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: October 3, 2004

                         Commission file number: 1-10827


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


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


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


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



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

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

      Number of shares of Common Stock outstanding as of November 9, 2004:
                                   33,877,079

<PAGE>

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

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

                                                                               October 3,           December 31,
                                     ASSETS                                       2004                  2003
                                     ------                                       ----                  ----
<S>                                                                             <C>                   <C>
Current assets:
  Cash and cash equivalents                                                      $25,328              $162,549
  Available-for-sale securities                                                  197,605               195,500
  Accounts receivable, net of allowances of
    $32,606 and $40,357                                                          156,229               157,707
  Inventories, net                                                                82,499                66,713
  Prepaid expenses and other current assets                                        5,895                10,033
  Deferred income tax assets                                                      50,641                34,473
                                                                                  ------                ------
    Total current assets                                                         518,197               626,975

Property, plant and equipment, at cost less
  accumulated depreciation and amortization                                       62,404                46,813
Investments                                                                       17,399                 7,500
Intangible assets, net                                                            37,770                35,564
Goodwill                                                                          76,800                24,662
Deferred charges and other assets                                                  8,788                 6,899
Non-current deferred income tax assets, net                                       47,514                14,399
                                                                                  ------                ------
    Total assets                                                                $768,872              $762,812
                                                                                 =======               =======

                  LIABILITIES AND STOCKHOLDERS' EQUITY
                  ------------------------------------
Current liabilities:
  Current portion of long-term debt                                                 $206                  $122
  Accounts payable                                                                35,216                20,157
  Payables due to distribution agreement partners                                 55,976                88,625
  Accrued salaries and employee benefits                                           6,436                 7,363
  Accrued expenses and other current liabilities                                  17,137                24,654
  Income taxes payable                                                            48,057                26,252
                                                                                  ------                ------
    Total current liabilities                                                    163,028               167,173
  Long-term debt, less current portion                                           200,326               200,211
  Other long-term liabilities                                                        347                   347
  Commitments and contingencies
Stockholders' equity:
  Preferred stock, par value $.0001 per share; authorized: 6,000,000 shares;
    no shares issued and outstanding                                                   -                     -
  Common stock, par value $.01 per share; authorized: 90,000,000 shares;
    issued: 34,715,886 and 34,318,163 shares                                         347                   343
  Additional paid-in capital                                                     187,575               171,931
  Retained earnings                                                              249,461               224,480
  Accumulated other comprehensive loss                                              (186)               (1,673)
  Treasury stock at cost: 843,700 shares                                         (32,026)                    -
                                                                                  ------              --------
    Total stockholders' equity                                                   405,171              395,081
                                                                                 -------              -------
 Total liabilities and stockholders' equity                                     $768,872             $762,812
                                                                                 =======              =======

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

                                                        2
</TABLE>
<PAGE>

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


                                                       NINE MONTHS ENDED                THREE MONTHS ENDED
                                                       -----------------                ------------------
                                                   OCTOBER 3,   SEPTEMBER 28,        OCTOBER 3,     SEPTEMBER 28,
                                                     2004           2003               2004            2003
                                                     ----           ----               ----            ----
<S>                                               <C>            <C>                 <C>            <C>
Revenues:
   Net product sales                              $574,810       $424,418            $151,566       $214,933
   Other product related revenues                    1,054         14,490                   -          1,702
                                                     -----         ------               -----          -----
Total revenues                                     575,864        438,908             151,566        216,635
Cost of goods sold                                 373,461        237,709              92,832        131,709
                                                   -------        -------              ------        -------
   Gross margin                                    202,403        201,199              58,734         84,926

Operating expenses (income):
   Research and development                         33,722         17,908              17,060          6,788
   Acquired in-process research and development     84,000              -              84,000              -
   Selling, general and administrative              49,676         44,246              16,128         14,141
   Settlements, net                                 (2,846)             -                   -              -
   Gain on sale of facility                         (2,812)             -                   -              -
                                                     -----        -------             -------       --------
   Total operating expenses                        161,740         62,154             117,188         20,929
                                                   -------         ------            --------         ------
      Operating income                              40,663        139,045             (58,454)        63,997
Other expense, net                                    (130)          (145)                (55)          (101)
Interest (expense) income, net                        (667)           474                 (94)           141
                                                       ---            ---                  --            ---
Income (loss) before
   provision (credit) for income taxes              39,866        139,374             (58,603)        64,037
Provision (credit) for income taxes                 14,885         55,053             (23,518)        25,295
                                                    ------         ------              ------         ------
Net income (loss)                                   24,981         84,321             (35,085)        38,742

Retained earnings, beginning of period             224,480        101,947             284,546        147,526
                                                   -------        -------             -------        -------
Retained earnings, end of period                  $249,461       $186,268            $249,461       $186,268
                                                   =======        =======             =======        =======

Net income (loss) per share of common stock:
   Basic                                              $.73          $2.53             $(1.03)          $1.15
                                                       ===           ====               ====           =====
   Diluted                                            $.71          $2.45             $(1.03)          $1.11
                                                       ===           ====               ====            ====

Weighted average number of common shares outstanding:
   Basic                                            34,225         33,269              33,958         33,758
                                                    ======         ======              ======         ======
   Diluted                                          35,027         34,368              33,958         35,004
                                                    ======         ======              ======         ======



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

                                                        3
</TABLE>
<PAGE>

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

                                                                                           NINE MONTHS ENDED
                                                                                           -----------------
                                                                                        OCTOBER 3,     SEPT. 28,
                                                                                          2004           2003
                                                                                          ----           ----
<S>                                                                                     <C>            <C>
Cash flows provided by operating activities:
   Net income                                                                           $24,981        $84,321
   Adjustments to reconcile net income
    to net cash provided by operating activities:
     Deferred income taxes                                                              (50,414)        (3,943)
     Acquired in-process research and development                                        84,000              -
     Depreciation and amortization                                                        9,421          6,681
     Inventory reserves                                                                   1,249            220
     Allowances against accounts receivable                                              (7,751)         8,571
     Stock option activity                                                                  788          3,690
     Gain on sale of property                                                            (2,812)             -
     Other                                                                                 (307)             6
   Changes in assets and liabilities:
     Decrease (increase) in accounts receivable                                           9,416       (130,154)
     Increase in inventories                                                            (16,907)        (7,171)
     Decrease (increase) in prepaid expenses and other assets                             5,366         (6,940)
     Increase in accounts payable                                                        14,164            574
     (Decrease) increase in payables due to distribution agreement partners             (32,649)        66,106
     (Decrease) increase in accrued expenses and other liabilities                      (12,853)         8,027
     Increase in income taxes payable                                                    25,755         57,233
                                                                                         ------         ------
       Net cash provided by operating activities                                         51,447         87,221
                                                                                         ------         ------

Cash flows from investing activities:
   Capital expenditures                                                                 (18,733)       (16,720)
   Investment in New River                                                               (7,000)             -
   Acquisition of Kali Laboratories, Inc., net of cash acquired                        (142,089)             -
   Acquisition of available-for-sale securities                                        (350,294)             -
   Proceeds from sale of available-for-sale securities                                  347,920              -
   Proceeds from sale of fixed assets                                                     4,980              -
                                                                                          -----     ----------
       Net cash used in investing activities                                           (165,216)       (16,720)
                                                                                        -------         ------

Cash flows from financing activities:
   Proceeds from issuances of common stock                                                8,375         23,122
   Repurchases of stock                                                                 (32,026)             -
   Increase in capital lease obligations                                                    399              -
   Principal payments under long-term debt and other borrowings                            (200)        (1,215)
                                                                                            ---          -----
       Net cash (used in) provided by financing activities                              (23,452)        21,907
                                                                                         ------         ------
Net (decrease) increase in cash and cash equivalents                                   (137,221)        92,408
Cash and cash equivalents at beginning of period                                        162,549         65,121
                                                                                        -------         ------
Cash and cash equivalents at end of period                                              $25,328       $157,529
                                                                                         ======        =======

Supplemental disclosure of cash flow information: Cash paid during the year for:
   Taxes                                                                                $29,896         $1,762
                                                                                         ======          =====
   Interest                                                                               5,863            104
                                                                                          =====            ===
Non-cash transactions:
   Tax benefit from exercise of stock options                                             3,955         10,764
                                                                                          =====         ======
   Issuance of warrants                                                                   2,530              -
                                                                                          =====              =
   Decrease in fair value of available-for-sale securities and investments                1,487              -
                                                                                          =====              =
   Receivable due from convertible debt, net                                                  -        177,945
                                                                                              =        =======
             The accompanying notes are an integral part of these consolidated financial statements.

                                                        4
</TABLE>

<PAGE>

                       PAR PHARMACEUTICAL COMPANIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 OCTOBER 3, 2004
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)

     Par  Pharmaceutical  Companies,  Inc.  (the  "Company"  or "PRX")  operates
primarily through its wholly owned subsidiary, Par Pharmaceutical, Inc. ("Par"),
in  one  business   segment,   the  manufacture  and   distribution  of  generic
pharmaceuticals,  principally  in the United  States.  In addition,  the Company
develops  and  manufactures,  in  small  quantities,  complex  synthetic  active
pharmaceutical  ingredients  through  its  wholly  owned  subsidiary,   FineTech
Laboratories  Ltd.  ("FineTech"),  based in Haifa,  Israel,  and sells a limited
number  of  mature  brand  name  drugs  through  an  agreement  between  Par and
Bristol-Myers  Squibb  Company  ("BMS").  The  Company  also  wholly  owns  Kali
Laboratories,  Inc. ("Kali"), a generic pharmaceutical  research and development
company located in Somerset,  New Jersey, which was acquired on June 9, 2004. On
May 26, 2004, the Company changed its name from Pharmaceutical  Resources,  Inc.
to Par Pharmaceutical  Companies,  Inc. Marketed products are principally in the
solid oral dosage form (tablet,  caplet and two-piece hard-shell  capsule).  The
Company also  distributes  one product in the semi-solid form of a cream and one
product in oral suspension form.

NOTE 1 - BASIS OF PREPARATION:

     The accompanying  consolidated  financial statements at October 3, 2004 and
for the nine-month and  three-month  periods ended October 3, 2004 and September
28,  2003,  respectively,  are  unaudited;  in  the  opinion  of  the  Company's
management, however, such statements include all adjustments (consisting of only
normal recurring accruals) necessary to present fairly the information presented
therein.  The  consolidated  balance sheet data at December 31, 2003 was derived
from the Company's audited consolidated financial statements at such date.

     On June 9, 2004,  the Company  purchased  all of the capital stock of Kali.
The  acquisition  was accounted for as a purchase  under  Statement of Financial
Accounting  Standards  ("SFAS")  No.  141,  "Business  Combinations",   and  the
consolidated financial statements include the operating results from the date of
acquisition.

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

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

NOTE 2 - STOCK-BASED COMPENSATION:

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

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

                                       5
<PAGE>

                       PAR PHARMACEUTICAL COMPANIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 OCTOBER 3, 2004
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)

     The following  table  illustrates  the effects on net income and net income
per share of common stock if the Company had applied the fair value  recognition
provisions of SFAS 123 to its stock-based employee compensation:
<TABLE>
<CAPTION>

                                                             NINE MONTHS ENDED             THREE MONTHS ENDED
                                                             -----------------             ------------------
                                                          OCT. 3,        SEPT. 28,         OCT. 3,       SEPT. 28,
                                                           2004           2003              2004           2003
                                                           ----           ----              ----           ----
<S>                                                      <C>             <C>             <C>             <C>
Net income (loss), as reported                           $24,981         $84,321         $(35,085)       $38,742
Add: Stock-based employee compensation
   expense included in reported net income,
   net of related tax effects                                  -           1,263                -              -
Deduct: Stock-based employee compensation
   expense determined under the fair value based
   method, net of related tax effects                    (14,013)         (7,884)          (2,827)        (2,573)
                                                          ------           -----            -----          -----
Pro forma net income (loss)                              $10,968         $77,700         $(37,912)       $36,169
                                                          ======          ======           ======         ======
Net income (loss) per share of common stock:
   As reported -Basic                                       $.73           $2.53           $(1.03)         $1.15
                                                             ===            ====             ====           ====
   As reported -Diluted                                     $.71           $2.45           $(1.03)         $1.11
                                                             ===            ====             ====           ====
   Pro forma -Basic                                         $.32           $2.34           $(1.12)         $1.07
                                                             ===            ====             ====           ====
   Pro forma -Diluted                                       $.31           $2.26           $(1.12)         $1.03
                                                             ===            ====             ====           ====
</TABLE>

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

                                NINE MONTHS ENDED        THREE MONTHS ENDED
                                -----------------        ------------------
                              OCT. 3,   SEPT. 28,       OCT. 3,   SEPT. 28,
                               2004       2003           2004        2003
                               ----       ----           ----        ----
Risk-free interest rate        3.9%       4.0%           3.3%        4.0%
Expected term               4.9 years   4.8 years     5.0 years    5.0 years
Expected volatility           60.5%      61.3%          60.7%       61.0%

     It has been assumed  also that no dividends  will be paid during the entire
term of the options.  The weighted average fair values of options granted in the
nine-month  periods ended October 3, 2004 and September 28, 2003 were $30.75 and
$18.08, respectively. The weighted average fair values of options granted in the
three-month periods ended October 3, 2004 and September 28, 2003 were $19.08 and
$29.55, respectively.

