
primarily  through  the use of a  common  carrier  or an  external  distribution
service. Shipping costs of $1,251 in the current six-month period was comparable
to $1,349 in the corresponding  period of the prior year. Although overall sales
volumes increased in fiscal year 2004,  shipping costs remained at approximately
the same level as fiscal  year 2003 due to a reduced  amount of  reliance  on an
external distribution service. The Company anticipates it will continue to incur
a high level of legal  expenses  related to the costs of litigation  relating to
potential  new  product  introductions  (see  "Notes to  Consolidated  Financial
Statements-Note   12-Commitments,    Contingencies   and   Other   Matters-Legal
Proceedings").  Although there can be no such  assurance,  selling,  general and
administrative  costs in fiscal year 2004 are expected to increase by 15% to 20%
from fiscal year 2003 primarily due to increased legal fees, personnel costs and
marketing activities.

     Selling, general and administrative costs of $16,481 (8% of total revenues)
for the second  quarter of 2004 increased  $1,901,  or 13%, from $14,580 (13% of
total revenues),  excluding a charge of $3,635 related to a retirement  package,
for the corresponding quarter of last year. The increased expenses in the second
quarter 2004  consisted of higher  costs for  personnel of $1,295,  marketing of
$836 and legal fees of $490.  Shipping  costs of $617 in the second quarter 2004
were lower than costs of $742 in the corresponding quarter of the prior year due
to a reduced amount of reliance on an external distribution service.

     Par owned a facility of  approximately  33,000  square feet  located on six
acres in Congers, New York (the "Congers Facility").  In March 2004, the Company
sold the Congers Facility to Ivax  Pharmaceuticals  New York, LLC for $4,980 and
recorded a gain on the sale of $2,812.

                                       21
<PAGE>

  SETTLEMENTS
     Net settlement  income of $2,846 was recorded pursuant to the settlement of
claims against Akzo Nobel NV and Organon USA Inc.,  relating to  anticompetitive
practices that delayed the availability of mirtazapine partially offset by legal
expenses  associated  with the  settlement of  litigation  with Asahi related to
paroxetine.

INTEREST EXPENSE/INCOME

     Net  interest  expense  was $573 and  $294,  respectively,  for the six and
three-month  periods ended July 4, 2004, compared to net interest income of $333
and $164 for the  corresponding  periods of 2003.  Net interest  expense in both
periods  of  the  current  year  includes  interest  payable  on  the  Company's
convertible  notes,  partially offset by interest income derived  primarily from
short-term  investments.  Net interest income in 2003 was primarily derived from
money market and other short-term investments.

INCOME TAXES

     The Company  recorded  provisions  for income taxes of $38,403 and $19,091,
respectively, and $29,758 and $15,112, respectively, for the six and three-month
periods ended July 4, 2004 and June 29, 2003,  based on the  applicable  federal
and state tax rates for those  periods  (see  "Notes to  Consolidated  Financial
Statements-Note 9-Income Taxes").

CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES

     The  Company's  critical  accounting  policies  are set forth in its Annual
Report on Form 10-K for the year  ended  December  31,  2003.  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 for the year ended December
31, 2003.

FINANCIAL CONDITION

LIQUIDITY AND CAPITAL RESOURCES

     Cash and cash  equivalents  of $51,088 at July 4, 2004  decreased  $111,461
from $162,549 at December 31, 2003, primarily due to the acquisition of Kali for
$140,430  in cash and  $2,530 in  warrants.  The  Company  had  $51,111  of cash
provided by operations,  gross proceeds of $4,980 from the sale of fixed assets,
primarily the Congers Facility, and $6,122 from the issuance of shares of Common
Stock upon the exercise of stock options.  In the six-month period ended July 4,
2004, the Company invested $11,243 in capital improvements,  primarily for Phase
II of the expansion of its  laboratories  in Spring  Valley,  New York,  and new
production  machinery.  In addition  the Company  repurchased  500 shares of its
common  stock  for  approximately  $20,077.  The  Company's  cash  balances  are
deposited  primarily  with  financial  institutions  in money  market  funds and
overnight investments.

