**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: March 31, 2007


**Commission
      file number: 1-10827**








**PAR
      PHARMACEUTICAL COMPANIES, INC.**


(Exact
      name of registrant as specified in its charter)


****


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





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


(Address
      of principal executive offices)


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








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








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




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





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







Number
      of
      shares of the Registrant’s ** common
      stock outstanding as of November 9, 2007: 33,823,950








TABLE
      OF
      CONTENTS


PAR
      PHARMACEUTICAL COMPANIES, INC.


FORM
      10-Q


FOR
      THE
      FISCAL QUARTER ENDED MARCH 31, 2007




PAGEPART
                I
            FINANCIAL
                INFORMATIONItem
                1.
            Condensed
                Consolidated Financial Statements (unaudited)Condensed
                Consolidated Balance Sheets as of March 31, 2007 and December 31,
                2006
            
            3Condensed
                Consolidated Statements of Operations for the three months ended
                March 31,
                2007 and April 1, 2006
            
            4Condensed
                Consolidated Statements of Cash Flows for the three months ended
                March 31,
                2007 and April 1, 2006
            
            5Notes
                to Condensed Consolidated Financial Statements
            
            6Item
                2.
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            
            29Item
                3.
            Quantitative
                and Qualitative Disclosures about Market Risk
            
            38Item
                4.
            Controls
                and Procedures
            
            39PART
                II
            OTHER
                INFORMATIONItem
                1.
            Legal
                Proceedings
            
            40Item
                1A.
            Risk
                Factors
            
            46Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            
            47Item
                6.
            Exhibits
            
            47SIGNATURES




2


**PART
      I - FINANCIAL INFORMATION**


**ITEM
      1. FINANCIAL STATEMENTS**




**PAR
      PHARMACEUTICAL COMPANIES, INC.**


**CONDENSED
      CONSOLIDATED BALANCE SHEETS**


(In
      Thousands, Except Share Data)


(Unaudited)


**ASSETS**
            
            **March
                    31,**
                  **2007**
            
            **December
                        31,**
                      **2006**Current
                assets:Cash
                and cash equivalents
            
            $
            141,477
            
            $
            120,991Available
                for sale debt and marketable equity securities
            
            
            119,754
            
            
            92,120Accounts
                receivable, net
            
            
            147,030
            
            
            99,043Inventories
            
            
            87,674
            
            
            106,322Prepaid
                expenses and other current assets
            
            
            23,215
            
            
            15,833Deferred
                income tax assets
            
            
            72,104
            
            
            72,105Income
                taxes receivable
            
            
            6,608
            
            
            12,422Total
                current assets
            
            
            597,862
            
            
            518,836Property,
                plant and equipment, at cost lessaccumulated
                depreciation and amortization
            
            
            86,354
            
            
            89,155Available
                for sale debt and marketable equity securities
            
            
            4,710
            
            
            7,652Investment
                in joint venture
            
            
            5,304
            
            
            5,292Other
                investments
            
            
            4,588
            
            
            16,588Intangible
                assets, net
            
            
            44,674
            
            
            47,880Goodwill
            
            
            63,729
            
            
            63,729Deferred
                charges and other assets
            
            
            6,917
            
            
            16,000Non-current
                deferred income tax assets, net
            
            
            49,278
            
            
            49,545Total
                assets
            
            $
            863,416
            
            $
            814,677******LIABILITIES
                AND STOCKHOLDERS’ EQUITY**Current
                liabilities:Short-term
                and current portion of long-term debt
            
            $
            202,632
            
            $
            204,469Accounts
                payable
            
            
            33,690
            
            
            48,297Payables
                due to distribution agreement partners
            
            
            89,635
            
            
            89,585Accrued
                salaries and employee benefits
            
            
            12,444
            
            
            15,510Accrued
                expenses and other current liabilities
            
            
            22,154
            
            
            18,833Income
                taxes payable
            
            
            20,815
            
            
            16,974Total
                current liabilities
            
            
            381,370
            
            
            393,668Long-term
                debt, less current portion
            
            
            -
            
            
            -Other
                long-term liabilities
            
            
            13,246
            
            
            -Commitments
                and contingencies
            
            
            -
            
            
            -Stockholders’
                equity:Preferred
                Stock, par value $0.0001 per share, authorized6,000,000
                shares; none issued and outstanding
            
            
            -
            
            
            -Common
                Stock, par value $0.01 per share, authorized90,000,000
                shares, issued 36,335,215 and 35,901,276 shares
            
            
            364
            
            
            359Additional
                paid-in-capital
            
            
            257,394
            
            
            254,013Retained
                earnings
            
            
            241,766
            
            
            200,256Accumulated
                other comprehensive gain (loss)
            
            
            3,209
            
            
            (431
            )Treasury
                stock, at cost 920,558 and 889,245 shares
            
            
            (33,933
            )
            
            (33,188
            )Total
                stockholders’ equity
            
            
            468,800
            
            
            421,009Total
                liabilities and stockholders’ equity
            
            $
            863,416
            
            $
            814,677





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





3


**PAR
      PHARMACEUTICAL COMPANIES, INC.**


**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS**


(In
      Thousands, Except Per Share Data)


(Unaudited)





**Three
                months ended****March
                    31,**
                  **2007**
            ****
            **April
                    1,**
                  **2006**Revenues:Net
                product sales
            
            $
            222,589
            
            $
            169,037Other
                product related revenues
            
            
            11,621
            
            
            3,281Total
                revenues
            
            
            234,210
            
            
            172,318Cost
                of goods sold
            
            
            146,521
            
            
            123,150Gross
                margin
            
            
            87,689
            
            
            49,168Operating
                expenses:Research
                and development
            
            
            14,039
            
            
            13,852Selling,
                general and administrative
            
            
            32,557
            
            
            28,342Settlements,
                net
            
            
            (578
            )
            
            -Total
                operating expenses
            
            
            46,018
            
            
            42,194Gain
                on sale of product rights
            
            
            (20,000
            )
            
            -Operating
                income
            
            
            61,671
            
            
            6,974Other
                expense, net
            
            
            (19
            )
            
            (39
            )Equity
                in loss of joint venture
            
            
            (148
            )
            
            (253
            )Realized
                gain on sale of marketable securities
            
            
            1,397
            
            
            -Interest
                income
            
            
            2,684
            
            
            1,983Interest
                expense
            
            
            (1,718
            )
            
            (1,694
            )Income
                before provision for income taxes
            
            
            63,867
            
            
            6,971Provision
                for income taxes
            
            
            22,353
            
            
            2,457Net
                income
            
            $
            41,514
            
            $
            4,514Earnings
                per share of common stock:Basic
            
            $
            1.20
            
            $
            0.13Diluted
            
            $
            1.19
            
            $
            0.13Weighted
                average number ofcommon
                shares outstanding:Basic
            
            
            34,618
            
            
            34,259Diluted
            
            
            34,997
            
            
            34,766







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


4


**PAR
      PHARMACEUTICAL COMPANIES, INC.**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


(In
      Thousands)


(Unaudited)





**Three
                Months Ended****March
                    31,**
                  **2007**
            
            **April
                    1,**
                  **2006****Cash
                flows from operating activities:**Net
                income
            
            $
            41,514
            
            $
            4,514Adjustments
                to reconcile net income to net cash provided by operating
                activities:Deferred
                income taxes
            
            
            -
            
            
            (6,720
            )Depreciation
                and amortization
            
            
            7,347
            
            
            5,279Equity
                in loss of joint venture
            
            
            148
            
            
            253Allowances
                against accounts receivable
            
            
            7,978
            
            
            16,703Share-based
                compensation expense
            
            
            3,702
            
            
            5,543Gain
                on sale of investments
            
            
            (1,397
            )
            
            -Tax
                benefit on exercise of nonqualified stock options
            
            
            138
            
            
            655Excess
                tax benefit on exercise of nonqualified stock options
            
            
            (138
            )
            
            (640
            )Tax
                deficiency related to vesting of restricted stock
            
            
            (683
            )
            
            -Other
            
            
            102
            
            
            25**Changes
                in assets and liabilities:**Increase
                in accounts receivable
            
            
            (55,965
            )
            
            (105,703
            )Decrease
                (increase) in inventories
            
            
            18,648
            
            
            (11,169
            )Decrease
                in prepaid expenses and other assets
            
            
            1,858
            
            
            4,888(Decrease)
                increase in accounts payable, accrued expenses and other
                liabilities
            
            
            (7,458
            )
            
            694Increase
                in payables due to distribution agreement partners
            
            
            50
            
            
            52,814Increase
                in income taxes payable/receivable
            
            
            20,843
            
            
            9,422**Net
                cash provided by (used in) operating activities**
            
            
            36,687
            
            
            (23,442
            )**Cash
                flows from investing activities:**Capital
                expenditures
            
            
            (1,719
            )
            
            (6,110
            )Purchases
                of intangibles
            
            
            (600
            )
            
            (14,137
            )Purchases
                of available for sale debt and marketable equity
                securities
            
            
            (36,415
            )
            
            -Proceeds
                from sale of available for sale debt and marketable equity
                securities
            
            
            31,085
            
            
            -Acquisition
                of subsidiary, contingent payment
            
            
            (5,000
            )
            
            (2,500
            )Capital
                contributions to joint venture
            
            
            (1,244
            )
            
            (261
            )Advance
                for product rights
            
            
            -
            
            
            (9,000
            )**Net
                cash used in investing activities**
            
            
            (13,893
            )
            