NOTE 3 - AVAILABLE-FOR-SALE SECURITIES:

     At October 3, 2004 and December 31, 2003, all of the Company's  investments
in marketable securities were classified as available-for-sale and, as a result,
were  reported  at fair  value.  The  following  is a summary  of the  Company's
available-for-sale securities at October 3, 2004:


<TABLE>
<CAPTION>
                                                                            UNREALIZED
                                                                            ----------           FAIR
                                                            COST          GAIN        LOSS       VALUE
                                                            ----          ----        ----       -----
<S>                                                       <C>              <C>       <C>       <C>
Debt securities issued by various state and local
  municipalities and agencies                             $111,565         $-         $(28)    $111,537
Securities issued by United States
  government and agencies                                   86,351          -         (283)      86,068
                                                            ------          -         ----       ------
Total                                                     $197,916          -        $(311)    $197,605
                                                           =======          =          ===      =======

                                                   6
</TABLE>
<PAGE>

                       PAR PHARMACEUTICAL COMPANIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 OCTOBER 3, 2004
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)


     The following is a summary of the Company's  available-for-sale  securities
at December 31, 2003:
<TABLE>
<CAPTION>
                                                                             UNREALIZED
                                                                             ----------          FAIR
                                                            COST          GAIN        LOSS       VALUE
                                                            ----          ----        ----       -----
<S>                                                       <C>             <C>         <C>     <C>
Debt securities issued by various state and local
  municipalities and agencies                             $185,450         $-           $-     $185,450
Securities issued by United States
  government and agencies                                   10,080          -          (30)      10,050
                                                            ------          -           --       ------
Total                                                     $195,530          -         $(30)    $195,500
                                                           =======          =           ==      =======
</TABLE>

     All of the  securities  are  available  for  immediate  sale and have  been
classified  as  short-term  investments.  The  following  table  summarizes  the
contractual  maturities  of debt  securities at October 3, 2004 and December 31,
2003:

                            OCTOBER 3, 2004              DECEMBER 31, 2003
                            ---------------              -----------------
                                       FAIR                           FAIR
                            COST       VALUE             COST         VALUE
                            ----       -----             ----         -----
Less than one year        $91,351     $91,068           $10,080     $10,050
Due in 1-2 years            1,056       1,055                 -           -
Due in 2-5 years           15,184      15,157                 -           -
Due after 5 years          90,325      90,325           185,450     185,450
                           ------      ------           -------     -------
Total                    $197,916    $197,605          $195,530    $195,500
                          =======     =======           =======     =======

     In addition to the short-term investments described above, the Company also
has  investments  in New River  Pharmaceuticals  Inc. ("New River") and Advancis
Pharmaceutical Corporation ("Advancis").  The Company assesses whether temporary
or  other-than-temporary  gains or  losses  on its  marketable  securities  have
occurred due to increases or declines in fair value or other market  conditions.
Because the Company has  determined  that all of its  marketable  securities are
available-for-sale,  unrealized  gains and losses are reported as a component of
accumulated other comprehensive income (loss) in stockholders' equity.

     The Company  purchased 875 shares of common stock of New River on August 5,
2004 in its initial public offering for $8 per share. Par's investment of $7,000
represents an ownership  position of 4.9% of the outstanding common stock of New
River.  New River,  based in Radford,  Virginia,  is a specialty  pharmaceutical
company focused on developing novel  pharmaceuticals that are safer and improved
versions of widely-prescribed  drugs,  including amphetamines and opioids. As of
October 3, 2004,  the fair value of the  Company's  investment  in New River was
$9,039, based on the market value of the common stock of New River at that date.
To date, the Company has recorded unrealized gains on this investment of $2,039,
with a corresponding  credit of $1,244 to accumulated other  comprehensive gains
and $795 to deferred income taxes.

     The Company  paid  $10,000 to purchase  1,000 shares of the common stock of
Advancis,  a pharmaceutical  company based in Germantown,  Maryland,  at $10 per
share in its initial  public  offering of 6,000 shares on October 16, 2003.  The
transaction closed on October 22, 2003. The Company's investment  represented an
ownership  position of 4.4% of the outstanding  common stock of Advancis.  As of
October 3, 2004,  the fair value of the  Company's  investment  in Advancis  was
$8,360,  based on the market value of the common stock of Advancis at that date.
To date,  the Company has recorded net unrealized  losses on this  investment of
$1,640, with corresponding  charges of $1,000 to accumulated other comprehensive
losses and $640 to deferred income taxes.

                                       7
<PAGE>

                       PAR PHARMACEUTICAL COMPANIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 OCTOBER 3, 2004
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)


NOTE 4 - ACCOUNTS RECEIVABLE:
                                                     OCTOBER 3,     DECEMBER 31,
                                                        2004           2003
                                                        ----           ----
    Trade accounts receivable, net of customer
      rebates and chargebacks                        $187,787         $196,888
    Other accounts receivable                           1,048            1,176
                                                        -----            -----
                                                      188,835          198,064
                                                      -------          -------
    Allowances:
    Doubtful accounts                                   1,847            1,756
    Returns                                            16,255           13,256
    Price adjustments and allowances                   14,504           25,345
                                                       ------           ------
                                                       32,606           40,357
                                                       ------           ------
    Accounts receivable,
      net of allowances                             $156,229          $157,707
                                                     =======           =======

     The trade accounts  receivable  amounts  presented above at October 3, 2004
and December 31, 2003 are net of provisions for customer  rebates of $15,034 and
$23,793,  and of  chargebacks  of $85,197 and  $75,598,  respectively.  Customer
rebates are price  reductions  generally  given to  customers as an incentive to
increase  sales volume.  Rebates are generally  based on a customer's  volume of
purchases made during an applicable  monthly,  quarterly or annual  period.  The
lower  rebate  reserve at October 3, 2004  compared  to  December  31,  2003 was
primarily  attributable  to lower pricing on paroxetine,  the generic version of
GlaxoSmithKline's ("GSK's") Paxil(R). Chargebacks are price adjustments provided
to  wholesale  customers  for product  that they  resell to specific  healthcare
providers  on the  basis  of  prices  negotiated  between  the  Company  and the
providers.  The increase in the  chargeback  reserve  from  December 31, 2003 is
primarily  attributable  to new products,  particularly  ribavirin,  the generic
version of Schering-Plough  Corporation's  ("Schering's")  Rebetol(R),  that the
Company began  selling in April 2004 and glyburide and metformin  hydrochloride,
the generic  version of BMS's  Glucovance(R),  introduced  by the Company in May
2004. The chargeback  reserve also increased due to lower contract  pricing from
competition on paroxetine,  which was partially offset by lower paroxetine sales
volumes.

     The  accounts   receivable   allowances  include  provisions  for  doubtful
accounts,  returns  and price  adjustments  and  allowances.  Price  adjustments
include cash discounts,  sales promotions and shelf-stock  adjustments.  Cash or
terms  discounts  are given to customers  that pay within a specified  period of
time.  The Company may conduct  sales or  trade-show  promotions  through  which
additional  discounts may be given on a new product or certain existing products
as an added incentive for the customer to purchase the Company's  products.  The
lower reserve for price  adjustments and allowances at October 3, 2004 is due to
the absence of reserves for certain stocking credits and shelf-stock adjustments
that  were  required  at  year-end.  Shelf-stock  adjustments  can be given to a
customer  either for price  protection  or when the  Company  lowers its invoice
pricing at the  wholesale  level,  without a reduction  in contract  price,  and
provides a credit for the difference  between the old and new invoice prices for
the inventory that the customer has on hand at the time of the price reduction.

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

     The Company's exclusivity period for megestrol acetate oral suspension, the
generic version of BMS's Megace(R) Oral Suspension, expired in mid-January 2002.
Through October 3, 2004, two generic  competitors had been granted United States
Food and Drug  Administration  ("FDA")  approval to market  generic  versions of

                                       8
<PAGE>

                       PAR PHARMACEUTICAL COMPANIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 OCTOBER 3, 2004
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)


megestrol  acetate oral  suspension and launched  products that compete with the
Company's product. In July 2004, Par entered into a legal settlement with one of
the competitors,  Teva Pharmaceuticals USA, Inc. ("Teva USA"), pursuant to which
Par granted a license to Teva USA for a limited number of units and Par receives
a royalty on Teva USA's net sales of megestrol  acetate oral  suspension  in the
United States (see "Note 11 -Commitments,  Contingencies and Other Matters-Legal
Proceedings").  On  November  3, 2004,  an  additional  competitor  was  granted
approval  from the FDA to launch a generic  version of  megestrol  acetate  oral
suspension, which generic product would also compete with the Company's product.
Sales and gross  margins on  megestrol  acetate  oral  suspension  continued  to
decline in fiscal  year 2004 due to the  effects of  competition;  however,  the
product is expected to continue to be a significant contributor to the Company's
overall  results  in  future  periods.  Net  sales  of  megestrol  acetate  oral
suspension were approximately  $17,800 for the third quarter of 2004, decreasing
$4,600  from  approximately  $22,400  for the third  quarter of 2003.  Megestrol
acetate oral suspension net sales were approximately  $54,800 for the nine-month
period  ended  October  3,  2004  compared  to  $65,000  for  the  corresponding
nine-month period of 2003.

     As a result of generic  competition  beginning in the first quarter of 2002
following the expiration of the Company's 180-day marketing  exclusivity period,
the sales  price  for  fluoxetine  10 mg and 20 mg  tablets  and 40 mg  capsules
substantially  declined  from the price that the Company had charged  during the
exclusivity period.  Despite pricing declines,  fluoxetine 40 mg capsules were a
significant sales and gross margin contributor in fiscal years 2002 and 2003. In
the first  quarter  of 2004,  however,  additional  competitive  factors  led to
further  pricing  pressure on fluoxetine 40 mg capsules,  resulting in lower net
sales and gross margins. Currently, there are two competitors in the market with
products  that compete with the  Company's  fluoxetine 40 mg product and a third
competitor  received FDA approval for its product in October 2004.  Net sales of
fluoxetine 10 mg and 20 mg tablets and 40 mg capsules were approximately $14,400
and $37,600,  respectively,  for the three- and nine-month periods ended October
3, 2004 compared to  approximately  $26,100 and $70,600,  respectively,  for the
corresponding periods of 2003.

     As discussed above,  net sales of megestrol  acetate oral suspension and of
fluoxetine  40 mg  capsules  have  decreased  as a result of  increased  generic
competition  and its  corresponding  effect on pricing  and market  share.  When
competition  enters the market and the  Company  anticipates  significant  price
erosion,  there are  circumstances  under  which the  Company  may decide to not
afford price protection to certain  customers and  consequently,  as a matter of
business strategy, to lose volume to competitors rather than reduce its pricing.
When there is general market pressure for lower pricing due to many  competitors
entering the market at the same time, the Company  decides which  customers will
be afforded price  protection  and a price  protection  reserve is  established,
based on estimated or actual existing customer  inventories.  The competition on
these two products has been somewhat  limited and competitors have been entering
the market over an extended period of time,  thereby reducing the need for broad
price protection and material price protection reserves. The Company has lowered
the pricing on these  products  over time and granted and  processed  some price
protection credits within the applicable reporting periods. However, the Company
did not establish a price protection reserve as of October 3, 2004 because there
were no additional price protection credits issued with respect to sales through
that date. The Company will continue to evaluate the effects of competition  and
will record a price protection  reserve when, if and to the extent that it deems
necessary.

     In fiscal year 2003, Par obtained the marketing  rights to paroxetine,  the
generic  version of  GlaxoSmithKline's  ("GSK")  Paxil(R),  in connection with a
litigation  settlement  (the "GSK  Settlement")  between  the  Company,  GSK and
certain of its affiliates, and Pentech Pharmaceuticals,  Inc. ("Pentech").  As a
result of the GSK  Settlement,  Par and GSK entered into an agreement  (the "GSK
Supply Agreement")  pursuant to which Par began marketing  paroxetine,  supplied
and licensed  from GSK, in the  Commonwealth  of Puerto Rico in May 2003 and the
United States in September  2003, at which time there was one other  competitive
generic product in the market.  The marketing  exclusivity  period in respect of
paroxetine  ended on  March 8,  2004  and two  additional  competitors  launched
competing  paroxetine  products in the second  quarter of 2004.  The  additional
competition  continues to  adversely  affect the  Company's  net sales and gross
margins  derived from  paroxetine.  Net sales of paroxetine  were  approximately
$26,800 and $208,700,  respectively, for the three- and nine-month periods ended
October 3, 2004 compared to approximately $95,400 and $96,300, respectively, for
the corresponding  periods of 2003. As a result of the competition,  the Company
had price protection reserves of approximately  $5,900 for paroxetine at July 4,
2004,  which it fully utilized by October 3, 2004, and issued  additional  price
protection credits within the current quarter.  The Company believes that market

                                       9
<PAGE>

conditions did not warrant any further price  protection  reserves at October 3,
2004. The Company will continue to evaluate the effects of competition  and will
record a price  protection  reserve  when,  if and to the  extent  that it deems
necessary.

NOTE 5 -INVENTORIES, NET:
                                                OCTOBER 3,       DECEMBER 31,
                                                   2004              2003
                                                   ----              ----
       Raw materials and supplies, net            $30,614          $21,551
       Work-in-process, net                        11,830            7,166
       Finished goods, net                         40,055           37,996
                                                   ------           ------
                                                  $82,499          $66,713
                                                   ======           ======

NOTE 6 - ACQUISITION OF KALI:

     On June 9, 2004, the Company  acquired all of the capital stock of Kali for
$143,345  in cash and  $2,530 in  warrants  to  purchase  150,000  shares of the
Company's  common  stock.  The Kali  stockholders  may be  entitled  to up to an
additional $10,000 if certain product-related  performance criteria are met over
the next four  years.  The  acquisition  did not  require  the  approval  of the
Company's stockholders. The Company acquired the physical facilities, in-process
research and development and  intellectual  property of Kali and retained all of
its 55 employees.  The  acquisition  of Kali expands the Company's  research and
development  capabilities and provides additional  sustained-release  technology
and oral disintegrating tablet technology.

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

     The unaudited  condensed  consolidated  pro forma  statements of operations
data were prepared by combining the  Company's  statement of operations  for the
12-months ended December 31, 2003 and for the nine and three month periods ended
October 3, 2004 and September 28, 2003 with Kali's  statements of operations for
the same  periods,  giving  effect to the  acquisition  as if it had occurred on
January 1, 2003. The unaudited  condensed  consolidated  pro forma statements of
operations do not give effect to any  restructuring  costs or any potential cost
savings or other operating efficiencies that could result from the acquisition.