     Working  capital,  which is current  assets minus current  liabilities,  of
$507,152 increased $47,350, from $459,802 at December 31, 2003, primarily due to
the unallocated  purchase price for Kali partially offset by the decrease in the
cash  on  hand,  and  increases  in  the  Company's  accounts   receivables  and
inventories partially offset by higher income taxes payable. The working capital
ratio,  which is calculated by dividing  current assets by current  liabilities,
was 3.74x at July 4, 2004  compared to 3.75x at December 31,  2003.  The Company
believes that its strong working capital ratio indicates the ability to meet its
ongoing and foreseeable obligations.

     In April 2004, the Company's board authorized the purchase of up to $50,000
worth of the  Company's  common  stock.  The  purchases  are  made,  subject  to
compliance with applicable securities laws, from time to time in the open market
or in  privately  negotiated  transactions.  Common stock  acquired  through the
buyback program will be available for general  corporate  purposes.  Pursuant to
the buyback program,  the Company had purchased  approximately 500 shares of its
common stock for approximately $20,077 through July 4, 2004.

     In  September  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. Net proceeds of $177,945 from the notes,
which were net of  underwriting  costs of $5,250 and the net  payment of $16,805
from the purchase of call  options and sale of  warrants,  were used to purchase

                                       22
<PAGE>

available-for-sale  securities in October 2003. Available-for-sale securities of
$198,955  at July 4, 2004 are all  available  for  immediate  sale.  The Company
intends to use its current  liquidity to support the  expansion of its business,
which included the acquisition of Kali,  increasing its research and development
activities,  entering into product license  arrangements and possibly  acquiring
other complementary businesses and products, and for general corporate purposes.

     As of July 4, 2004, the Company had payables owed to distribution agreement
partners of $94,881 related  primarily to amounts due pursuant to profit sharing
agreements,  particularly  amounts owed to GSK and Pentech on paroxetine and BMS
on glyburide and metformin  hydrochloride  and metformin ER. The Company expects
to pay these  amounts out of its  working  capital  during the third  quarter of
2004.

     The dollar values of the Company's  material  contractual  obligations  and
commercial commitments as of July 4, 2004 were as follows:
<TABLE>
<CAPTION>
                                                    AMOUNTS DUE BY PERIOD
                                                    ---------------------
                      TOTAL MONETARY    JULY-DEC. 31   2005 TO   2008 TO    2010 AND
OBLIGATION              OBLIGATION          2004        2007      2009    THEREAFTER
----------              ----------          ----        ----      ----    ----------
<S>                       <C>              <C>        <C>       <C>        <C>
Operating leases          $20,537          $1,603     $8,420    $4,991      $5,523
Convertible notes*        200,000               -          -         -     200,000
Other                         566             101        465         -           -
                              ---             ---        ---     -----     -------
Total obligations        $221,103          $1,704     $8,885    $4,991    $205,523
                          =======           =====      =====     =====     =======
</TABLE>

     *The  convertible  notes  mature on  September  30,  2010,  unless  earlier
converted or repurchased.

     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 or has  commitments  with several  non-affiliated
companies for products in various stages of development. These types of payments
or  commitments  are  generally  dependent  on a third party  achieving  certain
milestones  or the  timing of  third-party  research  and  development  or legal
expenses.  Due  to  the  uncertainty  of  the  timing  or  realization  of  such
commitments, these obligations are not included in the table above; however, the
agreements that contain such  commitments that the Company believes are material
are  described  below.  Payments made  pursuant to these  agreements  are either
capitalized or expensed according to the Company's accounting policies.

     Par and Nortec Development  Associates,  Inc. (a Glatt company) ("Nortec"),
entered into an  agreement,  dated  October 22, 2003, in which the two companies
agreed to  develop  additional  products  that are not part of the two  previous
agreements between Par and Nortec.  During the first two years of the agreement,
Par is obligated to make aggregate initial research and development  payments to
Nortec in the amount of $3,000,  of which  $1,500 was paid by Par in fiscal year
2003,  $500 was paid in June 2004, $500 is due in September 2004 and $500 is due
in January 2005. On or before October 15, 2005, Par has the option to either (i)
terminate the arrangement  with Nortec,  in which case the initial  research and
development  payments will be credited  against any  development  costs that Par
shall owe Nortec at that time or (ii) acquire all of the capital stock of Nortec
over the  subsequent  two years,  including the first fifty (50%) percent of the
capital  stock of Nortec over the third and fourth  years of the  agreement  for
$4,000,  and the remaining 50% from its owners at the end of the fourth year for
an additional  $11,000.  The parties have agreed to certain  revenue and royalty
sharing arrangements before and after Par's acquisition, if any, of Nortec.