            (32,008
            )**Cash
                flows from financing activities:**Proceeds
                from issuances of common stock upon exercise of stock
                options
            
            
            124
            
            
            8,756Excess
                tax benefits on exercise of nonqualified stock options
            
            
            138
            
            
            640Purchase
                of treasury stock
            
            
            (745
            )
            
            (567
            )Payments
                of short-term debt related to financed insurance premiums
            
            
            (1,805
            )
            
            (1,059
            )Principal
                payments under long-term and other borrowings
            
            
            (20
            )
            
            (95
            )**Net
                cash (used in) provided by financing activities**
            
            
            (2,308
            )
            
            7,675**Net
                increase (decrease) in cash and cash equivalents**
            
            
            20,486
            
            
            (47,775
            )Cash
                and cash equivalents at beginning of period
            
            
            120,991
            
            
            93,477**Cash
                and cash equivalents at end of period**
            
            $
            141,477
            
            $
            45,702Supplemental
                disclosure of cash flow information:Cash
                paid during the period for:Income
                taxes, net
            
            $
            2,056
            
            $
            139Interest
            
            $
            2,926
            
            $
            2,901Non-cash
                transactions:Increase
                in fair value of available for sale debt and marketable equity
                securities
            
            $
            6,022
            
            $
            2,338Capital
                expenditures incurred but not yet paid
            
            $
            112
            
            $
            295The
                accompanying notes are an integral part of these condensed consolidated
                financial statements.





5


**PAR
      PHARMACEUTICAL COMPANIES, INC.**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**March
      31, 2007**


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


(Unaudited)





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








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





The
      accompanying condensed consolidated financial statements at March 31, 2007
      and
      for the three-month periods ended March 31, 2007 and April 1, 2006 are
      unaudited; in the opinion of the Company’s management, however, such statements
      include all adjustments necessary to present fairly the information presented
      therein. The condensed consolidated balance sheet at December 31, 2006 was
      derived from the Company’s audited consolidated financial statements included in
      the Company’s 2006 Annual Report on Form 10-K.





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








**Note
      2 – Recent Accounting Pronouncements:**





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




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




In
      September 2006, the FASB issued SFAS No. 157 *Fair
      Value Measurements* (“SFAS
      No. 157”).  SFAS No. 157 establishes a common definition for fair value to
      be applied to GAAP guidance requiring use of fair value, establishes a framework
      for measuring fair value, and expands disclosure about such fair value
      measurements.  SFAS No. 157 is effective for fiscal years beginning after
      November 15, 2007.  The Company is currently evaluating the expected impact
      of the provisions of SFAS No. 157 on its results of operations and its financial
      position.




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




6


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




The
      Company adopted Statement of Financial Accounting Standards No. 123 (Revised
      2004), “Share-Based Payment” (“SFAS 123R”), effective January 1, 2006. SFAS 123R
      requires companies to recognize compensation expense in the amount equal to
      the
      fair value of all share-based payments granted to employees. The Company elected
      the modified prospective transition method and, therefore, adjustments to prior
      periods were not required as a result of adopting SFAS 123R. Under this method,
      the provisions of SFAS 123R apply to all awards granted after the date of
      adoption and to any unrecognized expense of non-vested awards at the date of
      adoption based on the grant date fair value. Under SFAS 123R, the Company will
      recognize share-based compensation ratably over the service period applicable
      to
      the award. SFAS 123R also amends SFAS No. 95, “Statement of Cash Flows,” to
      require that excess tax benefits that have been reflected as operating cash
      flows be reflected as financing cash flows. In accordance with SFAS 123R, $138
      and $640 of excess tax benefits for the three months ended March 31, 2007 and
      April 1, 2006, respectively, have been classified as both an operating cash
      outflow and financing cash inflow.





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





As
      of
      March 31, 2007, there were approximately 3.5 million shares of common stock
      available for future stock option grants. The Company issues new shares of
      common stock when stock option awards are exercised. Stock
      option awards outstanding under the Company’s current plans have been granted at
      exercise prices that were equal to the market value of the Company’s common
      stock on the date of grant.




In
      the
      quarter ended April 1, 2006, the Company accelerated the vesting of 50
      outstanding non-vested stock options in connection with the termination of
      certain executives. The effect of these accelerations resulted in additional
      compensation expense of $415 in the quarter ended April 1, 2006. The Company
      also modified 172 vested and non-vested options in connection with revised
      employment agreements for certain executives. The Company will record total
      compensation expense of $1,115, of which $695 was recorded for the three months
      ended April 1, 2006 and $806 for the full year of 2006. The Company recorded
      $33
      for the three months ended March 31, 2007 and the remaining $276 will be
      amortized over the remaining vesting period of the modified options.





*Stock
      Options*





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




**For
                      the three**
                    **months
                      ended**
                    **March
                      31,**
                    **2007**
            **For
                      the three**
                    **months
                      ended**
                    **April
                      1,**
                    **2006****Risk-free
                interest rate**
            4.6%
            4.4%**Expected
                life (in years)**
            6.2
            6.23**Expected
                Volatility**
            53.8%
            58.3%**Dividend**
            0%
            0%




The
      Black-Scholes option pricing model was developed for use in estimating the
      fair
      value of traded options, which have no vesting restrictions and are fully
      transferable. The
      Company compiled historical data on an employee-by-employee basis from the
      grant
      date through the settlement date. The results of analyzing the historical data
      showed that there were three distinct populations of optionees, the Executive
      Officers Group, the Outside Directors Group, and the All Others Group. The
      expected life of options represents the period of time that the options are
      expected to be outstanding and is based generally on historical trends. However,
      b ecause
      none of the Company’s existing options have reached their full 10-year term, and
      also because the majority of such options granted are out-of-the-money and
      the
      expected life of out-of-the-money options is uncertain, the Company opted to
      use
      the “simplified” method for “plain vanilla” options described in SAB 107. The
“simplified method” calculation is the average of the vesting term plus the
      original contractual term divided by 2. The
      Company anticipates that most grants in the future will be four-year graded
      vesting; however, Outside Directors will continue to have one-year vesting.
      The
      Company will revisit this assumption at least annually or sooner if
      circumstances warrant. The risk-free rate is based on the yield on the Federal
      Reserve treasury rate with a maturity date corresponding to the expected term
      of
      the option granted. The expected volatility assumption is based on the
      historical volatility of the Company’s common stock over a term equal to the
      expected term of the option granted. SFAS
      123R
      also requires forfeitures to be estimated at the time of grant and revised,
      if
      necessary, in subsequent periods if actual forfeitures differ from those
      estimates. It
      is
      assumed that no dividends will be paid during the entire term of the options. All option
      valuation models require input of highly subjective assumptions. Because the
      Company's employee stock options have characteristics significantly different
      from those of traded options, and because changes in subjective input
      assumptions can materially affect the fair value estimate, the actual value
      realized at the time the options are exercised may differ from the estimated
      values computed above. The
      weighted average per share fair values of options granted in the three month
      periods ended March 31, 2007 and April 1, 2006 were $13.86 and $19.47,
      respectively.


7


Set
      forth
      below is the impact on the Company’s results of operations of recording
      share-based compensation from its stock options for the three-month periods
      ended March 31, 2007 and April 1, 2006:





**For
                the three months ended****March
                    31,**
                  **2007**
            
            **April
                    1,**
                  **2006**Cost
                of sales
            
            $
            168
            
            $
            304Research
                and development
            
            
            422
            
            
            759Selling,
                general and administrative
            
            
            1,518
            
            
            2,883Total,
                pre-tax
            
            $
            2,108
            
            $
            3,946Tax
                benefit of share-based compensation
            
            
            (822
            )
            
            (1,539
            )Total,
                net of tax
            
            $
            1,286
            
            $
            2,407




The
      incremental stock-based compensation expense decreased both basic and diluted
      earnings per share by $0.04 per share for the three-month period ended March
      31,
      2007 and by $0.07 per share for the three-month period ended April 1, 2006.





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




Shares
            
            Weighted
                    Average
                    Exercise
                      Price
            
            Weighted
                    Average
                    Remaining
                      Life
            
            Aggregate
                    Intrinsic
                    ValueBalance
                at December 31, 2006
            
            
            5,470
            
            $
            36.00Granted
            
            
            399
            
            
            24.45Exercised
            
            
            (19
            )
            
            6.61Forfeited
            
            
            (258
            )
            
            34.54Balance
                at March 31, 2007
            
            
            5,592
            
            $
            35.32
            
            
            6.53
            
            $
            7,018Exercisable
                at March 31, 2007
            
            
            3,792
            
            $
            38.23
            
            
            5.40
            
            $
            4,311Vested
                and expected to vest at March 31, 2007
            
            
            5,304
            
            $
            35.34
            
            
            6.38
            
            $
            6,841





The
      total
      fair value of shares vested during the three-month periods ended March 31,
      2007
      and April 1, 2006 was $6,501 and $4,192, respectively. As of March 31, 2007,
      the
      total compensation cost related to all non-vested stock options granted to
      employees but not yet recognized was approximately $22,769. This cost will
      be
      amortized on a straight-line basis over the remaining weighted average vesting
      period of 2.7 years.





*Restricted
      Stock/Restricted Stock Units*





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





In
      the
      quarter ended March 31, 2007, the Company accelerated the vesting of 7
      outstanding non-vested restricted shares in connection with the termination
      of
      an executive. The effect of this acceleration resulted in additional
      compensation expense of $154 in the quarter ended March 31, 2007.