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

                                                  TWELVE MONTHS    NINE MONTHS ENDED          THREE MONTHS ENDED
                                                                   -----------------          ------------------
                                                 ENDED DEC. 31,   OCT. 3,     SEPT. 28,       OCT. 3,   SEPT. 28,
                                                      2003         2004         2003           2004       2003
                                                      ----         ----         ----           ----       ----
<S>                                                  <C>         <C>          <C>            <C>        <C>
Total revenue                                        $662,695    $576,648     $442,487       $151,566   $218,630
Net income (loss)                                    $121,125     $21,905      $85,133       $(35,085)   $39,616
Net income (loss) per basic share of common stock       $3.62        $.64        $2.56         $(1.03)     $1.17
                                                         ====         ===         ====           ====       ====
Net income (loss) per diluted share of common stock     $3.50        $.63        $2.48         $(1.03)     $1.13
                                                         ====         ===         ====           ====       ====

                                                       10
</TABLE>
<PAGE>

                       PAR PHARMACEUTICAL COMPANIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 OCTOBER 3, 2004
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)


     The  purchase  price was  allocated to the assets and  liabilities  of Kali
based on  management's  determination  of fair value.  The following  table sets
forth the allocation of the purchase price:

      Current assets                                   $2,513
      Property, plant and equipment                     3,224
      Receivable from VGS Holdings, Inc.                2,688
      Intellectual property                             6,545
      In-process research and development              84,000
      Goodwill                                         52,138
                                                       ------
        Total assets acquired                         151,108
      Current liabilities                               5,233
                                                        -----
        Total liabilities assumed                       5,233
                                                        -----
      Net assets acquired                            $145,875
                                                      =======

     In  accordance  with  SFAS No.  142,  "Accounting  for  Goodwill  and Other
Intangible Assets" ("SFAS 142"), the goodwill will not be amortized, but will be
tested at least annually for impairment using a fair value approach.

     The  allocated  purchase  price  for Kali  includes  $2,725  classified  as
core/developed  technology,  which was  capitalized  and included in  intangible
assets on the  consolidated  balance  sheet and $84,000  classified  as acquired
in-process  technology,  which was written off in the  three-month  period ended
October  3,  2004.  The  Company  classified  the  technology  assets  as either
core/developed  or in-process based on the stage of development that the product
was in at the time of acquisition.  All core/developed and in-process technology
was valued  using the income  approach,  which  focuses on the  income-producing
capability of the subject assets.  The underlying premise of the income approach
is that the value of an asset can be measured  by the  present  worth of the net
economic  benefit (cash receipts less cash outlays) to be received over the life
of the subject asset.

     The acquired in-process research and development  includes the valuation of
29  products  where  there  was a  material  investment  in their  research  and
development  activities  and they have completed a certain amount of development
work. The development  work on 16 of these products was considered  complete and
ANDAs  for 14 of the  products  were  filed  with  the  FDA.  The core/developed
products  include six  products  that have  completed  the final approval stage,
including the approval  process with the FDA and the Company's assessments of
patent issues and batch size compatibility.

     Kali leases,  with a purchase  option, a 45,000-square  foot  manufacturing
facility  located in Somerset,  New Jersey.  The building is subject to a triple
net lease between VGS Holdings and Kali that terminates on June 9, 2006. On June
9, 2004,  the lease was  assigned  to Par.  Because the rent under the lease was
below market value,  the Company  determined the value of the net rental benefit
to be $3,820,  which was recorded as an  intangible  asset in the third  quarter
2004.  That value was determined as the net present fair value of the difference
between the current  market rental rate for a similar  facility and the contract
rent.
<TABLE>
<CAPTION>
NOTE 7 - INTANGIBLE ASSETS, NET:
                                                                               OCTOBER 3,       DECEMBER 31,
                                                                                  2004              2003
                                                                                  ----              ----
<S>                                                                              <C>              <C>
   Intellectual property, net of accumulated amortization of $1,911 and $1,202   $11,213           $5,378
   Product license fees, net of accumulated amortization of $3,136 and $1,135      7,669            9,170
   BMS Asset Purchase Agreement, net of accumulated amortization
       of $4,318 and $3,064                                                        7,382            8,636
   Genpharm Distribution Agreement, net of accumulated amortization
       of $4,514 and $3,972                                                        6,319            6,861
   Trademark licensed from BMS                                                     5,000            5,000
   Genpharm Profit Sharing Agreement, net of accumulated amortization
       of $2,313 and $1,981                                                          187              519
                                                                                     ---              ---
                                                                                 $37,770          $35,564
                                                                                  ======           ======

                                                     11
</TABLE>
<PAGE>

                       PAR PHARMACEUTICAL COMPANIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 OCTOBER 3, 2004
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)


     The Company recorded  amortization  expense related to intangible assets of
$4,838 and $4,338,  respectively,  for the  nine-month  periods,  and $1,634 and
$1,881,  respectively,  for the three-month  periods,  ended October 3, 2004 and
September  28,  2003.  Amortization  expense  related to the  intangible  assets
currently  being  amortized is expected to total  approximately  $5,984 in 2004,
$4,450 in 2005,  $3,792 in 2006,  $3,792 in 2007,  $3,792 in 2008 and a total of
$9,024 thereafter.

     Intangible  assets not being  amortized at October 3, 2004 and December 31,
2003 were product  license fees of $6,999 and a trademark  licensed  from BMS of
$5,000. The Company does not amortize the intangible assets relating to products
that have not yet come to market because,  until those products reach the market
and begin to produce cash flows,  the related  intangible  asset has not, in the
Company's view, begun its useful life. Under SFAS 142, an asset's useful life is
the period over which an asset is expected to contribute  directly or indirectly
to future cash flows of a company.  The Company  anticipates  that the potential
products  related to these  intangible  assets  will be brought to market in the
near term,  thereupon  generating  cash flows for the  Company.  The  intangible
assets will then be amortized over their  estimated  remaining  useful lives and
accounted for in the same manner as other intangible assets currently subject to
amortization.

     The product license fees of $6,999 consist of payments made by Par pursuant
to  agreements  with  Breath Ltd. of the Arrow  Group  ("Breath")  and  FineTech
related to latanoprost  ophthalmic  solution 0.005%,  the generic  equivalent of
Pharmacia  Corporation's  Xalatan(R),  a glaucoma  medication.  Breath  filed an
Abbreviated New Drug Application  ("ANDA")  (currently pending with the FDA) for
latanoprost, which was developed by Breath pursuant to a joint manufacturing and
marketing  agreement  with  the  Company,  seeking  approval  to  engage  in the
commercial  manufacture,  sale and use of one  latanoprost  drug  product in the
United States. Par subsequently acquired ownership of the ANDA, which includes a
Paragraph  IV  certification  that the  patents in  connection  with  Xalatan(R)
identified in "Approved Drug Products with Therapeutic Equivalence  Evaluations"
are invalid, unenforceable and/or will not be infringed by Par's generic version
of Xalatan(R). Par believes that its ANDA is the first to be filed for this drug
with a  Paragraph  IV  certification.  As a result  of the  filing  of the ANDA,
Pharmacia Corporation,  Pharmacia AB, Pharmacia Enterprises, S.A., Pharmacia and
Upjohn  Company  (collectively,   "Pharmacia")  and  the  Trustees  of  Columbia
University in the City of New York ("Columbia"),  filed a lawsuit against Par on
December 21, 2001 in the United  States  District  Court for the District of New
Jersey,  alleging patent infringement.  In July 2004, the District Court for the
District  of New  Jersey  issued an  opinion  and order  dismissing  Pharmacia's
Corporation's claim of infringement on one patent; however, the Court also ruled
that two other patents  included in the  litigation are valid,  enforceable  and
infringed by Par. Par is appealing certain portions of the Court's decision (see
"Note 11 -Commitments, Contingencies and Other Matters-Legal Proceedings").

NOTE 8 - INCOME TAXES:

     The Company  accounts for income taxes in accordance with the provisions of
SFAS No. 109,  "Accounting  for Income  Taxes",  which  requires  the Company to
recognize  deferred tax assets and liabilities  for the future tax  consequences
attributable to differences  between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Current deferred
income tax assets at October 3, 2004 and December 31, 2003  consisted  primarily
of  temporary   differences  related  to  accounts  receivable   reserves,   and
non-current deferred income tax assets in both periods included the deferred tax
benefits  related to purchased  call options.  Non-current  deferred  income tax
assets at October 3, 2004,  also  included the  deferred  tax  benefits  related
acquired in-process research and development.

                                       12
<PAGE>

                       PAR PHARMACEUTICAL COMPANIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 OCTOBER 3, 2004
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)


NOTE 9 - CHANGES IN STOCKHOLDERS' EQUITY:

     Changes  in the  Company's  common  stock and  additional  paid-in  capital
accounts  during the  nine-month  period ended  October 3, 2004 were as follows:
<TABLE>
<CAPTION>
                                                                             ACCUMULATED
                                                 COMMON STOCK  ADDITIONAL       OTHER         TREASURY STOCK
                                                 ------------    PAID-IN    COMPREHENSIVE     --------------
                                                SHARES  AMOUNT   CAPITAL     (LOSS)/GAIN      SHARES   AMOUNT
                                                ------  ------   -------     -----------      ------   ------
<S>                                             <C>      <C>     <C>           <C>            <C>    <C>
   Balance, January 1, 2004                     34,318   $343    $171,931      $(1,673)         -          -
     Comprehensive loss:
       Unrealized gains on marketable
       securities, net of tax                        -      -           -        1,487          -          -
     Exercise of stock options                     346      4       8,100            -          -          -
     Issuance of warrants                            -      -       2,530            -          -          -
     Tax benefit from exercise of stock options      -      -       3,955            -          -          -
     Employee stock purchase program                 7    -           271            -          -          -
     Compensatory arrangements                      45      -         788            -          -          -
     Common stock acquired for treasury              -      -           -            -        844    (32,026)
                                            ----------  -----      ------     --------        ---     ------
   Balance, October 3, 2004                     34,716   $347    $187,575        $(186)       844   $(32,026)
                                                ======    ===     =======          ===        ===     ======
</TABLE>
<TABLE>
<CAPTION>
COMPREHENSIVE INCOME (LOSS):
                                                           NINE MONTHS ENDED               THREE MONTHS ENDED
                                                           -----------------               ------------------
                                                        OCTOBER 3,     SEPT. 28,         OCTOBER 3,     SEPT. 28,
                                                          2004           2003              2004            2003
                                                          ----           ----              ----            ----
<S>                                                      <C>             <C>            <C>              <C>
       Net income (loss)                                 $24,981         $84,321        $(35,085)        $38,742
       Other comprehensive gain:
       Unrealized gain on
       marketable securities, net of tax                   1,487               -            2,302              -
                                                           -----           -----            -----          -----
       Comprehensive income (loss)                       $26,468         $84,321         $(32,783)       $38,742
                                                          ======          ======           ======         ======
</TABLE>

     In April 2004, the Company's  board of directors  (the "board")  authorized
the repurchase of up to $50,000 of the Company's  common stock.  The repurchases
are made,  subject to compliance with applicable  securities  laws, from time to
time in the open market or in privately  negotiated  transactions.  Common stock
acquired  through the  repurchase  program is and will be available  for general
corporate  purposes.  At October 3, 2004, the Company had repurchased 844 shares
of its common  stock for  approximately  $32,026  pursuant to the  program.  The
following table sets forth (a) the number of shares repurchased, (b) the average
price paid per share, (c) the total number of shares  repurchased as part of the
publicly  announced  plan and (d) the  approximate  dollar value that may yet be
repurchased under the plan.
<TABLE>
<CAPTION>
                                               TOTAL                         TOTAL NUMBER OF     APPROXIMATE DOLLAR
                                             NUMBER OF         AVERAGE     SHARES REPURCHASED      VALUE THAT MAY
                                              SHARES         PRICE PAID   AS PART OF A PUBLICLY  YET BE REPURCHASED
                                          REPURCHASED(a)    PER SHARE(b)    ANNOUNCED PLAN(c)     UNDER THE PLAN(d)
                                          --------------    ------------    -----------------     -----------------
<S>                                             <C>            <C>                  <C>               <C>
May 2, 2004 through May 29, 2004                406            $40.08               406               $33,712
May 30, 2004 through July 4, 2004                94            $40.49                94               $29,922
July 5, 2004 through July 31, 2004              184            $32.94               184               $23,870
August 29, 2004 through October 3, 2004         160            $36.85               160               $17,974
                                                ---                                 ---
  For the nine-month
  period ended October 3, 2004                  844                                 844
                                                ===                                 ===

                                                         13
</TABLE>
<PAGE>

                       PAR PHARMACEUTICAL COMPANIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 OCTOBER 3, 2004
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)


NOTE 10 - EARNINGS PER SHARE:

     The following is a  reconciliation  of the amounts used to calculate  basic
and diluted earnings per share:
<TABLE>
<CAPTION>
                                                 NINE MONTHS ENDED               THREE MONTHS ENDED
                                                 -----------------               ------------------
                                               OCT. 3,        SEPT. 28,         OCT. 3,        SEPT. 28,
                                                2004            2003             2004            2003
                                                ----            ----             ----            ----
<S>                                            <C>             <C>            <C>              <C>
Net income                                     $24,981         $84,321        $(35,085)        $38,742
Basic:
Weighted average number of common
  shares outstanding                            34,225          33,269           33,958         33,758
Net income per share of common stock              $.73           $2.53          $(1.03)          $1.15
                                                    ==            ====            ====            ====
Assuming dilution:
Weighted average number of common
  shares outstanding                            34,225          33,269           33,958         33,758
Effect of dilutive options                         802           1,099                -          1,246
                                                   ---           -----             ----          -----
Weighted average number of common
   shares outstanding                           35,027          34,368           33,958         35,004
Net income per share of common stock              $.71           $2.45          $(1.03)          $1.11
                                                    ==            ====            ====            ====
</TABLE>

     Outstanding  options  and  warrants  of  1,343  and  120 at the  end of the
nine-month  periods ended October 3, 2004 and September 28, 2003,  respectively,
and 1,428 at the end of the  three-month  period ended  October 3, 2004 were not
included in the  computation of diluted  earnings per share because the exercise
prices were greater than the average market price of the common stock during the
respective  periods.  The effect of dilutive  options and  warrants was excluded
from the computation of diluted  earnings per share for the  three-month  period
ended  October 3, 2004  because  the effect  would have been  anti-dilutive.  In
addition,  outstanding  warrants  sold  concurrently  with  the  sale of  senior
subordinated  convertible  notes in  September  2003  were not  included  in the
computation  of diluted  earnings per share as of October 3, 2004.  The warrants
are  exercisable for an aggregate of 2,253 shares of common stock at an exercise
price of $105.20 per share.

