**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: September 29, 2007


**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.
                Employerincorporation
                or organization)
            
            Identification
                No.)




**300
      Tice Boulevard, Woodcliff Lake, New Jersey 07677**


(Address
      of principal executive offices)


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




Indicate
      by check mark whether the Registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days.


Yes o No x




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





Large
      accelerated filer x   Accelerated
      filer o  Non-accelerated
      filer o




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





Number
      of
      shares of the Registrant’s ** common
      stock outstanding as of December 14, 2007: 33,829,054










TABLE
      OF
      CONTENTS


PAR
      PHARMACEUTICAL COMPANIES, INC.


FORM
      10-Q


FOR
      THE
      FISCAL QUARTER ENDED SEPTEMBER 29, 2007


PAGEPART
                  I
              FINANCIAL
                  INFORMATIONItem
                  1.
              Condensed
                  Consolidated Financial Statements (unaudited)Condensed
                  Consolidated Balance Sheets as of September 29, 2007 and December
                  31,
                  2006
              
              3Condensed
                  Consolidated Statements of Operations for the three months and
                  nine months
                  ended September 29, 2007 and September 30, 2006
              
              4Condensed
                  Consolidated Statements of Cash Flows for the nine months ended
                  September
                  29, 2007 and September 30, 2006
              
              5Notes
                  to Condensed Consolidated Financial Statements
              
              6Item
                  2.
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              
              31Item
                  3.
              Quantitative
                  and Qualitative Disclosures about Market Risk
              
              41Item
                  4.
              Controls
                  and Procedures
              
              42PART
                  II
              OTHER
                  INFORMATIONItem
                  1.
              Legal
                  Proceedings
              
              42Item
                  1A.
              Risk
                  Factors
              
              49Item
                  2.
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              
              50Item
                  6.
              Exhibits
              
              50SIGNATURES
              
              51




2




**ITEM
      1. FINANCIAL STATEMENTS**




**PAR
      PHARMACEUTICAL COMPANIES, INC.**


**CONDENSED
      CONSOLIDATED BALANCE SHEETS**


(In
      Thousands, Except Share Data)


(Unaudited)




**September
                29,**
            
            **December
                31,****2007**
            
            **2006********ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            114,161
            
            $
            120,991Available
                for sale debt and marketable equity securities
            
            
            173,544
            
            
            92,120Accounts
                receivable, net
            
            
            108,182
            
            
            99,043Inventories
            
            
            81,049
            
            
            106,322Prepaid
                expenses and other current assets
            
            
            13,623
            
            
            15,833Deferred
                income tax assets
            
            
            72,105
            
            
            72,105Income
                taxes receivable
            
            
            6,605
            
            
            12,422Total
                current assets
            
            
            569,269
            
            
            518,836Property,
                plant and equipment, at cost lessaccumulated
                depreciation and amortization
            
            
            81,902
            
            
            89,155Available
                for sale debt and marketable equity securities
            
            
            7,233
            
            
            7,652Investment
                in joint venture
            
            
            5,774
            
            
            5,292Other
                investments
            
            
            2,500
            
            
            16,588Intangible
                assets, net
            
            
            38,719
            
            
            47,880Goodwill
            
            
            63,729
            
            
            63,729Deferred
                charges and other assets
            
            
            2,879
            
            
            16,000Non-current
                deferred income tax assets, net
            
            
            57,485
            
            
            49,545Total
                assets
            
            $
            829,490
            
            $
            814,677******LIABILITIES
                AND STOCKHOLDERS’ EQUITY**Current
                liabilities:Short-term
                and current portion of long-term debt
            
            $
            200,019
            
            $
            204,469Accounts
                payable
            
            
            30,546
            
            
            48,297Payables
                due to distribution agreement partners
            
            
            65,586
            
            
            89,585Accrued
                salaries and employee benefits
            
            
            13,413
            
            
            15,510Accrued
                expenses and other current liabilities
            
            
            25,168
            
            
            18,833Income
                taxes payable
            
            
            58
            
            
            16,974Total
                current liabilities
            
            
            334,790
            
            
            393,668Long-term
                debt, less current portion
            
            
            -
            
            
            -Other
                long-term liabilities
            
            
            13,718
            
            
            -Commitments
                and contingencies
            
            
            -
            
            
            -Stockholders’
                equity:Preferred
                Stock, par value $0.0001 per share, authorized6,000,000
                shares; none issued and outstanding
            
            
            -
            
            
            -Common
                Stock, par value $0.01 per share, authorized90,000,000
                shares, issued 36,421,650 and 35,901,276 shares
            
            
            364
            
            
            359Additional
                paid-in-capital
            
            
            267,994
            
            
            254,013Retained
                earnings
            
            
            245,837
            
            
            200,256Accumulated
                other comprehensive income (loss)
            
            
            1,351
            
            
            (431
            )Treasury
                stock, at cost 942,716 and 889,245 shares
            
            
            (34,564
            )
            
            (33,188
            )Total
                stockholders’ equity
            
            
            480,982
            
            
            421,009Total
                liabilities and stockholders’ equity
            
            $
            829,490
            
            $
            814,677





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





3


**PAR
      PHARMACEUTICAL COMPANIES, INC.**


**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS**


(In
      Thousands, Except Per Share Data)


(Unaudited)





**Three
                months ended**
            
            **Nine
                months ended****September
                29,**
            
            **September
                30,**
            
            **September
                29,**
            
            **September
                30,****2007**
            
            **2006**
            
            **2007**
            
            **2006**Revenues:Net
                product sales
            
            $
            206,923
            
            $
            168,951
            
            $
            589,526
            
            $
            528,571Other
                product related revenues
            
            
            5,753
            
            
            5,028
            
            
            25,000
            
            
            12,964Total
                revenues
            
            
            212,676
            
            
            173,979
            
            
            614,526
            
            
            541,535Cost
                of goods sold
            
            
            146,248
            
            
            118,919
            
            
            403,854
            
            
            382,540Gross
                margin
            
            
            66,428
            
            
            55,060
            
            
            210,672
            
            
            158,995Operating
                expenses:Research
                and development
            
            
            32,815
            
            
            12,574
            
            
            61,131
            
            
            43,983Selling,
                general and administrative
            
            
            33,910
            
            
            40,053
            
            
            100,466
            
            
            111,337Settlements,
                net
            
            
            (367
            )
            
            -
            
            
            (945
            )
            
            1,250Total
                operating expenses
            
            
            66,358
            
            
            52,627
            
            
            160,652
            
            
            156,570Gain
                on sale of product rights
            
            
            -
            
            
            3,054
            
            
            20,000
            
            
            3,054Operating
                income
            
            
            70
            
            
            5,487
            
            
            70,020
            
            
            5,479Other
                (expense) income, net
            
            
            -
            
            
            (38
            )
            
            (49
            )
            
            66Equity
                in loss of joint venture
            
            
            (107
            )
            
            (18
            )
            
            (335
            )
            
            (497
            )Loss
                on marketable securities, net
            
            
            -
            
            
            -
            
            
            (4,643
            )
            
            (3,773
            )Interest
                income
            
            
            3,680
            
            
            2,098
            
            
            10,265
            
            
            6,055Interest
                expense
            
            
            (1,691
            )
            
            (1,681
            )
            
            (5,136
            )
            
            (5,069
            )Income
                before provision for income taxes
            
            
            1,952
            
            
            5,848
            
            
            70,122
            
            
            2,261Provision
                for income taxes
            
            
            683
            
            
            1,461
            
            
            24,541
            
            
            565Net
                income
            
            $
            1,269
            
            $
            4,387
            
            $
            45,581
            
            $
            1,696Earnings****per
                share of common stock:Basic
            
            $
            0.04
            
            $
            0.13
            
            $
            1.31
            
            $
            0.05Diluted
            
            $
            0.04
            
            $
            0.13
            
            $
            1.30
            
            $
            0.05Weighted
                average number ofcommon
                shares outstanding:Basic
            
            
            34,738
            
            
            34,468
            
            
            34,677
            
            
            34,401Diluted
            
            
            34,906
            
            
            34,566
            
            
            34,949
            
            
            34,636




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




4


**PAR
      PHARMACEUTICAL COMPANIES, INC.**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


(In
      Thousands)


(Unaudited)




**Nine
                Months Ended****September
                29,**
            
            **September
                30,****2007**
            
            **2006****Cash
                flows from operating activities:**Net
                income
            
            $
            45,581
            
            $
            1,696Adjustments
                to reconcile net income to net cash provided by operating
                activities:Deferred
                income taxes
            
            
            (7,020
            )
            
            (6,720
            )Depreciation
                and amortization
            
            
            19,941
            
            
            15,986Loss
                on marketable securities, net
            
            
            4,643
            
            
            3,773Equity
                in loss of joint venture
            
            
            335
            
            
            497Allowances
                against accounts receivable
            
            
            (27,540
            )
            
            34,583Share-based
                compensation expense
            
            
            13,756
            
            
            18,750Loss
                on disposal of fixed assets
            
            
            37
            
            
            220Tax
                benefits on exercise of nonqualified stock options
            
            
            459
            
            
            694Excess
                tax benefits on exercise of nonqualified stock options
            
            
            (459
            )
            
            (679
            )Other
            
            
            170
            
            
            123**Changes
                in assets and liabilities:**Decrease
                (increase) in accounts receivable
            
            
            18,401
            
            
            (74,943
            )Decrease
                (increase) in inventories
            
            
            25,273
            
            
            (14,731
            )Decrease
                in prepaid expenses and other assets
            
            
            3,488
            
            
            8,680Decrease
                in accounts payable, accrued expenses and other
                liabilities
            
            
            (6,800
            )
            
            (16,693
            )(Decrease)
                increase in payables due to distribution agreement
                partners
            
            
            (23,999
            )
            
            53,612(Decrease)
                increase in income taxes payable/receivable
            
            
            (178
            )
            
            6,831**Net
                cash provided by operating activities**
            
            
            66,088
            
            
            31,679**Cash
                flows from investing activities:**Capital
                expenditures
            
            
            (5,272
            )
            
            (15,006
            )Purchases
                of intangibles
            
            
            (600
            )
            
            (14,137
            )Purchases
                of available for sale debt securities
            
            
            (225,389
            )
            
            (419
            )Purchases
                of available for sale marketable equity securities
            
            
            (3,850
            )
            
            -Purchases
                of long term investments
            
            
            (2,500
            )
            
            -Proceeds
                from maturity and sale of available for sale debt and marketable
                equity
                securities
            
            
            158,511
            
            
            5,000Proceeds
                from sale of other investments, advance for product rights and the
                redemption of a promissory note
            
            
            16,588
            
            
            (9,000
            )Acquisition
                of subsidiary, contingent payment
            
            
            (5,000
            )
            
            (2,500
            )Capital
                contributions to joint venture
            
            
            (1,943
            )
            
            (550
            )Proceeds
                from sale of fixed assets
            
            
            1,551
            
            
            -**Net
                cash used in investing activities**
            
            
            (67,904
            )
            
            (36,612
            )**Cash
                flows from financing activities:**Proceeds
                from issuances of common stock upon exercise of stock
                options
            
            
            341
            
            
            8,902Excess
                tax benefits on exercise of nonqualified stock options
            
            
            459
            
            
            679Purchase
                of treasury stock
            
            
            (1,376
            )
            
            (641
            )Payments
                of short-term debt related to financed insurance premiums
            
            
            (4,391
            )
            
            (2,889
            )Borrowings
                related to financed insurance premium liabilities
            
            
            -
            
            
            2,274Principal
                payments under long-term and other borrowings
            
            
            (47
            )
            
            (190
            )**Net
                cash (used in) provided by financing activities**
            
            
            (5,014
            )
            
            8,135**Net
                (decrease) increase in cash and cash equivalents**
            
            
            (6,830
            )
            
            3,202Cash
                and cash equivalents at beginning of period
            
            
            120,991
            
            
            93,477**Cash
                and cash equivalents at end of period**
            
            $
            114,161
            
            $
            96,679Supplemental
                disclosure of cash flow information:Cash
                paid during the period for:Income
                taxes, net
            
            $
            31,284
            
            $
            890Interest
            
            $
            5,883
            
            $
            5,811Non-cash
                transactions:Increase
                in fair value of available for sale debt and marketable equity
                securities
            
            $
            2,979
            
            $
            5,802Capital
                expenditures incurred but not yet paid
            
            $
            334
            
            $
            670


The
        accompanying notes are an integral part of these condensed consolidated
        financial statements.
  5




**PAR
      PHARMACEUTICAL COMPANIES, INC.**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**September
      29, 2007**


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


(Unaudited)





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




**Note
      1** **-** **Basis of** **Presentation** **:**





The
      accompanying condensed consolidated financial statements at September 29, 2007
      and for the three-month and nine-month periods ended September 29, 2007 and
      September 30, 2006 are unaudited; in the opinion of the Company’s management,
      however, such statements include all adjustments necessary to present fairly
      the
      information presented therein. The condensed consolidated balance sheet at
      December 31, 2006 was derived from the Company’s audited consolidated financial
      statements included in the Company’s 2006 Annual Report on Form
      10-K.





Pursuant
      to accounting requirements of the Securities and Exchange Commission (the “SEC”)
      applicable to quarterly reports on Form 10-Q, the accompanying condensed
      consolidated financial statements and these Notes do not include all disclosures
      required by accounting principles generally accepted in the United States
      (“GAAP”) for audited financial statements. Accordingly, these statements should
      be read in conjunction with the Company’s 2006 Annual Report on Form 10-K.
      Results of operations for interim periods are not necessarily indicative of
      those that may be achieved for full fiscal years.





*Restatement
      of previously issued financial statements*




Subsequent
      to the filing of the Company’s Annual Report on Form 10-K for the year ended
      December 31, 2006, the Company identified a balance sheet reclassification
      whereby the Company had included certain discounts due to customers for which
      no
      underlying receivables exist in accounts receivable, rather than presenting
      such
      amounts in accrued expenses. Accordingly, such presentation in the accompanying
      condensed consolidated financial statements has been restated to increase
      accounts receivable, net and accrued expenses and other current liabilities
      in
      the condensed consolidated balance sheet as of December 31, 2006 by $4.3
      million. This restatement had no effect on the condensed consolidated statements
      of operations nor on the overall condensed consolidated statements of cash
      flows
      as previously reported.




**Note
      2 - Recent Accounting Pronouncements:**





On
      December 12, 2007, the Financial Accounting Standards Board (“FASB”) ratified Emerging
      Issue Task Force Issue No.
      07-1
      (“EITF 07-1”), *Accounting
      for Collaborative Arrangements* .
      The key
      elements of EITF 07-1 **** relate
      to: ( *a* )
      the
      scope of the issue; ( *b* )
      the
      income statement presentation of transactions with third parties; ( *c* )
      the
      income statement presentation of payments between parties to the collaborative
      arrangement; ( *d* )
      the
      disclosures about collaborative arrangements that should be required in the
      financial statements of the parties to the collaborative arrangements; and
      ( *e* )
      the
      transition method. A contractual arrangement falls within the scope of EITF
      07-1
      if the arrangement requires the parties to be active participants and the
      arrangement exposes the parties to significant risks and rewards that are tied
      to the commercial success of the endeavor. Costs incurred and revenue generated
      on sales to third parties should be reported in the statement of operations
      based on the guidance in EITF Issue No. 99-19, *Reporting
      Revenue Gross as a Principal versus Net as an Agent* .
      The
      equity method of accounting should not be applied to a collaborative arrangement
      within the scope of this issue without the creation of a separate legal entity
      for the arrangement. P ayments
      between parties to the collaborative arrangement should be presented in the
      statement of operations based on the nature of the arrangement and each entity's
      business operations, the contractual terms of the arrangement as well as if
      existing GAAP is applicable. EITF 07-1 requires companies to disclose the nature
      and purpose of the arrangement, its rights and obligations under the
      arrangement, the accounting policy applied to the arrangement, and the amounts
      attributable to transactions between other participants to the collaborative
      arrangement and where in the statement of operations these amounts have been
      classified. EITF 07-1 requires that companies comply in its first fiscal year
      beginning after December 15, 2008 and transition to the guidance in this issue
      by retrospectively applying the guidance to all periods presented for all
      arrangements existing at the effective date, unless it is impracticable to
      do
      so. The impracticability assessment should be made on an
      arrangement-by-arrangement basis and certain disclosures would be required
      if a
      company utilized the impracticability exception. The Company is currently
      evaluating the potential impact of adopting EITF
      07-1 on
      its
      condensed consolidated financial statements.




6




On
      December 4, 2007, the FASB issued FASB Statement No. 141 (Revised 2007) (“SFAS
      141R”), *Business Combinations* .
      SFAS
      141R will significantly change the accounting for business combinations. Under
      SFAS 141R, an acquiring entity will be required to recognize all the assets
      acquired and liabilities assumed in a transaction at the acquisition date fair
      value with limited exceptions. SFAS 141R will change the accounting treatment
      for certain specific items, including; acquisition costs will be generally
      expensed as incurred, minority interests will be valued at fair value at the
      acquisition date, acquired contingent liabilities will be recorded at fair
      value
      at the acquisition date and subsequently measured at either the higher of such
      amount or the amount determined under existing guidance for non-acquired
      contingencies, in-process research and development will be recorded at fair
      value as an indefinite-lived intangible asset at the acquisition date,
      restructuring costs associated with a business combination will be generally
      expensed subsequent to the acquisition date, and changes in deferred tax asset
      valuation allowances and income tax uncertainties after the acquisition date
      generally will affect income tax expense. SFAS 141R also includes a substantial
      number of new disclosure requirements. SFAS 141R applies prospectively to
      business combinations for which the acquisition date is on or after the
      beginning of the first annual reporting period beginning on or after December
      15, 2008. Earlier adoption is prohibited *.* The
      Company will be required to record and disclose business combinations following
      existing GAAP until January 1, 2009. The Company is currently evaluating the
      potential impact of adopting SFAS 141R on its condensed consolidated financial
      statements.





In
      June
      2007, the FASB ratified Emerging Issue Task Force Issue No. 07-3 (“EITF 07-3”), *Accounting
      for Non-Refundable Advance Payments for Goods or Services to Be Used in Future
      Research and Development Activities* ,
      which
      requires nonrefundable advance payments for goods and services that will be
      used
      or rendered for future research and development activities to be deferred and
      capitalized. These amounts will be recognized as expense in the period that
      the
      related goods are delivered or the related services are performed or when an
      entity does not expect the goods to be delivered or services to be rendered.
      EITF 07-3 is effective for the fiscal years beginning after December 31, 2007,
      including interim periods within those fiscal years. Earlier adoption is not
      permitted. The Company will adopt the provisions of EITF 07-3 prospectively,
      beginning January 1, 2008.





In
      February 2007, the FASB issued SFAS No. 159 *The
      Fair Value Option for Financial Assets and Financial Liabilities — Including an
      Amendment of FASB Statement No. 115* (“SFAS
      159”), which becomes effective for fiscal periods beginning after November 15,
      2007.  Under SFAS 159, companies may elect to measure specified financial
      assets and liabilities at fair value that are not otherwise measured at fair
      value, with changes in fair value recognized in earnings each subsequent
      reporting period.  This election, called the “fair value option”, will
      enable some companies to reduce volatility in reported earnings caused by
      measuring related assets and liabilities differently.  SFAS 159 also
      establishes presentation and disclosure requirements designed to draw a
      comparison between the different measurement attributes a company elects for
      similar types of assets and liabilities. The Company is currently evaluating
      the
      potential impact of adopting SFAS 159 on its condensed consolidated financial
      statements.




In
      September 2006, the FASB issued SFAS No. 157 *Fair
      Value Measurements* (“SFAS
      No. 157”).  SFAS No. 157 establishes a common definition for fair value to
      be applied to GAAP guidance requiring use of fair value, establishes a framework
      for measuring fair value, and expands disclosure about such fair value
      measurements. SFAS
      No. 157 applies to fair value measurements that are already required or
      permitted by other accounting standards, except for measurements of share-based
      payments and measurements that are similar to, but not intended to be, fair
      value. The FASB has previously concluded in those accounting pronouncements
      that
      fair value is the relevant measurement attribute. Accordingly, this Statement
      does not require any new fair value measurements. SFAS
      No.
      157 is effective for fiscal years beginning after November 15, 2007.  In
      November 2007, FASB granted a one year deferral for the implementation of SFAS
      No. 157 for non-financial assets and liabilities. The Company is currently
      evaluating the expected impact of the provisions of SFAS No. 157 on its results
      of operations and its financial position.




In
      June
      2006, the FASB issued FIN No. 48 (“FIN 48”) *Accounting
      for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109* which
      is
      effective as of January 1, 2007.  FIN 48 clarifies the accounting for
      uncertainty in income taxes recognized in an enterprise’s financial statements
      in accordance with SFAS No. 109 *Accounting
      for Income Taxes* . 
      FIN 48 prescribes a recognition threshold and measurement attribute for
      financial statement recognition, measurement and disclosure of tax positions
      that a company has taken or expects to be taken in a tax return. 
Additionally, FIN 48 provides guidance on de-recognition, classification,
      interest and penalties, accounting in interim periods and transition.  Upon
      adoption on January 1, 2007, the Company analyzed filing positions in the
      federal and state jurisdictions where it is required to file income tax returns,
      as well as all open tax years in these jurisdictions. See Note 10, “Income
      Taxes”.




**Note
      3 - Share-Based Compensation:**





The
      Company adopted Statement of Financial Accounting Standards No. 123 (Revised
      2004), “Share-Based Payment” (“SFAS 123R”), effective January 1, 2006. SFAS 123R
      requires companies to recognize compensation expense in the amount equal to
      the
      fair value of all share-based payments granted to employees. The Company elected
      the modified prospective transition method and, therefore, adjustments to prior
      periods were not required as a result of adopting SFAS 123R. Under this method,
      the provisions of SFAS 123R apply to all awards granted after the date of
      adoption and to any unrecognized expense of awards not vested at the date of
      adoption based on the grant date fair value. Under SFAS 123R, the Company will
      recognize share-based compensation ratably over the service period applicable
      to
      the award. SFAS 123R also amends SFAS No. 95, “Statement of Cash Flows,” to
      require that excess tax benefits that have been reflected as operating cash
      flows be reflected as financing cash flows. In accordance with SFAS 123R, $0.5
      million and $0.7 million of excess tax benefits for the nine months ended
      September 29, 2007 and September 30, 2006, respectively, has been classified
      as
      both an operating cash outflow and financing cash inflow.




7




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





As
      of
      September 29, 2007, there were approximately 4.3 million shares of common stock
      available for future stock option grants. The Company issues new shares of
      common stock when stock option awards are exercised. Stock
      option awards outstanding under the Company’s current plans have been granted at
      exercise prices that were equal to the market value of the Company’s common
      stock on the date of grant.




In
      the
      quarter ended April 1, 2006, the Company accelerated the vesting of 50
      outstanding non-vested stock options in connection with the termination of
      certain executives. The effect of these accelerations resulted in additional
      compensation expense of $0.4 million in the quarter ended April 1, 2006. The
      Company also modified 172 vested and non-vested options in connection with
      revised employment agreements for certain executives. The Company will record
      total compensation expense of $1.1 million, of which $0.8 million was recorded
      for the nine months ended September 30, 2006 and $0.8 million for the full
      year
      of 2006. The Company recorded $0.03 million and $0.1 million for the three
      and
      nine months ended September 29, 2007 and the remaining $0.2 million will be
      amortized over the remaining vesting period of the modified options of
      approximately 2 years.