     In June 2004,  Par entered into an agreement  with  Advancis to develop and
market a novel  formulation  of the  antibiotic  amoxicillin.  Pursuant  to this
agreement,  Par paid Advancis a $5,000 upfront license fee, which was charged to
research  and  development  expenses  in June  2004,  and Par will  fund  future
development  expenses.  Advancis will grant Par the exclusive  right to sell and
distribute  the  product  and the  co-exclusive  right to  market  the  product.
Advancis will be responsible  for the development and manufacture of the product
and the two parties will share equally in marketing  expenses and profits if the
product is successfully developed and brought to market.

     Par and Advancis also entered into the Advancis Licensing Agreement,  dated
September 4, 2003, to market the antibiotic  Clarithromycin XL. Pursuant to this
agreement,  Advancis is responsible  for the  development and manufacture of the
product, while Par will be responsible for marketing, sales and distribution. If
certain  provisions  in the agreement are met, Par has agreed to pay Advancis an
aggregate amount of up to $6,000, based on the achievement of certain milestones

                                       23
<PAGE>

contained in the  agreement.  Pursuant to the  agreement,  Par has agreed to pay
Advancis a certain percentage of the gross profits, as defined in the Agreement,
on all sales of the product if it is successfully  developed and introduced into
the market.

     Par entered into an agreement  with BMS,  dated August 6, 2003,  to license
the brand name  Megace(R)  to be used for a potential  new product  currently in
development.  The product, if successfully developed,  would be a line extension
of the Company's  megestrol acetate oral suspension  products.  Pursuant to this
agreement,  Par paid BMS $5,000 in August 2003,  which is included in intangible
assets on the Company's consolidated balance sheets at April 4, 2004. As part of
this  agreement,  Par also  provided BMS with funding of  approximately  $400 in
fiscal year 2003 to support the active  promotion  of the brand name,  which was
expensed as incurred,  and will provide an additional  $1,600 throughout 2004 to
help retain brand equity and awareness among physicians.

     In November  2002,  the Company  amended the Pentech  Supply and  Marketing
Agreement,  dated November  2001,  with Pentech to market  paroxetine  capsules.
Pursuant to the  agreement,  the Company  paid all legal  expenses up to $2,000,
which were  expensed as incurred,  to obtain final  regulatory  approval.  Legal
expenses  in excess of $2,000 were fully  credited  against  profit  payments to
Pentech.  The Company had agreed to reimburse  Pentech for costs associated with
the  project of up to $1,300 for fiscal  year  2003.  In fiscal  year 2003,  the
Company paid  Pentech  $771 of these  costs,  which were charged to research and
development  expenses as incurred.  Pursuant to this agreement,  Par and Pentech
share in net profits on Par's sales of paroxetine.

     In July 2002,  the Company and Three  Rivers  entered into the Three Rivers
Distribution  Agreement,  which was  amended  in  October  2002,  to market  and
distribute  ribavirin  200  mg  capsules,  the  generic  version  of  Schering's
Rebetol(R).  Under the terms of the agreement, Three Rivers has agreed to supply
the product and was responsible  for managing the regulatory  process and patent
litigation.  Par has the  exclusive  right to sell the  product in  non-hospital
markets and has agreed to pay Three Rivers a percentage of the gross profits (as
defined in the  agreement).  The Company  paid Three  Rivers  $1,000 in November
2002,  which was charged to research  and  development  expense,  and paid Three
Rivers an additional $500 when Par launched the product in April 2004.