NOTE 11 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS:

   LEGAL PROCEEDINGS:

     On May 3, 2004,  Pentech filed an action  against the Company in the United
States District Court for the Northern District of Illinois. This action alleges
that the Company  breached its contract with Pentech  relating to the supply and
marketing  of  paroxetine.  Although the Company and Pentech are in dispute over
the amount of gross profit share, if any, due to Pentech,  the Company  believes
that it is in compliance  with its agreement  with Pentech and intends to defend
vigorously this action.

     On March 9, 2004,  the  Congress of  California  Seniors  brought an action
against GSK and the Company  concerning  the sale of  paroxetine in the State of
California. The Company intends to defend vigorously the claims set forth in the
complaint.

     On  September  10,  2003,  Par and a number  of  other  generic  and  brand
pharmaceutical  companies  were sued by a New York  county,  which  has  alleged
violations of laws (including the Racketeer Influenced and Corrupt Organizations
Act,  common  law fraud and  obtaining  funds by false  statements)  related  to
participation in the Medicaid program.  The complaint seeks declaratory  relief;
actual,  statutory and treble  damages,  with  interest;  punitive  damages;  an
accounting and  disgorgement of any illegal  profits;  a constructive  trust and
restitution;  and  attorneys'  and  experts'  fees  and  costs.  This  case  was
transferred   to  the  United  States   District   Court  for  the  District  of
Massachusetts  for  coordinated  and  consolidated  pre-trial  proceedings.   In
addition,  on  September  25, 2003,  the Office of the  Attorney  General of the
Commonwealth of Massachusetts filed a complaint in the District of Massachusetts
against Par and 12 other  leading  generic  pharmaceutical  companies,  alleging
principally that Par and such other companies violated,  through their marketing
and sales practices, state and federal laws, including allegations of common law

                                       14
<PAGE>

                       PAR PHARMACEUTICAL COMPANIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 OCTOBER 3, 2004
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)


fraud and violations of Massachusetts  false statements  statutes,  by inflating
generic  pharmaceutical  product prices paid for by the  Massachusetts  Medicaid
program.  Par has waived service of process with respect to the  complaint.  The
complaint seeks  injunctive  relief,  treble damages,  disgorgement of excessive
profits,  civil penalties,  reimbursement of investigative  and litigation costs
(including  experts' fees) and attorneys' fees. On January 29, 2004, Par 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 has not yet been  ruled on. On August 4,  2004,  Par and a number of other
generic  and brand  pharmaceutical  companies  were also sued by the City of New
York,  which has  alleged  violations  of laws  (including  common law fraud and
obtaining funds by false  statements)  related to  participation in its Medicaid
program.  The Complaint seeks declaratory relief;  actual,  statutory and treble
damages, with interest;  punitive damages; an accounting and disgorgement of any
illegal  profits;  a  constructive  trust and  restitution;  and  attorneys' and
experts' fees and costs.  This case was  transferred to the U.S.  District Court
for the District of  Massachusetts  for coordinated and  consolidated  pre-trial
proceedings.  Par  intends  to defend  vigorously  the claims  asserted  in such
complaints.  The Company  cannot predict with certainty at this time the outcome
or the effects on the Company of such litigations. Accordingly, no assurance can
be given that such  litigations or any other similar  litigation by other states
or jurisdictions,  if instituted, will not have a material adverse effect on the
Company's financial condition, results of operations, prospects or business.

     In August 2003, Teva USA filed a lawsuit against the Company and Par in the
United  States  District  Court for the  District of  Delaware  after its having
received  approval from the FDA to launch a generic version of BMS's  Megace(R),
which  generic  product  competes  with the  Company's  megestrol  acetate  oral
suspension  product.  In the  lawsuit,  Teva USA sought a  declaration  that its
product  has not  infringed  and will not  infringe  any of Par's  four  patents
relating to megestrol  acetate oral suspension.  On August 22, 2003, Par filed a
counterclaim  against Teva USA,  alleging  willful  infringement of one of Par's
four patents in the lawsuit,  U.S. Patent No.  6,593,318.  In July 2004, Par and
Teva USA entered into a settlement  of the lawsuit.  As part of the judgment and
order of permanent injunction entered by the parties, Teva USA acknowledged that
the claims of the U.S.  Patent No.  6,593,318 are valid and  enforceable  in all
respects  and that Teva USA's  product  infringes  that  patent.  As part of the
settlement, Par has granted a license to Teva USA for a limited number of units,
and, in return,  Par is  receiving  a royalty on Teva USA's  sales of  megestrol
acetate oral suspension in the United States.

     On July 15,  2003,  the  Company  and Par  filed a lawsuit  against  Roxane
Laboratories,  Inc.  ("Roxane")  in the  United  States  District  Court for the
District of New Jersey.  The Company and Par alleged  that Roxane had  infringed
Par's U.S.  Patents  numbered  6,593,318  and  6,593,320  relating to  megestrol
acetate  oral   suspension.   Roxane  has  denied  these   allegations  and  has
counterclaimed for declaratory  judgments of non-infringement  and invalidity of
both  patents.  In  addition,  Roxane has  recently  filed an amended  complaint
asserting  that  Par's  patents  in  the  litigation  are  unenforceable  due to
inequitable  conduct before the Patent Office.  Par intends to defend vigorously
against these allegations.

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

     On November 25, 2002, Ortho-McNeil  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.  Ortho-McNeil
alleged that Kali  infringed  U.S.  Patent No.  5,336,691 (the "`691 patent") by
submitting  a  Paragraph  IV  certification  to the FDA for  approval of tablets
containing  tramadol  hydrochloride and  acetaminophen.  Par is Kali's exclusive
marketing partner for these tablets through an agreement entered into before the
Company's  acquisition  of Kali.  Kali  has  denied  Ortho-McNeil's  allegation,
asserting  that  the  `691  patent  was  not  infringed  and is  invalid  and/or
unenforceable,  and that the lawsuit is barred by unclean  hands.  Kali also has
counterclaimed  for declaratory  judgments of  non-infringement,  invalidity and
unenforceability  of the `691  patent.  Summary  judgment  papers were served on
opposing  counsel on May 28, 2004. The referenced  summary  judgment  motion was
fully  briefed and  submitted to the Court as of August 23, 2004.  The Court has
stated that it will hold oral argument, which has not been scheduled.

                                       15
<PAGE>

                       PAR PHARMACEUTICAL COMPANIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 OCTOBER 3, 2004
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)


     As a result of Par's  filing  of the ANDA for  latanoprost,  Pharmacia  and
Columbia  (collectively,  the  "Plaintiffs")  filed  a  lawsuit  against  Par on
December 21, 2001 in the United  States  District  Court for the District of New
Jersey,  alleging  patent  infringement.  The  Plaintiffs  sought an  injunction
enjoining  approval  of the  Company's  ANDA and the  marketing  of its  generic
product  prior to the  expiration  of their  patents.  On February 8, 2002,  Par
answered the complaint and filed a counterclaim, which sought a declaration that
the  patents-in-suit  are invalid,  unenforceable  and/or not infringed by Par's
products  and that the  extension of the term of one of the patents was invalid.
The  trial  concluded  in March  2004 and on July 6,  2004 the  Court  issued an
opinion and order  ordering that judgment be entered in favor of the  Plaintiffs
on their claims of infringement of U.S. Patent Nos.  4,599,353 (expires July 28,
2006)  and  5,296,504  (expires  March 22,  2011);  that the  effective  date of
approval  of Par's ANDA shall be a date which is not  earlier  than the dates of
expiration  of those  patents;  and that Par is  enjoined  from  engaging in the
commercial manufacture, use, offer to sell, or sale within the United States, or
importation  into the United States,  of any drug product covered by, or the use
of which is covered by,  those two patents.  As to the third patent  asserted by
the Plaintiffs,  U.S. Patent No. 5,422,368,  the Court dismissed the Plaintiffs'
infringement  claims  and  declared  that the  patent  is  unenforceable  due to
inequitable  conduct. The Court further dismissed all of the parties' claims for
attorneys'  fees. Both Par and the Plaintiffs have filed notices of appeal which
are pending in the United States Court of Appeals for the Federal  Circuit.  Par
is appealing the Court's  decision only insofar as it relates to U.S. Patent No.
5,296,504.   Pursuant  to  agreements  with  Breath  and  FineTech   related  to
latanoprost,  the Company had recorded product license fees of $6,999, which are
included in intangible assets on its consolidated balance sheets.

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

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

   OTHER MATTERS:

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

                                       16
<PAGE>

                       PAR PHARMACEUTICAL COMPANIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 OCTOBER 3, 2004
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)


NOTE 12 - SUBSEQUENT EVENTS:

     In October 2004,  the board  adopted a stockholder  rights plan designed to
ensure that all  stockholders of the Company receive fair and equal treatment in
the event of an unsolicited attempt to acquire the Company.  The adoption of the
rights plan is intended to deter  partial and "two step" tender  offers or other
coercive  takeover  tactics,  and to prevent an acquirer from gaining control of
the Company without offering a fair price to all of the Company's  stockholders.
The rights plan was not adopted in response to any known  offers for the Company
and is similar to stockholder rights plans adopted by many other companies.

     To implement  the rights plan,  the board  declared a  distribution  of one
preferred  stock  purchase  right  per  share of common  stock,  payable  to all
stockholders of record as of November 8, 2004. The rights will be distributed as
a non-taxable  dividend and will expire on October 27, 2014.  The rights will be
evidenced by the  underlying  Company  common stock,  and no separate  preferred
stock purchase rights certificates will presently be distributed.  The rights to
acquire  preferred  stock  are  not  immediately  exercisable  and  will  become
exercisable  only if a person or group  acquires or commences a tender offer for
15% or more of PRX's common stock.

     If a person or group  acquires or  commences a tender offer for 15% or more
of PRX's common  stock,  each holder of a right,  except the  acquirer,  will be
entitled,  subject to PRX's right to redeem or exchange the right,  to exercise,
at an exercise  price of $225,  the right for one  one-thousandth  of a share of
PRX's newly-created Series A Junior Participating Preferred Stock, or the number
of shares of PRX common stock equal to the holder's number of rights  multiplied
by the  exercise  price and divided by 50% of the market  price of PRX's  common
stock on the date of the  occurrence  of such an event.  The board may terminate
the rights  plan at any time or redeem the rights,  for $0.01 per right,  at any
time before a person acquires 15% or more of PRX's common stock.

     On November 1, 2004,  Morton Grove  Pharmaceuticals,  Inc. ("Morton Grove")
filed a lawsuit  against the Company in the United States District Court for the
Northern  District of Illinois,  seeking a  declaratory  judgment  that four Par
patents relating to megestrol acetate oral suspension are invalid, unenforceable
and not infringed by a Morton Grove product that has not yet been launched,  but
which Morton Grove alleges it expects to begin  selling.  Par is evaluating  its
legal  options  in  responding  to  the  complaint  in  this  action.   Par  has
independently  learned  that  the FDA has  approved  Morton  Grove's  ANDA for a
megestrol  acetate  oral  suspension  product,  but Par does  not have  reliable
information  concerning  when  Morton  Grove may launch a product.  The  Company
intends to defend vigorously this action and shall assert counterclaims  against
Morton Grove.

                                       17
<PAGE>

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

     CERTAIN  STATEMENTS  IN  THIS  DOCUMENT  MAY  CONSTITUTE   "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF THE PRIVATE  SECURITIES  LITIGATION REFORM ACT
OF 1995,  INCLUDING THOSE CONCERNING  MANAGEMENT'S  EXPECTATIONS WITH RESPECT TO
FUTURE FINANCIAL  PERFORMANCE AND FUTURE EVENTS,  PARTICULARLY RELATING TO SALES
OF CURRENT  PRODUCTS AND THE  INTRODUCTION OF NEW  MANUFACTURED  AND DISTRIBUTED
PRODUCTS. SUCH STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES, TRENDS
AND  CONTINGENCIES,  MANY OF WHICH ARE BEYOND THE CONTROL OF THE COMPANY,  WHICH
COULD  CAUSE  ACTUAL  RESULTS  AND  OUTCOMES  TO DIFFER  MATERIALLY  FROM  THOSE
EXPRESSED HEREIN.  THESE STATEMENTS ARE OFTEN, BUT NOT ALWAYS, MADE TYPICALLY BY
USE OF WORDS OR PHRASES SUCH AS "ESTIMATE," "PLANS," "PROJECTS,"  "ANTICIPATES,"
"CONTINUING," "ONGOING," "EXPECTS," "INTENDS",  "BELIEVES," OR SIMILAR WORDS AND
PHRASES. FACTORS THAT MIGHT AFFECT SUCH FORWARD-LOOKING  STATEMENTS SET FORTH IN
THIS  DOCUMENT   INCLUDE  (i)  INCREASED   COMPETITION  FROM  NEW  AND  EXISTING
COMPETITORS  AND  PRICING  PRACTICES  FROM  SUCH  COMPETITORS  (ESPECIALLY  UPON
COMPLETION OF EXCLUSIVITY  PERIODS),  (ii) PRICING PRESSURES  RESULTING FROM THE
CONTINUED CONSOLIDATION BY THE COMPANY'S DISTRIBUTION CHANNELS, (iii) THE AMOUNT
OF FUNDS  AVAILABLE  FOR  INTERNAL  RESEARCH  AND  DEVELOPMENT  AND RESEARCH AND
DEVELOPMENT  JOINT  VENTURES,  (iv) RESEARCH AND  DEVELOPMENT  PROJECT DELAYS OR
DELAYS  AND  UNANTICIPATED  COSTS  IN  OBTAINING   REGULATORY   APPROVALS,   (v)
CONTINUATION  OF  DISTRIBUTION  RIGHTS UNDER  SIGNIFICANT  AGREEMENTS,  (vi) THE
CONTINUED ABILITY OF DISTRIBUTED PRODUCT SUPPLIERS TO MEET FUTURE DEMAND,  (vii)
THE  COSTS,  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 ON PRODUCTS AND (x) GENERAL  INDUSTRY AND
ECONOMIC  CONDITIONS.  ANY FORWARD-LOOKING  STATEMENTS INCLUDED IN THIS DOCUMENT
ARE MADE  ONLY AS OF THE DATE  HEREOF,  BASED ON  INFORMATION  AVAILABLE  TO THE
COMPANY AS OF THE DATE HEREOF,  AND,  SUBJECT TO APPLICABLE LAW TO THE CONTRARY,
THE COMPANY ASSUMES NO OBLIGATION TO UPDATE ANY FORWARD-LOOKING STATEMENTS.