The
      impact on the Company’s results of operations of recording share-based
      compensation from restricted stock for the three-month periods ended March
      31,
      2007 and April 1, 2006 was as follows:





**For
                the three months ended****March
                    31,**
                  **2007**
            
            **April
                    1,**
                  **2006**Cost
                of sales
            
            $
            115
            
            $
            89Research
                and development
            
            
            288
            
            
            528Selling,
                general and administrative
            
            
            1,191
            
            
            949Total,
                pre-tax
            
            $
            1,594
            
            $
            1,566Tax
                benefit of stock-based compensation
            
            
            (622
            )
            
            (610
            )Total,
                net of tax
            
            $
            972
            
            $
            956




8




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




Shares
            
            Weighted
                    Average
                    Grant
                      Price
            
            Aggregate
                    Intrinsic
                    ValueNon-vested
                balance at December 31, 2006
            
            
            494
            
            $
            32.92Granted
            
            
            409
            
            
            24.27Vested
            
            
            (145
            )
            
            36.10Forfeited
            
            
            (13
            )
            
            27.73Non-vested
                balance at March 31, 2007
            
            
            745
            
            $
            27.65
            
            $
            18,726





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




Shares
            
            Weighted
                    Average
                    Grant
                      Price
            
            Aggregate
                    Intrinsic
                    ValueNon-vested
                balance at December 31, 2006
            
            
            245
            
            $
            23.46Granted
            
            
            16
            
            
            26.13Vested
            
            
            (9
            )
            
            35.82Forfeited
            
            
            -
            
            
            -Non-vested
                balance at March 31, 2007
            
            
            252
            
            $
            23.21
            
            $
            6,328





As
      of
      March 31, 2007, the total compensation cost related to all non-vested restricted
      stock and restricted stock units granted to employees but not yet recognized
      was
      approximately $22,780; this cost will be amortized on a straight-line basis
      over
      the remaining weighted average vesting period of approximately 3.1 years. At
      March 31, 2007, approximately 1.3 million shares remain available for restricted
      stock and restricted stock unit grants.




*Employee
      Stock Purchase Program:*





The
      Company maintains an Employee Stock Purchase Program (the “Program”). The
      Program is designed to qualify as an employee stock purchase plan under Section
      423 of the Internal Revenue Code of 1986, as amended. It enables eligible
      employees to purchase shares of the Company’s common stock at a discount to the
      fair market value. An aggregate of 1,000 shares of common stock has been
      reserved for sale to employees under the Program. As of July 5, 2006, the
      Program was suspended by the Company. As a result, there was no Program activity
      during the three months ended March 31, 2007. Employees purchased 7 shares
      during the three-month period ended April 1, 2006 and the Company recorded
      expense of $27, reflecting a 15% discount from fair market value, in accordance
      with the terms of the Program at that time.








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





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


**Estimated****Unrealized**
            
            **Fair****Cost**
            
            **Gain**
            
            **Loss**
            
            **Value**Securities
                issued by government agencies
            
            $
            46,239
            
            $
            -
            
            $
            (188
            )
            
            46,051Debt
                securities issued by various state and local municipalities and
                agencies
            
            
            13,858
            
            
            -
            
            
            (95
            )
            
            13,763Other
                debt securities
            
            
            20,996
            
            
            186
            
            
            (365
            )
            
            20,817Auction
                rate securities
            
            
            31,551
            
            
            -
            
            
            -
            
            
            31,551Available
                for sale debt securities
            
            
            112,644
            
            
            186
            
            
            (648
            )
            
            112,182Marketable
                equity securities available for sale (see Note 5)
            
            
            6,562
            
            
            5,720
            
            
            -
            
            
            12,282Total
            
            $
            119,206
            
            $
            5,906
            
            $
            (648
            )
            $
            124,464


Of
      the
      $648 of unrealized loss as of March 31, 2007, $624 has been in an unrealized
      loss position for greater than a year. The Company believes that these losses
      are not other-than-temporary in accordance with FASB
      Staff Position Nos. FAS 115-1 / 124-1, "The Meaning of Other-Than-Temporary
      Impairment and Its Application to Certain Investments,” due to its assessment
      that all amounts due according to the contractual terms of the related debt
      security will be collected and its ability and intent to hold the related
      debt security for a reasonable period of time sufficient for a recovery of
      fair
      value up to (or beyond) the cost of the investment.Refer
      to
      Note 16, “Subsequent Events”, for discussion of events affecting the carrying
      value of an investment in a fund included in other debt securities in the above
      table.


9




*Auction
      Rate Securities*




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





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





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





The
      following table summarizes the contractual maturities of the Company’s available
      for sale debt securities at March 31, 2007:




**March
                31, 2007****Cost**
            
            **Estimated
                  Fair**
                **Value**Less
                than one year
            
            $
            36,489
            
            $
            36,450Due
                between 1-2 years
            
            
            21,490
            
            
            21,288Due
                between 2-5 years
            
            
            15,000
            
            
            14,957Due
                after 5 years
            
            
            33,624
            
            
            33,260Other
            
            
            6,041
            
            
            6,227Total
            
            $
            112,644
            
            $
            112,182




“Other”
      is comprised of an investment in a fund that invests in various floating rate
      structured finance securities.





Refer
      to
      Note 16 - “Subsequent Events,” for discussion of investment loss related to the
      fund that invests in various floating rate structured finance
      securities.








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





**Unrealized****Balance
                at March 31, 2007**
            
            **CarryingValue**
            
            **Gain**
            
            **Loss**
            
            **Fair
                Value**Abrika
                Pharmaceuticals, LLLP
            
            $
            4,588
            
            $
            -
            
            $
            -
            
            $
            4,588





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





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


10





In
      April
      2005, the Company acquired shares of the Series C preferred stock of Optimer
      Pharmaceuticals (“Optimer”), a privately-held biotechnology company located in
      San Diego, California, for $12,000. In February 2007, Optimer became a public
      company via an initial public offering (“IPO”). On February 20, 2007, the
      Company sold 1.1 million shares for $6.8 million and recognized a pre-tax gain
      of $1.4 million for the three-month period ended March 31, 2007. As of March
      31,
      2007, the Company held 1.3 million shares of Optimer common stock and the fair
      market value of the Optimer common stock held by the Company was $12.3 million
      based on the market value of Optimer’s common stock at that date. The Company
      recognized an unrealized gain of $5.7 million for the three months ended March
      31, 2007, which was included in other comprehensive income. In October 2007,
      the
      Company sold its remaining investment in Optimer common stock for $9.6 million
      and will recognize a pre-tax gain on the sale of $3.1 million in the fourth
      quarter of 2007. As of February 2007, the Company reclassified its investment
      in
      Optimer common stock from “Other investments” (noncurrent asset) to “Available
      for sale debt and marketable equity securities” as part of current assets on the
      condensed consolidated balance sheet. On February 27, 2007 in exchange for
      $20,000 the Company returned the marketing rights to Difimicin (PAR 101/
      OPT-80), an investigational drug to treat Clostridium difficle- associated
      diarrhea to Optimer. The Company recognized a gain on the sale of product rights
      of $20,000 related to this transaction for the three months ended March 31,
      2007.





In
      December 2004, the Company acquired a 5% limited partnership interest in Abrika
      Pharmaceuticals, LLLP (“Abrika”), a privately-held specialty generic
      pharmaceutical company located in Sunrise, Florida for $8,361, including costs.
      Additionally, the Company entered into an agreement with Abrika to collaborate
      on the marketing of five products to be developed by Abrika. The first product
      is expected to be a transdermal fentanyl patch for the management of chronic
      pain. This patch is a generic version of Duragesic® marketed by Janssen
      Pharmaceutica Products, L.P., a division of Johnson & Johnson. Pursuant to
      the agreement, the Company was required to pay up to $9,000 to Abrika at the
      time of the commercial launch of this product, subject to the attainment of
      certain profit targets. In February 2006, the Company and Abrika amended their
      collaboration agreement and the Company advanced Abrika $9,000. Abrika will
      earn
      the funds only upon the Food and Drug Administration’s (“FDA”) final and
      unconditional approval of the transdermal fentanyl patch. Abrika has agreed
      to
      repay the advance if it does not receive FDA approval within two years of the
      amendment. The Company also holds a convertible promissory note in the principal
      amount of $3,000, plus interest accruing at 8.0% annually for money loaned
      to
      Abrika. In July 2007, the Company and Abrika amended their collaboration
      agreement to remove all of the Company’s rights in, benefits from, and
      obligations arising as a result of the development and commercialization of
      the
      transdermal fentanyl patch. As a result of this amendment, the Company no longer
      has an obligation to pay Abrika the $9,000 upon FDA approval of the transdermal
      fentanyl patch. Both the $9,000 advance and the $3,000 promissory note are
      recorded in deferred charges and other assets, and were subsequently collected
      by the Company in the second quarter of 2007. Because Abrika is privately-held
      and accounted for under the cost method, the Company monitors the investment
      on
      a periodic basis to evaluate whether any declines in value becomes
      other-than-temporary. In November 2006, Abrika agreed to be purchased by a
      wholly-owned subsidiary of the Actavis group. Based on the terms of the merger
      agreement the Company is to receive approximately $4.6 million for its equity
      stake in Abrika. As
      part
      of the merger agreement, the Company has the potential for future “Earnout”
payments. The “Earnout” payments would be triggered if the post merger entity
      achieves certain gross profit targets in each of the calendar years 2007, 2008,
      and/or 2009. The maximum potential “Earnout” payments that the Company could
      receive are $6.25 million. The Company does not attribute any value to the
      “Earnout” payments because the Company believes the likelihood of achievement is
      remote. The
      Company wrote down its investment by approximately $3.8 million in the second
      quarter of 2006 based on the terms of the merger agreement between Abrika and
      Actavis that indicated that its investment was impaired. The merger transaction
      was completed in April 2007.