     Pursuant  to the  Genpharm  11 Product  Agreement,  Genpharm  has agreed to
develop  products,  submit all  corresponding  ANDAs to the FDA and subsequently
manufacture the products covered under the agreement. Par has agreed to serve as
exclusive  U.S.  marketer and  distributor  of the products,  pay a share of the
costs,  including  development  and legal  expenses  incurred  to  obtain  final
regulatory  approval,  and pay to Genpharm a percentage of the gross profits, as
defined in the agreement,  on all sales of products covered by the agreement. In
the second  quarter of 2002, the Company paid Genpharm a  non-refundable  fee of
$2,000, which is included in intangible assets, net of accumulated amortization,
on the Company's consolidated balance sheets, for two of the products.  Pursuant
to the agreement,  the Company's share of development and legal costs related to
the other  products  has been  expensed as  incurred.  The Company  will also be
required to make an additional  non-refundable  payment of up to $414 based upon
FDA acceptance of certain filings, as described in the agreement.

     In December 2001, the Company made its first payment of a potential  equity
investment of up to $2,438 to be made over a period of time in HighRapids,  Inc.
("HighRapids"),  a Delaware corporation.  HighRapids is a software developer and
the owner of patented rights to an artificial intelligence  generator.  Pursuant
to an agreement between the Company and HighRapids,  effective December 1, 2001,
the Company,  subject to its ongoing evaluation of HighRapids'  operations,  has
agreed to purchase  units,  consisting of secured debt,  evidenced by 7% secured
promissory  notes,  up to an aggregate  principal  amount of $2,425 and up to an
aggregate  of 1,330  shares of the common  stock of  HighRapids.  HighRapids  is
utilizing  the  Company's  cash  infusion  for  working  capital  and  operating
expenses. Through July 4, 2004, the Company had invested $1,506 of its potential
investment.  Due to  HighRapids'  current  operating  losses  and the  Company's
evaluation of its short-term  prospects for profitability,  the investments were
expensed as incurred and included in other expense on the Company's consolidated
statements of operations.

     In April 2001,  Par  entered  into a  licensing  agreement  with Aveva Drug
Delivery Systems,  (formerly Elan Transdermal  Technologies,  Inc.) ("Aveva"), a
U.S. subsidiary of Nitto Denko, to market a generic clonidine  transdermal patch
(Catapres  TTS(R)).   Under  such  agreement,   Aveva  is  responsible  for  the
development  and  manufacture of the product,  while Par is responsible  for its
marketing,  sale and distribution.  Pursuant to the agreement, Par has agreed to
pay Aveva $1,000 upon FDA approval of the product and  royalties on sales of the
product.

                                       24
<PAGE>

     The Company expects to continue to fund its operations,  including research
and  development  activities,  capital  projects and its  obligations  under the
existing distribution and development  arrangements discussed herein, out of its
working  capital,  including the proceeds  from the issuance of its  convertible
notes.  The Company  anticipates  that its capital  spending in fiscal year 2004
will not exceed the level in fiscal year 2003.  Implementation  of the Company's
business plan may require  additional debt and/or equity financing and there can
be no assurance that the Company will be able to obtain any additional  required
financing when needed and on terms acceptable or favorable to it.

FINANCING

     At July 4, 2004, the Company's total outstanding  long-term debt, including
the current  portion,  was $200,566.  The amount  consisted  primarily of senior
subordinated  convertible  notes and capital leases for computer  equipment.  In
September  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 first
payment of $2,875 was made on March 29,  2004.  The notes are  convertible  into
shares of Common Stock at an initial  conversion price of $88.76 per share, only
upon the occurrence of certain  events.  The notes mature on September 30, 2010,
unless earlier  converted or  repurchased.  The Company may not redeem the notes
prior to their maturity date.

SUBSEQUENT EVENTS

     The trial  related to  latanoprost  following  the  Pharmacia  and Columbia
lawsuit against Par on December 21, 2001 in the United States District Court for
the District of New Jersey, alleging patent infringement concluded in March 2004
and on July 6, 2004 the Court issued an Opinion and Order ordering that judgment
be entered in favor of the  Plaintiffs on their claims of  infringement  of U.S.
Patent Nos.  4,599,353  (expires July 28, 2006) and 5,296,504 (expires March 22,
2011);  that the effective  date of approval of Par's ANDA shall be a date which
is not earlier than the dates of  expiration of those  patents;  and that Par is
enjoined from engaging in the  commercial  manufacture,  use,  offer to sell, or
sale within the United  States,  or importation  into the United States,  of any
drug  product  covered by, or the use of which is covered by, those two patents.
As to the third patent asserted by Plaintiffs,  U.S. Patent No.  5,422,368,  the
Court dismissed Plaintiffs' infringements claims and declared that the patent is
unenforceable  due to  inequitable  conduct.  The Court  further  dismissed  all
parties' claims for attorneys'  fees. Both Par and Plaintiffs have filed notices
of appeal.  Par is appealing the Court's  decision only insofar as it relates to
U.S. Patent No. 5,296,504.