     THE FINANCIAL DATA CONTAINED IN THIS SECTION IS IN THOUSANDS.

OVERVIEW

     Revenues for the nine-month period ended October 3, 2004 increased 31% from
the  corresponding  period of 2003;  however,  the increase came  primarily from
lower  margin  new  products  and was not  enough to offset  lower  sales of the
Company's  key  higher  margin  products,  increased  research  and  development
spending and the  write-off  of acquired  in-process  research  and  development
related to the acquisition of Kali. These factors  contributed to lower earnings
when  comparing the  corresponding  nine-month  periods of fiscal years 2004 and
2003.  The  Company's  quarterly  sales and earnings  growth when  comparing the
results of the last four quarters,  beginning with the third quarter of 2003, to
the  results  of the  corresponding  quarters  of the prior year ended with both
declining  sales and  earnings  in the third  quarter of 2004.  Net sales of the
Company's  key products  had declined in the third  quarter of 2004 due to lower
pricing  and/or  volumes.  The Company will continue to attempt to introduce new
products  during the remainder of fiscal year 2004 and beyond in order to offset
sales and gross margin declines resulting from competition  involving certain of
its  significant  products and its planned  increase in research and development
expenses.  The  Company is seeking to reduce its  dependence  on its present top
selling products, by adding additional products through its internal development
program,  new  and  existing  distribution  agreements  and/or  acquisitions  of
complementary products or businesses.

     Net sales and gross margins  derived from generic  pharmaceutical  products
often follow a pattern based on regulatory and competitive  factors  believed by
management to be unique to the generic pharmaceutical industry. As the patent(s)
for a brand name product and the related  exclusivity period expires,  the first
generic  manufacturer to receive regulatory approval for a generic equivalent of
the product is often able to capture a substantial share of the market. However,
as other  generic  manufacturers  receive  regulatory  approvals  for  competing
products,  the market  share,  and the price,  of that product,  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.  Recently,  a large  portion of the  Company's  revenue
growth has been derived from sales of generic drugs during the 180-day marketing
exclusivity  period and from the sale of generic products where there is limited
competition.  These drugs include  paroxetine  tablets,  megestrol  acetate oral
suspension, fluoxetine 40 mg capsules, and 10 mg and 20 mg tablets.

     In fiscal year 2003,  Par obtained the  marketing  rights to  paroxetine in
connection with the GSK Settlement.  As a result of the GSK Settlement,  Par and
GSK entered into the GSK Supply Agreement, pursuant to which Par began marketing

                                       18
<PAGE>

paroxetine,  supplied and licensed  from GSK, in the United  States in September
2003  and the  Commonwealth  of  Puerto  Rico in May  2003.  The GSK  Settlement
provides that the Company's right to distribute paroxetine will be suspended if,
at any time, there is not another generic version fully  substitutable for Paxil
available  for purchase in the United  States.  On  September  8, 2003,  another
generic drug manufacturer,  Pharmaceutical Healthcare, Inc. ("Apotex"), launched
a generic  version of  Paxil(R).  Additionally,  in April 2002,  GSK  launched a
longer-lasting,  newly patented  version of the drug,  Paxil CR(R).  The Company
expects Paxil  CR(R)'s  market share to continue to grow in fiscal year 2004 and
beyond, which may cause the total market for paroxetine tablets to decrease. The
marketing exclusivity period in respect of paroxetine ended on March 8, 2004 and
two additional  competitors launched competing paroxetine products in the second
quarter  of 2004.  The  additional  competition  had an  adverse  effect  on the
Company's  revenues  and gross  margins  derived  from  paroxetine  in the third
quarter of 2004, which will continue in subsequent periods.  Due to both pricing
and  volumes  declines,  Paroxetine  sales in the  third  quarter  of 2004  have
decreased to $26,800 from $104,600 and $77,300,  respectively,  in the first and
second quarters of 2004.

     The  Company's  exclusivity  period for megestrol  acetate oral  suspension
expired in mid-January  2002.  Through October 3, 2004, two generic  competitors
had been granted FDA approval to market  generic  versions of megestrol  acetate
oral suspension and launched  products that compete with the Company's  product.
In July 2004, Par entered into a settlement  with one of the  competitors,  Teva
USA, pursuant to which Par granted a license to Teva USA for a limited number of
units  and Par is to  receive  a royalty  on Teva  USA's net sales of  megestrol
acetate oral suspension in the United States. On November 3, 2004, an additional
competitor  received  approval  from the FDA to  launch  a  generic  version  of
megestrol acetate oral suspension, which generic product would also compete with
the  Company's  product.  Sales and gross  margins  on  megestrol  acetate  oral
suspension  declined in fiscal year 2004 due to the  effects of  competition  on
pricing and volume;  however,  the product is expected by management to continue
to be a  significant  contributor  to the  Company's  overall  results in future
periods.  Megestrol acetate oral suspension net sales were approximately $54,800
for the  nine-month  period  ended  October 3, 2004  compared  to  approximately
$65,000 for the corresponding  nine-month period in 2003. Net sales of megestrol
acetate oral  suspension  were  approximately  $17,800 for the third  quarter of
2004,  decreasing  $4,600 from  approximately  $22,400 for the third  quarter of
2003.

     As a result of generic  competition  beginning in the first quarter of 2002
following the expiration of the Company's 180-day marketing  exclusivity period,
the sales  prices  for  fluoxetine  10 mg and 20 mg tablets  and 40 mg  capsules
substantially  declined from the prices that the Company had charged  during the
exclusivity  period.  Despite pricing declines,  fluoxetine 40 mg capsules was a
significant sales and gross margin contributor in fiscal years 2002 and 2003. In
the first  quarter  of 2004,  however,  additional  competitive  factors  led to
further pressure on fluoxetine 40 mg capsules,  resulting in significantly lower
net sales and gross margins.  Currently, there are two competitors in the market
with  products  that compete with the  Company's  fluoxetine 40 mg product and a
third  competitor  received FDA approval  for its product in October  2004.  Net
sales  of  fluoxetine  10  mg  and  20  mg  tablets  and  40  mg  capsules  were
approximately $14,400 and $37,600,  respectively,  for the three- and nine-month
periods  ended October 3, 2004  compared to  approximately  $26,100 and $70,600,
respectively, for the corresponding periods of 2003.

     In April 2004, the Company's marketing partner, Three Rivers Pharmaceutical
LLC ("Three Rivers"), received final approval from the FDA for its ribavirin 200
mg capsules,  the generic version of Schering's  Rebetol(R),  which is indicated
for the  treatment  of chronic  hepatitis.  Three Rivers was awarded 180 days of
shared marketing exclusivity,  commencing at launch, for being the first to file
an ANDA  containing  a  Paragraph  IV  certification.  Under  the  terms  of its
agreement with Three Rivers, Par has the exclusive marketing right to sell Three
Rivers' ribavirin product, which Par launched in early April 2004. The launch of
this ribavirin product has not been successful.  Several factors  contributed to
the unsuccessful  launch of ribavirin,  which the Company had anticipated  would
replace a portion of the lost revenues  from  competition  on other  products in
fiscal year 2004. In addition to the competitor with shared exclusivity, Warrick
Pharmaceuticals,  a subsidiary of Schering,  also  launched a generic  ribavirin
product  in the  United  States  in April  2004.  As a result of  launching  the
product, Schering is not receiving a royalty from Three Rivers on sales of Three
Rivers' and Par's generic  ribavirin.  Due to the  additional  competition,  the
pricing  pressure on ribavirin at launch was more  substantial  than the Company
had  previously  anticipated.  Additionally,  the market  size for  Rebetol  has
declined due to the success of Copegus(R),  a new product  introduced by Hoffman
La-Roche Inc. in 2003, which has taken significant market share from Rebetol(R).
Additionally,  the Company's marketing  exclusivity period ended in October 2004
and one  additional  competitor has since  launched a competing  product.  These
principal factors have reduced  ribavirin sales to approximately  $6,300 through
October 3, 2004.

                                       19
<PAGE>

     Generic drug pricing at the wholesale level can create varying  differences
between 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  that   difference.   The  Company  records   estimates  for  these
chargebacks,  along with  estimates  for sales  returns,  rebates or other sales
allowances  for all its  customers at the time of sale, as reductions to invoice
price, with corresponding adjustments to the accounts receivable allowances.

     The Company  generally will offer price protection for sales of new generic
drugs for which the market  exclusivity  period has expired.  In  addition,  the
Company may offer price  protection with respect to existing  products for which
it anticipates  significant  price erosion through increased  competition.  Such
price  protection  reflects for the fact that the prices of such drugs typically
will decline,  sometimes  substantially,  when additional generic  manufacturers
introduce and market a comparable generic product following the expiration of an
exclusivity  period.  Such  price  protection  plans,  which  are  common in the
Company's  industry,  generally  provide for  shelf-stock  adjustments  or lower
contract  pricing to the wholesalers,  which results in an increased  chargeback
per unit on existing inventory levels. The shelf-stock  adjustments are given to
customers  with respect to their  remaining  inventory at the  expiration of the
exclusivity  period for the  difference  between the Company's new price and the
price  at  which  the  Company  originally  sold the  product  to the  customer.
Shelf-stock  adjustments can also be issued to customers when the Company lowers
its invoice pricing,  but not its contract  pricing;  in such cases, the Company
provides a credit for the difference  between the old and new invoice prices for
the  inventory  that  the  customers  have  on hand  at the  time  of the  price
reduction.  When these  situations  occur,  the Company  records  estimates  for
shelf-stock adjustments and/or price protection, as reductions to invoice price,
with corresponding adjustments to the accounts receivable allowances.

     The Company  believes that it has the experience and access to information,
including  the  total  demand  for each drug that the  Company  manufactures  or
distributes,   the  Company's   market   share,   recent  or  pending  new  drug
introductions,  inventory practices of the Company's  customers,  resales by its
customers to end-users having contracts with the Company,  and rebate agreements
with each  customer,  necessary  to  reasonably  estimate  the  amounts  of such
reductions to invoice  price.  Some of the  assumptions  used by the Company for
certain of its estimates are based on  information  received from third parties,
such as customer  inventories  at a  particular  point in time,  or other market
factors  beyond  the  Company's  control.  The  Company  regularly  reviews  the
information related to these estimates and adjusts its reserves accordingly,  if
and when  actual  experience  differs  from  previous  estimates.  There were no
material  changes to the underlying  assumptions used by the Company to estimate
such  sales  returns,  rebates,  chargebacks,  shelf-stock  or price  protection
allowances or other sales allowances for the nine- and three-month periods ended
October  3, 2004 and  September  28,  2003,  to the  extent  they  would  have a
significant  effect on the  dilution  of gross to net  revenues.  The  Company's
reserves  related to the items  described above at October 3, 2004 and September
28, 2003 totaled $132,837 and $151,159, respectively.

     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, is seeking to introduce new products that
have limited competition and longer product life cycles. In addition to expected
new  product  introductions  as  part of its  various  strategic  alliances  and
relationships,  the Company plans to continue to invest in its internal research
and  development  efforts.  Also,  it is 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.

     In June 2004,  the Company  acquired all of the capital stock of Kali for a
purchase  price of $143,345  in cash and $2,530 in warrants to purchase  150,000
shares of the Company's  common  stock.  The  allocation  of the purchase  price
includes $84,000 valued as acquired in-process research and development that was
written off in the  three-month  period ended October 3, 2004 in accordance with
purchase  accounting  for  acquisitions.  The  Company  believes  that  the Kali
acquisition  will expand its research and development  capabilities and increase
its  product   portfolio.   The  acquisition   also  diversifies  the  Company's
development  pipeline  and  provides  what  the  Company  believes  to  be  four
additional  first-to-file  product  opportunities,  enhancing  its prospects for
sustained   long-term   growth.   Kali's  operation   includes  25  products  in
development,  another  13  currently  filed and  awaiting  FDA  approval,  and a


                                       20
<PAGE>

research and development  organization of approximately 55 employees.  Kali's 13
ANDAs  include five  potential  products  the Company  plans to market and other
potential  products  from  which the  Company  will be due  royalty  income,  if
successfully  launched  by  third  parties.  Included  as part of the  Company's
purchase of Kali is a lease,  with a purchase  option,  of a 45,000-square  foot
manufacturing facility in Somerset, New Jersey.

     In addition to its own product development program, the Company has several
strategic alliances through which it co-develops and distributes products. These
strategic  alliances  afford the Company many advantages,  including  additional
resources  for  increased   activity,   expertise  on  dissimilar   products  or
technologies,  and a  sharing  of  both  the  costs  and  risks  of new  product
development.  As a result of its internal program,  including the integration of
Kali,  and these  strategic  alliances,  the  Company's  pipeline  of  potential
products  includes  43 ANDAs  (six of which  have  been  tentatively  approved),
pending with, and awaiting  approval from, the FDA. The Kali ANDAs include those
for  potential  products  that  would be  marketed  by other  companies  through
licensing  agreements  entered into before the  Company's  acquisition  of Kali,
pursuant to which the Company  would be due royalty  income.  The Company pays a
percentage of the gross  profits or sales to its strategic  partners on sales of
products covered by its distribution  agreements.  Generally,  products that the
Company develops internally, as to which it is not required to split any profits
with its  strategic  partners,  contribute  higher gross  margins than  products
covered  under  distribution  agreements.  The  Company  is  engaged  in various
efforts,  subject to FDA approval and other  factors,  to introduce new products
through its research and development  efforts and  distribution  and development
agreements with third parties.

     The Company's business plan also includes its strategy to enter the branded
drug  market.  On June 29,  2004,  the  Company  submitted  its  first  New Drug
Application ("NDA"), pursuant to Section 505(b)(2) of the Federal Food, Drug and
Cosmetic Act, seeking marketing  clearance for megestrol acetate oral suspension
NanoCrystal(R)  Dispersion ("NCD").  The new NCD formulation is a line extension
of Par's currently  marketed  megestrol  acetate oral suspension.  This advanced
formulation  utilizes NCD technology to improve the  bioavailability of the drug
as  compared  to  currently  available  formulations  of the  product.  NCD is a
trademark of Elan  Corporation,  plc, Dublin Ireland.  If cleared for marketing,
megestrol  acetate  oral  suspension  NCD is  expected to be  indicated  for the
treatment of anorexia,  cachexia, or any unexplained  significant weight loss in
patients  with a diagnosis of acquired  immunodeficiency  syndrome  ("AIDS") and
will utilize the Megace(R) brand name, which Par has licensed from BMS.