**Note
      6 –** **Accounts Receivable:**




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





**March
                    31,**
                  **2007**
            
            **December
                    31,**
                  **2006**(a)Gross
                trade accounts receivable
            
            $
            356,195
            
            $
            300,230Chargebacks
            
            
            (47,724
            )
            
            (51,891
            )Rebates
                and incentive programs
            
            
            (87,492
            )
            
            (85,888
            )Returns
            
            
            (48,370
            )
            
            (42,905
            )Cash
                discounts and other
            
            
            (25,557
            )
            
            (18,038
            )Doubtful
                accounts
            
            
            (22
            )
            
            (2,465
            )Accounts
                receivable, net
            
            $
            147,030
            
            $
            99,043




(a)
              Restated
                  to reflect a reclassification to accrued expenses of $4,259 for
                  discounts
                  due to customers for which no underlying accounts receivable existed
                  as of
                  December 31, 2006.


11




**Allowance
                for doubtful accounts**




**For
                the three monthperiod ended****March
                31, 2007**
            
            **April
                1, 2006**Balance
                at beginning of period
            
            $
            (2,465
            )
            $
            (1,847
            )Additions
                - charge to expense
            
            
            -
            
            
            -Adjustments
                and/or deductions
            
            
            2,443
            
            
            325Balance
                at end of period
            
            $
            (22
            )
            $
            (1,522
            )





The
      following tables summarize the activity for the three months ended March 31,
      2007 and April 1, 2006, respectively, in the accounts affected by the estimated
      provisions described below:





**For
                the three months ended March 31, 2007****Accounts
                receivable reserves**
            
            **Beginning
                balance (3)**
            
            **Provision**
              **recorded**
              **for
                current**
              **period**
              **sales**
            
            **(Provision)**
              **reversal**
              **recorded**
              **for
                prior**
              **period
                sales**
            
            **Credits**
              **processed**
            
            **Ending**
              **balance**Chargebacks
            
            $
            (51,891
            )
            $
            (88,364
            )
            $
            -
            (1)
            $
            92,531
            
            $
            (47,724
            )Rebates
                and incentive programs
            
            
            (85,888
            )
            
            (55,192
            )
            
            2,699
            
            
            50,889
            
            
            (87,492
            )Returns
            
            
            (42,905
            )
            
            (10,770
            )
            
            (794
            )
            
            6,099
            
            
            (48,370
            )Cash
                discounts and other
            
            
            (18,038
            )
            
            (14,382
            )
            
            211
            
            
            6,652
            
            
            (25,557
            )Total
            
            $
            (198,722
            )
            $
            (168,708
            )
            $
            2,116
            
            $
            156,171
            
            $
            (209,143
            )**Accrued
                liabilities (2)**
            
            $
            (10,412
            )
            $
            (4,644
            )
            $
            -
            
            $
            708
            
            $
            (14,348
            )





**For
                the three months ended April 1, 2006****Accounts
                receivable reserves**
            
            **Beginning
                balance**
            
            **Provision**
              **recorded**
              **for
                current**
              **period**
              **sales**
            
            **(Provision)**
              **reversal**
              **recorded**
              **for
                prior**
              **period
                sales**
            
            **Credits**
              **processed**
            
            **Ending**
              **balance**Chargebacks
            
            $
            (102,256
            )
            $
            (110,309
            )
            $
            -
            (1)
            $
            112,735
            
            $
            (99,830
            )Rebates
                and incentive programs
            
            
            (50,991
            )
            
            (55,165
            )
            
            -
            
            
            39,207
            
            
            (66,949
            )Returns
            
            
            (32,893
            )
            
            (8,013
            )
            
            (1,473
            )
            
            6,523
            
            
            (35,856
            )Cash
                discounts and other
            
            
            (15,333
            )
            
            (11,863
            )
            
            -
            
            
            11,330
            
            
            (15,866
            )Total
            
            $
            (201,473
            )
            $
            (185,350
            )
            $
            (1,473
            )
            $
            169,795
            
            $
            (218,501
            )**Accrued
                liabilities (2)**
            
            $
            (9,040
            )
            $
            (10,353
            )
            $
            -
            
            $
            4,391
            
            $
            (15,002
            )





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




(2)
              Includes amounts due to customers
                for which no
                underlying accounts receivable exists, including Medicaid
                rebates.
 (3)
                Restated to reflect a reclassification
                  to
                  accrued expenses of $4,259 for discounts due to customers for which
                  no
                  underlying accounts receivable existed as of December 31, 2006.


The
      Company sells its products directly to wholesalers, retail drug store chains,
      drug distributors, mail order pharmacies and other direct purchasers and
      customers that purchase its products indirectly through the wholesalers,
      including independent pharmacies, non-warehousing retail drug store chains,
      managed health care providers and other indirect purchasers. The Company has
      entered into agreements at negotiated contract prices with those health care
      providers that purchase products through the Company’s wholesale customers at
      those contract prices. Chargeback credits are issued to wholesalers for the
      difference between the Company’s invoice price to the wholesaler and the
      contract price through which the product is resold to health care providers.
      Approximately 55% and 46% **** of
      the
      Company’s net product sales were derived from the wholesale distribution channel
      for the three months ended March 31, 2007 and April 1, 2006, respectively.
      The
      information that the Company considers when establishing its chargeback reserves
      includes contract and non-contract sales trends, average historical contract
      pricing, actual price changes, processing time lags and customer inventory
      information from its three largest wholesale customers. The Company’s chargeback
      provision and related reserve vary with changes in product mix, changes in
      customer pricing and changes to estimated wholesaler inventory.





12




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





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





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





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





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





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





*Use
      of Estimates in Reserves*


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


13




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





*Major
      Customers*


The
      amounts due from the Company’s four largest customers, McKesson Corporation,
      Cardinal Health Inc., AmerisourceBergen Corporation and Walgreen Co., accounted
      for approximately 28%, 20%, 11% and 12%, respectively, of the gross accounts
      receivable balance at March 31, 2007 and approximately 29%, 17%, 10%, and 14%,
      respectively, of the gross accounts receivable balance at December 31,
      2006.








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





**March
                    31,**
                  **2007**
            
            **December
                    31,**
                  **2006**Raw
                materials and supplies
            
            $
            22,556
            
            $
            32,713Work-in-process
            
            
            6,802
            
            
            5,779Finished
                goods
            
            
            58,316
            
            
            67,830$
            87,674
            
            $
            106,322





Inventory
      write-offs were $4,579 and $5,686 for the three month periods ended March 31,
      2007 and April 1, 2006, respectively. At March 31, 2007, the Company had
      inventories related to products that were not available to be marketed of
      $10,278, comprised of pre-launch inventories of $6,591 and research and
      development inventories of $3,687.








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





**March
                    31,**
                  **2007**
            
            **December
                    31,**
                  **2006**Land
            
            $
            1,888
            
            $
            1,888Buildings
            
            
            27,402
            
            
            27,372Machinery
                and equipment
            
            
            55,386
            
            
            55,210Office
                equipment, furniture and fixtures
            
            
            6,526
            
            
            6,524Computer
                software and hardware
            
            
            29,587
            
            
            29,464Leasehold
                improvements
            
            
            15,363
            
            
            15,393Construction
                in progress
            
            
            1,649
            
            
            1,250137,801
            
            
            137,101Less
                accumulated depreciation and amortization
            
            
            51,447
            
            
            47,946$
            86,354
            
            $
            89,155





Depreciation
      and amortization expense related to property, plant and equipment was $3,541
      and
      $2,416 for the three months ended March 31, 2007 and April 1, 2006,
      respectively.


14


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





**March
                    31,**
                  **2007**
            
            **December
                    31,**
                  **2006**Trademark
                licensed from Bristol-Myers Squibb Company, net of accumulated
                amortization of $1,230 and $917
            
            $
            8,771
            
            $
            9,084Teva
                Pharmaceutical Industries, Inc. Asset Purchase Agreement, net of
                accumulated amortization of $1,640 and $1,421
            
            
            6,848
            
            
            7,067Ivax
                License Agreement, net of accumulated amortization of $3,504 and
                $1,845
            
            
            4,496
            
            
            6,155Paddock
                Licensing Agreement, net of accumulated amortization of $500 and
                $250
            
            
            5,500
            
            
            5,750Spectrum
                Development and Marketing Agreement, net of accumulated amortization
                of $0
                and $0
            
            
            5,000
            
            
            5,000Genpharm,
                Inc. Distribution Agreement, net of accumulated amortization of $6,319
                and
                $6,138
            
            
            4,514
            
            
            4,695Bristol-Myers
                Squibb Company Asset Purchase Agreement, net of accumulated amortization
                of $8,496 and $8,078
            
            
            3,204
            
            
            3,621FSC
                Laboratories Agreement, net of accumulated amortization of $2,909
                and
                $2,756
            
            
            2,912
            
            
            3,066Intellectual
                property, net of accumulated amortization of $735 and $667
            
            
            1,955
            
            
            2,023Other
                intangible assets, net of accumulated amortization of $3,774 and
                $3,229
            
            
            1,474
            
            
            1,419$
            44,674
            
            $
            47,880




The
      Company recorded amortization expense related to intangible assets of $3,806
      and
      $2,864, respectively, for the three month periods ended March 31, 2007 and
      April
      1, 2006 and are included in cost of goods sold. During the three-month period
      ended March 31, 2007, the Company made a $600 milestone payment to Nortec
      Development, Inc. related to the commercialization of propranolol HCl ER that
      was recorded in “other intangible assets.” Amortization expense related to the
      intangible assets currently being amortized is expected to total approximately
      $8,322 for the remainder of 2007, $10,745 in 2008, $7,764 in 2009, $7,197 in
      2010, $6,218 in 2011 and $4,428 thereafter.