*Stock
      Options*




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





**For
                the three**
            
            **For
                the three**
            
            **For
                the nine**
            
            **For
                the nine****months
                ended**
            
            **months
                ended**
            
            **months
                ended**
            
            **months
                ended****September
                29,**
            
            **September
                30,**
            
            **September
                29,**
            
            **September
                30,****2007**
            
            **2006**
            
            **2007**
            
            **2006****Risk-free
                interest rate**
            
            
            4.6
            %
            
            4.8
            %
            
            4.6
            %
            
            4.5
            %**Expected
                life (in years)**
            
            
            6.3
            
            
            6.3
            
            
            6.2
            
            
            6.2**Expected
                Volatility**
            
            
            49.4
            %
            
            57.0
            %
            
            52.5
            %
            
            58.0
            %**Dividend**
            
            
            0
            %
            
            0
            %
            
            0
            %
            
            0
            %





The
      Black-Scholes option pricing model was developed for use in estimating the
      fair
      value of traded options, which have no vesting restrictions and are fully
      transferable. The
      Company compiled historical data on an employee-by-employee basis from the
      grant
      date through the settlement date. The results of analyzing the historical data
      showed that there were three distinct populations of optionees, the Executive
      Officers Group, the Outside Directors Group, and the All Others Group. The
      expected life of options represents the period of time that the options are
      expected to be outstanding and is based generally on historical trends. However,
      b ecause
      none of the Company’s existing options have reached their full 10-year term, and
      also because the majority of such options granted are out-of-the-money and
      the
      expected life of out-of-the-money options is uncertain, the Company opted to
      use
      the “simplified” method for “plain vanilla” options described in SAB 107. The
“simplified method” calculation is the average of the vesting term plus the
      original contractual term divided by 2. The
      Company anticipates that most grants in the future will be four-year graded
      vesting; however, Outside Directors will continue to have one-year vesting.
      The
      Company will revisit this assumption at least annually or sooner if
      circumstances warrant. The risk-free rate is based on the yield on the Federal
      Reserve treasury rate with a maturity date corresponding to the expected term
      of
      the option granted. The expected volatility assumption is based on the
      historical volatility of the Company’s common stock over a term equal to the
      expected term of the option granted. SFAS
      123R
      also requires forfeitures to be estimated at the time of grant and revised,
      if
      necessary, in subsequent periods if actual forfeitures differ from those
      estimates. It
      is
      assumed that no dividends will be paid during the entire term of the options. All option
      valuation models require input of highly subjective assumptions. Because the
      Company's employee stock options have characteristics significantly different
      from those of traded options, and because changes in subjective input
      assumptions can materially affect the fair value estimate, the actual value
      realized at the time the options are exercised may differ from the estimated
      values computed above. The
      weighted average per share fair values of options granted in the three month
      periods ended September 29, 2007 and September 30, 2006 were $11.06 and $9.27,
      respectively. The weighted average per share fair values of options granted
      in
      the nine month periods ending September 29, 2007 and September 30, 2006 were
      $13.18 and $17.72, respectively.




8




Set
      forth
      below is the impact on the Company’s results of operations of recording
      share-based compensation from its stock options for the three-month and
      nine-month periods ended September 29, 2007 and September 30, 2006:





**For
                the three months ended**
            
            **For
                the nine months ended****Sept
                29,**
            
            **Sept
                30,**
            
            **Sept
                29,**
            
            **Sept
                30,****2007**
            
            **2006**
            
            **2007**
            
            **2006**Cost
                of sales
            
            $
            167
            
            $
            227
            
            $
            525
            
            $
            802Research
                and development
            
            
            416
            
            
            568
            
            
            1,313
            
            
            2,005Selling,
                general and administrative
            
            
            1,499
            
            
            4,872
            
            
            4,725
            
            
            10,254Total,
                pre-tax
            
            $
            2,082
            
            $
            5,667
            
            $
            6,563
            
            $
            13,061Tax
                benefit of share-based compensation
            
            
            (812
            )
            
            (2,210
            )
            
            (2,560
            )
            
            (5,094
            )Total,
                net of tax
            
            $
            1,270
            
            $
            3,457
            
            $
            4,003
            
            $
            7,967




The
      incremental share-based compensation expense decreased both basic and diluted
      earnings per share by $0.04 and $0.10 for the three-month periods ended
      September 29, 2007 and September 30, 2006, respectively, and $0.12 for basic
      earnings per share and $0.11 for diluted earnings per share for the nine-month
      period ended September 29, 2007 and $0.23 for both basic and diluted earnings
      per share for the nine-month period ended September 30, 2006.





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




Weighted
            
            Weighted
            
            AggregateAverage
            
            Average
            
            IntrinsicShares
            
            Exercise
                Price
            
            Remaining
                Life
            
            ValueBalance
                at December 31, 2006
            
            
            5,470
            
            $
            36.00Granted
            
            
            573
            
            
            20.41Exercised
            
            
            (59
            )
            
            8.02Forfeited
            
            
            (1,145
            )
            
            37.25Balance
                at September 29, 2007
            
            
            4,839
            
            $
            34.81
            
            
            6.18
            
            $
            2,511Exercisable
                at September 29, 2007
            
            
            3,286
            
            $
            38.00
            
            
            5.01
            
            $
            2,244Vested
                and expected to vest at September 29, 2007
            
            
            4,370
            
            $
            34.60
            
            
            5.88
            
            $
            2,473





The
      total
      fair value of shares vested during the three-month periods ended September
      29,
      2007 and September 30, 2006, was $0.4 million and $2.7 million, respectively.
      The total fair value of shares vested during the nine-month periods ended
      September 29, 2007 and September 30, 2006, was $9.7 million and $8.2 million,
      respectively. As of September 29, 2007, the total compensation cost related
      to
      all non-vested stock options granted to employees but not yet recognized was
      approximately $17.7 million. This cost will be amortized on a straight-line
      basis over the remaining weighted average vesting period of 2.6 years.





*Restricted
      Stock/Restricted Stock Units*





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





The
      Company accelerated the vesting of 67 outstanding non-vested restricted shares
      in connection with the termination of certain executives in the nine-month
      period ended September 29, 2007. The effect of this acceleration resulted in
      additional compensation expense of $1.5 million in the nine-month period ended
      September 29, 2007.




9




The
      impact on the Company’s results of operations of recording share-based
      compensation from restricted stock for the three and nine month periods ended
      September 29, 2007 and September 30, 2006 was as follows:





**For
                the three months ended**
            
            **For
                the nine months ended****Sept
                29,**
            
            **Sept
                30,**
            
            **Sept
                29,**
            
            **Sept
                30,****2007**
            
            **2006**
            
            **2007**
            
            **2006**Cost
                of sales
            
            $
            180
            
            $
            59
            
            $
            458
            
            $
            262Research
                and development
            
            
            451
            
            
            226
            
            
            1,145
            
            
            1,039Selling,
                general and administrative
            
            
            1,622
            
            
            2,345
            
            
            5,590
            
            
            4,326Total,
                pre-tax
            
            $
            2,253
            
            $
            2,630
            
            $
            7,193
            
            $
            5,627Tax
                benefit of stock-based compensation
            
            
            (879
            )
            
            (1,026
            )
            
            (2,805
            )
            
            (2,195
            )Total,
                net of tax
            
            $
            1,374
            
            $
            1,604
            
            $
            4,388
            
            $
            3,432




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




Weighted
            
            AggregateAverage
            
            IntrinsicShares
            
            Grant
                Price
            
            ValueNon-vested
                balance at December 31, 2006
            
            
            495
            
            $
            32.92Granted
            
            
            533
            
            
            23.81Vested
            
            
            (195
            )
            
            35.40Forfeited
            
            
            (108
            )
            
            27.82Non-vested
                balance at September 29, 2007
            
            
            725
            
            $
            26.32
            
            $
            13,454





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




Weighted
            
            AggregateAverage
            
            IntrinsicShares
            
            Grant
                Price
            
            ValueNon-vested
                balance at December 31, 2006
            
            
            245
            
            $
            23.46Granted
            
            
            19
            
            
            26.39Vested
            
            
            (36
            )
            
            27.60Forfeited
            
            
            (5
            )
            
            21.68Non-vested
                balance at September 29, 2007
            
            
            223
            
            $
            23.08
            
            $
            4,123





As
      of
      September 29, 2007, the total compensation cost related to all non-vested
      restricted stock and restricted stock units granted to employees but not yet
      recognized was approximately $20.5 million; this cost will be amortized on
      a
      straight-line basis over the remaining weighted average vesting period of
      approximately 3.0 years. At September 29, 2007, approximately 1.3 million shares
      remain available for restricted stock and restricted stock unit grants.





*Employee
      Stock Purchase Program:*





The
      Company maintains an Employee Stock Purchase Program (the “Program”). The
      Program is designed to qualify as an employee stock purchase plan under Section
      423 of the Internal Revenue Code of 1986, as amended. It enables eligible
      employees to purchase shares of the Company’s common stock at a discount to the
      fair market value. An aggregate of 1,000 shares of common stock has been
      reserved for sale to employees under the Program. As of July 5, 2006, the
      Program was suspended by the Company. As a result, there was no Program activity
      during the nine months ended September 29, 2007. Employees purchased 0 shares
      and 15 shares during the three-month and nine-month periods ended September
      30,
      2006 and the Company recorded expense of $0 and $0.06 million, respectively,
      reflecting a 15% discount from fair market value, in accordance with the terms
      of the Program at that time.





10





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





At
      September 29, 2007 and December 31, 2006, all of the Company’s investments in
      debt and marketable equity securities were classified as available for sale
      and,
      as a result, were reported at their fair values on the condensed consolidated
      balance sheets. The following is a summary of amortized cost and estimated
      fair
      value of the Company’s debt and marketable equity securities available for sale
      at September 29, 2007:




**Estimated****Unrealized**
            
            **Fair****Cost**
            
            **Gain**
            
            **(Loss)**
            
            **Value**Securities
                issued by government agencies
            
            $
            41,242
            
            $
            -
            
            $
            (5
            )
            $
            41,237Debt
                securities issued by various state and local municipalities and
                agencies
            
            
            11,839
            
            
            -
            
            
            (43
            )
            
            11,796Other
                debt securities
            
            
            15,070
            
            
            -
            
            
            (712
            )
            
            14,358Auction
                rate securities
            
            
            100,000
            
            
            -
            
            
            -
            
            
            100,000Available
                for sale debt securities
            
            
            168,151
            
            
            -
            
            
            (760
            )
            
            167,391Marketable
                equity securities available for saleHana
                Biosciences, Inc.
            
            
            3,850
            
            
            -
            
            
            (975
            )
            
            2,875Optimer
                Pharmaceuticals, Inc. (see Note 5)
            
            
            6,561
            
            
            3,950
            
            
            -
            
            
            10,511Total
            
            $
            178,562
            
            $
            3,950
            
            $
            (1,735
            )
            $
            180,777





Of
      the
      $1.7 million of unrealized loss as of September 29, 2007, $0.8 million has
      been
      in an unrealized loss position for greater than a year. The Company believes
      that these losses are not other-than-temporary in accordance with FASB Staff
      Position Nos. FAS 115-1/ 124-1, "The Meaning of Other-Than-Temporary Impairment
      and Its Application to Certain Investments,” due to its assessment that all
      amounts due according to the contractual terms of the related debt security
      will
      be collected and its ability and intent to hold the related debt security for
      a
      reasonable period of time sufficient for a recovery of fair value up to (or
      beyond) the cost of the investment.




The
      Company held an investment, as a limited partner, in a fund that invested in
      various floating rate structured finance securities that experienced a severe
      reduction in value. In August 2007, the Company received notice from the fund
      manager that based on the liquidating procedures; there was no remaining equity
      for limited partners. The Company recorded a realized investment loss in the
      three months ended June 30, 2007 of $6.0 million. The estimated fair value
      of
      this investment was in an unrealized gain position at March 31,
      2007.





In
      August
      2007, the Company announced that it acquired the North American commercial
      rights to Zensana TM  (ondansetron
      HCl) Oral Spray from Hana
      Biosciences, Inc. (“Hana”).
      Ondansetron is used to prevent nausea and vomiting after chemotherapy, radiation
      and surgery. The terms of the agreement contain multiple elements, including
      a
      $5 million investment in Hana at a contractually agreed $1.2 million premium.
      The Company recorded its investment in Hana at $3.8 million based on the
      prevailing market prices and charged the $1.2 million, which represents a
      non-refundable upfront license payment, to research and development expense
      in
      the third quarter of 2007. In addition, Hana will receive milestone payments
      and
      royalties on future sales of Zensana TM .
      The
      Company also announced that it has entered into an agreement with NovaDel
      Pharma, Inc. (“NovaDel”) to collaborate in the reformulation of
      Zensana TM .
      Following completion of reformulation efforts already under way, the Company
      will reconfirm the product's pharmacokinetic profile and resubmit the New Drug
      Application (“NDA”) to the FDA. The Company has classified its investment in
      Hana as a noncurrent asset on its condensed consolidated balance sheet as of
      September 29, 2007 due to its contractual obligations with Hana and its intent
      to hold the investment for period of time greater than 12 months. The Company
      evaluated the near-term prospects of Hana in relation to the severity and
      duration of the impairment. Based on that evaluation and the Company's ability
      and intent to hold those investments for a reasonable period of time sufficient
      for a forecasted recovery of fair value, the Company does not consider the
      investment to be other-than-temporarily impaired at September 29, 2007. The
      Company recorded an unrealized loss of $1.0 million for the nine months ended
      September 29, 2007, which was included in other comprehensive income to reflect
      the estimated fair value of its investment in Hana.




*Auction
      Rate Securities*




Auction
      rate securities have been classified as short-term available for sale debt
      securities. Auction rate securities are variable rate bonds and preferred stock
      tied to short-term interest rates with maturities on the face of the securities
      in excess of 90 days. Auction rate securities have interest rate resets through
      a modified Dutch auction, at predetermined short-term intervals, usually every
      7, 28 or 35 days. Interest paid during a given period is based upon the interest
      rate determined during the prior auction. Although these securities are issued
      and rated as long-term securities, they are priced and traded as short-term
      instruments because of the historical liquidity provided through the interest
      rate reset. All of the Company’s auction rate securities are tax-exempt or
      tax-advantaged. All of the Company’s auction rate securities are tied to debt
      securities issued by various state and local municipalities and agencies and
      the
      auction rate securities are insured by AAA rated insurance
      companies.





11




The
      following is a summary of amortized cost and estimated fair value of the
      Company’s investments in debt and marketable equity securities available for
      sale at December 31, 2006:




**Estimated****Unrealized**
            
            **Fair****Cost**
            
            **Gain**
            
            **(Loss)**
            
            **Value**Securities
                issued by government agencies
            
            $
            66,238
            
            $
            -
            
            $
            (341
            )
            $
            65,897Debt
                securities issued by various state and local municipalities and
                agencies
            
            
            13,945
            
            
            -
            
            
            (190
            )
            
            13,755Other
                debt securities
            
            
            16,103
            
            
            211
            
            
            (444
            )
            
            15,870Auction
                rate securities
            
            
            4,250
            
            
            -
            
            
            -
            
            
            4,250Available
                for sale debt securities
            
            $
            100,536
            
            $
            211
            
            $
            (975
            )
            $
            99,772





The
      following table summarizes the contractual maturities of the Company’s available
      for sale debt securities at September 29, 2007:




**September
                29, 2007****Estimated
                Fair****Cost**
            
            **Value**Less
                than one year
            
            $
            42,468
            
            $
            42,399Due
                between 1-2 years
            
            
            12,613
            
            
            12,616Due
                between 2-5 years
            
            
            10,000
            
            
            10,018Due
                after 5 years
            
            
            103,070
            
            
            102,358Total
            
            $
            168,151
            
            $
            167,391




**Note
      5** **-** **Other Investments:**





**Unrealized****Balance
                at September 29, 2007**
            
            **Carrying
                Value**
            
            **Gain**
            
            **(Loss)**
            
            **Fair
                Value**IntelliPharmaCeutics
                Ltd.
            
            $
            2,500
            
            $
            -
            
            $
            -
            
            $
            2,500Total
                other investments
            
            $
            2,500
            
            $
            -
            
            $
            -
            
            $
            2,500




**Unrealized****Balance
                at December 31, 2006**
            
            **Carrying
                Value**
            
            **Gain**
            
            **Loss**
            
            **Fair
                Value**Abrika
                Pharmaceuticals, LLLP
            
            $
            4,588
            
            $
            -
            
            $
            -
            
            $
            4,588Optimer
                Pharmaceuticals, Inc.
            
            
            12,000
            
            
            -
            
            
            -
            
            
            12,000Total
                other investments
            
            $
            16,588
            
            $
            -
            
            $
            -
            
            $
            16,588





The
      Company assesses whether temporary or other-than-temporary losses on its
      investments have occurred due to declines in fair value or other market
      conditions.





In
      August
      2007, the Company announced that it entered into a stock purchase agreement
      to
      acquire an equity interest in IntelliPharmaCeutics Ltd. (“IPC Ltd.”), a
      privately held Delaware company. The terms of the agreement contain multiple
      elements, including a $5 million private placement investment that represents
      a
      4.2 percent equity interest in IntelliPharmaCeutics Corp. (“IPC Corp.”), the
      operating subsidiary of IPC Ltd. The Company recorded its investment in IPC
      Corp. at $2.5 million based on the Company’s assessment of the fair value of its
      investment and charged $2.5 million, which represents a non-refundable upfront
      license payment, to research and development expense in the third quarter of
      2007. Concurrently, the Company announced that it entered into a separate
      agreement with IPC Corp. to collaborate in the development and marketing of
      four
      modified release generic drug products. IPC Corp. is a Toronto-based specialty
      pharmaceutical company with which the Company previously has entered into
      single-product agreements covering the development and marketing of two modified
      release generic drug products. Under the terms of the new agreement, IPC Corp.
      will develop the four modified release products and the Company will provide
      development, regulatory and legal support for the applications. IPC Corp. will
      be eligible to receive development and post-launch milestone payments. The
      Company will have exclusive rights to market, sell and distribute the products
      in the U.S. and receive a majority share of the profits from the sales of each
      product. Because IPC Ltd. is privately-held and accounted for under the cost
      method, the Company monitors the investment on a periodic basis to evaluate
      whether any declines in value becomes other-than-temporary.




In
      April
      2005, the Company acquired shares of the Series C preferred stock of Optimer
      Pharmaceuticals, Inc. (“Optimer”), a privately-held biotechnology company
      located in San Diego, California, for $12.0 million. In February 2007, Optimer
      became a public company via an initial public offering (“IPO”). On February 20,
      2007, the Company sold 1.1 million shares for $6.8 million and recognized a
      pre-tax gain of $1.4 million in the first quarter of 2007. As of September
      29,
      2007, the Company held 1.3 million shares of Optimer common stock and the fair
      market value of the Optimer common stock held by the Company was $10.5 million
      based on the market value of Optimer’s common stock at that date. The Company
      recognized an unrealized gain of $4.0 million for the nine months ended
      September 29, 2007, which was included in other comprehensive income. In October
      2007, the Company sold its remaining investment in Optimer common stock for
      $9.6
      million and will recognize a pre-tax gain on the sale of $3.1 million in the
      fourth quarter of 2007. As of February 2007, the Company reclassified its
      investment in Optimer common stock from “Other investments” (noncurrent asset)
      to “Available for sale debt and marketable equity securities” as part of current
      assets on the condensed consolidated balance sheet. On February 27, 2007 in
      exchange for $20.0 million the Company returned the marketing rights to
      Difimicin (PAR 101), an investigational drug to treat Clostridium
      difficle-associated diarrhea to Optimer. The Company recognized a gain on the
      sale of product rights of $20.0 million related to this transaction in the
      three
      month period ended March 31, 2007.




12




In
      December 2004, the Company acquired a 5% limited partnership interest in Abrika
      Pharmaceuticals, LLLP, (“Abrika”), a privately-held specialty generic
      pharmaceutical company located in Sunrise, Florida for $8.4 million, including
      costs. Additionally, the Company entered into an agreement with Abrika to
      collaborate on the marketing of five products to be developed by Abrika. The
      first product is expected to be a transdermal fentanyl patch for the management
      of chronic pain. This patch is a generic version of Duragesic® marketed by
      Janssen Pharmaceutica Products, L.P., a division of Johnson & Johnson.
      Pursuant to the agreement, the Company was required to pay up to $9.0 million
      to
      Abrika at the time of the commercial launch of this product, subject to the
      attainment of certain profit targets. In February 2006, the Company and Abrika
      amended their collaboration agreement and the Company advanced Abrika $9.0
      million. Under the amendment, Abrika would earn the funds only upon the Food
      and
      Drug Administration’s (“FDA”) final and unconditional approval of the
      transdermal fentanyl patch. Abrika agreed to repay the advance if it did not
      receive FDA approval within two years of the amendment. The Company also held
      a
      convertible promissory note in the principal amount of $3.0 million, plus
      interest accruing at 8.0% annually for money loaned to Abrika. In July 2007,
      the
      Company and Abrika amended their collaboration agreement to remove all of the
      Company’s rights in, benefits from, and obligations arising as a result of the
      development and commercialization of the transdermal fentanyl patch. As a result
      of this amendment, the Company was no longer obligated to pay Abrika the $9.0
      million upon FDA approval of the transdermal fentanyl patch. Both the $9.0
      million advance and the $3.0 million promissory note were recorded in deferred
      charges and other assets, and were collected by the Company in the second
      quarter of 2007. In November 2006, Abrika agreed to be purchased by a
      wholly-owned subsidiary of the Actavis group. The Company wrote down its
      investment by approximately $3.8 million in the second quarter of 2006 based
      on
      the terms of the merger agreement between Abrika and Actavis that indicated
      that
      its investment was impaired. The merger transaction was completed in April
      2007.
      Based on the terms of the merger agreement in the second quarter of 2007, the
      Company received approximately $4.6 million for its equity stake in Abrika.
      As
      part of the merger agreement, the Company has the potential to earn future
      “Earnout” payments. The “Earnout” payments would be triggered if the post merger
      entity achieves certain gross profit targets in each of the calendar years
      2007,
      2008, and/or 2009. The maximum potential “Earnout” payments that the Company
      could receive are $6.25 million. The Company does not attribute any value to
      the
“Earnout” payments.





**Note
      6** **-** **Accounts Receivable:**




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




**September
                29,**
            
            **December
                31,****2007**
            
            **2006**(a)Gross
                trade accounts receivable
            
            $
            281,829
            
            $
            300,230Chargebacks
            
            
            (39,160
            )
            
            (51,891
            )Rebates
                and incentive programs
            
            
            (61,085
            )
            
            (85,888
            )Returns
            
            
            (52,003
            )
            
            (42,905
            )Cash
                discounts and other
            
            
            (21,372
            )
            
            (18,038
            )Doubtful
                accounts
            
            
            (27
            )
            
            (2,465
            )Accounts
                receivable, net
            
            $
            108,182
            
            $
            99,043





(a)
            Restated
                to reflect a reclassification to accrued expenses of $4.3 million
                for
                discounts due to customers for which no underlying accounts receivable
                existed as of December 31, 2006.