     In  July  2004,  Par and  Teva  USA  entered  into a  settlement  regarding
megestrol  acetate  oral  suspension.  As  part of the  judgment  and  order  of
permanent  injunction  entered by the parties,  Teva USA  acknowledged  that the
claims of the `318 patent are valid and  enforceable  in all  respects  and that
Teva USA's product  infringes the `318 patent.  As part of that settlement,  Par
has granted a license to Teva USA for a limited number of units,  and in return,
Par will  receive  a royalty  on Teva  USA's  sales of  megestrol  acetate  oral
suspension.

     On August 5, 2004, the Company  purchased 875 shares of common stock of New
River  Pharmaceuticals  Inc. ("New River") in an initial public  offering for $8
per share.  Par's investment of $7,000  represents an ownership  position of 4.9
percent  of the  outstanding  common  stock of New River.  New  River,  based in
Radford,  Virginia, is a specialty  pharmaceutical company focused on developing
novel  pharmaceuticals that are safer and improved versions of widely-prescribed
drugs,   including   amphetamines   and  opioids.   Utilizing  its   proprietary
Carrierwave(TM)  technology,  New  River is  currently  developing  versions  of
amphetamines and opioids that are designed to provide overdose protection, abuse
resistance and less potential for addiction while providing efficacy  comparable
to the active pharmaceutical ingredients on which they are based.

       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 government  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
nature. Professional portfolio managers managed 100% of these available-for-sale
securities  at  July 4,  2004.  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 have  minimal  or no
interest risk due to their short-term nature.

                                       25
<PAGE>

     The following  table  summarizes  the  available-for-sale  securities  that
subject the Company to market risk at July 4, 2004 and December 31, 2003:

                                                           JULY 4,   DEC. 31,
                                                            2004       2003
                                                            ----       ----
Debt securities issued by various state and local
  municipalities and agencies                             $128,772   $185,450
Securities issued by United States government and
  agencies                                                  70,183     10,050
                                                            ------     ------
Total                                                     $198,955   $195,500
                                                           =======    =======

  AVAILABLE-FOR-SALE SECURITIES:
     The primary objectives for the Company's investment portfolio are liquidity
and safety of  principal.  Investments  are made to achieve the highest  rate of
return while  retaining  safety of principal.  The Company's  investment  policy
limits  investments to certain types of instruments  issued by institutions  and
governmental agencies with investment-grade credit ratings. A significant change
in  interest   rates  could   affect  the  market   value  of  the  $198,955  in
available-for-sale securities that have a maturity greater than one year.

     The Company is also subject to market risk in respect of its  investment in
Advancis,  which is  subject to  fluctuations  in the price of  Advancis  common
stock,  which is publicly  traded.  The Company paid  $10,000 to purchase  1,000
shares of the common stock of Advancis,  at $10 per share, in its initial public
offering of 6,000 shares on October 16, 2003. The transaction  closed on October
22, 2003.  The value of the Company's  investment in Advancis as of July 4, 2004
was $7,420.

                        ITEM 4. CONTROLS AND PROCEDURES.

     Based on an evaluation under the supervision and with the  participation of
the  Company's  management,   the  Company's  principal  executive  officer  and
principal  financial  officer  have  concluded  that  the  Company's  disclosure
controls and procedures (as defined in Rules  13a-15(e) and 15d-15(e)  under the
Securities Exchange Act of 1934, as amended, (the "Exchange Act") were effective
as of July 4, 2004 to ensure that  information  required to be  disclosed by the
Company in reports that it files or submits  under the Exchange Act is recorded,
processed,  summarized  and reported  within the time  periods  specified in the
Commission's rules and forms.

     There were no changes in the  Company's  internal  control  over  financial
reporting  identified in  management's  evaluation  during the second quarter of
fiscal 2004 that have materially affected or are reasonably likely to materially
affect the Company's internal controls over financial reporting.