The
      Company evaluates all intangible assets for impairment quarterly or whenever
      events or other changes in circumstances indicate that the carrying value of
      an
      asset may no longer be recoverable. As of March 31, 2007, the Company believes
      its net intangible assets are recoverable.








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





On
      January 1, 2007, the Company adopted FIN 48. The cumulative effect of applying
      the provisions of FIN 48 resulted in a reclassification of $13.0 million of
      tax
      liabilities from current to non-current and did not require adjustment to
      retained earnings. The total amount of unrecognized tax benefits as of January
      1, 2007 was $9.4 million, excluding interest and penalties, and did not change
      materially as of March 31, 2007. Of this amount $8.8 million, if recognized,
      would lower the Company’s effective tax rate in future periods. The total amount
      of unrecognized tax benefits could increase or decrease within the next twelve
      months for a number of reasons including the expiration of statutes of
      limitations, audit settlements, tax examination activities and the recognition
      and measurement considerations under FIN 48. The Company does not believe that
      the total amount of the unrecognized tax benefits will significantly increase
      or
      decrease over the next twelve months.





The
      Company has elected to retain its existing accounting policy with respect to
      the
      treatment of interest and penalties attributable to income taxes in accordance
      with FIN 48, and continues to reflect interest and penalties attributable to
      income taxes, to the extent they arise, as a component of its income tax
      provision or benefit as well as its outstanding income tax assets and
      liabilities. Accrued interest and penalties of $3.6 million related to uncertain
      tax positions as of January 1, 2007 did not change materially and are included
      in other long-term liabilities in the condensed consolidated balance sheet
      as of
      March 31, 2007.





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





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





The
      Company’s effective tax rates for the three month periods ended March 31, 2007
      and April 1, 2006 were 35% and 35%, respectively.





15


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




*Short-Term
      Debt*


The
      Company finances a portion of its insurance premiums and classifies the amounts
      due as short-term debt. As of March 31, 2007 and December 31, 2006, the Company
      had recorded $2,587 and $4,404, respectively, as short-term debt related to
      financing these insurance premiums.





*Long-Term
      Debt*


**March
                    31,**
                  **2007**
            
            **December
                    31,**
                  **2006**Senior
                subordinated convertible notes (a)
            
            $
            200,000
            
            $
            200,000Other
                (b)
            
            
            45
            
            
            65200,045
            
            
            200,065Less
                current portion
            
            
            (200,045
            )
            
            (200,065
            )$
            -
            
            $
            -





(a)  Senior
      subordinated convertible notes in the aggregate principal amount of
      $200,000. The notes bear interest at an annual rate of 2.875%, payable
      semi-annually on March 30 and September 30 of each year. The notes are
      convertible into common stock at an initial conversion price of $88.76 per
      share, upon the occurrence of certain events. Upon conversion, the Company
      has
      agreed to satisfy the conversion obligation in cash in amount equal to the
      principal amount of the notes converted. The notes mature on September 30,
      2010,
      unless earlier converted or repurchased.  The Company may not redeem
      the notes prior to their maturity date. On March 31, 2007, the senior
      subordinated convertible notes had a quoted market value of $185,500. See “Legal
      Proceedings” in Note 14, “Commitments, Contingencies and Other Matters” for
      discussion involving notices of default and acceleration the Company received
      from the Trustee of the Company’s 2.875% Senior Subordinated Convertible Notes
      due 2010 and the subsequent related litigation. Until the matter is resolved,
      the Company is recording the payment obligations as a current liability as
      of
      March 31, 2007 because the Court in the matter could (i) rule against the
      Company’s position and (ii) determine that the appropriate remedy would be the accelerated
      payment of
      the
      Notes. Accordingly, the Company cannot consider the possibility of accelerated
      payment to be remote.


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


16




Note
      12 –Changes
      in Stockholders’ Equity:




Changes
      in the Company’s Common Stock, Additional Paid-In Capital and Accumulated Other
      Comprehensive Income (loss) accounts during the three-month period ended March
      31, 2007 were as follows:


**Accumulated****Additional**
            
            **Other****Common
                Stock**
            
            **Paid-In**
            
            **Comprehensive****Shares**
            
            **Amount**
            
            **Capital**
            
            **Income
                (loss)**Balance,
                December 31, 2006
            
            
            35,901
            
            $
            359
            
            $
            254,013
            
            $
            (431
            )Unrealized
                gain on available for sale securities, net of tax
            
            
            -
            
            
            -
            
            
            -
            
            
            3,640Exercise
                of stock options
            
            
            19
            
            
            -
            
            
            124
            
            
            -Tax
                benefit from exercise of stock options
            
            
            -
            
            
            -
            
            
            138
            
            
            -Tax
                deficiency related to vesting of restricted stock
            
            
            -
            
            
            -
            
            
            (683
            )
            
            -Forfeitures
                of restricted stock
            
            
            (13
            )
            
            -
            
            
            -
            
            
            -Issuances
                of restricted stock
            
            
            409
            
            
            5
            
            
            (5
            )
            
            -Compensatory
                arrangements
            
            
            -
            
            
            -
            
            
            3,702
            
            
            -Other
            
            
            19
            
            
            -
            
            
            105
            
            
            -Balance,
                March 31, 2007
            
            
            36,335
            
            $
            364
            
            $
            257,394
            
            $
            3,209





**Three
                months ended****March
                    31,**
                  **2007**
            
            **April
                    1,**
                  **2006****Comprehensive
                Income:**Net
                income
            
            $
            41,514
            
            $
            4,514Other
                comprehensive income:Unrealized
                gain on available for sale securities, net of tax
            
            
            3,640
            
            
            1,397Comprehensive
                Income
            
            $
            45,154
            
            $
            5,911


In
      April
      2004, the Company’s Board of Directors (the “Board”) authorized the repurchase
      of up to $50.0 million of the Company’s common stock. The repurchases may be
      made, subject to compliance with applicable securities laws, from time to time
      in the open market or in privately negotiated transactions. Shares of common
      stock acquired through the repurchase program are and will be available for
      general corporate purposes. The Company has repurchased 849 thousand shares
      of
      its common stock for approximately $32.2 million pursuant to the program. As
      of
      March 31, 2007, the Company was still able to repurchase up to approximately
      $17.8 million of its common stock under the above plan. On September 28, 2007,
      the Company announced that its Board approved an expansion of its share
      repurchase program allowing for the repurchase of up to $75.0 million of the
      Company’s common stock, inclusive of the $17.8 million remaining from the April
      2004 authorization.








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




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


**Three
                months ended****March
                31, 2007**
            
            **April
                1, 2006**Net
                income
            
            $
            41,514
            
            $
            4,514Basic:Weighted
                average number of common shares outstanding
            
            
            34,618
            
            
            34,259Net
                income per share of common stock
            
            $
            1.20
            
            $
            0.13Assuming
                dilution:Weighted
                average number of common shares outstanding
            
            
            34,618
            
            
            34,259Effect
                of dilutive securities
            
            
            379
            
            
            507Weighted
                average number of common shares outstanding
            
            
            34,997
            
            
            34,766Net
                income per share of common stock
            
            $
            1.19
            
            $
            0.13





17


Outstanding
      options and warrants of 4,788 and 3,960 as of March 31, 2007 and April 1, 2006,
      respectively, were not included in the computation of diluted earnings per
      share
      because their exercise prices were greater than the average market price of
      the
      common stock during the respective periods and their inclusion would, therefore,
      have been anti-dilutive. In addition, outstanding warrants sold concurrently
      with the sale of senior subordinated convertible notes in September 2003 were
      not included in the computation of diluted earnings per share as of March 31,
      2007 and April 1, 2006. The warrants are exercisable for an aggregate of 2,253
      shares at an exercise price of $105.20 per share.







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




*Pension
      Plan:*


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





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





The
      Pension Plan has been settled in the second quarter of 2007. During the second
      quarter of 2007, the Company received a favorable determination on the
      termination of the Pension Plan from the Internal Revenue Service and has filed
      the appropriate notice with the Pension Benefit Guaranty Corporation. Concurrent
      with the approval of the termination, the Company distributed benefits or
      purchased annuities to cover each of the participants in the Pension Plan.
      Finally, the Company has met the advance notification requirements set forth
      in
      the Single-Employer Pension Plan Amendment Act of 1986 (the “SEPPAA”) and has
      notified each party affected by this termination, as required by the SEPPAA.
      The
      Company recorded a loss of $88 in the fourth quarter of 2006 related to the
      settlement. No further financial impacts are anticipated in 2007 or beyond
      related to the settlement.