**Allowance
                for doubtful accounts****For
                the nine-month**
              **period
                ended****September
                29, 2007**
            
            **September
                30, 2006**Balance
                at beginning of period
            
            $
            (2,465
            )
            $
            (1,847
            )Additions
                - charge to expense
            
            
            -
            
            
            (10,442
            )Adjustments
                and/or deductions
            
            
            2,438
            
            
            1,831Balance
                at end of period
            
            $
            (27
            )
            $
            (10,458
            )




13




The
      following tables summarize the activity for the nine months ended September
      29,
      2007 and September 30, 2006, respectively, in the accounts affected by the
      estimated provisions described below:





**For
                the nine months ended September 29, 2007****Accounts
                receivable reserves**
            
            **Beginning
                balance**(3)
            
            **Provision
                recorded**
              **for
                current period sales**
            
            **(Provision)
                reversal recorded**
              **for
                prior period sales**
            
            **Credits
                processed**
            
            **Ending
                balance**Chargebacks
            
            $
            (51,891
            )
            $
            (253,057
            )
            $
            -
            (1)
            $
            265,788
            
            $
            (39,160
            )Rebates
                and incentive programs
            
            
            (85,888
            )
            
            (150,480
            )
            
            3,109
            
            
            172,174
            
            
            (61,085
            )Returns
            
            
            (42,905
            )
            
            (24,646
            )
            
            (3,164
            )
            
            18,712
            
            
            (52,003
            )Cash
                discounts and other
            
            
            (18,037
            )
            
            (55,144
            )
            
            211
            
            
            51,598
            
            
            (21,372
            )Total
            
            $
            (198,721
            )
            $
            (483,327
            )
            $
            156
            
            $
            508,272
            
            $
            (173,620
            )**Accrued
                liabilities**(2)
            
            $
            (10,412
            )
            $
            (13,006
            )
            $
            -
            
            $
            7,332
            
            $
            (16,086
            )





**For
                the nine months ended September 30, 2006****Accounts
                receivable reserves**
            
            **Beginning
                balance**
            
            **Provision
                recorded**
              **for
                current period sales**
            
            **(Provision)
                reversal recorded for prior period sales**
            
            **Credits
                processed**
            
            **Ending
                balance**Chargebacks
            
            $
            (102,256
            )
            $
            (268,630
            )
            $
            -
            (1)
            $
            290,633
            
            $
            (80,253
            )Rebates
                and incentive programs
            
            
            (50,991
            )
            
            (156,674
            )
            
            -
            
            
            123,565
            
            
            (84,100
            )Returns
            
            
            (32,893
            )
            
            (29,757
            )
            
            (7,686
            )
            
            21,508
            
            
            (48,828
            )Cash
                discounts and other
            
            
            (15,333
            )
            
            (35,722
            )
            
            -
            
            
            36,790
            
            
            (14,265
            )Total
            
            $
            (201,473
            )
            $
            (490,783
            )
            $
            (7,686
            )
            $
            472,496
            
            $
            (227,446
            )**Accrued
                liabilities**(2)
            
            $
            (9,040
            )
            $
            (11,943
            )
            $
            85
            
            $
            11,858
            
            $
            (9,040
            )





(1)
      The
      amount of provision or reversal of reserves related to prior periods for
      chargebacks is not determinable on a product or customer specific basis:
      however, based upon historical analysis and analysis of activity in subsequent
      periods, the Company has determined that its chargeback estimates remain
      reasonable.





(2)
      Includes amounts due to customers for which no underlying accounts receivable
      exists, including Medicaid rebates.





(3)
      Restated to reflect a reclassification to accrued expenses of $4.3 million
      for
      discounts due to customers for which no underlying accounts receivable existed
      as of December 31, 2006.





The
      Company sells its products directly to wholesalers, retail drug store chains,
      drug distributors, mail order pharmacies and other direct purchasers and
      customers that purchase its products indirectly through the wholesalers,
      including independent pharmacies, non-warehousing retail drug store chains,
      managed health care providers and other indirect purchasers. The Company has
      entered into agreements at negotiated contract prices with those health care
      providers that purchase products through the Company’s wholesale customers at
      those contract prices. Chargeback credits are issued to wholesalers for the
      difference between the Company’s invoice price to the wholesaler and the
      contract price through which the product is resold to health care providers.
      Approximately 59% and 50% **** of
      the
      Company’s net product sales were derived from the wholesale distribution channel
      for the nine months ended September 29, 2007 and September 30, 2006,
      respectively. The information that the Company considers when establishing
      its
      chargeback reserves includes contract and non-contract sales trends, average
      historical contract pricing, actual price changes, processing time lags and
      customer inventory information from its three largest wholesale customers.
      The
      Company’s chargeback provision and related reserve vary with changes in product
      mix, changes in customer pricing and changes to estimated wholesaler inventory.





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





14




Pursuant
      to a drug rebate agreement with the Centers for Medicare and Medicaid Services
      and similar supplemental agreements with various states, the Company provides
      such states with a rebate on drugs dispensed under the Medicaid program. The
      Company determines its estimate of Medicaid rebate accrual primarily based
      on
      historical experience of claims submitted by the various states and any new
      information regarding changes in the Medicaid program that might impact the
      Company’s provision for Medicaid rebates. In determining the appropriate accrual
      amount the Company considers historical payment rates; processing lag for
      outstanding claims and payments; and levels of inventory in the distribution
      channel. The Company reviews the accrual and assumptions on a quarterly basis
      against actual claims data to help ensure that the estimates made are
      reliable.





The
      Company accepts returns of product according to the following criteria: (i)
      the
      product returns must be approved by authorized personnel in writing or by
      telephone with the lot number and expiration date accompanying any request;
      and
      (ii) the Company generally will accept returns of products from any customer
      and
      will provide the customer with a credit memo for such returns if such products
      are returned within six months prior to, and until 12 months following, such
      products’ expiration date. The Company records a provision for product returns
      based on historical experience, including actual rate of expired and damaged
      returns, average remaining shelf-lives of products sold, which generally range
      from 12 to 36 months, and estimated return dates. Additionally the Company
      considers other factors when estimating its current period return provision,
      including levels of inventory in the distribution channel, significant market
      changes that may impact future expected returns, and actual product returns
      and
      may record additional provisions for specific returns that it believes are
      not
      covered by the historical rates.





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





The
      Company may at its discretion provide price adjustments due to various
      competitive factors, through shelf-stock adjustments on customers’ existing
      inventory levels. There are circumstances under which the Company may not
      provide price adjustments to certain customers and consequently, as a matter
      of
      business strategy, may lose future sales volume to competitors rather than
      reduce its pricing.





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





*Use
      of Estimates in Reserves*




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





In
      February 2007 and in August 2007, the Company launched propranolol HCl ER and
      metoprolol succinate ER, respectively. As is customary and in the ordinary
      course of business, the Company’s first quarter shipments for propranolol and
      the third quarter shipments for metoprolol included initial trade inventory
      stocking that the Company believed was commensurate with new product
      introductions. At the time of each launch, the Company was able to make
      reasonable estimates of product returns, rebates, chargebacks and other sales
      reserves by using historical experience of similar generic product launches
      and
      significant existing demand for the products.




15




*Major
      Customers*




The
      amounts due from the Company’s four largest customers, McKesson Corporation,
      Cardinal Health Inc., AmerisourceBergen Corporation and Walgreen Co., accounted
      for approximately 28%, 19%, 16% and 11%, respectively, of the gross accounts
      receivable balance at September 29, 2007 and approximately 29%, 17%, 10%, and
      14%, respectively, of the gross accounts receivable balance at December 31,
      2006.





*Other*




In
      June
      2007, the Company terminated the agreements related to certain cephalosporin
      and
      non-cephalosporin products. The Company wrote off certain receivable and
      inventory amounts totaling approximately $1.2 million in the second quarter
      of
      2007.




**Note
      7** **-** **Inventories:**





**September
                29,**
            
            **December
                31,****2007**
            
            **2006**Raw
                materials and supplies
            
            $
            23,238
            
            $
            32,713Work-in-process
            
            
            5,681
            
            
            5,779Finished
                goods
            
            
            52,130
            
            
            67,830$
            81,049
            
            $
            106,322





Inventory
      write-offs were $14.9 million and $20.5 million for the nine month periods
      ended
      September 29, 2007 and September 30, 2006, respectively. As of September 29,
      2007, the Company had inventories related to products that were not available
      to
      be marketed of $9.0 million, comprised of pre-launch inventories of $6.2 million
      and research and development inventories of $2.8 million.





**Note
      8 - Property, Plant and Equipment, net:**





**September
                29,**
            
            **December
                31,****2007**
            
            **2006**Land
            
            $
            1,888
            
            $
            1,888Buildings
            
            
            26,574
            
            
            27,372Machinery
                and equipment
            
            
            52,957
            
            
            55,210Office
                equipment, furniture and fixtures
            
            
            6,287
            
            
            6,524Computer
                software and hardware
            
            
            30,306
            
            
            29,464Leasehold
                improvements
            
            
            15,114
            
            
            15,393Construction
                in progress
            
            
            3,721
            
            
            1,250136,847
            
            
            137,101Less
                accumulated depreciation and amortization
            
            
            54,945
            
            
            47,946$
            81,902
            
            $
            89,155





Depreciation
      and amortization expense related to property, plant and equipment was $3.4
      million and $2.7 million for the three months ended September 29, 2007 and
      September 30, 2006, respectively, and $10.2 million and $7.6 million for the
      nine months ended September 29, 2007 and September 30, 2006,
      respectively.




16




**Note
      9** **-** **Intangible Assets, net:**





**September
                29,**
            
            **December
                31,****2007**
            
            **2006**Trademark
                licensed from Bristol-Myers Squibb Company, net of accumulated
                amortization of $1,940 and $917
            
            $
            8,060
            
            $
            9,084Teva
                Pharmaceutical Industries, Inc. Asset Purchase Agreement, net of
                accumulated amortization of $2,086 and $1,421
            
            
            6,402
            
            
            7,067Ivax
                License Agreement, net of accumulated amortization of $4,939 and
                $1,845
            
            
            3,061
            
            
            6,155Paddock
                Licensing Agreement, net of accumulated amortization of $1,000 and
                $250
            
            
            5,000
            
            
            5,750Spectrum
                Development and Marketing Agreement, net of accumulated amortization
                of $0
                and $0
            
            
            5,000
            
            
            5,000Genpharm,
                Inc. Distribution Agreement, net of accumulated amortization of $6,680
                and
                $6,138
            
            
            4,153
            
            
            4,695Bristol-Myers
                Squibb Company Asset Purchase Agreement, net of accumulated amortization
                of $9,332 and $8,078
            
            
            2,368
            
            
            3,621FSC
                Laboratories Agreement, net of accumulated amortization of $3,688
                and
                $2,756
            
            
            2,134
            
            
            3,066Intellectual
                property, net of accumulated amortization of $871 and $667
            
            
            1,819
            
            
            2,023Other
                intangible assets, net of accumulated amortization of $4,527 and
                $3,229
            
            
            722
            
            
            1,419$
            38,719
            
            $
            47,880




The
      Company recorded amortization expense related to intangible assets of $9.8
      million and $8.4 million, respectively, for the nine-month periods ended
      September 29, 2007 and September 30, 2006 and are included in cost of goods
      sold. During the first quarter of 2007, the Company made a $0.6 million
      milestone payment to Nortec Development, Inc. related to the commercialization
      of propranolol HCl ER that was recorded in other intangible assets. Amortization
      expense related to the intangible assets currently being amortized is expected
      to total $2.5 million for the remainder of 2007, $12.0 million in 2008, $8.0
      million in 2009, $6.7 million in 2010, $5.2 million in 2011 and $4.3 million
      thereafter.





The
      Company evaluates all intangible assets for impairment quarterly or whenever
      events or other changes in circumstances indicate that the carrying value of
      an
      asset may no longer be recoverable. As of September 29, 2007, the Company
      believes its net intangible assets are recoverable.




**Note
      10** **-** **Income Taxes:**





On
      January 1, 2007, the Company adopted FIN 48. The cumulative effect of applying
      the provisions of FIN 48 resulted in a reclassification of $13.0 million of
      tax
      liabilities from current to non-current and did not require adjustment to
      retained earnings. The total amount of unrecognized tax benefits as of January
      1, 2007 was $9.4 million, excluding interest and penalties, and did not change
      materially as of September 29, 2007. Of this amount $8.8 million, if recognized,
      would lower the Company’s effective tax rate in future periods. The total amount
      of unrecognized tax benefits could increase or decrease within the next twelve
      months for a number of reasons including the expiration of statutes of
      limitations, audit settlements, tax examination activities and the recognition
      and measurement considerations under FIN 48. The Company does not believe that
      the total amount of the unrecognized tax benefits will significantly increase
      or
      decrease over the next twelve months.





The
      Company has elected to retain its existing accounting policy with respect to
      the
      treatment of interest and penalties attributable to income taxes in accordance
      with FIN 48, and continues to reflect interest and penalties attributable to
      income taxes, to the extent they arise, as a component of its income tax
      provision or benefit as well as its outstanding income tax assets and
      liabilities. As of January 1, 2007, the Company had accrued $3.6 million of
      interest and penalties related to uncertain tax positions. As of September
      29,
      2007, this amount increased to $4.3
      million and is
      included in other long-term liabilities in the Company’s condensed consolidated balance sheet.





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





Current
      deferred income tax assets at September 29, 2007 and December 31, 2006 consisted
      of temporary differences primarily related to accounts receivable reserves.
      Non-current deferred income tax assets at September 29, 2007 and December 31,
      2006 consisted of the tax benefit related to purchased call options, acquired
      in-process research and development and timing differences primarily related
      to
      intangible assets and stock options.





The
      Company’s effective tax rates for the three months ended September 29, 2007 and
      September 30, 2006 were 35% and 25%, respectively. The Company’s effective tax
      rates for the nine months ended September 29, 2007 and September 30, 2006 were
      35% and 25%, respectively.




17




**Note
      11 - Short-Term and Long-Term Debt:**




*Short-Term
      Debt*





The
      Company finances a portion of its insurance premiums and classifies the amounts
      due as short-term debt. As of September 29, 2007 and December 31, 2006, the
      Company had recorded $0.0 million and $4.4 million, respectively, as short-term
      debt related to financing these insurance premiums.





*Long-Term
      Debt*





**September
                29,**
            
            **December
                31,****2007**
            
            **2006**Senior
                subordinated convertible notes(a)
            
            $
            200,000
            
            $
            200,000Other
                (b)
            
            
            19
            
            
            65200,019
            
            
            200,065Less
                current portion
            
            
            (200,019
            )
            
            (200,065
            )$
            -
            
            $
            -





(a)
            Senior
                subordinated convertible notes in the aggregate principal amount
                of $200.0
                million. The notes bear interest at an annual rate of 2.875%, payable
                semi-annually on March 30 and September 30 of each year. The notes
                are
                convertible into common stock at an initial conversion price of $88.76
                per
                share, upon the occurrence of certain events. Upon conversion, the
                Company
                has agreed to satisfy the conversion obligation in cash in amount
                equal to
                the principal amount of the notes converted. The notes mature on
                September
                30, 2010, unless earlier converted or repurchased.  The Company
                may not redeem the notes prior to their maturity date. On September
                29,
                2007, the senior subordinated convertible notes had a quoted market
                value
                of $176.5 million. See “Legal Proceedings” in Note 14, “Commitments,
                Contingencies and Other Matters” for discussion involving notices of
                default and acceleration the Company received from the Trustee of
                the
                Company’s 2.875% Senior Subordinated Convertible Notes due 2010 and the
                subsequent related litigation. Until the matter is resolved, the
                Company
                is recording the payment obligations as a current liability because
                the
                Court in the matter could (i) rule against the Company’s position and (ii)
                determine that the appropriate remedy would be theaccelerated
                paymentof
                the Notes. Accordingly, the Company cannot consider the possibility
                of
                accelerated payment to be remote.


(b)
            Includes
                primarily amounts due under capital leases for computer
                equipment.




18




**Note
      12** **-** **Changes in Stockholders’ Equity:**




Changes
      in the Company’s Common Stock, Additional Paid-In Capital and Accumulated Other
      Comprehensive Income (loss) accounts during the nine-month period ended
      September 29, 2007 were as follows:




**Accumulated****Additional**
            
            **Other****Common
                Stock**
            
            **Paid-In**
            
            **Comprehensive****Shares**
            
            **Amount**
            
            **Capital**
            
            **Income
                (loss)**Balance,
                December 31, 2006
            
            
            35,901
            
            $
            359
            
            $
            254,013
            
            $
            (431
            )Unrealized
                gain on available for sale securities, net of tax
            
            
            -
            
            
            -
            
            
            -
            
            
            1,782Exercise
                of stock options
            
            
            59
            
            
            -
            
            
            341
            
            
            -Tax
                benefit from exercise of stock options
            
            
            -
            
            
            -
            
            
            459
            
            
            -Tax
                deficiency related to vesting of restricted stock
            
            
            -
            
            
            -
            
            
            (739
            )
            
            -Forfeitures
                of restricted stock
            
            
            (108
            )
            
            -
            
            
            -
            
            
            -Issuances
                of restricted stock
            
            
            550
            
            
            5
            
            
            -
            
            
            -Compensatory
                arrangements
            
            
            -
            
            
            -
            
            
            13,756
            
            
            -Other
            
            
            20
            
            
            -
            
            
            164
            
            
            -Balance,
                September 29, 2007
            
            
            36,422
            
            $
            364
            
            $
            267,994
            
            $
            1,351





**Three
                months ended**
            
            **Nine
                months ended****Sept
                29,**
            
            **Sept
                30,**
            
            **Sept
                29,**
            
            **Sept
                30,****2007**
            
            **2006**
            
            **2007**
            
            **2006****Comprehensive
                Income:**Net
                income
            
            $
            1,269
            
            $
            4,387
            
            $
            45,581
            
            $
            1,696Other
                comprehensive income:Unrealized
                (loss) gain on available for sale securities, net of tax
            
            
            (1,174
            )
            
            2,448
            
            
            1,782
            
            
            3,529Comprehensive
                Income
            
            $
            95
            
            $
            6,835
            
            $
            47,363
            
            $
            5,225





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




19




**Note
      13** **-** **Earnings Per Share:**




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




**Three
                months ended**
            
            **Nine
                months ended****September
                29, 2007**
            
            **September
                30, 2006**
            
            **September
                29, 2007**
            
            **September
                30, 2006**Net
                income
            
            $
            1,269
            
            $
            4,387
            
            $
            45,581
            
            $
            1,696Basic:Weighted
                average number of common shares outstanding
            
            
            34,738
            
            
            34,468
            
            
            34,677
            
            
            34,401Net
                income per share of common stock
            
            $
            0.04
            
            $
            0.13
            
            $
            1.31
            
            $
            0.05Assuming
                dilution:Weighted
                average number of common shares outstanding
            
            
            34,738
            
            
            34,468
            
            
            34,677
            
            
            34,401Effect
                of dilutive securities
            
            
            168
            
            
            98
            
            
            272
            
            
            235Weighted
                average number of common shares outstanding
            
            
            34,906
            
            
            34,566
            
            
            34,949
            
            
            34,636Net
                income per share of common stock
            
            $
            0.04
            
            $
            0.13
            
            $
            1.30
            
            $
            0.05





Outstanding
      options of 4,281 and 5,074 as of September 29, 2007 and September 30, 2006,
      respectively, were not included in the computation of diluted earnings per
      share
      because their exercise prices were greater than the average market price of
      the
      common stock during the respective periods and their inclusion would, therefore,
      have been anti-dilutive. In addition, outstanding warrants sold concurrently
      with the sale of senior subordinated convertible notes in September 2003 were
      not included in the computation of diluted earnings per share as of September
      29, 2007 and September 30, 2006. The warrants are exercisable for an aggregate
      of 2,253 shares at an exercise price of $105.20 per share.





**Note
      14** **-** **Commitments, Contingencies and Other Matters:**




*Pension
      Plan:*




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





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





The
      Pension Plan has been settled in the second quarter of 2007. During the second
      quarter of 2007, the Company received a favorable determination on the
      termination of the Pension Plan from the Internal Revenue Service and has filed
      the appropriate notice with the Pension Benefit Guaranty Corporation. Concurrent
      with the approval of the termination, the Company distributed benefits or
      purchased annuities to cover each of the participants in the Pension Plan.
      Finally, the Company has met the advance notification requirements set forth
      in
      the Single-Employer Pension Plan Amendment Act of 1986 (the “SEPPAA”) and has
      notified each party affected by this termination, as required by the SEPPAA.
      The
      Company recorded a loss of $0.09 million in the fourth quarter of 2006 related
      to the settlement. No further financial impacts are anticipated in 2007 or
      beyond related to the settlement.





*Legal
      Proceedings*




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




**Contractual
      Matters**




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




20




**Corporate
      Litigation**




As
      previously disclosed in the Company’s Current Report on Form 8-K, filed
      July 24, 2006, the Company and certain of its executive officers have been
      named as defendants in several purported stockholder class action lawsuits
      filed
      on behalf of purchasers of common stock of the Company between April 29,
      2004 and July 5, 2006. The lawsuits followed the Company’s July 5,
      2006 announcement regarding the restatement of certain of its financial
      statements and allege that the Company and certain members of its management
      engaged in violations of the Securities Exchange Act of 1934, as amended, by
      issuing false and misleading statements concerning the Company’s financial
      condition and results. The class actions have been consolidated and are pending
      in the United States District Court, District of New Jersey. The Court has
      appointed co-lead plaintiffs and co-lead counsel. Co-lead plaintiffs filed
      a
      Consolidated Amended Complaint on April 30, 2007, purporting to represent
      purchasers of common stock of the Company between July 23, 2001 and July 5,
      2006. Defendants filed a motion to dismiss the Amended Complaint on June 29,
      2007. The Company intends and the members of management named as defendants
      have
      stated their intentions to vigorously defend the lawsuits and any additional
      lawsuits that may hereafter be filed with respect to the restatement.
      Additionally, the Company has been informed by a letter from the Staff of the
      SEC dated July 7, 2006, that the SEC is conducting an informal
      investigation of the Company related to its restatement. The Company intends
      to
      fully cooperate with and assist the SEC in this investigation. The letter from
      the SEC states that the investigation should not be construed as an indication
      by the SEC or its Staff that any violation of law has occurred or as a
      reflection upon any person, entity or security. In addition, on September 6,
      2006, in connection with this informal investigation, the SEC also requested
      certain information with respect to the Company’s internal review of its
      accounting for historical stock option grants. The Company has provided the
      information that the SEC has requested  in
      December 2006. The SEC has not contacted the Company about its informal
      investigation since the Company filed its Annual Report on Form 10-K/A for
      2005
      on March 13, 2007.