                                       26
<PAGE>

                           PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.
------  -----------------

     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 is in breach of its  contract  with  Pentech  relating  to the
supply  and  marketing  of  paroxetine.  The  Company  believes  that  it  is in
compliance with its agreement with Pentech and intends to vigorously defend this
action.

     On March 9, 2004,  the  Congress of  California  Seniors  brought an action
against GSK and the Company  concerning  the sale of  paroxetine in the State of
California. On April 28, 2004, GSK, with the consent of the Company, removed the
action from state court to federal court in California.  The Company  intends to
defend vigorously the claims set forth in the complaint.

     On  September  25,  2003,  the  Office  of  the  Attorney  General  of  the
Commonwealth  of  Massachusetts  filed a complaint in federal  district court in
Boston  against  Par and 12  other  leading  generic  pharmaceutical  companies,
alleging  principally that Par 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.  Par has  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. In addition,  on
September 25, 2003,  Par and a number of other generic and brand  pharmaceutical
companies were sued by a New York county,  which 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;  a constructive
trust and  restitution;  attorneys'  and experts' fees and costs.  This case was
transferred to the District of  Massachusetts  for coordinated and  consolidated
pre-trial  proceedings.  Par and the other defendants involved in the litigation
filed a motion to dismiss  on January  29,  2004.  On August 4, 2004,  Par 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 related to participation
in its Medicaid program. Par intends to defend vigorously the claims asserted in
such  complaints.  The Company  cannot  predict with  certainty at this time the
outcome or the  effects  on the  Company of such  litigations.  Accordingly,  no
assurance can be given that such litigations or any other similar  litigation by
other states or jurisdictions,  if instituted,  will not have a material adverse
effect on the Company's financial condition, results of operations, prospects or
business.

     In October 2003,  Apotex filed a complaint against Par in the United States
District Court for the Eastern District of Pennsylvania  alleging  violations of
state and federal  antitrust laws as a result of the Company's  settlement  with
GSK and the GSK Supply  Agreement.  Par filed a motion to dismiss  the action in
its  entirety in December  2003 and a briefing on that motion was  completed  in
April  2004.  Par  intends  to defend  vigorously  this  action,  and may assert
counterclaims against Apotex and claims against third parties.

     In August 2003, Teva USA filed a lawsuit against the Company and Par in the
United States  District Court for the District of Delaware after having received
approval  from the FDA to launch a generic  version  of BMS's  Megace(R),  which
generic product  competes with the Company's  megestrol  acetate oral suspension
product. In the lawsuit,  Teva USA sought a declaration that its product has not
infringed and will not infringe any of Par's four patents  relating to megestrol
acetate oral  suspension.  On August 22, 2003, Par filed a counterclaim  against
Teva USA  alleging  willful  infringement  of one of Par's  four  patents in the
lawsuit,  the  `318  patent.  In July  2004,  Par and Teva  USA  entered  into a
settlement of the lawsuit regarding  megestrol acetate oral suspension.  As part
of the judgment and order of permanent  injunction entered by the parties,  Teva
USA acknowledged that the claims of the `318 patent are valid and enforceable in
all respects and that Teva USA's product  infringes the `318 patent.  As part of
the  settlement,  Par will grant a license  to Teva USA for a limited  number of
units, and in return, Par will receive a royalty on Teva USA's sales.

     On July 15, 2003, the Company and Par filed a lawsuit against Roxane in the
United States District Court for the District of New Jersey. The Company and Par
alleged that Roxane had  infringed  Par's U.S.  Patents  numbered  6,593,318 and
6,593,320 relating to megestrol acetate oral suspension. Roxane has denied these
allegations and has counterclaimed for declaratory judgments of non-infringement
and invalidity of both patents.