     The  Company's  brand market  business  strategy  also includes a potential
505(b)(2) NDA submission  planned for 2005 through Advancis.  The Company has an
agreement  with Advancis to develop and market a low dose  pulsatile form of the
antibiotic  amoxicillin,  utilizing Advancis' proprietary PULSYS(TM) technology.
If successfully developed,  amoxicillin PULSYS(TM) would be a once-daily version
of the antibiotic  amoxicillin that is administered for fewer days with improved
therapeutic effect.

     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  may 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 either
certify  that the patent  listed by the FDA as covering  the generic  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 generic
drug is invalid or will not be infringed by the manufacture,  sale or use of the
new drug for which the ANDA is filed. Under either circumstance, 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.  Also,
other  companies  that  compete  with the Company by  manufacturing,  developing
and/or  selling the same generic  pharmaceutical  products may  similarly  bring
lawsuits  against the Company  and/or its  strategic  partners  claiming  patent
infringement or invalidity.  Because substantially all of the Company's business
involves the marketing and  development  of off-patent  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  condition
(financial and other), prospects and results of operations.

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<PAGE>

RESULTS OF OPERATIONS

GENERAL

     The Company's net income of $24,981 for the nine-month period ended October
3, 2004  decreased  $59,340,  from  $84,321,  for the  nine-month  period  ended
September  28,  2003.  Although  total  revenues of $575,864 in this  nine-month
period of 2004  increased  $136,956,  or 31%,  from  $438,908  in the first nine
months of 2003,  gross  margin  dollars  remained  at close to the same level as
additional  sales from lower margin new products were not enough to offset lower
sales of the  Company's  key higher margin  products.  Research and  development
spending in 2004 of $33,722 increased $15,814, or 88%, from $17,908 in the prior
year and the  Company  expects to continue to spend at a higher rate on research
and  development in the fourth quarter 2004 and fiscal year 2005. The allocation
of the Kali purchase  price  resulted in $84,000  valued as acquired  in-process
research and development,  which was written off in the three-month period ended
October  3,  2004 in  accordance  with  purchase  accounting  for  acquisitions.
Selling,  general  and  administrative  costs in fiscal  year 2004 were  $49,676
compared to $44,246 in the corresponding  nine-month period of 2003. Fiscal year
2003  selling,  general  and  administrative  costs  include a charge of $3,712,
recorded in the second quarter of 2003,  related to a retirement package for the
Company's former  chairman,  president and chief executive  officer.  Nine-month
operating  expenses in 2004 are net of settlement income of $2,846,  recorded in
the second  quarter of 2004,  resulting  primarily from the settlement of claims
against  Akzo  Nobel  NV and  Organon  USA  Inc.  relating  to  anti-competitive
practices that delayed the  availability  of  mirtazapine,  a generic version of
Remeron(R)  and a $2,812 gain on the sale of the Company's  facility in Congers,
New York.

     The Company incurred a net loss for the three-month period ended October 3,
2004 of $(35,085) compared to net income of $38,742 for the corresponding period
of 2003  primarily  due to  increased  competition  on key  products,  increased
spending on research and  development  and the write-off of acquired  in-process
research and development  related to the acquisition of Kali. Third quarter 2004
revenues  of  $151,566  and gross  margins  of $58,734  (39% of total  revenues)
decreased  from the prior year's  third  quarter  revenues and gross  margins of
$216,635 and $84,926 (39% of total revenues).  Research and development spending
of $17,060 in the third quarter of 2004  increased 151% from $6,788 in the prior
year,  primarily  due to a payment  to  Advancis  to fund the  development  of a
potential  new  product,  the addition of Kali and higher  biostudies.  Selling,
general  and  administrative  costs were  $16,128 in the third  quarter of 2004,
increasing 14% from $14,141 for the corresponding quarter of last year.

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

REVENUES

     Total  revenues  for the  nine-month  period  ended  October  3,  2004 were
$575,864,  increasing $136,956,  or 31%, from total revenues of $438,908 for the
corresponding  nine-month period of 2003, primarily due to additional sales from
new  products  sold  under  various  distribution   agreements.   Net  sales  of
paroxetine,  which the Company  launched in September  2003 in the United States
and is sold through the GSK Supply Agreement, totaled approximately $208,700 for
the nine  month  period  of  2004,  increasing  $112,400  from  $96,300  for the
corresponding  nine-month period of 2003.  Additionally,  net sales of other new
distributed products, including $34,200 of glyburide and metformin hydrochloride
(Glucovance(R))    introduced   in   May   2004,   $20,800   of   mercaptopurine
(Purinethol(R)),  introduced  in  February  2004,  and $19,900 of  metformin  ER
(Glucophage  XR(R))  introduced in December  2003,  contributed to the growth of
revenues  in 2004 and  partially  offset  sales  decreases  of certain  existing
distributed products, particularly fluoxetine 40 mg capsules and 10 mg and 20 mg
tablets which  decreased  $33,000 and tizanidine  (Zanaflex(R))  which decreased

                                       22
<PAGE>

$15,700. The Company's top selling manufactured product,  megestrol acetate oral
suspension,  also  decreased  $10,200.  Net sales of  fluoxetine  and  megestrol
acetate oral suspension were  approximately  $37,600 and $54,800,  respectively,
for the nine-month period ended October 3, 2004, decreasing $33,000 and $10,200,
respectively, compared to the first nine-months of 2003.

     Net sales of distributed  products,  which consist of products manufactured
under contract and licensed products, were approximately $432,500, or 75% of the
Company's total revenues,  and $283,100, or 65% of the Company's total revenues,
respectively, in the first nine-months of fiscal years 2004 and 2003. Presently,
the Company is substantially dependent upon distributed products for its overall
sales and,  because the Company  continues to introduce  new products  under its
distribution  agreements,  it expects that this  dependence  will continue.  Any
inability by its suppliers to meet demand could  adversely  affect the Company's
future sales.

     The Company's gross revenues before  deductions for  chargebacks,  rebates,
price  adjustments,  sales returns or other sales allowances were $1,234,292 for
the  nine-month  period  ended  October 3, 2004  compared  to  $769,682  for the
nine-month period ended September 28, 2003.  Deductions from gross revenues were
$659,482  for the  nine  months  ended  October  3,  2004 and  $345,264  for the
corresponding  period of the prior year.  The  gross-to-net  revenue  percentage
spread  increased to 53% for the  nine-month  period of 2004 compared to 45% for
the corresponding period of 2003, primarily due to the ribavirin launch in April
2004 and  competition  on  paroxetine.  The Company had committed to promotional
dollars on  ribavirin  in an effort to obtain  market  share and, due to a rapid
drop in price after  launch,  the net selling price was much lower than expected
for a new  product.  The  effect  of  price  declines  for  both  ribavirin  and
paroxetine  increased the chargeback issued to wholesalers during the nine-month
period ended October 3, 2004.

     The Company's other product related  revenues of $1,054 for the nine-months
ended October 3, 2004 decreased significantly from $14,490 for the corresponding
period of 2003. The Company records other product related  revenues  pursuant to
an agreement with Genpharm, where the Company receives a portion of the profits,
as defined in the  agreement,  generated  from Kremers Urban  Development  Co.'s
("KUDCo"),  a subsidiary of Schwarz  Pharma AG of Germany,  sales of omeprazole,
the generic version of Astra Zeneca's Prilosec(R). In the third quarter of 2003,
two  generic  competitors  began  selling  forms  of  omeprazole,  significantly
reducing the  Company's  share of profits  related to  omeprazole.  The revenues
related to this  agreement  are  expected  to  continue  to  decrease  in future
periods.

     Total revenues in the third quarter 2004 of $151,566 decreased $65,069,  or
30%, from revenues in the third quarter of 2003, primarily due to lower sales of
paroxetine  of  $68,600.  Third  quarter  2004 net sales of  paroxetine  totaled
approximately  $26,800,  while net sales of megestrol  acetate  oral  suspension
decreased  $4,600 to $17,800 from $22,400 in the  corresponding  period of 2003,
and net sales of  fluoxetine  decreased  $11,700 to $14,400  from $26,100 in the
third  quarter of 2003.  Third  quarter  sales  reflect the impact of  increased
generic  competition on the Company's key products,  paroxetine,  fluoxetine and
megestrol acetate oral suspension and its  corresponding  effects on pricing and
market share.

     The Company's gross revenues before  deductions for  chargebacks,  rebates,
price adjustments, sales returns or other sales allowances were $331,505 for the
quarter  ended  October 3, 2004  compared  to  $360,971  for the  quarter  ended
September 28, 2003.  Deductions  from gross  revenues were  $179,939,  or 54% of
gross  revenues,  for the third  quarter of 2004 and  $146,038,  or 40% of gross
revenues, for the corresponding quarter of the prior year. As noted above, lower
pricing  on  paroxetine  and  ribavirin  were the  primary  contributors  to the
increased gross-to-net revenue spread in 2004 compared to 2003.

     Net sales of distributed products were approximately  $99,700 and $164,800,
respectively,  of the  Company's  total  revenues in the third quarter of fiscal
years  2004  and  2003,  which  represented  approximately  66%  and  76% of the
Company's total revenues in the respective periods.

     As discussed above,  net sales of megestrol  acetate oral suspension and of
fluoxetine  40 mg  capsules  have  decreased  as a result of  increased  generic
competition and its effect on pricing and market share. When competition  enters
the market,  there are  circumstances  under which the Company may decide to not
afford price protection to certain  customers and  consequently,  as a matter of
business  strategy,  lose volume to competitors  rather than reduce its pricing.
When there is general market pressure for lower pricing due to many  competitors
entering the market at the same time, the Company  decides which  customers will
be afforded price protection and a price protection reserve is established based
on estimated or actual existing customer  inventories.  The competition on these
two products has been somewhat  limited and  competitors  have been entering the

                                       23
<PAGE>

market  over an extended  period of time,  thereby  reducing  the need for broad
price  protection and material price protection  reserves.  Although the Company
lowered  the  pricing  on these  products  over time and some  price  protection
credits were granted and processed within the reporting periods, the Company did
not  establish  a price  protection  reserve as of October 3, 2004 as it did not
believe that there would be any additional  significant price protection credits
to be issued with respect to sales through that date.  The Company will continue
to  evaluate  the  effects of  competition  and will  record a price  protection
reserve when, if and to the extent that it deems necessary.

     As a result of the competition,  the Company had price protection  reserves
of approximately  $5,900 for paroxetine at July 4, 2004, which it fully utilized
by October 3, 2004, and issued  additional price  protection  credits within the
current quarter. The Company believes that market conditions did not warrant any
further price protection  reserves at October 3, 2004. The Company will continue
to  evaluate  the  effects of  competition  and will  record a price  protection
reserve when, if and to the extent that it deems necessary.

GROSS MARGIN

     The  Company's  gross margin of $202,403  (35% of total  revenues)  for the
first nine-months of 2004 increased $1,204 from $201,199 (46% of total revenues)
for the corresponding period of 2003. Increased revenues had a negligible effect
on gross margin  dollars as the increases  were  generated  primarily from lower
margin new products  and was not enough to offset  lower sales of the  Company's
key higher margin  products.  A significant  portion of the sales  increase were
generated from products sold under the distribution agreements with GSK, Pentech
and BMS,  where the Company  splits  profits  with its contract  partners.  As a
result of these  agreements,  the Company's  gross margin as a percentage of its
total revenues in the first nine months of 2004 declined principally because net
sales of these  products,  after  the  allocation  of profit  splits,  yielded a
significantly  lower gross margin  percentage  than the Company's  average gross
margin  as a  percentage  of  total  revenues  of  its  other  products  in  the
corresponding period of 2003. In addition,  Par's gross margin was also impacted
by the decline in other product related revenues.

     The gross  margin for the nine  months  ended  October 3, 2004  included an
income  adjustment  to cost of goods sold of $6,200,  which was  recorded in the
second quarter of 2004 and relates to sales of paroxetine during the period from
September 2003 to June 2004, that reflects a change in accounting  estimate used
in the calculation of the profit split due to Pentech.  The change in accounting
estimate has effectively reduced payables due under Par's agreement with Pentech
relating to the supply and  marketing of  paroxetine.  The change in  accounting
estimate  follows  Pentech's  filing of an action  against Par during the second
quarter of 2004.

     The gross margin of $58,734 (39% of total revenues) in the third quarter of
2004 decreased $26,192 from $84,926 (39% of total revenues) in the third quarter
of 2003.  The gross  margin  dollar  decrease  was  primarily  a result of lower
contributions  from sales of  certain of the  Company's  key  products  as noted
above.

     As discussed above, the Company generated lower sales and gross margins for
paroxetine,  fluoxetine  and  megestrol  acetate oral  suspension in each of the
periods reported above.  Despite existing market  conditions and the possibility
of additional  competition on these products,  the Company anticipates all three
products will remain  significant  contributors  to its overall  performance  in
fiscal year 2004.

     Inventory  write-offs of $7,741 and $2,705,  respectively,  in the nine-and
three-month  periods ended October 3, 2004 increased from $2,022 and $705 in the
corresponding  periods of 2003.  The inventory  write-offs,  taken in the normal
course of business,  were related primarily to the disposal of finished products
due to short shelf lives and work-in-process inventory not meeting the Company's
quality  control  standards.  The  increase  write-offs  in each of the  current
periods  included  the  write-off of  inventory  for a product  whose launch was
delayed. The Company maintains inventory levels that it believes are appropriate
to optimize its customer service.

OPERATING EXPENSES

   RESEARCH AND DEVELOPMENT

     The  Company's  research  and  development  expenses  of  $33,722  for  the
nine-month  period ended  October 3, 2004  increased  $15,814,  or 88%, from the
corresponding  period of the prior  fiscal  year.  The  increase  was  primarily
attributable  to a payment to  Advancis of $9,500 to fund the  development  of a
novel  formulation of the antibiotic  amoxicillin,  increased  biostudy costs of


                                       24
<PAGE>

$3,300 and increased personnel costs of $1,900,  including such costs related to
the acquisition of Kali. As previously  discussed,  the Company acquired Kali in
June 2004. The Company expects to utilize Kali to develop  products  principally
for its own new product pipeline.