*Legal
      Proceedings*


**Contractual
      Matters**




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





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




**Corporate
      Litigation**




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


18




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





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




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




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





**Patent
      Related Matters**




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


19




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




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




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




20




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




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




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




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


21


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




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





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





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





On
      September 13, 2007, Santarus, Inc., and The Curators of the University of
      Missouri filed a lawsuit against the Company in the United States District
      Court
      for the District of Delaware. The complaint alleges infringement of U.S. Patent
      Nos. 6,699,885; 6,489,346; and 6,645,988 because the Company submitted a
      Paragraph IV certification to the FDA for approval of 20 mg and 40 mg
      omeprazole/sodium bicarbonate capsules. The Company is preparing to answer
      and
      counterclaim and will assert all available defenses in addition to seeking
      a
      declaration of non-infringement and invalidity of the patents.




On
      October 1, 2007, Elan Corporation, PLC filed a lawsuit against the Company
      in
      the United States District Court for the District of Delaware. The complaint
      alleges infringement of U.S. Patent Nos. 6,228,398 and 6,730,325 because the
      Company submitted a Paragraph IV certification to the FDA for approval of 5,
      10,
      15, and 20 mg dexmethylphenidate hydrochloride extended release capsules. The
      Company is preparing to answer and counterclaim and will assert all available
      defenses in addition to seeking a declaration of non-infringement and invalidity
      of the patents.





On
      September 21, 2007, Sanofi-Aventis and Sanofi-Aventis U.S., LLC filed a lawsuit
      against the Company and Actavis South Atlantic LLC ("Actavis") in the United
      States District Court for the District of Delaware. The complaint alleges
      infringement of U.S. Patent Nos. 4,661,491 and 6,149,940 because the Company
      and
      Actavis submitted a Paragraph IV certification to the FDA for approval of 10
      mg
      alfuzosin hydrochloride extended release tablets. The Company and Actavis are
      preparing to answer and counterclaim and will assert all available defenses
      in
      addition to seeking a declaration of non-infringement and invalidity of the
      patents.





On
      September 24, 2007, Sanofi-Aventis filed a lawsuit against the Company and
      its
      development partner, Actavis, in the United States District Court for the
      District of Delaware. The complaint alleges infringement of U.S. Patent Nos.
      4,661,491 and 6,149,940 because the Company and Actavis submitted a Paragraph
      IV
      certification to the FDA for approval of 10 mg alfuzosin hydrochloride extended
      release tablets. The Company and Actavis will assert all available defenses
      and
      counterclaims including seeking a declaration of non-infringement and invalidity
      of the patents.


22


On
      October 1, 2007, Elan filed a lawsuit against the Company and its development
      partner, IntelliPharmaCeutics ("IPC") in the United States District Court for
      the District of Delaware. On October 5, 2007, Celgene and Novartis filed a
      lawsuit against IPC in the United States District Court for the District of
      New
      Jersey. The complaints allege infringement of U.S. Patent Nos. 6,228,398;
      6,730,325; 5,908,850; 6,355,656; 6,528,530; 5,837,284; and 6,635,284 because
      the
      Company and IPC submitted a Paragraph IV certification to the FDA for approval
      of 5, 10, 15, and 20 mg dexmethylphenidate extended release capsules. Par and
      IPC will assert all available defenses and counterclaims including seeking
      a
      declaration of non-infringement and invalidity of the patents.





On
      July
      6, 2007, Sanofi-Aventis and Debiopharm, S.A. filed a lawsuit against the Company
      and its development partner, MN Pharmaceuticals ("MN"), in the United States
      District Court for the District of New Jersey. The complaint alleges
      infringement of U.S. Patent Nos. 5,338,874 and 5,716,988 because the Company
      and
      MN submitted a Paragraph IV certification to the FDA for approval of 50 mg/10
      ml, 100 mg/20 ml, and 200 mg/40 ml oxaliplatin by injection. The Company and
      MN
      will assert all available defenses and counterclaims including seeking a
      declaration of non-infringement and invalidity of the patents.





**Industry
      Related Matters**





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





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




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




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


23




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





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




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





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




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




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




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




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




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




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





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





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




24




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


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




**Other**




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






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




On
      April
      15, 2002, Rhodes Technology (“Rhodes”) and the Company created a joint venture,
      SVC Pharma (“SVC”), to research, develop, commercialize and market
      pharmaceutical preparations for human therapy. The parties agreed to capitalize
      the joint venture with equal contributions and all profits or losses are to
      be
      shared equally between Rhodes and the Company. The Company accounts for this
      investment under the equity method of accounting in accordance with APB No.
      18, *the
      Equity Method of Accounting for Investments in Common Stock* .
      As of
      March 31, 2007, the Company’s net investment in SVC totaled approximately
      $5,304. The investment in SVC is reviewed for impairment each reporting period.
      Any impairment deemed to be “other-than temporary” will be recognized in the
      appropriate period and the basis will be adjusted. As of March 31, 2007, the
      Company believes its investment in SVC was not impaired.






**Note
      16 – Subsequent Events:**




In
      June
      2007, the Company’s investment in a fund that invests in various floating rate
      structured finance securities, included in the Company’s available for sale debt
      and marketable equity securities, experienced a severe reduction in value.
      As of
      March 31, 2007, this investment had a cost basis of $6.0 million and an
      associated fair value of approximately $6.2 million. During the second quarter,
      the underlying assets of the fund were affected by the lack of liquidity in
      and
      deterioration of the collateralized debt obligation market that includes
      financial instruments derived from subprime home mortgage bonds. In July 2007,
      the Company received notice from the fund that the fund’s fair value is
      estimated to be less than 10% of its cost basis and that the fund would be
      liquidated over the next few months. In August 2007, the Company received a
      second notice from the fund that the Company was not going to receive any
      proceeds from the liquidation of the fund. The Company accordingly recorded
      a
      realized investment loss for the entire cost basis of the investment in the
      fund
      as of June 30, 2007.




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




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




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




In
      August
      2007, the Company announced
      that it acquired the North American commercial rights to Zensana TM (ondansetron
      HCl) Oral Spray from Hana Biosciences, Inc (“Hana”). Ondansetron is used to
      prevent nausea and vomiting after chemotherapy, radiation and surgery, and
      following successful development and approval, Zensana TM could
      be
      among the first in its class of 5-HT3 antagonist anti-emetic therapies to be
      available in an oral spray form. Under terms of the agreement, the Company
      made
      a $5.0 million equity investment in Hana at a contractually agreed premium
      to
      the prevailing market price. Of this amount, $1.2 million was charged to
      research and development expense in the third quarter of 2007. In addition,
      Hana
      would receive milestone payments and royalties on future sales of
      Zensana TM .
      The
      Company also announced that it has entered into an agreement with NovaDel
      Pharma, Inc. (“NovaDel”) to collaborate in the reformulation of
      Zensana TM .
      Following completion of reformulation efforts already under way, the Company
      will reconfirm the product's pharmacokinetic profile and resubmit the NDA to
      the
      FDA. In addition, as part of the Company’s strategy to continue to concentrate
      resources on supportive care in AIDS and oncology, the Company has returned
      to
      NovaDel the rights to NitroMistTM,
      NovaDel’s proprietary oral spray form of the drug used to treat angina pectoris.


25




In
      August
      2007, the Company announced that it entered into a stock purchase agreement
      to
      acquire an equity interest in IntelliPharmaCeutics Ltd. (“IPC Ltd.”), a Delaware
      company. The Company made a $5.0 million stock purchase that represents a 4.2
      percent equity interest in IntelliPharmaCeutics Corp. (“IPC Corp.”), the
      operating subsidiary of IPC Ltd. Concurrently, the Company announced that it
      entered into a separate agreement with IPC Corp. to collaborate in the
      development and marketing of four modified release generic drug products. IPC
      Corp. is a Toronto-based specialty pharmaceutical company with which the Company
      previously has entered into single-product agreements covering the development
      and marketing of two modified release generic drug products. Under the terms
      of
      the new agreement, IPC Corp. will develop the four modified release products
      and
      the Company will provide development, regulatory and legal support for the
      applications. IPC Corp. will be eligible to receive development and post-launch
      milestone payments. The Company will have exclusive rights to market, sell
      and
      distribute the products in the U.S. and receive a majority share of the profits
      from the sales of each product.





On
      September 28, 2007, the Company announced that its Board approved an expansion
      of its share repurchase program allowing for the repurchase of up to $75.0
      million of the Company’s common stock, inclusive of the $17.8 million remaining
      from the April 2004 authorization.





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





In
      October 2007, the Company entered into a product development, manufacturing
      and
      supply agreement with Aveva Drug Delivery Systems, Inc. (“Aveva”) under which
      the Company received an exclusive license to commercialize in the United States
      a generic drug product to be developed by Aveva. Under the terms of the
      agreement, the Company paid Aveva an initial development payment. The
      Company will also pay Aveva milestone payments if certain development milestones
      are achieved, and the Company will pay Aveva a portion of the net
      profits of any future sales of the product .








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





In
      the
      fourth quarter of 2006, the Company made the decision to restructure its
      business operations and as a result, terminate approximately 10% of its
      workforce. The restructuring plan met the criteria outlined in SFAS 146 *Accounting
      for Costs Associated with Exit or Disposal Activities* .
      During
      the fourth quarter of 2006, the Company recorded a restructuring charge
      primarily to its generic business of approximately $1.0 million related to
      employee termination benefits. During the three month period ended March 31,
      2007, no additional restructuring charges were incurred and $700 of benefits
      were paid out. The remaining benefits are expected to be paid out during the
      remainder of 2007.