On
      August 14, 2006, individuals claiming to be stockholders of the Company
      filed a derivative action in the U.S. District Court for the Southern District
      of New York, purportedly on behalf of the Company, against the current and
      certain former directors and certain current and former officers of the Company
      as a nominal defendant. The plaintiffs in this action allege that, among other
      things, the named defendants breached their fiduciary duties to the Company
      based on substantially the same factual allegations as the class action lawsuits
      referenced above. The plaintiffs also alleged that certain of the defendants
      have been unjustly enriched based on their receipt of allegedly backdated
      options to purchase shares of common stock of the Company, and seek to require
      those defendants to disgorge any profits made in connection with their exercise
      of such options and additional attendant damages relating to allegedly backdated
      options during the period from January 1, 1996 to the present. The action
      has been transferred to the United States District Court, District of New
      Jersey. On June 29, 2007, the plaintiffs filed their amended complaint and
      in
      connection therewith, dropped their claims related to alleged stock option
      backdating. Defendants have made a motion to dismiss the complaint, which motion
      has been fully briefed. The Company intends and each of the individuals named
      as
      defendants have stated their intentions to vigorously defend against the
      remaining allegations.





On
      September 1, 2006, the Company received a notice of default from the
      American Stock Transfer & Trust Company, as trustee (the “Trustee”) of the
      Company’s 2.875% Senior Subordinated Convertible Notes due 2010 (the “Notes”).
      The Trustee claims, in essence, that the Company’s failure to include financial
      statements in its Quarterly Report on Form 10-Q for the second quarter of 2006
      constituted a default under Section 6.2 of the Indenture, dated as of
      September 30, 2003 (the “Indenture”), between the Company, as issuer, and
      the Trustee, relating to the Notes. The notice of default asserted that if
      the
      purported default continued unremedied for 30 days after the receipt of the
      notice, an “event of default” would occur under the Indenture. Under the
      Indenture, the occurrence of an event of default would give the Trustee or
      certain holders of the Notes the right to declare all unpaid principal and
      accrued interest on the Notes immediately due and payable. On October 2,
      2006, the Company received a notice of acceleration from the Trustee purporting
      to accelerate payment of the Notes.




The
      Company believes that it has complied with its obligations under the Indenture
      relating to the Notes. Therefore, the Company believes that the above-mentioned
      notice of default and notice of acceleration are invalid and without merit.
      Under the Indenture, the Company is required only to provide the Trustee with
      copies of its annual and other reports (or copies of such portions of such
      reports as the SEC may by rules and regulations prescribe) that it is required
      to file with the SEC pursuant to Section 13 or 15(d) of the Securities Exchange
      Act of 1934, as amended, within 15 calendar days after it files such annual
      and
      other reports with the SEC. Moreover, the Company’s Indenture specifically
      contemplates providing the Trustee with portions of reports. On August 24,
      2006
      (within 15 days of filing with the SEC), the Company provided to the Trustee
      a
      copy of its Quarterly Report on Form 10-Q for the second quarter of 2006. The
      Company’s Form 10-Q did not include the Company’s financial statements for the
      second quarter of 2006 and related Management’s Discussion and Analysis due to
      the Company’s work to restate certain of its past financial statements, and,
      therefore, in accordance with SEC rules, the Company filed a Form 12b-25
      Notification of Late Filing disclosing the omissions. The Company’s Form 12b-25
      also was provided to the Trustee on August 24, 2006. Accordingly, the Company
      believes that it complied with the Indenture provision in question.




21




After
      the
      Company communicated its position to the Trustee, the Trustee filed a lawsuit,
      on October 19, 2006, on behalf of the holders of the Notes in the Supreme
      Court of the State of New York, County of New York, alleging a breach of the
      Indenture and of an alleged covenant of good faith and fair dealing. The lawsuit
      demands, among other things, that the Company pay the holders of the Notes
      either the principal, any accrued and unpaid interest and additional interest
      (as such term is defined in the Indenture), if any, or the difference between
      the fair market value of the Notes on October 2, 2006 and par, whichever
      the Trustee elects, or in the alternative, damages to be determined at trial,
      alleged by the Trustee to exceed $30 million. The Company filed a Notice of
      Removal to remove the lawsuit to the U.S. District Court for the Southern
      District of New York and has filed its answer to the complaint in that Court.
      On
      January 19, 2007, the Trustee filed a motion for summary judgment along
      with supporting documentation. On February 16, 2007, the Company filed its
      response to the Trustee’s motion for summary judgment and cross-moved for
      summary judgment in its favor. The Court has not yet ruled on the motions.
      Until
      the matter is resolved, the Company is recording the payment obligations as
      a
      current liability on the condensed consolidated balance sheets because the
      Court
      in the matter could (i) rule against the Company’s position and (ii) determine
      that the appropriate remedy would be the accelerated payment of the convertible
      notes.





**Patent
      Related Matters**




On
      July
      7, 2004, Xcel Pharmaceuticals, Inc. (now known as Valeant Pharmaceuticals,
      North
      America (“Valeant”)) filed a lawsuit against Kali Laboratories, Inc. (“Kali”), a
      wholly owned subsidiary of the Company, in the United States District Court
      for
      the District of New Jersey. Valeant alleged that Kali infringed U.S. Patent
      No.
      5,462,740 (“the ‘740 patent”) by submitting a Paragraph IV certification to the
      FDA for approval of a generic version of Diastat brand of diazepam rectal gel.
      Kali has denied Valeant’s allegation, asserting that the ‘740 patent was not
      infringed and is invalid and/or unenforceable. Kali also has counterclaimed
      for
      declaratory judgments of non-infringement, invalidity and unenforceability
      of
      the ‘740 patent as well as a judgment that the ‘740 patent was unenforceable due
      to patent misuse. The parties conducted fact and expert discovery through April
      2006. The parties submitted their proposed final pretrial order in June 2006
      and
      appeared before the Court for pretrial conferences on June 13, 2006 and November
      16, 2006. Under applicable law and regulations, the filing of the lawsuit
      triggered an automatic 30-month stay of FDA approval of Kali’s Abbreviated New
      Drug Application, or ANDA. That stay expired on November 29, 2006. The parties
      appeared before the Court for settlement conferences on May 17, 2007 and June
      28, 2007. At the June 28 settlement conference the parties entered into an
      agreement in principle to settle the action. Immediately thereafter, the Court
      entered an order dismissing the action without prejudice to its being reinstated
      if the parties have not finalized their settlement agreement within 60 days.
      On
      October 16, 2007, the parties submitted a stipulated dismissal of the litigation
      which was entered on October 23, 2007, terminating the lawsuit. The settlement
      terms also permitted the Company, through its marketing partner Barr
      Laboratories, Inc., ("Barr") to introduce generic versions of the Diastat
      products on or after September 1, 2010. Profits from the sale of these products
      will be split between the Company and Barr.




On
      November 1, 2004, Morton Grove Pharmaceuticals, Inc. (“Morton Grove”) filed a
      lawsuit against the Company in the United States District Court for the Northern
      District of Illinois, seeking a declaratory judgment that four Company patents
      relating to megestrol acetate oral suspension are invalid, unenforceable and
      not
      infringed by a Morton Grove product that was launched in the fourth quarter
      of
      2004. Morton Grove acknowledges that its product is covered by the Company’s
      patent claims. The Company asserted counterclaims that the Morton Grove product
      infringed three patents and that such infringement was willful. Morton Grove
      amended its complaint to allege antitrust violations. On
      November 29, 2007, a stipulated dismissal with prejudice was signed by the
      judge
      with each party only liable for its own costs and attorneys’ fees. ****




On
      July
      15, 2003, the Company filed a lawsuit against Roxane Laboratories, Inc.
      (“Roxane”) in the United States District Court for the District of New Jersey.
      The Company alleged that Roxane had infringed the Company’s U.S. Patents
      numbered 6,593,318 and 6,593,320 and that the infringement was willful. Roxane
      has denied these allegations and has counterclaimed for declaratory judgments
      of
      non-infringement and invalidity of both patents. On September 8, 2006, the
      Court
      issued a claim construction ruling on certain claim terms in dispute between
      the
      parties. Based on that construction, the Court ruled in favor of the Company
      and
      dismissed Roxane’s motion for summary judgment of non-infringement. On November
      8, 2006, the Court ruled that the claims at issue in these patents were invalid
      as non-enabled on summary judgment. On December 8, 2006, the Company appealed
      the ruling to the Federal Circuit Court of Appeals, highlighting the district
      court’s failure to apply its own claim construction and to consider the
      testimony of the Company’s experts before awarding summary judgment to Roxane.
      On October 26, 2007, the U.S. Circuit Court of Appeals for the Federal Circuit
      affirmed the New Jersey District Court's ruling of invalidity for
      non-enablement.




On
      November 25, 2002, Ortho-McNeil Pharmaceutical, Inc. (“Ortho-McNeil”) filed a
      lawsuit against Kali, a wholly owned subsidiary of the Company, in the United
      States District Court for the District of New Jersey (the "2002 Litigation").
      Ortho-McNeil alleged that Kali infringed U.S. Patent No. 5,336,691 (the “‘691
      patent”) by submitting a Paragraph IV certification to the FDA for approval of
      tablets containing tramadol HCl and acetaminophen. Kali denied Ortho-McNeil’s
      allegation, asserting that the ‘691 patent was not infringed and is invalid
      and/or unenforceable, and that the lawsuit is barred by unclean hands. Kali
      also
      counterclaimed for declaratory judgments of non-infringement, invalidity and
      unenforceability of the ‘691 patent. Ortho-McNeil amended its complaint on July
      27, 2005 to assert infringement against the Company, and to include a claim
      for
      damages against the Company and Kali. The Company and Kali have answered and
      counterclaimed, alleging that the ‘691 patent is not infringed, and is invalid
      and unenforceable for inequitable conduct. On August 1, 2006, the Patent and
      Trademark Office reissued the ‘691 patent as U.S. Patent No. RE 39,221 (the
      "'221 Patent"), containing original claim 6 from the '691 Patent and several
      additional new claims. On August 1 and August 4, 2006, Ortho-McNeil filed a
      complaint and then an amended complaint against Kali, the Company, and two
      other
      companies, Barr and Caraco Pharmaceutical Laboratories, Ltd. (“Caraco”) (the
      "2006 Litigation"). Ortho-McNeil alleged infringement and willful infringement
      of the claims of the re-issue patent (other than claim 6, which is the subject
      of the 2002 Litigation) against the Company through the Company’s marketing of
      its tramadol HCl and acetaminophen tablets. Ortho-McNeil made similar
      allegations against Barr and Caraco. On April 4, 2007, the United States
      District Court for the District of New Jersey granted Kali's and the Company's
      motions for summary judgment that claim 6 of the '221 Patent, the only claim
      at
      issue in the 2002 Litigation, was invalid and was not infringed by the Company's
      ANDA product. Ortho-McNeil filed a motion requesting permission to immediately
      appeal this decision, and the Court denied Ortho-McNeil's motion and entered
      an
      order consolidating the 2002 and 2006 litigations. The Company has requested
      permission from the Court to file immediate summary judgment motions as to
      all
      of the remaining '221 Patent claims at issue, and also has requested that the
      Court proceed to trial on the Company's counterclaims for invalidity,
      unenforceability and intervening rights as to the '221 Patent. Ortho-McNeil
      has
      opposed the Company's requests, and the parties are awaiting a decision by
      the
      Court on these requests. On July 18, 2007, the Company entered into a settlement
      and license agreement with Ortho-McNeil that resolves patent litigation related
      to the Company’s sales of its generic tramadol HCl and acetaminophen product.
      Under the terms of the settlement, the Company will pay Ortho-McNeil a royalty
      on sales of its generic product commencing with sales from August 2006 through
      November 15, 2007 by which time the Company will cease selling its generic
      product. Commensurate with the level of sales of tramadol HCl and acetaminophen
      tablets, the Company has reflected these payments in its condensed consolidated
      financial statements as of and for the periods ended September 29, 2007. In
      accordance with the settlement and license agreement, the pending patent
      litigation between Ortho McNeil, the Company and Kali in the United States
      District Court for the District Court of New Jersey will be concluded. As part
      of the settlement, the Company is entering into a consent judgment on the
      validity, enforceability and infringement of the ‘221 Patent.




22




The
      Company entered into a licensing agreement with developer Paddock Laboratories,
      Inc. (“Paddock”) to market testosterone 1% gel, a generic version of Unimed
      Pharmaceuticals, Inc.’s (“Unimed”) product Androgel®. Pursuant to this
      agreement, the Company is responsible for management of any litigation and
      payment of all legal fees associated with this product. The product, if
      successfully brought to market, would be manufactured by Paddock and marketed
      by
      the Company. Paddock has filed an ANDA (that is pending with the FDA) for the
      testosterone 1% gel product. As a result of the filing of the ANDA, Unimed
      and
      Laboratories Besins Iscovesco (“Besins”), co-assignees of the patent-in-suit,
      filed a lawsuit against Paddock in the United States District Court for the
      Northern District of Georgia, alleging patent infringement on August 22, 2003.
      The Company has an economic interest in the outcome of this litigation by virtue
      of its licensing agreement with Paddock. Unimed and Besins sought an injunction
      to prevent Paddock from manufacturing the generic product. On November 18,
      2003,
      Paddock answered the complaint and filed a counterclaim, seeking a declaration
      that the patent-in-suit is invalid and/or not infringed by Paddock’s product. On
      September 13, 2006, the Company acquired from Paddock all rights to the ANDA
      for
      testosterone 1% gel, a generic version of Unimed’s product Androgel® for $6
      million. The lawsuit was resolved by settlement. The settlement and license
      agreement terminates all on-going litigation. The settlement and license
      agreement also permits the Company to launch the generic version of the product
      no later than February 28, 2016, assuring the Company’s ability to market a
      generic version of Androgel® well before the expiration of the patents at issue.
      On March 7, 2007, the Company was issued a Civil Investigative Demand seeking
      information and documents in connection with the court-approved settlement
      in
      2006 of the patent infringement case, Unimed v. Paddock, in the U.S. District
      Court for Northern District of Georgia. The Bureau of Competition for the
      Federal Trade Commission (“FTC”) is investigating whether the settlement of the
      litigation constituted unfair methods of competition in a potential violation
      of
      Section 5 of the FTC Act. The Company believes it has complied with all
      applicable laws in connection with the court-approved settlement and it intends
      to co-operate with the FTC in this matter.




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




On
      April
      28, 2006, CIMA Labs, Inc. (“CIMA”) and Schwarz Pharma, Inc. (“Schwarz Pharma”)
      filed separate lawsuits against the Company in the United States District Court
      for the District of New Jersey (CIMA Labs, Inc. et al. v. Par Pharmaceutical
      Companies, Inc. et al., (Civil Action Nos. 06-CV-1970, 1999 (DRD)(ES)). CIMA
      and
      Schwarz Pharma each have alleged that the Company infringed U.S. Patent Nos.
      6,024,981 (the “’981 patent”) and 6,221,392 (the “’392 patent”) by submitting a
      Paragraph IV certification to the FDA for approval of alprazolam orally
      disintegrating tablets. CIMA owns the ’981 and ’392 patents and Schwarz Pharma
      is CIMA’s exclusive licensee. The two lawsuits were consolidated on January 29,
      2007. In response to the lawsuit, the Company has answered and counterclaimed
      denying CIMA’s and Schwarz Pharma’s infringement allegations, asserting that the
’981 and ’392 patents are not infringed and are invalid and/or unenforceable.
      The parties have exchanged written discovery. All 40 claims in the ’981 patent
      were rejected in a non-final office action in a reexamination proceeding at
      the
      United States Patent and Trademark Office (“PTO”) on February 24, 2006. The PTO
      again rejected all 40 claims in a second non-final office action dated February
      24, 2007. The ‘392 patent is also the subject of a reexamination proceeding. The
      Company will continue to monitor these ongoing reexamination proceedings. CIMA
      has moved to stay this lawsuit pending the outcome of the reexamination
      proceedings and to consolidate this lawsuit with another lawsuit in the same
      district involving the same patents (CIMA Labs, Inc. et al. v. Actavis Group
      hf
      et al., (Civil Action No. 07-CV-0893 (DRD) (ES)). A hearing on these motions
      was
      held on May 30, 2007. The Company intends to vigorously defend this lawsuit
      and
      pursue its counterclaims.




23




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




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




On
      April
      10, 2007, Abbott Laboratories (“Abbott”) and Astellas Pharma Inc. (“Astellas”),
      filed an amended complaint against the Company and Par and six other defendants,
      seeking judgment alleging that U.S. Patent Nos. 4,599,334 (the “’334 patent”)
      and 4,935,507 (the “’507 patent”) are, or will be, infringed by the defendants’
planned production of cefdinir products. The Company denied Abbott and Astellas’
allegations, asserting that the ’334 and ’507 patents are not infringed and are
      invalid. The Company counterclaimed for declaratory judgments of
      non-infringement and invalidity of the patents. On September 27, 2007, the
      Company's motion for stipulated substitution of Orchid Chemicals &
Pharmaceuticals Ltd for Par was entered and the Company's involvement in the
      case was terminated.




On
      December 19, 2006, Reliant Pharmaceuticals, Inc. (“Reliant”) filed a lawsuit
      against the Company in the United States District Court for the District of
      Delaware (Reliant Pharmaceuticals, Inc. v. Par Pharmaceutical Inc., (Civil
      Action Nos. 06-CV-774-JJF)). Reliant alleged, in its Complaint, that the Company
      infringed U.S. Patent No. 5,681,588 (the “’588 patent”) by submitting a
      Paragraph IV certification to the FDA for approval to market generic 325 mg
      Propafenone HCl SR capsules. On January 26, 2007, Reliant amended its complaint
      to add the additional allegation that the Company infringed the ‘588 patent by
      submitting a Paragraph IV certification to the FDA for approval to market
      generic 225 mg and 425 mg—in addition to the 325 mg—Propafenone HCl SR capsules.
      The Company has answered and counterclaimed denying Reliant’s infringement
      allegations, and asserting that the ’588 patent is invalid and unenforceable. A
      scheduling order has been entered under which all fact and expert discovery
      will
      be completed by May 30, 2008. The parties have begun discovery and Reliant
      has
      filed a motion to disqualify Par’s counsel. The Company intends to vigorously
      defend this lawsuit and pursue its counterclaims.




On
      May 9,
      2007, Purdue Pharma Products L.P., Napp Pharmaceutical Group Ltd., Biovail
      Laboratories International SRL, and Ortho-McNeil, Inc. filed a lawsuit against
      Par in the United States District Court for the District of Delaware. The
      complaint alleges infringement of U.S. Patent No. 6,254,887 (the “’887 patent”)
      because the Company submitted a Paragraph IV certification to the FDA for
      approval of 200mg extended release tablets containing tramadol hydrochloride.
      On
      May 30, 2007, the Company filed its answer and counterclaim to the complaint
      seeking a declaration of noninfringement and invalidity of the '887 patent.
      A
      subsequent complaint was served on July 2, 2007 in the same District Court.
      The
      new complaint alleges that the Company's 100mg and 200mg extended release
      tablets containing tramadol hydrochloride infringe the ‘887 patent. The Company
      filed its answer and counterclaim on July 23, 2007 and will assert all available
      defenses in addition to seeking a declaration of noninfringement and invalidity
      of the '887 patent. On October 24, 2007, plaintiffs filed an amended complaint
      in the Delaware District Court in view of the Company's amendment of its ANDA
      to
      include the 300 mg strength of extended release tramadol. The
      Company filed its answer and counterclaims on November 13, 2007. The Company
      intends to defend this action vigorously and pursue its counterclaims against
      Purdue, Napp, Biovail and Ortho-McNeil.




On
      September 13, 2007, Santarus, Inc. ("Santarus") and The Curators of the
      University of Missouri (“Missouri”) filed a lawsuit against the Company in the
      United States District Court for the District of Delaware. The complaint alleges
      infringement of U.S. Patent Nos. 6,699,885; 6,489,346; and 6,645,988 because
      the
      Company submitted a Paragraph IV certification to the FDA for approval of 20
      mg
      and 40 mg omeprazole/sodium bicarbonate capsules. The
      Company filed its answer and counterclaims on October 7, 2007. The Company
      intends to defend this action vigorously and pursue its counterclaims against
      Santarus and Missouri.




24




On
      September 21, 2007, Sanofi-Aventis and Sanofi-Aventis U.S., LLC
      ("Sanofi-Aventis") filed a lawsuit against the Company and its development
      partner, Actavis South Atlantic ("Actavis"), in the United States District
      Court
      for the District of Delaware. The complaint alleges infringement of U.S. Patent
      Nos. 4,661,491 and 6,149,940 because the Company and Actavis submitted a
      Paragraph IV certification to the FDA for approval of 10 mg alfuzosin
      hydrochloride extended release tablets. The Company filed its answer and
      counterclaims on October 24, 2007. The Company intends to defend this action
      vigorously and pursue its counterclaims against Sanofi-Aventis.





On
      October 1, 2007, Elan Corporation, PLC filed a lawsuit against the Company
      and
      its development partner, IntelliPharmaCeutics Corp., and IntelliPharmaCeutics
      Ltd. ("IPC") in the United States District Court for the District of Delaware.
      On October 5, 2007, Celgene and Novartis filed a lawsuit against IPC in the
      United States District Court for the District of New Jersey. The complaint
      in
      the Delaware case alleged infringement of U.S. Patent Nos. 6,228,398 and
      6,730,325 because the Company submitted a Paragraph IV certification to the
      FDA
      for approval of 5, 10, 15, and 20 mg dexmethylphenidate hydrochloride extended
      release capsules. Elan filed an amended complaint on October 15, 2007. The
      original complaint in the New Jersey case alleged infringement of U.S. Patent
      Nos. 6,228,398; 6,730,325; 5,908,850; 6,355,656; 6,528,530; 5,837,284; and
      6,635,284 because the Company and IPC submitted a Paragraph IV certification
      to
      the FDA for approval of 5, 10, 15, and 20 mg dexmethylphenidate extended release
      capsules. The Company and IPC filed their answer and counterclaims in the
      Delaware case on November 19, 2007. Celgene and Novartis filed an amended
      complaint on October 15, 2007 and the Company and IPC filed their answer and
      counterclaims in the New Jersey case on November 20, 2007. The Company intends
      to defend these actions vigorously and pursue its counterclaims against Elan,
      Celgene, and Novartis.





On
      July
      6, 2007, Sanofi-Aventis and Debiopharm, S.A. filed a lawsuit against the Company
      and its development partner, MN Pharmaceuticals ("MN"), in the United States
      District Court for the District of New Jersey. The complaint alleges
      infringement of U.S. Patent Nos. 5,338,874 and 5,716,988 because the Company
      and
      MN submitted a Paragraph IV certification to the FDA for approval of 50 mg/10
      ml, 100 mg/20 ml, and 200 mg/40 ml oxaliplatin by injection. The
      Company and MN filed their answer and counterclaims on October 10, 2007. The
      Company and MN intend to defend this action vigorously and pursue their
      counterclaims against Sanofi and Debiopharm .