     The  allocated  purchase  price for Kali  includes  $84,000  classified  as
acquired in-process technology,  which was written off in the three-month period
ended October 3, 2004 in accordance with purchase  accounting for  acquisitions.
The  Company  classified  the  technology  assets  as either  core/developed  or
in-process  based on the stage of development  the product was in at the time of
acquisition.  All core/developed and in-process  technology was valued using the
income  approach,  which  focuses on the  income-producing  capabilities  of the
subject assets.  The underlying premise of the income approach is that the value
of an asset can be  measured by the present  worth of the net  economic  benefit
(cash  receipts  less cash  outlays) to be received over the life of the subject
asset.

     The  in-process  research  and  development  includes  the  valuation of 29
products  where  there was a material  investment  in research  and  development
activities  and the  completion  of a  certain  amount  of  development  work in
connection with the products.  The development  work on 16 of these products was
considered complete and 14 of the products were filed with the FDA.

     In June 2004,  Par entered into an agreement  with  Advancis to develop and
market a novel  formulation  of the  antibiotic  amoxicillin.  Pursuant  to this
agreement, Par paid Advancis a $5,000 upfront license fee and $4,500 in research
and development costs, which were charged to research and development expense in
fiscal year 2004, and Par will fund future development of $23,500 through fiscal
year  2005.  Advancis  agreed  to  grant  Par the  exclusive  right  to sell and
distribute  the  product  and the  co-exclusive  right to  market  the  product.
Advancis will be responsible  for the development and manufacture of the product
and the two  parties  have agreed to share  equally in  marketing  expenses  and
profits if the product is successfully developed and brought to market.

     Research  and  development  expenses  for the  third  quarter  of 2004 were
$17,060,  increasing $10,272 from $6,788 for the corresponding  quarter of 2003.
The increase in the quarter was primarily  due to a payment to Advancis  $4,500,
higher costs for biostudies $2,400,  other outside  development  projects $1,300
and personnel costs $1,200.

     The Company  expects its  research and  development  spending in the fourth
quarter of 2004 to  approximate  its third quarter 2004  expenditures.  Although
there can be no such  assurance,  the Company  believes that its annual research
and development expenses could approach $60,000 for fiscal year 2005.

     In  addition  to the ANDAs filed by Kali for  potential  products  that are
subject to licensing  agreements  with other  companies  entered into before the
Kali  acquisition,  the  Company  has  11  ANDAs  for  potential  products  (two
tentatively  approved)  pending with,  and awaiting  approval from, the FDA as a
result of its own product development program.

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

     The Company and Genpharm  have also entered into a  distribution  agreement
(the  "Genpharm  Distribution  Agreement"),  dated  March  25,  1998.  Under the
Genpharm  Distribution  Agreement,  Genpharm  pays the research and  development
costs  associated  with  the  products  covered  by  the  Genpharm  Distribution
Agreement. There are six ANDAs for potential products (two tentatively approved)
that are  covered by the  Genpharm  Distribution  Agreement  pending  with,  and
awaiting approval from, the FDA. The Company is currently  marketing 21 products
under the Genpharm Distribution Agreement.

     Genpharm and the Company  share the costs of  developing  products  covered
under an agreement (the "Genpharm Additional Product Agreement"), dated November
27,  2000.  There is one ANDA for a potential  product  covered by the  Genpharm

                                       25
<PAGE>

Additional  Product Agreement pending with, and awaiting approval from, the FDA.
The Company is currently  marketing two products  under the Genpharm  Additional
Product Agreement.

   SELLING, GENERAL AND ADMINISTRATIVE

     Total  selling,  general and  administrative  expenses  were $49,676 (9% of
total revenues) for the first nine-months of 2004. In the  corresponding  period
of the prior year, total costs of $44,246 included a charge of $3,712 related to
a retirement  package for the  Company's  former  chairman,  president and chief
executive officer,  recorded in the second quarter of 2003.  Excluding the prior
year charge,  costs in 2004 increased $9,142, or 27%, from $40,534 (10% of total
revenues)  in the  corresponding  period of last year.  The increase in 2004 was
primarily  attributable to higher marketing costs of $3,200,  personnel costs of
$2,700,  including those for information systems assessments,  and legal fees of
$1,500.  Distribution  costs include  those  related to shipping  product to the
Company's  customers,  primarily  through  the  use of a  common  carrier  or an
external distribution service. Shipping costs of $1,924 in the nine-month period
ended October 3, 2004 were comparable to $1,990 in the  corresponding  period of
the prior year.  Although  overall sales volumes  increased in fiscal year 2004,
shipping costs  remained at  approximately  the same level as the  corresponding
period of 2003 due to a reduced  amount of reliance on an external  distribution
service. The Company anticipates it will continue to incur a high level of legal
expenses  related to the costs of  litigation  relating to potential new product
introductions   (see   "Notes   to   Consolidated   Financial    Statements-Note
11-Commitments,  Contingencies and Other Matters-Legal  Proceedings").  Although
there can be no such assurance,  selling,  general and  administrative  costs in
fiscal year 2005 are expected to grow by up to 30% to 35% from fiscal year 2004,
primarily due to planned brand marketing activities.

     Selling,  general  and  administrative  costs  of  $16,128  (11%  of  total
revenues) for the third quarter of 2004 increased  $1,987,  or 14%, from $14,141
(7% of total revenues) from the third quarter of 2003. The increased expenses in
the third  quarter of 2004  consisted of higher costs for  marketing of $700 and
personnel  of $600.  Shipping  costs of $673 in the third  quarter  of 2004 were
comparable to costs of $641 in the corresponding quarter of the prior year.

   SETTLEMENTS

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

   GAIN ON SALE OF FACILITY

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

INTEREST EXPENSE/INCOME

     Net  interest  expense  was $667 and $94,  respectively,  for the nine- and
three-month  periods ended October 3, 2004,  compared to net interest  income of
$474 and $141, respectively, for the corresponding periods of 2003. Net interest
expense in both periods of the current  year  includes  interest  payable on the
Company's  convertible  notes,  partially  offset  by  interest  income  derived
primarily from short-term investments. Net interest income in 2003 was primarily
derived from money market and other short-term investments.

INCOME TAXES

     The Company  recorded  provisions  for income taxes of $14,885 and $55,053,
respectively, for the nine-month periods ended October 3, 2004 and September 28,
2003.  In  addition,  the  Company  recorded  a credit  for  income  taxes and a
provision  for income taxes of  $(23,518)  and  $25,295,  respectively,  for the
three-month periods ended October 3, 2004 and September 28, 2003. The provisions
and credit  were based on the  applicable  federal and state tax rates for those
periods (see "Notes to Consolidated Financial Statements-Note 8-Income Taxes").

                                       26
<PAGE>

CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES

     The  Company's  critical  accounting  policies  are set forth in its Annual
Report on Form 10-K for the year  ended  December  31,  2003.  There has been no
change,  update  or  revision  to the  Company's  critical  accounting  policies
subsequent to the filing of the Company's  Form 10-K for the year ended December
31, 2003.

FINANCIAL CONDITION

LIQUIDITY AND CAPITAL RESOURCES

     Cash and cash equivalents of $25,328 at October 3, 2004 decreased  $137,221
from $162,549 at December 31, 2003, primarily due to the acquisition of Kali for
$143,345  in cash and  $2,530 in  warrants.  The  Company  had  $51,404  of cash
provided by operations,  gross proceeds of $4,980 from the sale of fixed assets,
primarily the Congers Facility, and $8,418 from the issuance of shares of Common
Stock upon the exercise of stock options. In the nine-month period ended October
3, 2004, the Company  invested  $18,733 in capital  improvements,  primarily for
Phase II of the  expansion  of its  laboratories  in  Spring  Valley,  New York,
information system improvements and new production machinery. The Company's cash
balances are deposited  primarily  with financial  institutions  in money market
funds and overnight investments.

     There have been no significant changes in credit terms, collection efforts,
credit utilization, or delinquency related to the Company's accounts receivable.
There are many  timing  issues  that could  cause  fluctuations  when  measuring
accounts  receivable days based on the previous quarter's average days' sales in
accounts receivable. The Company measures its days' sales in accounts receivable
on a rolling twelve month average.  Days' sales in accounts  receivable based on
this  calculation  increased  to 76  days at  October  3,  2004  from 63 days at
December 31, 2003. Generally, the Company has a customer base that pays in 60 to
90 days and the Company's management expects days' sales in accounts receivables
to fluctuate within that range.

     Working  capital,  which is current  assets minus current  liabilities,  of
$355,169 decreased $104,633,  from $459,802 at December 31, 2003,  primarily due
to the purchase of Kali with cash on hand. The working  capital ratio,  which is
calculated  by  dividing  current  assets by current  liabilities,  was 3.18x at
October 3, 2004  compared to 3.75x at December  31, 2003.  The Company  believes
that its strong working  capital ratio indicates its ability to meet ongoing and
foreseeable obligations.

     In April 2004,  the  Company's  board  authorized  the  repurchase of up to
$50,000 worth of the Company's common stock.  The repurchases are made,  subject
to compliance  with  applicable  securities  laws, from time to time in the open
market or in privately  negotiated  transactions.  Common stock acquired through
the repurchase program are available for general corporate purposes. Pursuant to
the program, the Company had repurchased  approximately 844 shares of its common
stock for approximately $32,026 through October 3, 2004.

     In  September  2003,  the Company  sold an  aggregate  principal  amount of
$200,000 of senior  subordinated  convertible  notes pursuant to Rule 144A under
the Securities Act of 1933, as amended. Net proceeds of $177,945 from the notes,
which were net of  underwriting  costs of $5,250 and the net  payment of $16,805
from the purchase of call  options and sale of  warrants,  were used to purchase
available-for-sale  securities in October 2003. Available-for-sale securities of
$197,605 at October 3, 2004 are all available for  immediate  sale.  The Company
intends to use its current  liquidity to support the  expansion of its business,
which included the acquisition of Kali,  increasing its research and development
activities,  entering into product license  arrangements,  potentially acquiring
other complementary businesses and products, and for general corporate purposes.

     As of  October 3, 2004,  the  Company  had  payables  owed to  distribution
agreement  partners of $55,976  related  primarily  to amounts  due  pursuant to
profit  sharing  agreements,  particularly  amounts  owed to GSK and  Pentech on
paroxetine  and BMS on glyburide and metformin  hydrochloride  and metformin ER.
The Company  expects to pay these amounts out of its working  capital during the
fourth quarter of 2004.

     The dollar values of the Company's  material  contractual  obligations  and
commercial commitments as of October 3, 2004 were as follows:

                                       27
<PAGE>

<TABLE>
<CAPTION>
                                                                            AMOUNTS DUE BY PERIOD
                                                                            ---------------------
                                     TOTAL MONETARY    OCT.-DEC. 31     2005 TO   2008 TO    2010 AND
     OBLIGATION                        OBLIGATION          2004          2007      2009     THEREAFTER
     ----------                        ----------          ----          ----      ----     ----------
<S>                                   <C>                <C>           <C>        <C>       <C>
     Operating leases                  $19,977             $784         $8,423    $4,991        $5,779
     Convertible notes*                200,000                -              -         -       200,000
     Advancis development expenses      23,500            4,500         19,000         -             -
     Nortec                                500                -            500         -             -
     Other                                 538               57            481         -             -
                                           ---               --            ---     -----     ---------
     Total obligations                $244,515           $5,341        $28,404    $4,991     $205,779
                                       =======            =====         ======     =====      =======
</TABLE>

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

     In addition to its internal  research and development  costs,  the Company,
from time to time, enters into agreements with third parties for the development
of new  products  and  technologies.  To date,  the  Company  has  entered  into
agreements and advanced  funds or has  commitments  with several  non-affiliated
companies for products in various stages of development. These types of payments
or  commitments  are generally  dependent on 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
commitments, these obligations are not included in the above table; however, the
agreements that contain such  commitments that the Company believes are material
are  described  below.  Payments made  pursuant to these  agreements  are either
capitalized or expensed according to the Company's accounting policies.

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

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

     The  Company  expects to  continue to fund its  operations,  including  its
research and development activities,  capital projects and obligations under the
existing distribution and development  arrangements discussed herein, out of its
working  capital,  including the proceeds  from the issuance of its  convertible
notes. However, the Company anticipates that its capital spending in fiscal year
2004  will  be  at  approximately  the  same  level  as  in  fiscal  year  2003.
Implementation of the Company's business plan may require additional debt and/or
equity  financing and there can be no assurance that the Company will be able to
obtain any additional  required financing when needed and on terms acceptable or
favorable to it.

FINANCING

     At  October  3, 2004,  the  Company's  total  outstanding  long-term  debt,
including the current portion,  was $200,532.  The amount consisted primarily of
senior subordinated convertible notes and capital leases for computer equipment.
In September 2003, the Company sold an aggregate principal amount of $200,000 of
senior subordinated convertible notes pursuant to Rule 144A under the Securities
Act of 1933,  as amended.  The notes bear  interest at an annual rate of 2.875%,

                                       28
<PAGE>

payable  semi-annually  on March 30 and  September  30 of each  year.  The first
payment  of $2,875 was made on March 29,  2004 and the second  payment of $2,875
was made on September 29, 2004. The notes are convertible  into shares of Common
Stock at an  initial  conversion  price  of  $88.76  per  share,  only  upon the
occurrence of certain  events.  The notes mature on September  30, 2010,  unless
earlier converted or repurchased.  The Company may not redeem the notes prior to
their maturity date.

SUBSEQUENT EVENTS

     In October  2004,  the Company's  board  adopted a stockholder  rights plan
designed to ensure that all PRX stockholders receive fair and equal treatment in
the event of an unsolicited attempt to acquire the Company.  The adoption of the
rights plan is intended to deter  partial and "two step" tender  offers or other
coercive  takeover  tactics,  and to prevent an acquirer from gaining control of
PRX without offering a fair price to all of PRX's stockholders.  The rights plan
was not  adopted  in  response  to any known  offers  for PRX and is  similar to
stockholder rights plans adopted by many other companies.