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




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




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




26


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





**Three
                months ended****March
                  31,**
                **2007**
            
            **April
                1,**
                **2006**Revenues:Generic
            
            $
            214,736
            
            $
            164,116Brand
            
            
            19,474
            
            
            8,202Total
                revenues
            
            $
            234,210
            
            $
            172,318Gross
                margin:Generic
            
            $
            73,483
            
            $
            43,123Brand
            
            
            14,206
            
            
            6,045Total
                gross margin
            
            $
            87,689
            
            $
            49,168Operating
                income (loss):Generic
            
            $
            43,850
            
            $
            16,212Brand
            
            
            17,821
            
            
            (9,238
            )Total
                operating income
            
            $
            61,671
            
            $
            6,974Other
                expense, net
            
            
            (19
            )
            
            (39
            )Equity
                in loss of joint venture
            
            
            (148
            )
            
            (253
            )Realized
                gain on sale of marketable securities
            
            
            1,397
            
            
            -Interest
                income
            
            
            2,684
            
            
            1,983Interest
                expense
            
            
            (1,718
            )
            
            (1,694
            )Provision
                (benefit) for income taxes
            
            
            22,353
            
            
            2,457Net
                income
            
            $
            41,514
            
            $
            4,514





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





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


**Product**
            
            **For
                the three months ended March 31,**
              **2007**
            
            **For
                the three months ended April 1,**
              **2006***Generic*Fluticasone
                (Flonase®)
            
            $
            49,930
            
            $
            56,265Propranolol
                HCl ER (Inderal LA®)
            
            
            31,252
            
            
            -Various
                amoxicillin products (Amoxil®)
            
            
            19,711
            
            
            17,646Metoprolol
                succinate ER (Toprol-XL®)
            
            
            12,342
            
            
            -Cabergoline
                (Dostinex®)
            
            
            11,395
            
            
            2,551Tramadol
                HCl and acetaminophen tablets (Ultracet®)
            
            
            5,687
            
            
            8,951Polyethylene
                glycol (Miralax®)
            
            
            4,293
            
            
            -Ibuprofen
                Rx (Advil®, Nuprin®, Motrin®)
            
            
            4,288
            
            
            3,867Ranitidine
                HCl Syrup (Zantac®)
            
            
            4,151
            
            
            -Lovastatin
                (Mevacor®)
            
            
            3,774
            
            
            3,795Fluoxetine
                (Prozac®)
            
            
            3,325
            
            
            4,118Minocycline
                (Minocin®)
            
            
            2,458
            
            
            1,961Mercatopurine
                (Purinethol®)
            
            
            2,424
            
            
            2,141Quinapril
                (Accupril®)
            
            
            2,157
            
            
            5,150Paroxetine
                (Paxil®)
            
            
            1,373
            
            
            5,853Megestrol
                oral suspension (Megace®)
            
            
            806
            
            
            3,104Cefprozil
                (Cefzil®)
            
            
            563
            
            
            5,090Other
                product related revenues (2)
            
            
            9,121
            
            
            3,281Other
                (1)
            
            
            45,686
            
            
            40,343Total
                Generic Revenues
            
            $
            214,736
            
            $
            164,116






27




**Product**
            
            
            **For
                the three months ended March 31,**
              **2007**
            
            
            **For
                the three months ended April 1,**
              **2006***Branded*Megace®
                ES
            
            $
            16,974
            
            $
            7,781Other
            
            
            -
            
            
            421Other
                product related revenues (2)
            
            
            2,500
            
            
            -Total
                Branded Revenues
            
            $
            19,474
            
            $
            8,202







(1)
            The
                further detailing of revenues of the Company’s other approximately 65
                generic products is impracticable due to the low volume of revenues
                associated with each of these generic products. No single product
                in the
                other category is in excess of 3% of total generic revenues for three
                month periods ended March 31, 2007 or April 1,
                2006.




(2)
              Other
                  product related revenues represents licensing and royalty related
                  revenues
                  from profit sharing agreements related to products such as ondansetron
                  ODT, the generic version of Zofran ODT®, doxycycline monohydrate, the
                  generic version of Adoxa®, and quinapril, the generic version of
                  Accupril®. Other product related revenues included in the Brand business
                  relate to a co-promotion arrangement with Solvay.







28




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





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





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





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





**OVERVIEW**


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





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





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


29




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





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





The
      following table shows the revenues, gross margin, and operating income by
      segment for the three-months ended March 31, 2007 and April 1,
      2006:




**Three
                months ended****March
                  31,**
                **2007**
            
            **April
                1,**
                **2006**Revenues:Generic
            
            $
            214,736
            
            $
            164,116Brand
            
            
            19,474
            
            
            8,202Total
                revenues
            
            $
            234,210
            
            $
            172,318Gross
                margin:Generic
            
            $
            73,483
            
            $
            43,123Brand
            
            
            14,206
            
            
            6,045Total
                gross margin
            
            $
            87,689
            
            $
            49,168Operating
                income (loss):Generic
            
            $
            43,850
            
            $
            16,212Brand
            
            
            17,821
            
            
            (9,238
            )Total
                operating (loss) income
            
            $
            61,671
            
            $
            6,974





30





Total
      revenues and gross margin dollars increased $61,892, or 35.9%, and $38,521,
      or
      78.3%, respectively, for the three months ended March 31, 2007 from the three
      months ended April 1, 2006. Generic revenues and gross margins increased
      $50,620, or 30.8%, and $30,360, or 70.4%, respectively, for the three months
      ended March 31, 2007 from the three months ended April 1, 2006. Increased
      generic sales and gross margins in 2007 were primarily due to new product
      launches including the first quarter launches of propranolol HCl ER caps and
      ranitidine HCl syrup, the 2006 fourth quarter launch of metoprolol succinate
      ER
      25 mg, the 2006 second quarter launch of polyethylene glycol, higher cabergoline
      and amoxicillin product sales and royalties earned related to the sales of
      ondansetron tablets, which were launched in the fourth quarter of 2006. The
      increases are offset by lower sales attributed to declining market prices for
      fluticasone, paroxetine, tramadol APAP and cefprozil, lower sales volume for
      cefprozil due to customers switching to other generic manufacturers as well
      as
      the absence of pharmaceutical products containing ribavirin as an active
      ingredient, the rights to which were sold to Three Rivers in the third quarter
      of 2006. The increase in gross margin percentage for the generic business from
      26.3% to 34.2% was driven primarily by the introduction of propranolol and
      increased sales of cabergoline, which have higher gross margin percentages,
      and
      lower sales of cefprozil which has lower gross margin percentages, tempered
      by
      lower sales of high margin ribavirin related products. Branded revenues and
      gross margin dollars for the first quarter of 2007 of $19,474 and $14,206,
      respectively, were driven by increased sales of Megace® ES and payments related
      to the co-promotion of Androgel®.





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





The
      increase in operating income from the generic business was impacted in the
      first
      three months of 2007 by the sales and gross margins discussed above offset
      by
      higher research and development of approximately $3,300. Branded operating
      income was favorably impacted in the first three months of 2007 due to higher
      gross margin on higher sales, lower research and development costs of
      approximately $3,100 and the recognition of $20,000 income related to the return
      of marketing rights to a product that was being co-developed with another
      company; these increases were tempered by higher costs for marketing and a
      field
      force expansion to promote and support the Company’s branded products.





**RESULTS
      OF OPERATIONS**





**Revenues**


Total
      revenues for the three months ended March 31, 2007 were $234,210, increasing
      $61,892, or 35.9%, from total revenues of $172,318 for the three months ended
      April 1, 2006. Revenues for generic products for the three months ended March
      31, 2007 were $214,736, increasing $50,620, or 30.8%, from generic revenues
      of
      $164,116 for the three months ended April 1, 2006, due primarily to the
      introduction of new products. Increased generic revenues in 2007 were primarily
      due to new product launches including the first quarter 2007 launches of
      propranolol HCl ER (net sales of $31,252), and ranitidine HCl syrup (net sales
      of $4,151), the 2006 launches of metoprolol succinate ER 25 mg (net sales of
      $12,342) and polyethylene glycol (net sales of $4,293), royalties of $5,276
      earned related to the sales of ondansetron tablets, which were launched in
      the
      fourth quarter of 2006 and higher cabergoline and amoxicillin product sales
      of
      $8,844 and $2,065, respectively. Partially offsetting these increases were
      lower
      sales of certain existing products due to competitive pressures, including
      fluticasone, which decreased by $6,335, cefprozil, which decreased by $4,527,
      paroxetine, which decreased by $4,480, tramadol HC1 and acetaminophen tablets,
      which decreased by $3,264, quinapril, which decreased by $2,993, and megestrol
      oral suspension, which decreased by $2,298 from the first quarter of 2006,
      as
      well as the absence of pharmaceutical products containing ribavirin as an active
      ingredient. Net sales of distributed products were approximately $118,830 or
      51%
      of the Company’s total product revenues in the first quarter of 2007, and
      $116,417, or 68% of the Company’s total revenues in the first quarter of 2006.
      The Company is substantially dependent upon distributed products for its overall
      sales and any inability by its suppliers to meet demand could adversely affect
      the Company’s future sales. Revenues for the Company’s branded segment were
      $19,474 for the three months ended March 31, 2007, increasing $11,272, or
      137.4%, from branded revenues of $8,202 for the three months ended April 1,
      2006, due to increased sales of Megace® ES and the co-promotion fee for
      Androgel®.