On
      December 11, 2007, AstraZeneca Pharmaceuticals, LP, AstraZeneca UK Ltd., IPR
      Pharmaceuticals, Inc. and Shionogi Seiyaku Kabushiki Kaisha filed a lawsuit
      against the Company in the United States District Court for the District of
      Delaware. The complaint alleges patent infringement because the Company
      submitted a Paragraph IV certification to the FDA for approval of 5 mg, 10
      mg,
      20 mg and 40 mg rosuvastatin calcium tablets. The Company is preparing to answer
      and counterclaim and will assert all available defenses in addition to seeking
      a
      declaration of non-infringement and invalidity.




**Industry
      Related Matters**





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




25




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




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




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





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





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




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





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




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




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




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




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




The
      State
      of Alaska filed an Amended Complaint on October 17, 2006, naming the Company
      and
      other pharmaceutical companies as defendants. The Alaska complaint pleads causes
      of action for (i) violation of the Alaska Unfair Trade Practices and Consumer
      Protection Act and (ii) unjust enrichment. The complaint seeks monetary damages;
      declarative relief; injunctive relief; compensatory, restitution, and/or
      disgorgement damages; civil penalties; punitive damages; costs, attorneys'
      fees,
      and prejudgment interest; and other relief deemed just and equitable by the
      Court. T he
      defendants filed a joint motion to dismiss the State's Amended Complaint on
      January 5, 2007. This motion was denied on May 7, 2007. The
      Company intends to defend this action vigorously.




26




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





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





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




On
      September 21, 2007, the State of Utah filed a Complaint against the Company
      and
      various other pharmaceutical companies. The Utah Complaint pleads causes of
      action for (i) violations of the Utah False Claims Act and (ii) common law
      fraudulent misrepresentation. The State seeks actual, statutory, and treble
      damages, including prejudgment interest; restitution; attorneys' fees, experts'
      fees, and costs; and other relief deemed just and equitable by the
      Court.




Finally,
      on October 9, 2007, the State of Iowa filed a Complaint against the Company
      and
      various other pharmaceutical companies. The Iowa Complaint pleads causes of
      action for (i) violations of the Iowa Consumer Fraud Act, (ii) common law
      fraudulent misrepresentation, (iii) common law unjust enrichment and (iv)
      reporting of false best price information in violation of 42 USC Sec 1396R-8.
      The State seeks (i) a declaration that the Company committed the alleged
      violations, (ii) injunctive relief against the continuation of the alleged
      violations, (iii) actual, statutory damages, including prejudgment interest
      for
      the claim of unjust enrichment, (iv) actual, statutory damages, including
      prejudgment interest for the claim of fraudulent misrepresentation, (v) actual
      and punitive damages for alleged fraud, (vi) an accounting of alleged illegal
      profits and a disgorgement of same, restitution, attorneys' fees, experts'
      fees,
      and costs and other relief deemed just and equitable by the Court.





**Other**




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




**Note
      15 - Investment in Joint Venture:**




On
      April
      15, 2002, Rhodes Technology (“Rhodes”) and the Company created a joint venture,
      SVC Pharma (“SVC”), to research, develop, commercialize and market
      pharmaceutical preparations for human therapy. The parties agreed to capitalize
      the joint venture with equal contributions and all profits or losses are to
      be
      shared equally between Rhodes and the Company. The Company accounts for this
      investment under the equity method of accounting in accordance with APB No.
      18, *the
      Equity Method of Accounting for Investments in Common Stock* .
      As of
      September 29, 2007, the Company’s net investment in SVC totaled approximately
      $5.8 million. The investment in SVC is reviewed for impairment each reporting
      period. Any impairment deemed to be “other-than temporary” will be recognized in
      the appropriate period and the basis will be adjusted. As of September 29,
      2007,
      the Company believes its investment in SVC was not impaired.




**Note
      16 - Subsequent Events:**




In
      October 2007, the Company sold its investment in Optimer common stock for $9.6
      million and will recognize a pre-tax gain on the sale of $3.1 million in the
      fourth quarter of 2007.




In
      November 2007, the Company announced a tender offer for certain unvested stock
      options granted to employees having an exercise price in excess of $33.61.
      The
      tender offer expires on December 21, 2007. The Company may recognize up to
      approximately $4.6 million pre-tax compensation expense in the fourth quarter
      of
      2007 that otherwise would have been recognized ratably in 2008 and 2009
      depending on the level of acceptance of the tender offer. The cash outlay of
      the
      tender offer may be up to approximately $0.9 million on a pre-tax basis.





27





**Note
      17** **-** **Restructuring Costs:**




In
      the
      fourth quarter of 2006, the Company made the decision to restructure its
      business operations and as a result, terminate approximately 10% of its
      workforce. The restructuring plan met the criteria outlined in SFAS 146 *Accounting
      for Costs Associated with Exit or Disposal Activities* .
      During
      the fourth quarter of 2006, the Company recorded a restructuring charge
      primarily to its generic business of approximately $1.0 million related to
      employee termination benefits. During the nine-month period ended September
      29,
      2007, no additional restructuring charges were incurred and substantially all
      of
      the benefits were paid out.




**Note
      18** **-** **Segment Information:**




Starting
      in the third quarter of 2005, the Company operates in two reportable business
      segments: generic pharmaceuticals and branded pharmaceuticals. Branded products
      are marketed under brand names through marketing programs that are designed
      to
      generate physician and consumer loyalty. Branded products generally are patent
      protected, which provides a period of market exclusivity during which they
      are
      sold with little or no competition. Generic pharmaceutical products are the
      chemical and therapeutic equivalents of reference brand drugs. The Drug Price
      Competition and Patent Term Restoration Act of 1984 provides that generic drugs
      may enter the market upon the approval of an ANDA and the expiration,
      invalidation or circumvention of any patents on corresponding brand drugs,
      or
      the expiration of any other market exclusivity periods related to the brand
      drugs.




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




28




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





**Three
                months ended**
            
            **Nine
                months ended****September
                29,**
            
            **September
                30,**
            
            **September
                29,**
            
            **September
                30,****2007**
            
            **2006**
            
            **2007**
            
            **2006**Revenues:Generic
            
            $
            188,092
            
            $
            159,727
            
            $
            548,872
            
            $
            509,554Brand
            
            
            24,584
            
            
            14,252
            
            
            65,654
            
            
            31,981Total
                revenues
            
            $
            212,676
            
            $
            173,979
            
            $
            614,526
            
            $
            541,535Gross
                margin:Generic
            
            $
            47,150
            
            $
            45,331
            
            $
            161,536
            
            $
            136,404Brand
            
            
            19,278
            
            
            9,729
            
            
            49,136
            
            
            22,591Total
                gross margin
            
            $
            66,428
            
            $
            55,060
            
            $
            210,672
            
            $
            158,995Operating
                income (loss):Generic
            
            $
            12,310
            
            $
            11,554
            
            $
            67,501
            
            $
            31,599Brand
            
            
            (12,240
            )
            
            (6,067
            )
            
            2,519
            
            
            (26,120
            )Total
                operating income
            
            $
            70
            
            $
            5,487
            
            $
            70,020
            
            $
            5,479Other
                (expense) income, net
            
            
            -
            
            
            (38
            )
            
            (49
            )
            
            66Equity
                in loss of joint venture
            
            
            (107
            )
            
            (18
            )
            
            (335
            )
            
            (497
            )Realized
                loss on sale of marketable securities
            
            
            -
            
            
            -
            
            
            (4,643
            )
            
            (3,773
            )Interest
                income
            
            
            3,680
            
            
            2,098
            
            
            10,265
            
            
            6,055Interest
                expense
            
            
            (1,691
            )
            
            (1,681
            )
            
            (5,136
            )
            
            (5,069
            )Provision
                for income taxes
            
            
            683
            
            
            1,461
            
            
            24,541
            
            
            565Net
                income
            
            $
            1,269
            
            $
            4,387
            
            $
            45,581
            
            $
            1,696





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





29




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





**Three
                months ended**
            
            **Nine
                months ended****September
                29,**
            
            **September
                30,**
            
            **September
                29,**
            
            **September
                30,****Product**
            
            **2007**
            
            **2006**
            
            **2007**
            
            **2006***Generic*Metoprolol
                succinate ER (Toprol-XL®)
            
            $
            71,719
            
            $
            -
            
            $
            101,337
            
            $
            -Fluticasone
                (Flonase®)
            
            
            29,846
            
            
            48,064
            
            
            130,114
            
            
            181,572Propranolol
                HCl ER (Inderal LA®)
            
            
            12,134
            
            
            -
            
            
            53,769
            
            
            -Cabergoline
                (Dostinex®)
            
            
            7,475
            
            
            9,651
            
            
            26,258
            
            
            24,061Various
                amoxicillin products (Amoxil®)
            
            
            6,840
            
            
            15,487
            
            
            27,088
            
            
            41,388Ibuprofen
                Rx (Advil®, Nuprin®, Motrin®)
            
            
            6,127
            
            
            3,732
            
            
            13,942
            
            
            12,391Tramadol
                HCl and acetaminophen tablets (Ultracet®)
            
            
            4,553
            
            
            4,876
            
            
            11,413
            
            
            17,666Ranitidine
                HCl Syrup (Zantac®)
            
            
            4,389
            
            
            -
            
            
            10,864
            
            
            -Meclizine
                HCl (Antivert®)
            
            
            3,503
            
            
            1,224
            
            
            5,809
            
            
            3,902Methimazole
                (Tapazole®)
            
            
            3,292
            
            
            2,734
            
            
            9,013
            
            
            8,368Fluoxetine
                (Prozac®)
            
            
            2,722
            
            
            5,079
            
            
            9,997
            
            
            14,277Megestrol
                oral suspension (Megace®)
            
            
            1,307
            
            
            5,198
            
            
            5,421
            
            
            13,329Lovastatin
                (Mevacor®)
            
            
            1,037
            
            
            3,581
            
            
            3,997
            
            
            11,759Paroxetine
                (Paxil®)
            
            
            898
            
            
            2,798
            
            
            3,257
            
            
            9,360Doxycycline
                monohydrate (Adoxa®)
            
            
            540
            
            
            6,289
            
            
            5,253
            
            
            10,991Cefprozil
                (Cefzil®)
            
            
            359
            
            
            900
            
            
            451
            
            
            8,784Quinapril
                (Accupril®)
            
            
            (629
            )
            
            5,456
            
            
            2,131
            
            
            14,881Other
                product related revenues (2)
            
            
            3,253
            
            
            5,028
            
            
            17,500
            
            
            12,964Other
                (1)
            
            
            28,727
            
            
            39,630
            
            
            111,258
            
            
            123,861Total
                Generic Revenues
            
            $
            188,092
            
            $
            159,727
            
            $
            548,872
            
            $
            509,554*Branded*Megace®
                ES
            
            $
            22,084
            
            $
            12,664
            
            $
            58,154
            
            $
            28,990Other
            
            
            -
            
            
            1,588
            
            
            -
            
            
            2,991Other
                product related revenues (2)
            
            
            2,500
            
            
            -
            
            
            7,500
            
            
            -Total
                Branded Revenues
            
            $
            24,584
            
            $
            14,252
            
            $
            65,654
            
            $
            31,981





(1) 
                 The further detailing of revenues of the Company’s other
                approximately 65 generic products is impracticable due to the low
                volume
                of revenues associated with each of these generic products. No single
                product in the other category is in excess of 3% of total generic
                revenues
                for the three-month or nine-month periods ended September 29, 2007
                or
                September 30, 2006.(2) 
                 Other product related revenues represents licensing and royalty
                related revenues from profit sharing agreements related to products
                such
                as ondansetron ODT, the generic version of Zofran ODT®, doxycycline
                monohydrate, the generic version of Adoxa®, and quinapril, the generic
                version of Accupril®. Other product related revenues included in the Brand
                business relate to a co-promotion arrangement with Solvay.




**Note
      19** **-** **Research and Development Agreements:**




In
      June
      2007, the Company announced it entered into an exclusive licensing agreement
      under which it will receive commercialization rights in the U.S. to Immtech
      Pharmaceuticals' (“Immtech”) lead oral drug candidate, pafuramidine maleate, for
      the treatment of pneumocystis pneumonia in AIDS patients. The Company made
      an
      initial payment of $3.0 million. The Company will also pay Immtech as much
      as
      $29.0 million in development milestones if pafuramidine advances through ongoing
      Phase III clinical trials and U.S. regulatory review and approval.  In
      addition to royalties on sales, Immtech may receive milestone payments on future
      sales and will retain the right to co-market pafuramidine in the
      U.S.




In
      July
      2007, the Company announced it entered into an exclusive licensing agreement
      under which the Company will receive commercialization rights in the U.S. to
      BioAlliance Pharma's Loramyc (miconazole Lauriad ® ),
      an
      antifungal therapy currently in Phase III development for the treatment of
      oropharyngeal candidiasis, an opportunistic infection commonly found in
      immunocompromised patients, including those with HIV and cancer. Under the
      terms
      of the agreement, the Company paid BioAlliance an initial payment of $15.0
      million. The Company will also pay BioAlliance $20.0 million upon FDA approval.
      In addition to royalties on sales, BioAlliance may receive milestone payments
      on
      future sales.





Refer
      to
      Note 4 - “Available for Sale Debt and Marketable Equity Securities” and Note 5 -
“Other Investments” for a description of agreements with Hana and IPC Corp,
      respectively.




30




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





Certain
      statements in this Report constitute “forward-looking statements” within the
      meaning of the Private Securities Litigation Reform Act of 1995, including
      those
      concerning management’s expectations with respect to future financial
      performance, trends and future events, particularly relating to sales of current
      products and the introduction of new manufactured and distributed products.
      Such
      statements involve known and unknown risks, uncertainties and contingencies,
      many of which are beyond the control of the Company, which could cause actual
      results and outcomes to differ materially from those expressed herein. These
      statements are often, but not always, made using words such as “estimates,”
“plans,” “projects,” “anticipates,” “continuing,” “ongoing,” “expects,”
“intends,” “believes,” “forecasts” or similar words and phrases. Factors that
      might affect such forward-looking statements set forth in this Report include:
      (i) increased competition from new and existing competitors, and pricing
      practices from such competitors (particularly upon completion of exclusivity
      periods), (ii) pricing pressures resulting from the continued consolidation
      by
      the Company’s distribution channels, (iii) the amount of funds available for
      internal research and development, and research and development joint ventures,
      (iv) research and development project delays or delays and unanticipated costs
      in obtaining regulatory approvals, (v) continuation of distribution rights
      under
      significant agreements, (vi) the continued ability of distributed product
      suppliers to meet future demand, (vii) the costs, delays involved in and outcome
      of any threatened or pending litigations, including patent and infringement
      claims, (viii) unanticipated costs, delays and liabilities in integrating
      acquisitions, (ix) obtaining or losing 180-day marketing exclusivity periods
      on
      products, (x) general industry and economic conditions and (xi) the extent
      and
      impact of the accounting and restatement issues, as discussed in the Company’s
      past reports filed with the SEC. To the extent that any statements made in
      this
      Report contain information that is not historical, such statements are
      essentially forward-looking and are subject to certain risks and uncertainties,
      including the risks described above as well as the risks and uncertainties
      discussed from time to time in other of the Company's filings with the SEC,
      including its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and
      Current Reports on Form 8-K. Any forward-looking statements included in this
      Quarterly Report on Form 10-Q are made as of the date hereof only, based on
      information available to the Company as of the date hereof, and, subject to
      any
      applicable law to the contrary, the Company assumes no obligation to update
      any
      forward-looking statements. The Company can make no assurance as to the
      potential effects of the restatement, including the effects of any
      investigations, informal or otherwise, conducted by the SEC or other entities
      or
      lawsuits filed against the Company in connection therewith.





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





The
      following discussion should be read in conjunction with the Company’s condensed
      consolidated financial statements and related notes to condensed consolidated
      financial statements contained elsewhere in this Form 10-Q.





**OVERVIEW**




Critical
      to the growth of the Company is its introduction of new manufactured and
      distributed products at selling prices that generate adequate gross margins.
      The
      Company, through its internal development program and various strategic
      alliances and relationships, seeks to introduce new products that have less
      competition and to broaden its product list. The Company plans to continue
      to
      invest in its internal research and development efforts, brand marketing
      strategy and its strategic alliances and relationships throughout fiscal year
      2007 and beyond. Also, the Company will continue seeking additional products
      for
      sale through new and existing distribution agreements or acquisitions of
      complementary products and businesses, additional first-to-file opportunities
      and unique dosage forms to differentiate its products in the marketplace. The
      Company pays a percentage of the gross profits or net sales to its strategic
      partners on sales of products covered by its distribution agreements. Generally,
      products that the Company develops internally, and to which it is not required
      to split any profits with strategic partners, contribute higher gross margins
      than products covered by distribution agreements.





These
      efforts resulted in new product introductions in the first nine months of 2007,
      including propranolol HCl extended release (“ER”) capsules, which is an outcome
      of the Company’s strategic partnership with Nortec Development Associates, Inc,
      ranitidine HCl syrup, pursuant to a supply and distribution agreement with
      GSK
      and the launch of metoprolol succinate ER 25 mg in the fourth quarter of 2006
      and additional strengths (50mg, 100mg, and 200mg) in the third quarter 2007,
      pursuant to a supply and distribution agreement with Astra Zeneca (“AZ”).
      Additionally, in accordance with the development, sales, marketing and supply
      agreement with Barr, the Company receives royalties from the sales of
      ondansetron tablets, which were launched in the fourth quarter of 2006.





31




The
      Company’s business plan includes developing and marketing branded drugs as part
      of its effort to add products with longer life cycles and higher profitability
      to the Company’s product line. In July 2005, the Company received FDA approval
      for its first New Drug Application (“NDA”), filed pursuant to Section 505(b)(2)
      of the Federal Food, Drug and Cosmetic Act, and immediately began marketing
      megestrol acetate oral suspension NanoCrystal ® Dispersion
      (“Megace ® ES”).
      Megace ® ES
      is
      indicated for the treatment of anorexia, cachexia or any unexplained significant
      weight loss in patients with a diagnosis of AIDS and is utilizing the
      Megace ® brand
      name that the Company has licensed from Bristol-Myers Squibb Company (“BMS”). In
      September 2006, the Company entered into an extended-reach agreement with Solvay
      Pharmaceuticals, Inc. (“Solvay”) that provides for the Company’s branded sales
      force to co-promote Androgel®, as well as future versions of the product or
      other products that are mutually agreed upon, for a period of six years. As
      compensation for its marketing and sales efforts, the Company will receive
      $10
      million annually, paid quarterly, for the six-year period. The
      Company has progressed on its business plan during 2007 by acquiring the rights
      to additional branded products currently in Phase III clinical trials. In June
      2007, the Company acquired the commercialization rights in the U.S. to Immtech’s
      lead oral drug candidate, pafuramidine maleate, for the treatment of
      pneumocystis pneumonia in AIDS patients. In July 2007, the Company also acquired
      an exclusive licensing agreement under which the Company will receive
      commercialization rights in the U.S. to BioAlliance Pharma's Loramyc (miconazole
      Lauriad®), an antifungal therapy for the treatment of oropharyngeal candidiasis,
      an opportunistic infection commonly found in immunocompromised patients,
      including those with HIV and cancer. In August 2007, the Company also acquired
      the North American commercial rights to Zensana TM (ondansetron HCl) Oral Spray from Hana Biosciences, Inc. (“Hana”). Ondansetron
      is used to prevent nausea and vomiting after chemotherapy, radiation and
      surgery, and following successful development and approval, Zensana TM could be
      among the first in its class of 5-HT3 antagonist anti-emetic therapies to be
      available in an oral spray form. The Company also announced that it has entered
      into an agreement with NovaDel, to collaborate in the reformulation of
      Zensana TM .
      Following completion of reformulation efforts already under way, the Company
      will reconfirm the product's pharmacokinetic profile and resubmit the NDA to
      the
      FDA.





In
      addition to the substantial costs of product development, the Company may incur
      significant legal costs in bringing certain products to market. Litigation
      concerning patents and proprietary rights is often protracted and expensive.
      Pharmaceutical companies with patented brand products are increasingly suing
      companies that produce generic forms of their patented brand name products
      for
      alleged patent infringement or other violations of intellectual property rights,
      which could delay or prevent the entry of such generic products into the market.
      Generally, a generic drug may not be marketed until the applicable patent(s)
      on
      the brand name drug expires. When an ANDA is filed with the FDA for approval
      of
      a generic drug, the filing person may certify either that the patent listed
      by
      the FDA as covering the branded product is about to expire, in which case the
      ANDA will not become effective until the expiration of such patent, or that
      the
      patent listed as covering the branded drug is invalid or will not be infringed
      by the manufacture, sale or use of the new drug for which the ANDA is filed.
      In
      either case, there is a risk that a branded pharmaceutical company may sue
      the
      filing person for alleged patent infringement or other violations of
      intellectual property rights. Because a substantial portion of the Company’s
      current business involves the marketing and development of generic versions
      of
      brand products, the threat of litigation, the outcome of which is inherently
      uncertain, is always present. Such litigation is often costly and
      time-consuming, and could result in a substantial delay in, or prevent, the
      introduction and/or marketing of products, which could have a material adverse
      effect on the Company’s business, financial condition, prospects and results of
      operations.





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





32




The
      following table shows the revenues, gross margin, and operating income by
      segment for the three months and nine months ended September 29, 2007 and
      September 30, 2006:





**Three
                months ended**
            
            **Nine
                months ended****September
                29,**
            
            **September
                30,**
            
            **September
                29,**
            
            **September
                30,****2007**
            
            **2006**
            
            **2007**
            
            **2006**Revenues:Generic
            
            $
            188,092
            
            $
            159,727
            
            $
            548,872
            
            $
            509,554Brand
            
            
            24,584
            
            
            14,252
            
            
            65,654
            
            
            31,981Total
                revenues
            
            $
            212,676
            
            $
            173,979
            
            $
            614,526
            
            $
            541,535Gross
                margin:Generic
            
            $
            47,150
            
            $
            45,331
            
            $
            161,536
            
            $
            136,404Brand
            
            
            19,278
            
            
            9,729
            
            
            49,136
            
            
            22,591Total
                gross margin
            
            $
            66,428
            
            $
            55,060
            
            $
            210,672
            
            $
            158,995Operating
                income (loss):Generic
            
            $
            12,310
            
            $
            11,554
            
            $
            67,501
            
            $
            31,599Brand
            
            
            (12,240
            )
            
            (6,067
            )
            
            2,519
            
            
            (26,120
            )Total
                operating income
            
            $
            70
            
            $
            5,487
            
            $
            70,020
            
            $
            5,479




Total
      revenues increased $38.7 million, or 22.2%, for the three months ended September
      29, 2007 from the three months ended September 30, 2006. Total gross margin
      dollars increased $11.4 million, or 20.6%, for the three months ended September
      29, 2007 from the three months ended September 30, 2006. Generic revenues and
      gross margins increased $28.4 million or 17.8%, and $1.8 million, or 4.0%,
      respectively, for the three months ended September 29, 2007 from the three
      months ended September 30, 2006. Increased generic sales in 2007 were primarily
      due to the introduction of additional strengths of metoprolol succinate ER
      (50mg, 100mg, and 200mg), the first quarter launches of propranolol HCl ER
      caps
      and ranitidine HCl syrup, and the 2006 fourth quarter launch of metoprolol
      succinate ER 25mg. These increases were partially offset by lower sales of
      fluticasone, various amoxicillin products, quinapril, megestrol oral suspension,
      and doxycycline. The increase in gross margin was primarily due to the higher
      sales described above and lower inventory write-offs of finished products in
      the
      three months ended September 29, 2007 compared to the same period in 2006.
      Branded revenues and gross margin dollars increased for the third quarter of
      2007 by $10.3 million or 72.5% and $9.5 million, or 98.1%, respectively, driven
      by increased sales of Megace® ES and fees received related to the co-promotion
      of Androgel®.