                                       27
<PAGE>

     On May 28,  2003,  Asahi  filed a lawsuit  against  Par and  several  other
parties  in the  United  States  District  Court for the  Northern  District  of
Illinois alleging, among other things, violations of state and federal antitrust
laws  relating to the  settlement  of GSK's  patent  action  against  Pentech in
respect of paroxetine.  Pentech had granted Par rights under  Pentech's ANDA for
paroxetine capsules. Pursuant to the GSK Settlement, reached between the parties
on April 18, 2003,  Pentech and Par acknowledged  that the patent held by GSK is
valid and  enforceable  and would be  infringed by  Pentech's  proposed  capsule
product and GSK agreed to allow Par to distribute  in Puerto Rico  substitutable
generic paroxetine  immediate release tablets supplied and licensed from GSK for
a royalty  payable to GSK. In addition,  Par was granted the right under the GSK
Settlement  to  distribute  the drug in the  United  States if  another  generic
version fully  substitutable for Paxil(R) became available in the United States.
Par denied any wrongdoing in connection  with the Asahi Glass  antitrust  action
and it filed a motion to dismiss the  complaint on August 22,  2003.  In October
2003, the court dismissed all of the state and federal  antitrust claims against
Par.  Subsequent  to the  October  2003  decision  in the  District  Court,  the
remaining  state law claims were  dismissed  with  prejudice  and Asahi filed an
appeal with the United States Court of Appeals for the Federal Circuit.  Par and
Asahi  entered into a settlement  agreement on June 18, 2004,  pursuant to which
Par and Pentech paid Asahi $1,100.

     In February  2003,  Abbott,  Fornier  Industrie  et Sante and  Laboratoires
Fournier  S.A.  filed a complaint in the United  States  District  Court for the
District of New Jersey  against  Par,  alleging  that Par's  generic  version of
TriCor(R)  (fenofibrate)  infringes  one or more  claims of their  patents.  The
Company had filed an ANDA for the product in October 2002. Par intends to defend
vigorously  this  lawsuit and has filed an answer and a  counterclaim,  alleging
non-infringement and patent invalidity. At this time, it is not possible for the
Company to predict the outcome of this litigation with any certainty.

     On November  25,  2002,  Ortho-McNeil  filed a lawsuit  against Kali in the
United  States  District  Court for the  District  of New  Jersey.  Ortho-McNeil
alleged  that Kali  infringed  the `691  patent by  submitting  a  Paragraph  IV
certification   to  the  FDA  for  approval  of  tablets   containing   tramadol
hydrochloride and acetaminophen.  Par is Kali's exclusive  marketing partner for
these tablets.  Kali has 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 has counterclaimed for declaratory
judgments  of  non-infringement,  invalidity  and  unenforceability  of the `691
patent. Summary judgment papers were served on opposing counsel on May 28, 2004;
however under New Jersey practice the summary  judgment papers will not be filed
with the court until the briefing is complete.

     Breath  filed an ANDA  (currently  pending  with the FDA) for  latanoprost,
which was developed by Breath  pursuant to a joint  manufacturing  and marketing
agreement  with the  Company,  seeking  approval  to  engage  in the  commercial
manufacture,  sale and use of one latanoprost drug product in the United States.
Par subsequently  acquired  ownership of the ANDA, which includes a Paragraph IV
certification  that the patents in  connection  with  Xalatan(R)  identified  in
"Approved Drug Products with Therapeutic  Equivalence  Evaluations" are invalid,
unenforceable  and/or  will  not  be  infringed  by  Par's  generic  version  of
Xalatan(R).  Par  believes  that its ANDA is the first to be filed for this drug
with a  Paragraph  IV  certification.  As a result  of the  filing  of the ANDA,
Pharmacia and Columbia  filed a lawsuit  against Par on December 21, 2001 in the
United States  District  Court for the District of New Jersey,  alleging  patent
infringement.  Pharmacia and Columbia sought an injunction enjoining approval of
the  Company's  ANDA  and the  marketing  of its  generic  product  prior to the
expiration of their patents. On February 8, 2002, Par answered the complaint and
filed a counterclaim,  which sought a declaration that the  patents-in-suit  are
invalid,  unenforceable  and/or not  infringed  by Par's  products  and that the
extension of the term of one of the patents was invalid.  All parties  sought to
recover their respective  attorneys' fees. The trial concluded in March 2004 and
on July 6, 2004 the Court issued an Opinion and Order  ordering that judgment be
entered  in favor of the  Plaintiffs  on their  claims of  infringement  of U.S.
Patent Nos.  4,599,353  (expires July 28, 2006) and 5,296,504 (expires March 22,
2011);  that the effective  date of approval of Par's ANDA shall be a date which
is not earlier than the dates of  expiration of those  patents;  and that Par is
enjoined from engaging in the  commercial  manufacture,  use,  offer to sell, or
sale within the United  States,  or importation  into the United States,  of any
drug  product  covered by, or the use of which is covered by, those two patents.
As to the third patent  asserted by the Plaintiffs,  U.S. Patent No.  5,422,368,
the Court dismissed the Plaintiffs'  infringements  claims and declared that the
patent is unenforceable due to inequitable  conduct. The Court further dismissed
all parties' claims for attorneys'  fees. Both Par and the Plaintiffs have filed
notices of appeal.  Par is  appealing  the Court's  decision  only insofar as it
relates to U.S.  Patent No.  5,296,504.  Pursuant to agreements  with Breath and
FineTech  related to latanoprost,  the Company had recorded product license fees
of $6,999,  which are included in intangible assets on its consolidated  balance
sheets. If unsuccessful in its appeal, Par will reevaluate the recoverability of
these product license fees.