     To implement  the rights plan,  the board  declared a  distribution  of one
preferred  stock  purchase  right  per  share of common  stock,  payable  to all
stockholders of record as of November 8, 2004. The rights will be distributed as
a non-taxable  dividend and will expire on October 27, 2014.  The rights will be
evidenced by the underlying PRX common stock,  and no separate  preferred  stock
purchase  rights  certificates  will  presently  be  distributed.  The rights to
acquire  preferred  stock  are  not  immediately  exercisable  and  will  become
exercisable  only if a person or group  acquires or commences a tender offer for
15% or more of PRX's common stock.

     If a person or group  acquires or  commences a tender offer for 15% or more
of PRX's common  stock,  each holder of a right,  except the  acquirer,  will be
entitled,  subject to PRX's right to redeem or exchange the right,  to exercise,
at an exercise  price of $225,  the right for one  one-thousandth  of a share of
PRX's newly-created Series A Junior Participating Preferred Stock, or the number
of shares of PRX common stock equal to the holder's number of rights  multiplied
by the  exercise  price and divided by 50% of the market  price of PRX's  common
stock on the date of the  occurrence  of such an event.  The board may terminate
the rights  plan at any time or redeem the rights,  for $0.01 per right,  at any
time before a person acquires 15% or more of PRX's common stock.

     On November 1, 2004,  Morton  Grove filed a lawsuit  against the Company in
the United States District Court for the Northern District of Illinois,  seeking
a declaratory  judgment that four Par patents relating to megestrol acetate oral
suspension  are  invalid,  unenforceable  and not  infringed  by a Morton  Grove
product  that has not yet been  launched,  but which  Morton  Grove  alleges  it
expects to begin  selling.  Par is evaluating its legal options in responding to
the  complaint  in this  action.  Par has  independently  learned  that  FDA has
approved Morton Grove's ANDA for a megestrol  acetate oral  suspension  product,
but Par does not have  reliable  information  concerning  when Morton  Grove may
launch a product. The Company intends to defend vigorously this action and shall
assert counterclaims against Morton Grove.

       ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

     The Company is subject to market risk  primarily from changes in the market
values of its investments in marketable debt and securities issued by government
agencies.  These instruments are classified as available for sale securities for
financial  reporting  purposes and have minimal or no interest risk due to their
short-term  nature.  Professional  portfolio  managers  managed  100%  of  these
available-for-sale  securities at October 3, 2004.  Additional  investments  are
made in  overnight  deposits  and money  market  funds.  These  instruments  are
classified as cash and cash  equivalents  for financial  reporting  purposes and
have minimal or no interest risk due to their short-term nature.

     The following  table  summarizes  the  available-for-sale  securities  that
subject the Company to market risk at October 3, 2004 and December 31, 2003:

                                                     OCT. 3,     DEC. 31,
                                                      2004         2003
                                                      ----         ----
     Debt securities issued by various
       state and local municipalities
       and agencies                                $111,537      $185,450
     Securities issued by United States
       government and agencies                       86,068        10,050
                                                     ------        ------
     Total                                         $197,605      $195,500
                                                    =======       =======

                                       29
<PAGE>

   AVAILABLE-FOR-SALE SECURITIES:

     The primary objectives for the Company's investment portfolio are liquidity
and safety of  principal.  Investments  are made to achieve the highest  rate of
return while  retaining  safety of principal.  The Company's  investment  policy
limits  investments to certain types of instruments  issued by institutions  and
governmental agencies with investment-grade credit ratings. A significant change
in  interest   rates  could   affect  the  market   value  of  the  $197,605  in
available-for-sale securities that have a maturity greater than one year.

     The Company is also subject to market risk in respect of its investments in
Advancis and New River,  which are subject to  fluctuations in the trading price
of Advancis and New River common stocks,  which are publicly traded. The Company
paid $10,000 to purchase  1,000  shares of the common stock of Advancis,  at $10
per share,  in its initial public  offering of 6,000 shares on October 16, 2003.
The transaction closed on October 22, 2003. The Company's investment represented
an ownership position of 4.4% of the outstanding  common stock of Advancis.  The
value of the Company's  investment in Advancis as of October 3, 2004 was $8,360.
The Company  purchased 875 shares of common stock of New River on August 5, 2004
in an initial  public  offering  for $8 per share.  PRX's  investment  of $7,000
represented an ownership position of 4.9% of the outstanding common stock of New
River. As of October 3, 2004, the fair value of the Company's  investment in New
River was $9,039.

                        ITEM 4. CONTROLS AND PROCEDURES.

     Based on an evaluation under the supervision and with the  participation of
the  Company's  management,   the  Company's  principal  executive  officer  and
principal  financial  officer  have  concluded  that  the  Company's  disclosure
controls and procedures (as defined in Rules  13a-15(e) and 15d-15(e)  under the
Securities Exchange Act of 1934, as amended, (the "Exchange Act") were effective
as of October 3, 2004 to ensure that the information required to be disclosed by
the  Company  in  reports  that it files or submits  under the  Exchange  Act is
recorded,  processed,  summarized and reported within the time periods specified
in the Commission's rules and forms.

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

                           PART II. OTHER INFORMATION

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

     On May 3, 2004,  Pentech filed an action  against the Company in the United
States District Court for the Northern District of Illinois. This action alleges
that the Company  breached its contract with Pentech  relating to the supply and
marketing  of  paroxetine.  Although the Company and Pentech are in dispute over
the amount of gross profit share, if any, due to Pentech,  the Company  believes
that it is in compliance  with its agreement  with Pentech and intends to defend
vigorously this action.

     On March 9, 2004,  the  Congress of  California  Seniors  brought an action
against GSK and the Company  concerning  the sale of  paroxetine in the State of
California. The Company intends to defend vigorously the claims set forth in the
complaint.

     On  September  10,  2003,  Par and a number  of  other  generic  and  brand
pharmaceutical  companies  were sued by a New York  county,  which  has  alleged
violations of laws (including the Racketeer Influenced and Corrupt Organizations
Act,  common  law fraud and  obtaining  funds by false  statements)  related  to
participation in the Medicaid program.  The complaint seeks declaratory  relief;
actual,  statutory and treble  damages,  with  interest;  punitive  damages;  an
accounting and  disgorgement of any illegal  profits;  a constructive  trust and
restitution;  and  attorneys'  and  experts'  fees  and  costs.  This  case  was
transferred   to  the  United  States   District   Court  for  the  District  of
Massachusetts  for  coordinated  and  consolidated  pre-trial  proceedings.   In
addition,  on  September  25, 2003,  the Office of the  Attorney  General of the
Commonwealth of Massachusetts filed a complaint in the District of Massachusetts
against Par and 12 other  leading  generic  pharmaceutical  companies,  alleging
principally that Par and such other companies violated,  through their marketing
and sales practices, state and federal laws, including allegations of common law
fraud and violations of Massachusetts  false statements  statutes,  by inflating
generic  pharmaceutical  product prices paid for by the  Massachusetts  Medicaid
program.  Par has waived service of process with respect to the  complaint.  The
complaint seeks  injunctive  relief,  treble damages,  disgorgement of excessive
profits,  civil penalties,  reimbursement of investigative  and litigation costs
(including  experts' fees) and attorneys' fees. On January 29, 2004, Par and the

                                       30
<PAGE>

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 has not yet been  ruled on. On August 4,  2004,  Par and a number of other
generic  and brand  pharmaceutical  companies  were also sued by the City of New
York,  which has  alleged  violations  of laws  (including  common law fraud and
obtaining funds by false  statements)  related to  participation in its Medicaid
program.  The Complaint seeks declaratory relief;  actual,  statutory and treble
damages, with interest;  punitive damages; an accounting and disgorgement of any
illegal  profits;  a  constructive  trust and  restitution;  and  attorneys' and
experts' fees and costs.  This case was  transferred to the U.S.  District Court
for the District of  Massachusetts  for coordinated and  consolidated  pre-trial
proceedings.  Par  intends  to defend  vigorously  the claims  asserted  in such
complaints.  The Company  cannot predict with certainty at this time the outcome
or the effects on the Company of such litigations. Accordingly, no assurance can
be given that such  litigations or any other similar  litigation by other states
or jurisdictions,  if instituted, will not have a material adverse effect on the
Company's financial condition, results of operations, prospects or business.

     In August 2003, Teva USA filed a lawsuit against the Company and Par in the
United  States  District  Court for the  District of  Delaware  after its having
received  approval from the FDA to launch a generic version of BMS's  Megace(R),
which  generic  product  competes  with the  Company's  megestrol  acetate  oral
suspension  product.  In the  lawsuit,  Teva USA sought a  declaration  that its
product  has not  infringed  and will not  infringe  any of Par's  four  patents
relating to megestrol  acetate oral suspension.  On August 22, 2003, Par filed a
counterclaim  against Teva USA,  alleging  willful  infringement of one of Par's
four patents in the lawsuit,  U.S. Patent No.  6,593,318.  In July 2004, Par and
Teva USA entered into a settlement  of the lawsuit.  As part of the judgment and
order of permanent injunction entered by the parties, Teva USA acknowledged that
the claims of the U.S.  Patent No.  6,593,318 are valid and  enforceable  in all
respects  and that Teva USA's  product  infringes  that  patent.  As part of the
settlement, Par has granted a license to Teva USA for a limited number of units,
and, in return,  Par is  receiving  a royalty on Teva USA's  sales of  megestrol
acetate oral suspension in the United States.

     On July 15, 2003, the Company and Par filed a lawsuit against Roxane in the
United States District Court for the District of New Jersey. The Company and Par
alleged that Roxane had  infringed  Par's U.S.  Patents  numbered  6,593,318 and
6,593,320 relating to megestrol acetate oral suspension. Roxane has denied these
allegations and has counterclaimed for declaratory judgments of non-infringement
and  invalidity  of both  patents.  In addition,  Roxane has  recently  filed an
amended   complaint   asserting   that  Par's  patents  in  the  litigation  are
unenforceable due to inequitable  conduct before the Patent Office.  Par intends
to defend vigorously against these allegations.

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

     On  November  25,  2002,  Ortho-McNeil  filed a  lawsuit  against  Kali,  a
wholly-owned  subsidiary of the Company, in the United States District Court for
the District of New Jersey.  Ortho-McNeil  alleged that Kali  infringed the `691
patent by  submitting  a Paragraph IV  certification  to the FDA for approval of
tablets  containing  tramadol  hydrochloride  and  acetaminophen.  Par is Kali's
exclusive  marketing partner for these tablets through an agreement entered into
before  the  Company's  acquisition  of  Kali.  Kali has  denied  Ortho-McNeil's
allegation,  asserting  that the `691  patent was not  infringed  and is invalid
and/or unenforceable, and that the lawsuit is barred by unclean hands. Kali also
has counterclaimed for declaratory judgments of non-infringement, invalidity and
unenforceability  of the `691  patent.  Summary  judgment  papers were served on
opposing  counsel on May 28, 2004. The referenced  summary  judgment  motion was
fully  briefed and  submitted to the Court as of August 23, 2004.  The Court has
stated that it will hold oral argument, which has not been scheduled.

     As a result of Par's  filing of the ANDA for  latanoprost,  the  Plaintiffs
filed a lawsuit  against Par on December 21, 2001 in the United States  District
Court  for  the  District  of New  Jersey,  alleging  patent  infringement.  The
Plaintiffs sought an injunction enjoining approval of the Company's ANDA and the
marketing of its generic  product prior to the expiration of their  patents.  On

                                       31
<PAGE>

February 8, 2002,  Par answered the  complaint and filed a  counterclaim,  which
sought a declaration that the patents-in-suit are invalid,  unenforceable and/or
not infringed by Par's products and that the extension of the term of one of the
patents was invalid.  The trial  concluded in March 2004 and on July 6, 2004 the
Court issued an opinion and order  ordering that judgment be entered in favor of
the Plaintiffs on their claims of  infringement  of U.S.  Patent Nos.  4,599,353
(expires  July 28,  2006)  and  5,296,504  (expires  March 22,  2011);  that the
effective  date of  approval  of Par's ANDA shall be a date which is not earlier
than the dates of  expiration  of those  patents;  and that Par is enjoined from
engaging in the commercial  manufacture,  use, offer to sell, or sale within the
United  States,  or  importation  into the United  States,  of any drug  product
covered  by, or the use of which is covered  by,  those two  patents.  As to the
third patent asserted by the Plaintiffs,  U.S. Patent No.  5,422,368,  the Court
dismissed the  Plaintiffs'  infringement  claims and declared that the patent is
unenforceable due to inequitable conduct. The Court further dismissed all of the
parties'  claims for attorneys'  fees.  Both Par and the  Plaintiffs  have filed
notices of appeal  which are  currently  pending in the United  States  Court of
Appeals for the Federal  Circuit.  Par is appealing  the Court's  decision  only
insofar as it relates to U.S. Patent No. 5,296,504.  Pursuant to agreements with
Breath and FineTech  related to  latanoprost,  the Company had recorded  product
license  fees  of  $6,999,  which  are  included  in  intangible  assets  on its
consolidated balance sheets.

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

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

ITEM 6.  EXHIBITS
------   --------

10.57    Development and Commercialization Agreement between Advancis and Par
         Pharmaceutical, Inc. dated May 28, 2004.*

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

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

32.1     Certification  by the 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.


*Confidential  treatment  requested for certain portions of the Exhibit purusant
to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, which portions
are omitted and filed separately,  with the Securities and Exchange  Commission.

                                       32
<PAGE>

                                    SIGNATURE


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



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




November 12, 2004                 /s/ Scott Tarriff
                                  ----------------------------------
                                  Scott Tarriff
                                  PRESIDENT AND CHIEF EXECUTIVE OFFICER





November 12, 2004                 /s/ Dennis J. O'Connor
                                  ----------------------------------
                                  Dennis J. O'Connor
                                  VICE PRESIDENT AND CHIEF FINANCIAL OFFICER

                                       33
<PAGE>

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

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

   10.57       Development and  Commercialization  Agreement between Advancis
               and Par Pharmaceutical, Inc. dated May 28, 2004.*

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

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

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

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



*Confidential  treatment  requested for certain portions of the Exhibit purusant
to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, which portions
are omitted and filed separately,  with the Securities and Exchange  Commission.

                                       34