Total
      revenues and gross margin dollars increased $73.0 million, or 13.5%, and $51.7
      million, or 32.5%, respectively, for the nine months ended September 29, 2007
      from the nine months ended September 30, 2006. Generic revenues and gross margin
      dollars increased $39.3 million, or 7.7%, and $25.1 million or 18.4%,
      respectively for the nine months ended September 29, 2007 from the nine months
      ended September 30, 2006. Increased generic sales in the first nine months
      of
      2007 were primarily due to new product introductions including metoprolol
      succinate ER (25mg, 50mg, 100mg, and 200mg), propranolol HCl ER caps and
      ranitidine HCl syrup, and royalties earned related to the sales of ondansetron
      tablets, which were launched in the fourth quarter of 2006. These increases
      were
      partially offset by lower sales of existing products including fluticasone,
      various amoxicillin products, quinapril, cefprozil, megestrol oral suspension,
      doxycycline, paroxetine, tramadol HC1 and acetaminophen tablets, and lovastatin.
      The increase in gross margin was primarily due to the higher sales described
      above and lower inventory write-offs of finished products in the nine months
      ended September 29, 2007 compared with the same period in 2006. Branded revenues
      and gross margin dollars for the first nine months of 2007 increased $33.7
      million or 105.3% and $26.5 million or 117.5%, respectively, driven by increased
      sales of Megace® ES and fees received related to the co-promotion of Androgel®.





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





33




**RESULTS
      OF OPERATIONS**





**Revenues
      - Three months ended September 29, 2007**




Total
      revenues for the three months ended September 29, 2007 were $212.7 million,
      increasing $38.7 million or 22.2%, from total revenues of $174.0 million for
      the
      three months ended September 30, 2006. Revenues for generic products for the
      three months ended September 29, 2007 were $188.1 million, increasing $28.4
      million, or 17.8%, from generic revenues of $159.7 million for the three months
      ended September 30, 2006. Increased generic sales for the three months ended
      September 29, 2007 were primarily due to the third quarter launch of additional
      strengths of metoprolol succinate ER (50mg, 100mg, and 200mg), first quarter
      launches of propranolol HCl ER caps and ranitidine HCl syrup, and the 2006
      fourth quarter launch of metoprolol succinate ER 25 mg. These increases were
      partially offset by lower sales of existing products including fluticasone,
      which decreased by $18.2 million, various amoxicillin products, which decreased
      by $8.6 million, quinapril, which decreased by $6.1 million, megestrol oral
      suspension, which decreased by $3.9 million, and doxycycline which
      decreased by $5.7 million. Increased competition adversely affected both
      the volume and pricing on the above existing products. Among the top selling
      products in 2007 that did not have sales in the corresponding three-month period
      in 2006 were metoprolol succinate ER (25mg, 50mg, 100mg and 200mg) (net sales
      of
      $71.7 million), propranolol HCl ER caps (net sales of $12.1 million), and
      ranitidine HCl syrup (net sales of $4.4 million). Net sales of distributed
      products were approximately $134.0 million or 63.0% of the Company’s total
      revenues in the third quarter of 2007, and $107.6 million or 61.9% of the
      Company’s total revenues in the third quarter of 2006. The Company is
      substantially dependent upon distributed products for its overall sales and
      any
      inability by its suppliers to meet demand could adversely affect the Company’s
      future sales. Revenues for the Company’s branded segment were $24.6 million for
      the three months ended September 29, 2007, increasing $10.3 million, or 72.5%,
      from branded revenues of $14.3 million for the three months ended September
      30,
      2006, due to increased sales of Megace®
      ES and
      the
      co-promotion fees for Androgel®.





**Revenues
      - Nine months ended September 29, 2007**




Total
      revenues for the nine months ended September 29, 2007 were $614.5 million,
      increasing $73.0 million, or 13.5%, from total revenues of $541.5 million for
      the nine months ended September 30, 2006. Revenues for generic products for
      the
      nine months ended September 29, 2007 were $548.9 million, increasing $39.3
      million, or 7.7%, from generic revenues of $509.6 million for the nine months
      ended September 30, 2006, due primarily to the launches of metoprolol succinate
      ER 25 mg, 50mg, 100mg, and 200mg (net sales of $101.3 million), propranolol
      HCl
      ER caps (net sales of $53.8 million), and ranitidine HCl syrup (net sales of
      $10.9 million), and higher royalties driven by the 2006 fourth quarter launch
      of
      ondansetron tablets ($8.4 million). These increases were partially offset by
      lower sales of existing products including fluticasone, which decreased by
      $51.5
      million, various amoxicillin products, which decreased by $14.3 million,
      quinapril, which decreased by $12.8 million, cefprozil, which decreased by
      $8.3
      million, megestrol oral suspension, which decreased by $7.9 million, lovastatin,
      which decreased by $7.8 million, tramadol HC1 and acetaminophen tablets, which
      decreased by $6.3 million, and paroxetine, which decreased by $6.1 million.
      Increased competition adversely affected both the volume and pricing on these
      existing products. Net sales of distributed products, which consist of products
      manufactured under contract and licensed products, were approximately $341.6
      million, or 55.6% of the Company’s total revenues for the nine months ended
      September 29, 2007, and $366.0 million, or 67.6% of the Company’s total revenues
      for the nine months ended September 30, 2006. The Company is substantially
      dependent upon distributed products for its overall sales and any inability
      by
      its suppliers to meet demand could adversely affect the Company’s future sales.
      Revenues for the branded segment were $65.7 million for the nine months ended
      September 29, 2007, increasing $33.7 million, or 105.3%, primarily due to
      increased sales of Megace®
      ES and
      the
      co-promotion fees for Androgel®.





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





The
      Company’s gross revenues before deductions for chargebacks, rebates and
      incentive programs (including rebates paid under federal and state government
      Medicaid drug reimbursement programs), sales returns and other sales allowances
      were $1,110.8 million for the nine months ended September 29, 2007 compared
      to
      $1,051.9 million for the nine months ended September 30, 2006. Deductions from
      gross revenues were $496.2 million for the nine months ended September 29,
      2007
      compared to $510.3 million for the nine months ended September 30, 2006. These
      deductions are discussed in the notes to condensed consolidated financial
      statements - Note 6 - “Accounts Receivable.” The total gross-to-net sales
      adjustments as a percentage of gross sales decreased to 44.7% for the nine
      months ended September 29, 2007 compared to 48.5% for the nine months ended
      September 30, 2006, primarily due to a decrease in wholesaler acquisition costs
      in 2006, less
      price competition for the Company's new products and for Megace®
      ES ,
      lower
      return levels ,
      and
      higher royalties in 2007, which are not impacted by deductions, tempered
      by pricing pressure for certain existing products .
      Among
      the top selling products that did not have sales in the corresponding prior
      year
      nine-month period were propranolol HCl ER, metoprolol succinate ER, and
      ranitidine HCl syrup.





34




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





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





The
      following tables summarize the activity for the nine months ended September
      29,
      2007 and September 30, 2006 in the accounts affected by the estimated provisions
      described below:





**For
                the nine months ended September 29, 2007****Accounts
                receivable reserves**
            
            **Beginning
                balance**(3)
            
            **Provision
                recorded**
              **for
                current period sales**
            
            **(Provision)
                reversal recorded**
              **for
                prior period sales**
            
            **Credits
                processed**
            
            **Ending
                balance**Chargebacks
            
            $
            (51,891
            )
            $
            (253,057
            )
            $
            -
            (1)
            $
            265,788
            
            $
            (39,160
            )Rebates
                and incentive programs
            
            
            (85,888
            )
            
            (150,480
            )
            
            3,109
            
            
            172,174
            
            
            (61,085
            )Returns
            
            
            (42,905
            )
            
            (24,646
            )
            
            (3,164
            )
            
            18,712
            
            
            (52,003
            )Cash
                discounts and other
            
            
            (18,037
            )
            
            (55,144
            )
            
            211
            
            
            51,598
            
            
            (21,372
            )Total
            
            $
            (198,721
            )
            $
            (483,327
            )
            $
            156
            
            $
            508,272
            
            $
            (173,620
            )**Accrued
                liabilities**(2)
            
            $
            (10,412
            )
            $
            (13,006
            )
            $
            -
            
            $
            7,332
            
            $
            (16,086
            )





**For
                the nine months ended September 30, 2006****Accounts
                receivable reserves**
            
            **Beginning
                balance**
            
            **Provision
                recorded**
              **for
                current period sales**
            
            **(Provision)
                reversal recorded for prior period sales**
            
            **Credits
                processed**
            
            **Ending
                balance**Chargebacks
            
            $
            (102,256
            )
            $
            (268,630
            )
            $
            -
            (1)
            $
            290,633
            
            $
            (80,253
            )Rebates
                and incentive programs
            
            
            (50,991
            )
            
            (156,674
            )
            
            -
            
            
            123,565
            
            
            (84,100
            )Returns
            
            
            (32,893
            )
            
            (29,757
            )
            
            (7,686
            )
            
            21,508
            
            
            (48,828
            )Cash
                discounts and other
            
            
            (15,333
            )
            
            (35,722
            )
            
            -
            
            
            36,790
            
            
            (14,265
            )Total
            
            $
            (201,473
            )
            $
            (490,783
            )
            $
            (7,686
            )
            $
            472,496
            
            $
            (227,446
            )**Accrued
                liabilities**(2)
            
            $
            (9,040
            )
            $
            (11,943
            )
            $
            85
            
            $
            11,858
            
            $
            (9,040
            )





(1)
            The
                amount of provision or reversal of reserves related to prior periods
                for
                chargebacks is not determinable on a product or customer specific
                basis:
                however, based upon historical analysis and analysis of activity
                in
                subsequent periods, the Company has determined its chargeback estimates
                remain reasonable.





(2)
            Includes
                amounts due to customers for which no underlying accounts receivable
                exists, including Medicaid rebates.





(3)
            Restated
                to reflect a reclassification to accrued expenses of $4.3 million
                for
                discounts due to customers for which no underlying accounts receivable
                existed as of December 31, 2006.




35




*Use
      of Estimates in Reserves*




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





**Gross
      Margin - Three months ended September 29, 2007**





The
      Company’s gross margin of $66.4 million (31.2% of total revenues) for the three
      months ended September 29, 2007 increased $11.4 million from $55.0 million
      (31.6% of total revenues) for the three months ended September 30, 2006. The
      generic products gross margin of $47.1 million (25.1% of generic revenues)
      for
      the three months ended September 29, 2007 increased $1.8 million from $45.3
      million (28.4% of generic revenues) for the three months ended September 30,
      2006 primarily due to product launches of propranolol HC1 ER and metoprolol
      succinate ER and lower write-off of finished product inventory, tempered by
      lower sales of existing products including various amoxicillin products,
      fluticasone and lovastatin. The branded products gross margin of $19.3 million
      (78.4% of branded revenues) for the three months ended September 29, 2007
      increased by $9.5 million from $9.7 million (68.3% of branded revenues) for
      the
      three months ended September 30, 2006 due to higher sales of Megace® ES and
      co-promotion fees for selling Androgel®, which commenced in the fourth quarter
      of 2006. The rate of gross margin in 2007 is impacted by lower margin sales
      of
      metoprolol succinate ER, tempered by higher margin propranolol, lower inventory
      write-offs, and reduced sales on lower margin existing products including
      lovastatin, fluticasone, and various amoxicillin products.




**Gross
      Margin - Nine months ended September 29, 2007**




The
      Company’s gross margin of $210.7 million (34.3% of total revenues) in the first
      nine months of 2007 increased $51.7 million from $159.0 million (29.4% of total
      revenues) in the corresponding period of 2006. Generic product gross margins
      of
      $161.5 million (29.4% of generic revenues) in the nine months ended September
      29, 2007 increased $25.1 million from $136.4 million (26.8% of generic revenues)
      in the corresponding period of 2006 primarily due to the introduction of new
      product launches including propranolol HCl ER and metoprolol succinate ER,
      royalties earned from the sales of ondansetron tablets, which launched in the
      fourth quarter of 2006, and lower inventory write-offs. The branded products
      gross margin of $49.1 million (74.8% of branded revenues) **** for
      the
      nine months ended September 29, 2007 increased by $26.5 million from $22.6
      million (70.6% of branded revenues) for the nine months ended September 30,
      2006
      due to higher sales of Megace® ES and co-promotion fees for selling Androgel®,
      which was commenced in the fourth quarter of 2006. The rate of gross margin
      in
      2007 reflects the launch of higher margin propranolol HC1 ER, lower inventory
      write-offs of finished product, lower sales of lower margin existing products
      including fluticasone and lovastatin, and royalties earned from the sales of
      ondansetron tablets, which launched in the fourth quarter 2006, tempered by
      the
      launch of lower margin metoprolol succinate ER.





**Operating
      Expenses**





***Research
      and Development Expenses - Three Months Ended September 29,
      2007***





The
      Company’s research and development expenses of $32.8 million **** (15.4
      %
      of total revenues) for the three months ended September 29, 2007 increased
      $20.2
      million or 161.0%, from $12.6 million (7.2% of total revenues) for the three
      months ended September 30, 2006. The increase was primarily attributable to
      costs incurred in connection with the in-license of two compounds in late-stage
      development in support of the Company’s strategy to expand its brand segment. In
      July 2007, the Company acquired the U.S. commercialization rights from
      BioAlliance Pharma (“BioAlliance”) to Loramyc (micronazole Lauriad), an
      innovative antifungal therapy for the treatment of oropharyngeal candidiasis,
      an
      opportunistic infection commonly found in immunocompromised patients, including
      those with HIV and cancer. The Company paid Bio Alliance $15.0 million upon
      the
      execution of the agreement. In August 2007, the Company acquired the North
      American commercial rights from Hana Biosciences, Inc. (“Hana”) to Zensana TM (ondansetron HCl) oral spray, which is used to prevent nausea and vomiting
      after
      chemotherapy, radiation and surgery. Under the terms of this agreement, the
      Company made a $5.0 million equity investment in Hana at a contractually agreed
      premium to the prevailing market price. Of this amount, $1.2 million , representing the premium paid , was
      charged to Research and Development expense in the quarter.




36




In
      support of its generic segment, the Company entered into an agreement with
      IntelliPharmaCeutics Ltd (“IPC”), a
      privately held corporation, to
      develop and market four controlled release generic drug products in August
      2007.
      Under the terms of this agreement, the Company made a $5.0 million private
      placement equity
      investment, of which $2.5 million was charged to Research and Development in
      the
      quarter. These
      increases were partially offset by a reduction in personnel cost of
      approximately $1.4 million principally
      the result of the
      restructuring of the R&D organization, which occurred during the first half
      of 2007.





***Research
      and Development Expenses - Nine Months Ended September 29,
      2007***





The
      Company’s research and development expenses of $61.1 million (9.9% of total
      revenues) for the nine months ended September 29, 2007 increased $17.1
      million , or 39.0%
      from $44.0 million (8.1% of total revenues) for the nine months ended September
      30, 2006. The increase is primarily attributed to costs incurred in the third
      quarter in connection with the BioAlliance, Hana, and IPC collaborations
      discussed above. In addition, during the second quarter the Company executed
      an
      exclusive licensing agreement with Immtech Pharmaceuticals (“Immtech”) for the
      U.S. commercial rights to parfuramidine maleate for the treatment of
      pneumocystis pneumonia in AIDS patients. The Company paid Immtech $3.0 million
      upon the execution of this agreement, which is in support of the Company’s brand
      segment. These
      increases were partially offset by the decrease in branded
      clinical costs related to the
      Megace® ES clinical development program for oncology, which was terminated in
      2006, and PAR 101, which was terminated in the first quarter of 2007, as
      well
      as lower personnel cost due
      to
      the restructuring of the R&D organization.





Although
      there can be no such assurance, research and development expenses for fiscal
      year 2007, including payments to be made to unaffiliated companies, are expected
      to be approximately 20% to 25% higher than
      fiscal year 2006, driven by investments made in connection with the Company’s
      strategy to expand its brand segment.





***Selling,
      General and Administrative Expenses - Three months ended September 29,
      2007***




Total
      selling, general and administrative expenses of $33.9 million ( 15.9 %
      of
      total revenues) for the three months ended September 29, 2007 decreased
      $ 6.1 million
      or 15.3 %,
      from
      $ 40.1 million
      (23.0% of total revenues) for the three months ended September 30, 2006.
      The decrease in 2007 was primarily due to the non-recurrence of severance costs
      incurred in 2006 for executives of $7.1 million,
      partially offset by increased costs associated with the expansion of finance
      and
      accounting functions and increased professional costs related to the Company’s
      restatement of prior periods.





***Selling,
      General and Administrative Expenses - Nine months ended September 29,
      2007***




Total
      selling, general and administrative expenses of $100.5 million (16.3% of total
      revenues) for the nine months ended September 29, 2007 decreased $10.9 million,
      or 9.8% from $111.3 million (20.4 % of total revenues) for the nine months
      ended
      September 30, 2006. The decrease in 2007 was primarily due to the non-recurrence
      of the second quarter 2006 write-off of approximately $10.0 million in bad
      debts
      for invalid customer deductions that the Company determined would not be pursued
      for collection, lower net severance costs of approximately $4.8 million,
      partially offset by costs associated with the expansion of finance and
      accounting functions and increased professional costs related to the Company’s
      restatement of prior periods.




Although
      there can be no such assurance, selling, general and administrative expenses
      in
      the fiscal year 2007 are expected to decrease by 10% to 15% from fiscal year
      2006 primarily due to the reduction of one-time charges in 2006 such as the
      second quarter 2006 write-off of approximately $10.0 million in bad debts for
      invalid customer deductions that the Company determined would not be pursued
      for
      collection, severance costs associated with the termination of executive
      officers, and restructuring expenses.





***Settlements,
      net***





In
      August
      2007, the Company received $0.4 million and recorded a corresponding gain
      related to the settlement of a class action law suit against a former supplier
      of raw materials that was found guilty of anti-competitive activities.





In
      August
      2003, the Company and Perrigo Pharmaceuticals entered into a product
      development, manufacturing and supply agreement to commercialize various
      products. In March 2007, the parties terminated the agreement. The terms of
      the
      settlement resulted in a net gain for the Company in the amount of $0.4 million
      for the three months ended March 31, 2007.





In
      September 1999 the Company and Resolution Chemicals (“Resolution”) entered into
      a development, manufacture and marketing agreement. On February 8, 2007, the
      Company and Resolution agreed to terminate the development, manufacture and
      marketing agreement. For consideration of $0.2 million, the Company returned
      all
      rights and was relieved of its obligations established under the initial
      agreements. The terms of the settlement resulted in a gain of $0.2
      million.




37




The
      loss
      of $1.25 million for the nine months ended September 30, 2006, relates to the
      settlement with Genpharm that resolved disputes related to distribution and
      other agreements between the companies. The Company recorded approximately
      $1.5
      million of expenses in the second quarter of 2006 as a result of the settlement,
      of which $1.25 million was recorded in settlements, net. The remaining $0.25
      million was recorded in research and development expenses.





***Gain
      on Sale of Product Rights***




In
      May
      2005 the Company and Optimer entered into a joint development and collaboration
      agreement to commercialize Difimicin (PAR 101), an investigational drug to
      treat
      Clostridum difficle-associated diarrhea. On February 27, 2007 in exchange for
      $20.0 million the Company returned the marketing rights to Optimer. The Company
      recognized a gain on the sale of product rights of $20.0 million related to
      this
      transaction in the three month period ended March 31, 2007.





In
      September 2006 the Company sold, transferred and conveyed the Company’s rights
      associated with ribavirin products, including certain assets and the assumption
      of certain liabilities to Three Rivers Pharmaceuticals LLC for $6.6 million.
      The
      Company recorded a gain of $3.1 million for the three months ended September
      30,
      2006 relating to this agreement.





**Equity
      in Loss of Joint Venture**





Equity
      in
      loss of joint venture for the third quarter was $0.1 million and $0.02 million
      for the three months ended September 29, 2007 and September 30, 2006,
      respectively, and $0.3 million and $0.5 million for the nine months ended
      September 29, 2007 and September 30, 2006, respectively. The amount represents
      the Company’s share of loss in the SVC joint venture which primarily relates to
      pre-production activities.





**Realized
      loss on sale of marketable securities, net**





In
      February 2007, the Company sold approximately 1.1 million shares of its
      investment in Optimer stock for approximately $6.8 million and recognized a
      pre-tax gain of $1.4 million for the three month period ended March 31, 2007.
      The Company held 1.3 million shares of Optimer common stock as of September
      29,
      2007.





As
      of
      June 30, 2007, the Company held an investment, as a limited partner, in a fund
      that invested in various floating rate structured finance securities that
      experienced a severe reduction in value. In August 2007, the Company received
      notice from the fund manager that based on the liquidating procedures; there
      was
      no remaining equity for limited partners. The Company recorded a realized
      investment loss in the three months ended June 30, 2007 of $6.0
      million.





**Interest
      Income**





Interest
      income was $3.7 million and $2.1 million for the three months ended September
      29, 2007 and September 30, 2006, respectively, and $10.3 million and $6.1
      million for the nine months ended September 29, 2007 and September 30, 2006,
      respectively. Interest income principally includes interest income derived
      primarily from money market and other short-term investments.





**Interest
      Expense**





Interest
      expense was $1.7 million and $1.7 million for the three months ended September
      29, 2007 and September 30, 2006, respectively, and $5.1 million and $5.1 million
      for the nine months ended September 29, 2007 and September 30, 2006,
      respectively. Interest expense for 2007 and 2006 principally includes interest
      payable on the Company’s convertible notes.





**Income
      Taxes**




The
      Company recorded a provision for income taxes of $0.7 million and $1.5 million
      for the three months ended September 29, 2007 and September 30, 2006,
      respectively. The
      Company’s effective tax rates for the three months ended September 29, 2007 and
      September 30, 2006 were 35.0% and
      25.0%, respectively. For the nine-month periods ended September 29, 2007 and
      September 30, 2006, the Company recorded a provision for income taxes of $24.5
      million and $0.6 million, respectively. The Company’s effective tax rates for
      the nine months ended September 29, 2007 and September 30, 2006 were 35.0%
      and
      25.0%, respectively.