                                       28
<PAGE>

     Par entered into a licensing  agreement  with  developer  Paddock to market
testosterone  1% gel, a generic  version of Unimed's  product  Androgel(R).  The
product, if successfully  brought to market, will be manufactured by Paddock and
marketed by Par. Paddock has filed an ANDA (which is currently  pending with the
FDA) for the testosterone 1% gel product. As a result of the filing of the ANDA,
Unimed and Besins,  co-assignees of the patent-in-suit,  filed a lawsuit against
Paddock in the United States District Court for the Northern District of Georgia
alleging  patent  infringement  on August 22,  2003.  Par has an interest in the
outcome of this  litigation by virtue of its licensing  agreement  with Paddock.
Unimed  and  Besins  are  seeking  an   injunction   to  prevent   Paddock  from
manufacturing  the generic product.  On November 18, 2003,  Paddock answered the
complaint  and  filed  a  counterclaim,  which  seeks  a  declaration  that  the
patent-in-suit is invalid and/or not infringed by Paddock's  product.  This case
is currently in discovery. At this time, the Company is not able to predict with
any certainty the outcome of this litigation.

     The Company  and/or Par are parties to certain  other  litigation  matters,
including product liability and patent actions;  the Company believes that these
actions are  incidental  to the conduct of its business and that their  ultimate
resolution  thereof  will not have a material  adverse  effect on its  financial
condition, results of operations or liquidity. The Company intends to vigorously
defend or, in cases where the Company is plaintiff, to prosecute these actions.


ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
------  --------------------------------

     (a) Exhibits:

10.9.6   Employment  Agreement,  dated as of May 28,  2004,  by and  between Par
         Pharmaceutical, Inc. and Shankar Hariharan.

31.1     Certification of Principal Executive Officer.

31.2     Certification of Principal Financial Officer.

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.

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.

     (b) Reports on Form 8-K:

         Current  Reports on Forms 8-K, dated April 13, 2004 (Items 2 and 7) and
         June 14, 2004 (Items 2 and 7) reflect the  acquisition  of Kali;  dated
         June 14, 2004 (Item 5) reflect a change in the  Company's  name;  dated
         July 30, 2004 (Item 12)  reflect  the  Company's  second  quarter  2004
         earnings release.

                                       29
<PAGE>

                                    SIGNATURE

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



                                  PAR PHARMACEUTICAL COMPANIES, INC.
                                  ----------------------------------
                                  (Registrant)




August 13, 2004                   /s/ Scott Tarriff
                                  -----------------
                                  Scott Tarriff
                                  PRESIDENT AND CHIEF EXECUTIVE OFFICER



August 13, 2004                   /s/ Dennis J. O'Connor
                                  ----------------------
                                  Dennis J. O'Connor
                                  VICE PRESIDENT AND CHIEF FINANCIAL OFFICER

                                       30
<PAGE>

                                  EXHIBIT INDEX
                                  -------------


Exhibit Number                         Description
--------------                         -----------

   10.9.6       Employment  Agreement,  dated as of May 28, 2004, by and between
                Par Pharmaceutical, Inc. and Shankar Hariharan.

   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.

                                       31