**FINANCIAL
      CONDITION**





**Liquidity
      and Capital Resources**





Cash
      and
      cash equivalents were $114.2 million at September 29, 2007 which represented
      a
      decrease of $6.8 million from $121.0 million at December 31, 2006. In the
      nine-month period ended September 29, 2007, cash provided by operations was
      $66.1 million driven by net income of $45.6 million and adjusted for
      depreciation and amortization of $19.9 million, share-based compensation of
      $13.8 million and a decrease in inventories of $25.3 million primarily driven
      by
      improved inventory turns for purchased finished goods, the sell-out of launch
      quantities on hand at the end of 2006 including for metoprolol succinate ER
      and
      propranolol HCl ER, lower inventory related to terminated products, and
      increased material usage of megestrol raw materials mainly from higher sales
      of
      Megace® ES, and a decrease in accounts receivable of $18.4 million primarily due
      to higher cash collections. The factors that increased operating cash flows
      in
      the nine-month period ended September 29, 2007 were partially offset by a
      decrease in accounts receivable reserves of $29.3 million driven by net
      improvements in the Company's lag for processing customer credits, as well
      as
      lower trade inventory for future chargebacks and the improvements in the gross
      to net rate discussed previously, and decrease in payables due to distribution
      agreement partners of $24.0 million mainly due to decreased sales of distributed
      products such as fluticasone and amoxicillin, tempered by higher sales of
      metoprolol due to third quarter product launches. Cash flows used in investing
      activities were $67.9 million for the nine months ended September 29, 2007,
      principally due to the net purchases of available for sale securities of $70.7
      million. Cash used in financing activities was $5.0 million primarily related
      to
      payments of short-term debt related to finance insurance premiums of $4.4
      million.




38




The
      Company’s working capital, which is calculated as current assets minus current
      liabilities, of $234.5 million at September 29, 2007 increased $109.3 million,
      from $125.2 million at December 31, 2006. The working capital ratio, which
      is
      calculated by
      dividing current assets by current liabilities, was 1.70x at September 29,
      2007
      compared to 1.32x at December 31, 2006. The Company believes that its strong
      working capital ratio indicates the ability to meet its ongoing and foreseeable
      obligations for
      the
      next 12 fiscal months .





In
      2004,
      the Board authorized the repurchase of up to $50.0 million of the Company’s
      common stock. Repurchases are made, subject to compliance with applicable
      securities laws, from time to time in the open market or in privately negotiated
      transactions. Shares of common stock acquired through the repurchase program
      are
      available for general corporate purposes. On September 28, 2007, the Company
      announced that its Board approved an expansion of its share repurchase program
      allowing for the repurchase of up to $75.0 million of the Company’s common
      stock, inclusive of the $17.8 million remaining from the April 2004
      authorization.




Available
      for sale debt and marketable equity securities of $173.5 million included in
      current assets at September
      29, 2007 were all
      available for immediate sale. The Company intends to continue to use its current
      liquidity to support the expansion of its business, entering into product
      license arrangements, potentially acquiring complementary businesses and
      products and for general corporate purposes.





As
      of September
      29, 2007 ,
      the
      Company had payables due to distribution agreement partners of $65.6 million
      related primarily to amounts due under profit sharing agreements, particularly
      including amounts owed to GSK with respect to fluticasone and to Pentech with
      respect to paroxetine. The Company expects to pay these amounts, with the
      exception of the payables due to Pentech as a result of current litigation
      with
      it, out of its working capital during the third quarter of 2007. I n
      2004,
      Pentech filed a legal action against the Company alleging that the Company
      breached its contract with Pentech. The Company and Pentech are in dispute
      over
      the amount of gross profit share. The decrease in payables due to distribution
      agreement partners from December 31, 2006 can be primarily attributed to lower
      payables associated with fluticasone partially offset by higher payables
      associated with propranolol.





Upon
      the
      adoption of FIN 48, the Company has not updated the contractual
      obligations table presented as of December 31, 2006 in the Company’s Form 10-K, as
      the
      Company is unable to make reasonable estimates as to the period(s) in which
      cash
      will be paid related to the unrecognized tax benefits. The cumulative effect
      of
      applying the provisions of FIN 48 resulted in a reclassification of $13.0
      million of certain tax liabilities from current to non-current. The difference
      between a tax position taken or expected to be taken in a tax return and the
      benefit recognized and measured pursuant to FIN
      48
      represents an unrecognized tax benefit.  An unrecognized tax benefit
      is a liability that represents a potential future obligation
      to the taxing authorities. The total amount of unrecognized tax benefits as
      of
      January 1, 2007 was $9.4 million, excluding interest and penalties, and did
      not
      change materially as of September 29, 2007. As of January 1, 2007, the Company
      had accrued $3.6 million of interest and penalties related to uncertain tax
      positions. As of September 29, 2007,$4.2
      million of interest and penalties related to uncertain tax positionsis
      included in other long-term liabilities in the Company’scondensed consolidated balance sheet.We
      do not
      expect a significant tax payment related to theseother
      long-term liabilitieswithin
      the next year. There have been no other material changes to contractual
      obligations table presented as of December 31, 2006 in the Company’s Form 10-K.





In
      addition to its internal research and development costs, the Company, from
      time
      to time, enters into agreements with third parties for the development of new
      products and technologies. To date, the Company has entered into agreements
      and
      advanced funds and has commitments or contingent liabilities with several
      non-affiliated companies for products in various stages of development. These
      contingent payments or commitments are generally dependent on the third party
      achieving certain milestones or the timing of third-party research and
      development or legal expenses. Due to the uncertainty of the timing and/or
      realization of such contingent commitments, these obligations are not included
      in the contractual obligations table presented as of December 31, 2006 in the
      Company’s Form 10-K. Payments made pursuant to these agreements are either
      capitalized or expensed in accordance with the Company’s accounting policies.
      The total amount that ultimately could be due under agreements with
      contingencies is approximately $61 million as of September
      29, 2007 .
      See
“Subsequent Events” below.





39




As
      part
      of the consideration for the acquisition of Kali, the former Kali stockholders
      were entitled to up to $10.0 million from the Company if certain product-related
      performance criteria were met over a four year period. As of December 31, 2005,
      the former Kali stockholders had earned $5.0 million of this contingent payout
      of which $2.5 million was paid in January 2005 and an additional $2.5 million
      was paid in January 2006. During the fourth quarter of 2006, the Kali
      stockholders earned the final $5.0 million of these contingent payments, which
      was paid in January 2007.





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





**Financing**





At September
      29, 2007 ,
      the
      Company’s total outstanding short and long-term debt, including the current
      portion, was $200.0 million. The amount consisted primarily of senior
      subordinated convertible notes and capital leases of computer equipment. In
      2003, the Company sold an aggregate principal amount of $200.0 million of senior
      subordinated convertible notes pursuant to Rule 144A under the Securities Act
      of
      1933, as amended.  The notes bear interest at an annual rate of 2.875%,
      payable semi-annually on March 30 and September 30 of each year. The notes
      are
      convertible into shares of common stock of the Company at an initial conversion
      price of $88.76 per share, only upon the occurrence of certain events. Upon
      redemption, the Company has agreed to satisfy the conversion obligation in
      cash
      in an amount equal to the principal amount of the notes converted. The notes
      mature on September 30, 2010, unless earlier accelerated, converted or
      repurchased.  The Company may not redeem the notes prior to the
      maturity date. The Trustee under the Indenture governing the Notes has alleged
      that the Company has defaulted in the performance of its obligations under
      the
      Indenture and has instituted a lawsuit in connection therewith. Accordingly,
      until the matter is resolved, the Company is recording the payment obligations
      under the notes as a current liability on the Company’s condensed consolidated
      balance sheet as of September
      29, 2007 .
      Refer
      to notes to condensed consolidated financial statements - Note 14 -
“Commitments, Contingencies and Other Matters.”





**Critical
      Accounting Policies and Use of Estimates**




The
      Company’s critical accounting policies are set forth in its Annual Report on
      Form 10-K for the fiscal year ended December 31, 2006. 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 fiscal year ended December 31,
      2006, except as discussed below.





In
      June
      2006, the FASB issued FIN No. 48 (“FIN 48”) *Accounting
      for Uncertainty in Income Taxes — an interpretation of FASB Statement No.
      109* which is
      effective as of January 1, 2007. FIN 48 clarifies the accounting for uncertainty
      in income taxes recognized in an enterprise’s financial statements in accordance
      with SFAS No. 109 *Accounting
      for Income Taxes* .
      FIN 48
      prescribes a recognition threshold and measurement attribute for financial
      statement recognition, measurement and disclosure of tax positions that a
      company has taken or expects to be taken in a tax return. Additionally, FIN
      48
      provides guidance on de-recognition, classification, interest and penalties,
      accounting in interim periods and transition. Upon adoption the Company analyzed
      filing positions in the federal and state jurisdictions where it is required
      to
      file income tax returns, as well as all open tax years in these jurisdictions.
      Refer to notes to condensed consolidated financial statements - Note 10- “Income
      Taxes.”





**Subsequent
      Events**





Refer
      to
      notes to condensed consolidated financial statements - Note 14 - “Commitments,
      Contingencies and Other Matters” and Item 1 of Part II - “Legal
      Proceedings.”





In
      October 2007, the Company sold its investment in Optimer common stock for $9.6
      million and will recognize a pre-tax gain on the sale of $3.1 million in the
      fourth quarter of 2007.





In
      November 2007, the Company announced a tender offer for certain unvested stock
      options granted to employees having an exercise price in excess of $33.61.
      The
      tender offer expires on December 21, 2007. The Company may recognize up to
      approximately $4.6 million pre-tax compensation expense in the fourth quarter
      of
      2007 that otherwise would have been recognized ratably in 2008 and 2009
      depending on the level of acceptance of the tender offer. The cash outlay of
      the
      tender offer may be up to approximately $0.9 million on a pre-tax basis.




40




**ITEM
      3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**




The
      Company is subject to market risk primarily from changes in the fair values
      of
      its investments in debt securities including governmental agency securities
      and
      auction rate securities. These instruments are classified as available for
      sale
      securities for financial reporting purposes and have minimal interest risk
      due
      to their short-term natures. Professional portfolio managers managed 100% of
      these available for sale securities at September
      29, 2007 .
      Additional investments are made in overnight deposits and money market funds.
      These instruments are classified as cash and cash equivalents for financial
      reporting purposes and also have minimal or no interest risk due to their
      short-term natures. For cash, cash equivalents and available for sale debt
      securities, a 10 percent decrease in interest rates would decrease interest
      income by approximately $1.3 million. The Company does not have any financial
      obligations exposed to variability in interest rates.




The
      following table summarizes the available for sale securities that subject the
      Company to market risk at September
      29, 2007 and
      December 31, 2006:




**September
                  29,**
              
              **December
                  31,****2007**
              
              **2006**Securities
                  issued by government agencies
              
              $
              41,237
              
              $
              65,897Debt
                  securities issued by various state and local municipalities and
                  agencies
              
              
              11,796
              
              
              13,755Other
                  debt securities
              
              
              14,358
              
              
              15,870Auction
                  rate securities
              
              
              100,000
              
              
              4,250Marketable
                  equity securities available for sale
              
              
              13,386
              
              
              -Total
              
              $
              180,777
              
              $
              99,772





*Available
      for Sale Securities and Other Investments*




The
      primary objectives for the Company’s investment portfolio are liquidity and
      safety of principal. Investments are made with the intention to achieve a
      relatively high rate of return while, at the same time, retaining safety of
      principal. The Company’s investment policy limits investments to certain types
      of instruments issued by institutions and U.S. governmental agencies with
      investment-grade credit ratings. A significant change in prevailing interest
      rates could affect the market value of the portion of the $180.8 million, as
      of
      September 29, 2007, in available for sale securities that have a maturity
      greater than one year.




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




In
      April
      2005, the Company acquired shares of the Series C preferred stock of Optimer,
      a
      privately-held biotechnology company located in San Diego, California, for
      $12.0
      million. In February 2007, Optimer became a public company via an initial public
      offering (“IPO”). On February 20, 2007, the Company sold 1.1 million shares for
      $6.8 million and recognized a pre-tax gain of $1.4 million in the first quarter
      of 2007. As of September 29, 2007, the Company held 1.3 million shares of
      Optimer common stock and the fair market value of the Optimer common stock
      held
      by the Company was $10.5 million based on the market value of Optimer’s common
      stock at that date. The Company included an unrealized gain of $4.0 million
      for
      the nine months ended September 29, 2007, which was included in other
      comprehensive income. In October 2007, the Company sold its investment in
      Optimer common stock for $9.6 million and will recognize a pre-tax gain on
      the
      sale of $3.1 million in the fourth quarter of 2007. As of September 29, 2007,
      the Company reclassified its investment in Optimer common stock from “Other
      investments” (noncurrent asset) to “Available for sale debt and marketable
      equity securities” as part of current assets on the condensed consolidated
      balance sheet.




In
      August
      2007, the Company made an equity investment in Hana for $5.0 million at a
      contractually agreed premium to the prevailing market price. Of this amount,
      $1.2 million was charged to research and development expense in the third
      quarter of 2007. The Company has classified its investment in Hana as a
      noncurrent asset on its condensed consolidated balance sheet as of September
      29,
      2007 due to its contractual obligations with Hana and its ability and intent
      to
      hold the investment for a reasonable period of time (not anticipated to be
      less
      than 12 months) sufficient for a recovery of fair value up to (or beyond) the
      cost of the investment. The Company recorded an unrealized loss of $1.0 million
      for the nine months ended September 29, 2007, which was included in other
      comprehensive income to reflect the estimated fair value of its investment
      in
      Hana.




41




**ITEM
      4. CONTROLS AND PROCEDURES**





***Disclosure
      Controls and Procedures***




The
      Company maintains disclosure controls and procedures that are designed to ensure
      that information required to be disclosed in the Company’s filings with the SEC
      is recorded, processed, summarized and reported within the time period specified
      in the SEC’s rules and forms, and that such information is accumulated and
      communicated to management, including the Company’s Chief Executive Officer
      (CEO) and Chief Financial Officer (CFO), as appropriate, to allow timely
      decisions regarding required disclosure based on the definition of “disclosure
      controls and procedures” as defined in Rule 13a-15(e) promulgated under the
      Securities Exchange Act of 1934, as amended (the “Exchange Act”). In designing
      and evaluating disclosure controls and procedures, the Company has recognized
      that any controls and procedures, no matter how well designed and operated,
      can
      provide only reasonable assurance of achieving the desired control objectives,
      and management is required to apply judgment in evaluating its controls and
      procedures. An evaluation was performed under the supervision and with the
      participation of Company management, including the CEO and the CFO, to assess
      the effectiveness of the design and operation of its disclosure controls and
      procedures (as defined under the Exchange Act) as of September 29, 2007. Based
      on that evaluation, the Company’s management, including its CEO and the CFO,
      concluded that the Company’s disclosure controls and procedures were not
      effective as of September 29, 2007 because
      it has not yet been concluded that the material weaknesses in
      the
      Company’s internal control over financial reporting reported
      as of December 31, 2006 in the Company’s Form 10-K have been remediated.





***Changes
      in Internal Control over Financial Reporting***




There
      have been no significant changes in the Company's internal control over
      financial reporting identified during the quarter ended September 29, 2007,
      except for the implementation of measures described below under “Remediation of
      Material Weaknesses.”





***Remediation
      of Material Weaknesses***




The
      Company has implemented, or plans to implement, certain measures to remediate
      the material weaknesses identified in the Company’s 2006 Form 10-K. As of the
      date of the filing of this Quarterly Report on Form 10-Q, the Company has
      implemented the following measures:





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




·
            Revised
                its methodologies with respect to sales cut-off procedures and enhanced
                controls around spreadsheets used for calculating certain components
                of
                its rebate reserves.




·
            Formalized
                the level of approval and communication required for granting and
                estimating price adjustments to
                customers.





The
      Company anticipates that these remediation actions represent ongoing improvement
      measures. Furthermore, while the Company has taken steps to remediate the
      material weaknesses, these steps may not be adequate to fully remediate those
      weaknesses, and additional measures may be required. The effectiveness of its
      remediation efforts will not be known until the Company can test those controls
      in connection with the management tests of internal controls over financial
      reporting that the Company will perform as of December 31, 2007.




**PART
      II. OTHER INFORMATION**





**ITEM
      1** **.** **LEGAL
      PROCEEDINGS**




**Contractual
      Matters**




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




42




**Corporate
      Litigation**




As
      previously disclosed in the Company’s Current Report on Form 8-K, filed
      July 24, 2006, the Company and certain of its executive officers have been
      named as defendants in several purported stockholder class action lawsuits
      filed
      on behalf of purchasers of common stock of the Company between April 29,
      2004 and July 5, 2006. The lawsuits followed the Company’s July 5,
      2006 announcement that it will restate certain of its financial statements
      and
      allege that the Company and certain members of its management engaged in
      violations of the Securities Exchange Act of 1934, as amended, by issuing false
      and misleading statements concerning the Company’s financial condition and
      results. The class actions have been consolidated and are pending in the United
      States District Court, District of New Jersey. The Court has appointed co-lead
      plaintiffs and co-lead counsel. Co-lead plaintiffs filed a Consolidated Amended
      Complaint on April 30, 2007, purporting to represent purchasers of common stock
      of the Company between July 23, 2001 and July 5, 2006. Defendants filed a motion
      to dismiss the Amended Complaint on June 29, 2007. The Company intends and
      the
      members of management named as defendants have stated their intentions to
      vigorously defend the lawsuits and any additional lawsuits that may hereafter
      be
      filed with respect to the restatement. Additionally, the Company has been
      informed by a letter from the Staff of the SEC dated July 7, 2006, that the
      SEC is conducting an informal investigation of the Company related to its
      proposed restatement. The Company intends to fully cooperate with and assist
      the
      SEC in this investigation. The letter from the SEC states that the investigation
      should not be construed as an indication by the SEC or its Staff that any
      violation of law has occurred or as a reflection upon any person, entity or
      security. In addition, on September 6, 2006, in connection with this informal
      investigation, the SEC also requested certain information with respect to the
      Company’s internal review of its accounting for historical stock option grants.
      The Company has provided the information that the SEC has requested  in
      December 2006. The SEC has not contacted the Company about its informal
      investigation since the Company filed its Annual Report on Form 10-K/A for
      2005
      on March 13, 2007.




On
      August 14, 2006, individuals claiming to be stockholders of the Company
      filed a derivative action in the U.S. District Court for the Southern District
      of New York, purportedly on behalf of the Company, against the current and
      certain former directors and certain current and former officers of the Company
      as a nominal defendant. The plaintiffs in this action allege that, among other
      things, the named defendants breached their fiduciary duties to the Company
      based on substantially the same factual allegations as the class action lawsuits
      referenced above. The plaintiffs also alleged that certain of the defendants
      have been unjustly enriched based on their receipt of allegedly backdated
      options to purchase shares of common stock of the Company, and seek to require
      those defendants to disgorge any profits made in connection with their exercise
      of such options and additional attendant damages relating to allegedly backdated
      options during the period from January 1, 1996 to the present. The action
      has been transferred to the United States District Court, District of New
      Jersey. On June 29, 2007, the plaintiffs filed their amended complaint and
      in
      connection therewith, dropped their claims related to alleged stock option
      backdating. Defendants have made a motion to dismiss the complaint, which motion
      has been fully briefed. The Company intends and each of the individuals named
      as
      defendants have stated their intentions to vigorously defend against the
      remaining allegations.





On
      September 1, 2006, the Company received a notice of default from the
      American Stock Transfer & Trust Company, as trustee (the “Trustee”) of the
      Company’s 2.875% Senior Subordinated Convertible Notes due 2010 (the “Notes”).
      The Trustee claims, in essence, that the Company’s failure to include financial
      statements in its Quarterly Report on Form 10-Q for the second quarter of 2006
      constituted a default under Section 6.2 of the Indenture, dated as of
      September 30, 2003 (the “Indenture”), between the Company, as issuer, and
      the Trustee, relating to the Notes. The notice of default asserted that if
      the
      purported default continued unremedied for 30 days after the receipt of the
      notice, an “event of default” would occur under the Indenture. Under the
      Indenture, the occurrence of an event of default would give the Trustee or
      certain holders of the Notes the right to declare all unpaid principal and
      accrued interest on the Notes immediately due and payable. On October 2,
      2006, the Company received a notice of acceleration from the Trustee purporting
      to accelerate payment of the Notes.




The
      Company believes that it has complied with its obligations under the Indenture
      relating to the Notes. Therefore, the Company believes that the above-mentioned
      notice of default and notice of acceleration are invalid and without merit.
      Under the Indenture, the Company is required only to provide the Trustee with
      copies of its annual and other reports (or copies of such portions of such
      reports as the SEC may by rules and regulations prescribe) that it is required
      to file with the SEC pursuant to Section 13 or 15(d) of the Securities Exchange
      Act of 1934, as amended, within 15 calendar days after it files such annual
      and
      other reports with the SEC. Moreover, the Company’s Indenture specifically
      contemplates providing the Trustee with portions of reports. On August 24,
      2006
      (within 15 days of filing with the SEC), the Company provided to the Trustee
      a
      copy of its Quarterly Report on Form 10-Q for the second quarter of 2006. The
      Company’s Form 10-Q did not include the Company’s financial statements for the
      second quarter of 2006 and related Management’s Discussion and Analysis due to
      the Company’s work to restate certain of its past financial statements, and,
      therefore, in accordance with SEC rules, the Company filed a Form 12b-25
      Notification of Late Filing disclosing the omissions. The Company’s Form 12b-25
      also was provided to the Trustee on August 24, 2006. Accordingly, the Company
      believes that it complied with the Indenture provision in question.




After
      the
      Company communicated its position to the Trustee, the Trustee filed a lawsuit,
      on October 19, 2006, on behalf of the holders of the Notes in the Supreme
      Court of the State of New York, County of New York, alleging a breach of the
      Indenture and of an alleged covenant of good faith and fair dealing. The lawsuit
      demands, among other things, that the Company pay the holders of the Notes
      either the principal, any accrued and unpaid interest and additional interest
      (as such term is defined in the Indenture), if any, or the difference between
      the fair market value of the Notes on October 2, 2006 and par, whichever
      the Trustee elects, or in the alternative, damages to be determined at trial,
      alleged by the Trustee to exceed $30.0 million. The Company filed a Notice
      of Removal to remove the lawsuit to the U.S. District Court for the Southern
      District of New York and has filed its answer to the complaint in that Court.
      On
      January 19, 2007, the Trustee filed a motion for summary judgment along
      with supporting documentation. On February 16, 2007, the Company filed its
      response to the Trustee’s motion for summary judgment and cross-moved for
      summary judgment in its favor. The Court has not yet ruled on the motions.
      Until
      the matter is resolved, the Company is recording the payment obligations as
      a
      current liability on the condensed consolidated balance sheets because the
      Court
      in the matter could (i) rule against the Company’s position and (ii) determine
      that the appropriate remedy would be the accelerated payment of the convertible
      notes.




43





**Patent
      Related Matters**




On
      July
      7, 2004, Xcel Pharmaceuticals, Inc. (now known as Valeant Pharmaceuticals,
      North
      America (“Valeant”)) filed a lawsuit against Kali Laboratories, Inc. (“Kali”), a
      wholly owned subsidiary of the Company, in the United States District Court
      for
      the District of New Jersey. Valeant alleged that Kali infringed U.S. Patent
      No.
      5,462,740 (“the ‘740 patent”) by submitting a Paragraph IV certification to the
      FDA for approval of a generic version of Diastat brand of diazepam rectal gel.
      Kali has denied Valeant’s allegation, asserting that the ‘740 patent was not
      infringed and is invalid and/or unenforceable. Kali also has counterclaimed
      for
      declaratory judgments of non-infringement, invalidity and unenforceability
      of
      the ‘740 patent as well as a judgment that the ‘740 patent was unenforceable due
      to patent misuse. The parties conducted fact and expert discovery through April
      2006. The parties submitted their proposed final pretrial order in June 2006
      and
      appeared before the Court for pretrial conferences on June 13, 2006 and November
      16, 2006. Under applicable law and regulations, the filing of the lawsuit
      triggered an automatic 30-month stay of FDA approval of Kali’s Abbreviated New
      Drug Application, or ANDA. That stay expired on November 29, 2006. The parties
      appeared before the Court for settlement conferences on May 17, 2007 and June
      28, 2007. At the June 28 settlement conference the parties entered into an
      agreement in principle to settle the action. Immediately thereafter, the Court
      entered an order dismissing the action without prejudice to its being reinstated
      if the parties have not finalized their settlement agreement within 60 days.
      On
      October 16, 2007, the parties submitted a stipulated dismissal of the litigation
      which was entered on October 23, 2007, terminating the lawsuit. The settlement
      terms also permitted the Company, through its marketing partner Barr
      Laboratories, Inc., ("Barr") to introduce generic versions of the Diastat
      products on or after September 1, 2010. Profits from the sale of these products
      will be split between the Company and Barr.




On
      November 1, 2004, Morton Grove Pharmaceuticals, Inc. (“Morton Grove”) filed a
      lawsuit against the Company in the United States District Court for the Northern
      District of Illinois, seeking a declaratory judgment that four Company patents
      relating to megestrol acetate oral suspension are invalid, unenforceable and
      not
      infringed by a Morton Grove product that was launched in the fourth quarter
      of
      2004. Morton Grove acknowledges that its product is covered by the Company’s
      patent claims. The Company asserted counterclaims that the Morton Grove product
      infringed three patents and that such infringement was willful. Morton Grove
      amended its complaint to allege antitrust violations. On
      November 29, 2007, a stipulated dismissal with prejudice was signed by the
      judge
      with each party only liable for its own costs and attorneys’ fees. ****




On
      July
      15, 2003, the Company filed a lawsuit against Roxane Laboratories, Inc.
      (“Roxane”) in the United States District Court for the District of New Jersey.
      The Company alleged that Roxane had infringed the Company’s U.S. Patents
      numbered 6,593,318 and 6,593,320 and that the infringement was willful. Roxane
      has denied these allegations and has counterclaimed for declaratory judgments
      of
      non-infringement and invalidity of both patents. On September 8, 2006, the
      Court
      issued a claim construction ruling on certain claim terms in dispute between
      the
      parties. Based on that construction, the Court ruled in favor of the Company
      and
      dismissed Roxane’s motion for summary judgment of non-infringement. On November
      8, 2006, the Court ruled that the claims at issue in these patents were invalid
      as non-enabled on summary judgment. On December 8, 2006, the Company appealed
      the ruling to the Federal Circuit Court of Appeals, highlighting the district
      court’s failure to apply its own claim construction and to consider the
      testimony of the Company’s experts before awarding summary judgment to Roxane.
      On October 26, 2007, the U.S. Circuit Court of Appeals for the Federal Circuit
      affirmed the New Jersey District Court's ruling of invalidity for
      non-enablement.




On
      November 25, 2002, Ortho-McNeil Pharmaceutical, Inc. (“Ortho-McNeil”) filed a
      lawsuit against Kali, a wholly owned subsidiary of the Company, in the United
      States District Court for the District of New Jersey (the "2002 Litigation").
      Ortho-McNeil alleged that Kali infringed U.S. Patent No. 5,336,691 (the “‘691
      patent”) by submitting a Paragraph IV certification to the FDA for approval of
      tablets containing tramadol HCl and acetaminophen. Kali denied Ortho-McNeil’s
      allegation, asserting that the ‘691 patent was not infringed and is invalid
      and/or unenforceable, and that the lawsuit is barred by unclean hands. Kali
      also
      counterclaimed for declaratory judgments of non-infringement, invalidity and
      unenforceability of the ‘691 patent. Ortho-McNeil amended its complaint on July
      27, 2005 to assert infringement against the Company, and to include a claim
      for
      damages against the Company and Kali. The Company and Kali have answered and
      counterclaimed, alleging that the ‘691 patent is not infringed, and is invalid
      and unenforceable for inequitable conduct. On August 1, 2006, the Patent and
      Trademark Office reissued the ‘691 patent as U.S. Patent No. RE 39,221 (the
      "'221 Patent"), containing original claim 6 from the '691 Patent and several
      additional new claims. On August 1 and August 4, 2006, Ortho-McNeil filed a
      complaint and then an amended complaint against Kali, the Company, and two
      other
      companies, Barr and Caraco Pharmaceutical Laboratories, Ltd. (“Caraco”) (the
      "2006 Litigation"). Ortho-McNeil alleged infringement and willful infringement
      of the claims of the re-issue patent (other than claim 6, which is the subject
      of the 2002 Litigation) against the Company through the Company’s marketing of
      its tramadol HCl and acetaminophen tablets. Ortho-McNeil made similar
      allegations against Barr and Caraco. On April 4, 2007, the United States
      District Court for the District of New Jersey granted Kali's and the Company's
      motions for summary judgment that claim 6 of the '221 Patent, the only claim
      at
      issue in the 2002 Litigation, was invalid and was not infringed by the Company's
      ANDA product. Ortho-McNeil filed a motion requesting permission to immediately
      appeal this decision, and the Court denied Ortho-McNeil's motion and entered
      an
      order consolidating the 2002 and 2006 litigations. The Company has requested
      permission from the Court to file immediate summary judgment motions as to
      all
      of the remaining '221 Patent claims at issue, and also has requested that the
      Court proceed to trial on the Company's counterclaims for invalidity,
      unenforceability and intervening rights as to the '221 Patent. Ortho-McNeil
      has
      opposed the Company's requests, and the parties are awaiting a decision by
      the
      Court on these requests. On July 18, 2007, the Company entered into a settlement
      and license agreement with Ortho-McNeil that resolves patent litigation related
      to the Company’s sales of its generic tramadol HCl and acetaminophen product.
      Under the terms of the settlement, the Company will pay Ortho-McNeil a royalty
      on sales of its generic product commencing with sales from August 2006 through
      November 15, 2007 by which time the Company will cease selling its generic
      product. In accordance with the settlement and license agreement, the pending
      patent litigation between Ortho McNeil, the Company and Kali in the United
      States District Court for the District Court of New Jersey will be concluded.
      As
      part of the settlement, the Company is entering into a consent judgment on
      the
      validity, enforceability and infringement of the ‘221 Patent.




44




The
      Company entered into a licensing agreement with developer Paddock Laboratories,
      Inc. (“Paddock”) to market testosterone 1% gel, a generic version of Unimed
      Pharmaceuticals, Inc.’s (“Unimed”) product Androgel®. Pursuant to this
      agreement, the Company is responsible for management of any litigation and
      payment of all legal fees associated with this product. The product, if
      successfully brought to market, would be manufactured by Paddock and marketed
      by
      the Company. Paddock has filed an ANDA (that is pending with the FDA) for the
      testosterone 1% gel product. As a result of the filing of the ANDA, Unimed
      and
      Laboratories Besins Iscovesco (“Besins”), co-assignees of the patent-in-suit,
      filed a lawsuit against Paddock in the United States District Court for the
      Northern District of Georgia, alleging patent infringement on August 22, 2003.
      The Company has an economic interest in the outcome of this litigation by virtue
      of its licensing agreement with Paddock. Unimed and Besins sought an injunction
      to prevent Paddock from manufacturing the generic product. On November 18,
      2003,
      Paddock answered the complaint and filed a counterclaim, seeking a declaration
      that the patent-in-suit is invalid and/or not infringed by Paddock’s product. On
      September 13, 2006, the Company acquired from Paddock all rights to the ANDA
      for
      testosterone 1% gel, a generic version of Unimed’s product Androgel® for $6
      million. The lawsuit was resolved by settlement. The settlement and license
      agreement terminates all on-going litigation. The settlement and license
      agreement also permits the Company to launch the generic version of the product
      no later than February 28, 2016, assuring the Company’s ability to market a
      generic version of Androgel® well before the expiration of the patents at issue.
      On March 7, 2007, the Company was issued a Civil Investigative Demand seeking
      information and documents in connection with the court-approved settlement
      in
      2006 of the patent infringement case, Unimed v. Paddock, in the U.S. District
      Court for Northern District of Georgia. The Bureau of Competition for the
      Federal Trade Commission (“FTC”) is investigating whether the settlement of the
      litigation constituted unfair methods of competition in a potential violation
      of
      Section 5 of the FTC Act. The Company believes it has complied with all
      applicable laws in connection with the court-approved settlement and it intends
      to co-operate with the FTC in this matter.




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




On
      April
      28, 2006, CIMA Labs, Inc. (“CIMA”) and Schwarz Pharma, Inc. (“Schwarz Pharma”)
      filed separate lawsuits against the Company in the United States District Court
      for the District of New Jersey (CIMA Labs, Inc. et al. v. Par Pharmaceutical
      Companies, Inc. et al., (Civil Action Nos. 06-CV-1970, 1999 (DRD)(ES)). CIMA
      and
      Schwarz Pharma each have alleged that the Company infringed U.S. Patent Nos.
      6,024,981 (the “’981 patent”) and 6,221,392 (the “’392 patent”) by submitting a
      Paragraph IV certification to the FDA for approval of alprazolam orally
      disintegrating tablets. CIMA owns the ’981 and ’392 patents and Schwarz Pharma
      is CIMA’s exclusive licensee. The two lawsuits were consolidated on January 29,
      2007. In response to the lawsuit, the Company has answered and counterclaimed
      denying CIMA’s and Schwarz Pharma’s infringement allegations, asserting that the
’981 and ’392 patents are not infringed and are invalid and/or unenforceable.
      The parties have exchanged written discovery. All 40 claims in the ’981 patent
      were rejected in a non-final office action in a reexamination proceeding at
      the
      United States Patent and Trademark Office (“PTO”) on February 24, 2006. The PTO
      again rejected all 40 claims in a second non-final office action dated February
      24, 2007. The ‘392 patent is also the subject of a reexamination proceeding. The
      Company will continue to monitor these ongoing reexamination proceedings. CIMA
      has moved to stay this lawsuit pending the outcome of the reexamination
      proceedings and to consolidate this lawsuit with another lawsuit in the same
      district involving the same patents (CIMA Labs, Inc. et al. v. Actavis Group
      hf
      et al., (Civil Action No. 07-CV-0893 (DRD) (ES)). A hearing on these motions
      was
      held on May 30, 2007. The Company intends to vigorously defend this lawsuit
      and
      pursue its counterclaims.




45




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




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




On
      April
      10, 2007, Abbott Laboratories (“Abbott”) and Astellas Pharma Inc. (“Astellas”),
      filed an amended complaint against the Company and Par and six other defendants,
      seeking judgment alleging that U.S. Patent Nos. 4,599,334 (the “’334 patent”)
      and 4,935,507 (the “’507 patent”) are, or will be, infringed by the defendants’
planned production of cefdinir products. The Company denied Abbott and Astellas’
allegations, asserting that the ’334 and ’507 patents are not infringed and are
      invalid. The Company counterclaimed for declaratory judgments of
      non-infringement and invalidity of the patents. On September 27, 2007, the
      Company's motion for stipulated substitution of Orchid Chemicals &
Pharmaceuticals Ltd for Par was entered and the Company's involvement in the
      case was terminated.




On
      December 19, 2006, Reliant Pharmaceuticals, Inc. (“Reliant”) filed a lawsuit
      against the Company in the United States District Court for the District of
      Delaware (Reliant Pharmaceuticals, Inc. v. Par Pharmaceutical Inc., (Civil
      Action Nos. 06-CV-774-JJF)). Reliant alleged, in its Complaint, that the Company
      infringed U.S. Patent No. 5,681,588 (the “’588 patent”) by submitting a
      Paragraph IV certification to the FDA for approval to market generic 325 mg
      Propafenone HCl SR capsules. On January 26, 2007, Reliant amended its complaint
      to add the additional allegation that the Company infringed the ‘588 patent by
      submitting a Paragraph IV certification to the FDA for approval to market
      generic 225 mg and 425 mg—in addition to the 325 mg—Propafenone HCl SR capsules.
      The Company has answered and counterclaimed denying Reliant’s infringement
      allegations, and asserting that the ’588 patent is invalid and unenforceable. A
      scheduling order has been entered under which all fact and expert discovery
      will
      be completed by May 30, 2008. The parties have begun discovery and Reliant
      has
      filed a motion to disqualify Par’s counsel. The Company intends to vigorously
      defend this lawsuit and pursue its counterclaims.




On
      May 9,
      2007, Purdue Pharma Products L.P., Napp Pharmaceutical Group Ltd., Biovail
      Laboratories International SRL, and Ortho-McNeil, Inc. filed a lawsuit against
      Par in the United States District Court for the District of Delaware. The
      complaint alleges infringement of U.S. Patent No. 6,254,887 (the “’887 patent”)
      because the Company submitted a Paragraph IV certification to the FDA for
      approval of 200mg extended release tablets containing tramadol hydrochloride.
      On
      May 30, 2007, the Company filed its answer and counterclaim to the complaint
      seeking a declaration of noninfringement and invalidity of the '887 patent.
      A
      subsequent complaint was served on July 2, 2007 in the same District Court.
      The
      new complaint alleges that the Company's 100mg and 200mg extended release
      tablets containing tramadol hydrochloride infringe the ‘887 patent. The Company
      filed its answer and counterclaim on July 23, 2007 and will assert all available
      defenses in addition to seeking a declaration of noninfringement and invalidity
      of the '887 patent. On October 24, 2007, plaintiffs filed an amended complaint
      in the Delaware District Court in view of the Company's amendment of its ANDA
      to
      include the 300 mg strength of extended release tramadol. The
      Company filed its answer and counterclaims on November 13, 2007. The Company
      intends to defend this action vigorously and pursue its counterclaims against
      Purdue, Napp, Biovail and Ortho-McNeil.




On
      September 13, 2007, Santarus, Inc. ("Santarus") and The Curators of the
      University of Missouri (“Missouri”) filed a lawsuit against the Company in the
      United States District Court for the District of Delaware. The complaint alleges
      infringement of U.S. Patent Nos. 6,699,885; 6,489,346; and 6,645,988 because
      the
      Company submitted a Paragraph IV certification to the FDA for approval of 20
      mg
      and 40 mg omeprazole/sodium bicarbonate capsules. The
      Company filed its answer and counterclaims on October 7, 2007. The Company
      intends to defend this action vigorously and pursue its counterclaims against
      Santarus and Missouri.




46




On
      September 21, 2007, Sanofi-Aventis and Sanofi-Aventis U.S., LLC
      ("Sanofi-Aventis") filed a lawsuit against the Company and its development
      partner, Actavis South Atlantic ("Actavis"), in the United States District
      Court
      for the District of Delaware. The complaint alleges infringement of U.S. Patent
      Nos. 4,661,491 and 6,149,940 because the Company and Actavis submitted a
      Paragraph IV certification to the FDA for approval of 10 mg alfuzosin
      hydrochloride extended release tablets. The Company filed its answer and
      counterclaims on October 24, 2007. The Company intends to defend this action
      vigorously and pursue its counterclaims against Sanofi-Aventis.





On
      October 1, 2007, Elan Corporation, PLC filed a lawsuit against the Company
      and
      its development partner, IntelliPharmaCeutics Corp., and IntelliPharmaCeutics
      Ltd. ("IPC") in the United States District Court for the District of Delaware.
      On October 5, 2007, Celgene and Novartis filed a lawsuit against IPC in the
      United States District Court for the District of New Jersey. The complaint
      in
      the Delaware case alleged infringement of U.S. Patent Nos. 6,228,398 and
      6,730,325 because the Company submitted a Paragraph IV certification to the
      FDA
      for approval of 5, 10, 15, and 20 mg dexmethylphenidate hydrochloride extended
      release capsules. Elan filed an amended complaint on October 15, 2007. The
      original complaint in the New Jersey case alleged infringement of U.S. Patent
      Nos. 6,228,398; 6,730,325; 5,908,850; 6,355,656; 6,528,530; 5,837,284; and
      6,635,284 because the Company and IPC submitted a Paragraph IV certification
      to
      the FDA for approval of 5, 10, 15, and 20 mg dexmethylphenidate extended release
      capsules. The Company and IPC filed their answer and counterclaims in the
      Delaware case on November 19, 2007. Celgene and Novartis filed an amended
      complaint on October 15, 2007 and the Company and IPC filed their answer and
      counterclaims in the New Jersey case on November 20, 2007. The Company intends
      to defend these actions vigorously and pursue its counterclaims against Elan,
      Celgene, and Novartis.





On
      July
      6, 2007, Sanofi-Aventis and Debiopharm, S.A. filed a lawsuit against the Company
      and its development partner, MN Pharmaceuticals ("MN"), in the United States
      District Court for the District of New Jersey. The complaint alleges
      infringement of U.S. Patent Nos. 5,338,874 and 5,716,988 because the Company
      and
      MN submitted a Paragraph IV certification to the FDA for approval of 50 mg/10ml,
      100 mg/20 ml, and 200 mg/40 ml oxaliplatin by injection. The
      Company and MN filed their answer and counterclaims on October 10, 2007. The
      Company and MN intend to defend this action vigorously and pursue their
      counterclaims against Sanofi and Debiopharm .





On
      December 11, 2007, AstraZeneca Pharmaceuticals, LP, AstraZeneca UK Ltd., IPR
      Pharmaceuticals, Inc. and Shionogi Seiyaku Kabushiki Kaisha filed a lawsuit
      against the Company in the United States District Court for the District of
      Delaware. The complaint alleges patent infringement because the Company
      submitted a Paragraph IV certification to the FDA for approval of 5 mg, 10
      mg,
      20 mg and 40 mg rosuvastatin calcium tablets. The Company is preparing to answer
      and counterclaim and will assert all available defenses in addition to seeking
      a
      declaration of non-infringement and invalidity.





**Industry
      Related Matters**





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




47





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




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




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




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




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




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




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




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




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




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




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




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




48




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




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




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




On
      September 21, 2007, the State of Utah filed a Complaint against the Company
      and
      various other pharmaceutical companies. The Utah Complaint pleads causes of
      action for (i) violations of the Utah False Claims Act and (ii) common law
      fraudulent misrepresentation. The State seeks actual, statutory, and treble
      damages, including prejudgment interest; restitution; attorneys' fees, experts'
      fees, and costs; and other relief deemed just and equitable by the
      Court.




Finally,
      on October 9, 2007, the State of Iowa filed a Complaint against the Company
      and
      various other pharmaceutical companies. The Iowa Complaint pleads causes of
      action for (i) violations of the Iowa Consumer Fraud Act, (ii) common law
      fraudulent misrepresentation, (iii) common law unjust enrichment and (iv)
      reporting of false best price information in violation of 42 USC Sec 1396R-8.
      The State seeks (i) a declaration that the Company committed the alleged
      violations, (ii) injunctive relief against the continuation of the alleged
      violations, (iii) actual, statutory damages, including prejudgment interest
      for
      the claim of unjust enrichment, (iv) actual, statutory damages, including
      prejudgment interest for the claim of fraudulent misrepresentation, (v) actual
      and punitive damages for alleged fraud, (vi) an accounting of alleged illegal
      profits and a disgorgement of same, restitution, attorneys' fees, experts'
      fees,
      and costs and other relief deemed just and equitable by the Court.





**Other**





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





**ITEM
      1A.**  **RISK
      FACTORS**





There
      are
      no material changes from the risk factors set forth in Part I, Item 1A, “Risk
      Factors,” of the Company’s 2006 Annual Report on Form 10-K. Please refer to that
      section for disclosures regarding certain risks and uncertainties related to
      the
      Company’s business and operations.




49








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




**Issuer
      Purchases of Equity Securities** **(1)**


**Quarter
      Ending September 29, 2007**





**Period**
            
            **Total
                Number of Shares of Common Stock Purchased****(3)**
            
            **Average
                Price Paid per Share of Common Stock**
            
            **Total
                Number of Shares of Common Stock Purchased as Part of Publicly Announced
                Plans or Programs**
            
            **Maximum
                Number of Shares of Common Stock that May Yet Be Purchased Under
                the Plans
                or Programs****(2)**July
                1, 2007 through July 28, 2007
            
            
            -
            
            
            N/A
            
            
            -
            
            
            N/AJuly
                29, 2007 through August 25, 2007
            
            
            419
            
            
            N/A
            
            
            -
            
            
            N/AAugust
                26, 2007 through September 29, 2007
            
            
            1,262
            
            
            N/A
            
            
            -
            
            
            4,040,948Total
            
            
            1,681
            
            
            N/A
            
            
            -





(1)
            In
                April 2004, the Board authorized the repurchase of up to $50.0 million
                of
                the Company’s common stock. Repurchases are made, subject to compliance
                with applicable securities laws, from time to time in the open market
                or
                in privately negotiated transactions,whenever
                it appears prudent to do so.
                Shares of common stock acquired through the repurchase program are
                available for reissuance for general corporate purposes.The
                authorized amount remaining for stock repurchases under the repurchase
                program was $75 million, as of September 29, 2007. The repurchase
                program
                has no expiration date.On
                September 28, 2007, the Company announced that its Board approved
                an
                expansion of its share repurchase program allowing for the repurchase
                of
                up to $75 million of the Company’s common stock, inclusive of the $17.8
                million remaining from the April 2004 authorization.




(2)
            Based
                on the closing price of the Company’s common stock on the New York Stock
                Exchange of $18.56 at September 28,
                2007.




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




**ITEM
      6** **.** **EXHIBITS**





31.1
            Certification of the Principal Executive Officer
              (filed
              herewith.)  31.2
            Certification
                of the Principal Financial Officer (filed
                herewith.)  32.1
            Certification by the Chief Executive Officer pursuant
              to
              18 U.S.C. Section 1350, as adopted pursuant toSection
              906 of the Sarbanes-Oxley Act of 2002 (attached
              hereto.)  32.2
            Certification
                by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350,
                as
                adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
                (attached hereto.)




50




**SIGNATURES**





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


PAR
                PHARMACEUTICALCOMPANIES, INC.
                (Registrant)December
              20, 2007
            
            /s/
                Patrick G. LePorePatrick
                G. LePore
              *Chairman,
                President and Chief Executive
                Officer* December
              20, 2007
            
            /s/
              Gerard A. MartinoGerard
                A. Martino
              *Executive
                Vice President and Chief Operating
                Officer* December
              20, 2007
            
            /s/
              Veronica A. LubatkinVeronica
              A. Lubatkin
              *Executive
                Vice President and Chief Financial
                Officer*


51


**EXHIBIT
      INDEX**





Exhibit
              Number
            
            Description31.1
            
            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.




52