In
      February 2007, the Company began shipping propranolol HCl ER. As in the ordinary
      course of business, the Company’s first quarter shipments included initial trade
      inventory stocking that the Company believes was commensurate with a new product
      introduction of this magnitude. As a result of the above and the entry of a
      competitor in March 2007, the Company’s second quarter 2007 revenues declined to
      approximately $10,383, significantly below the first quarter sales of $31,252.


31


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





The
      Company’s gross revenues before deductions for chargebacks, rebates and
      incentive programs (including rebates paid under federal and state government
      Medicaid drug reimbursement programs), sales returns and other sales allowances
      were $405,446 for the three months ended March 31, 2007 compared to $369,494
      for
      the three months ended April 1, 2006. Deductions from gross revenues were
      $171,236 for the three months ended March 31, 2007 compared to $197,176 for
      the
      three months ended April 1, 2006. These deductions are discussed in the Notes
      to
      condensed consolidated financial statements - Note 6 - “Accounts Receivable.”
The total gross-to-net sales adjustments as a percentage of gross sales
      decreased to 42.2% for the three months ended March 31, 2007 compared to 53.4%
      for the three months ended April 1, 2006, primarily due to a decrease in
      wholesaler acquisition costs in 2006, the lack of competition for fluticasone,
      and higher royalties in 2007, which are not impacted by deductions. Among the
      top selling products that did not have sales in the corresponding prior year
      three month period were propranolol HCl ER, metoprolol succinate ER 25 mg,
      ranitidine HCl syrup and polyethylene glycol.





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





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





The
      following tables summarize the activity for the three months ended March 31,
      2007 and April 1, 2006 in the accounts affected by the estimated provisions
      described below:


**For
                  the three months ended March 31, 2007****Accounts
                  receivable reserves**
              
              **Beginning**
                **balance
                  (3)**
              
              **Provision**
                **recorded**
                **for
                  current**
                **period
                  sales**
              
              **(Provision)**
                **reversal**
                **recorded**
                **for
                  prior**
                **period
                  sales**
              
              **Credits**
                **processed**
              
              **Ending**
                **balance**Chargebacks
              
              $
              (51,891
              )
              $
              (88,364
              )
              $
              -
              (1)
              $
              92,531
              
              $
              (47,724
              )Rebates
                  and incentive programs
              
              
              (85,888
              )
              
              (55,192
              )
              
              2,699
              
              
              50,889
              
              
              (87,492
              )Returns
              
              
              (42,905
              )
              
              (10,770
              )
              
              (794
              )
              
              6,099
              
              
              (48,370
              )Cash
                  discounts and other
              
              
              (18,038
              )
              
              (14,382
              )
              
              211
              
              
              6,652
              
              
              (25,557
              )Total
              
              $
              (198,722
              )
              $
              (168,708
              )
              $
              2,116
              
              $
              156,171
              
              $
              (209,143
              )**Accrued
                  liabilities (2)**
              
              $
              (10,412
              )
              $
              (4,644
              )
              $
              -
              
              $
              708
              
              $
              (14,348
              )





32




**For
                  the three months ended April 1, 2006****Accounts
                  receivable reserves**
              
              **Beginning**
                **balance**
              
              **Provision**
                **recorded**
                **for
                  current**
                **period
                  sales**
              
              **(Provision)**
                **reversal**
                **recorded**
                **for
                  prior**
                **period
                  sales**
              
              **Credits**
                **processed**
              
              **Ending**
                **balance**Chargebacks
              
              $
              (102,256
              )
              $
              (110,309
              )
              $
              -
              (1)
              $
              112,735
              
              $
              (99,830
              )Rebates
                  and incentive programs
              
              
              (50,991
              )
              
              (55,165
              )
              
              -
              
              
              39,207
              
              
              (66,949
              )Returns
              
              
              (32,893
              )
              
              (8,013
              )
              
              (1,473
              )
              
              6,523
              
              
              (35,856
              )Cash
                  discounts and other
              
              
              (15,333
              )
              
              (11,863
              )
              
              -
              
              
              11,330
              
              
              (15,866
              )Total
              
              $
              (201,473
              )
              $
              (185,350
              )
              $
              (1,473
              )
              $
              169,795
              
              $
              (218,501
              )**Accrued
                  liabilities (2)**
              
              $
              (9,040
              )
              $
              (10,353
              )
              $
              -
              
              $
              4,391
              
              $
              (15,002
              )





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




(2)
                Includes amounts due to customers
                  for which no
                  underlying accounts receivable exists, including Medicaid
                  rebates.
 (3)
                  Restated to reflect a reclassification
                    to
                    accrued expenses of $4,259 for discounts due to customers for
                    which no
                    underlying accounts receivable existed as of December 31, 2006.


*Use
      of Estimates in Reserves*


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





**Gross
      Margin**


The
      Company’s gross margin of $87,689 (37.4% of total revenues) for the three months
      ended March 31, 2007 increased $38,521 from $49,168 (28.5% of total revenues)
      for the three months ended April 1, 2006. This increase in gross margin is
      attributed to the increased sales of products with higher gross margin,
      increased royalty income and revenues related to the co-promotion of Androgel.
      The generic products gross margin of $73,483 (34.2% of generic revenues) for
      the
      three months ended March 31, 2007 increased $30,360 from $43,123 (26.3% of
      generic revenues) for the three months ended April 1, 2006 primarily due to
      new
      product launches including the first quarter launches of propranolol HCl ER
      caps
      and ranitidine HCl syrup, the 2006 fourth quarter launch of metoprolol succinate
      ER 25 mg, the 2006 second quarter launch of polyethylene glycol, higher
      cabergoline and amoxicillin product sales, partially offset by lower sales
      of
      fluticasone, cefprozil, paroxetine, and tramadol HC1 and acetaminophen tablets,
      as well as the absence of pharmaceutical products containing ribavirin as an
      active ingredient, the rights to which were sold to Three Rivers in the third
      quarter of 2006. The Company’s gross margin percentage increased from 28.5% to
      37.4%. The increased percentage is attributed to the launch of propranolol,
      increased sales of cabergoline (which has higher margin percentages), increased
      sales of Megace® ES, royalties related to the sales of ondansetron and the
      co-promotion fee for Androgel. These increases are partially offset by lower
      sales of higher margin ribavirin related products.





**Operating
      Expenses**





**** ***Research
      and Development***


The
      Company’s research and development expenses of $14,039 (6.0% of total revenues)
      for the three months ended March 31, 2007 increased $187, or 1.3%, from $13,852
      (8.0% of total revenues) for the three months ended April 1, 2006. The results
      reflect increased development costs in support of the portfolio of products
      for
      the generic market, offset by lower branded clinical costs related to Megace® ES
      clinical development program for Oncology, which was terminated in 2006, and
      Par
      101, which was terminated in the first quarter of 2007 with the return of the
      marketing rights to Optimer, as well as lower personnel cost due to a
      restructuring of the research and development organization.




Although
      there can be no such assurance, research and development expenses for fiscal
      year 2007, including payments to be made to unaffiliated companies, are expected
      to be approximately 25% to 30% higher than fiscal year 2006.


33




***Selling,
      General and Administrative Expenses***




Total
      selling, general and administrative expenses of $32,557 (13.9% of total
      revenues) for the three months ended March 31, 2007 increased $4,215, or 14.9%,
      from $28,342 (16.4% of total revenues) for the three months ended April 1,
      2006.
      The increase in 2007 is primarily attributable to higher selling and marketing
      costs of $2,275 related to the Company’s branded division, and increased general
      and administrative costs of $2,036, primarily due to the expansion of finance
      and accounting functions and increased professional costs related to the
      Company’s restatement of prior periods. The higher selling costs are primarily
      due to the expansion of the field force to promote the Company’s branded
      products.





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





***Settlements,
      net***





In
      August
      2003, the Company and Perrigo Pharmaceuticals Company entered into a product
      development manufacturing and supply agreement to commercialize various
      products. In March 2007, the parties terminated the agreement. The terms of
      the
      settlement resulted in a net gain for the Company in the amount of $378 for
      the
      three months ended March 31, 2007.





In
      September 1999, the Company entered into an agreement to develop, manufacture
      and market the pharmaceutical formulation naturbinol with Resolution Chemicals
      Limited (“Resolution”). In February 2007, the parties agreed to terminate this
      agreement. The terms of the settlement resulted in a net gain for the Company
      in
      the amount of $200 for the three months ended March 31, 2007.





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




In
      May
      2005 the Company and Optimer entered into a joint development and collaboration
      agreement to commercialize Difimicin (PAR 101/ OPT-80), an investigational
      drug
      to treat Clostridium difficle- associated diarrhea. On February 27, 2007 in
      exchange for $20,000 the Company returned the marketing rights to Optimer.
      The
      Company recognized a gain on the sale of product rights of $20,000 related
      to
      this transaction for the three months ended March 31, 2007.





**Realized
      Gain on Sale of Marketable Securities**




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








**Equity
      in Loss of Joint Venture**





Equity
      in
      loss of joint venture for the first quarter was $148 and $253 for the three
      months ended March 31, 2007 and April 1, 2006, respectively. The amount
      represents the Company’s share of loss in the SVC joint venture which primarily
      relates to pre-production activities.





**Interest
      Income**





Interest
      income was $2,684 and $1,983 for the three months ended March 31, 2007 and
      April
      1, 2006, respectively. Interest income principally includes interest income
      derived primarily from money market and other short-term investments.





**Interest
      Expense**





Interest
      expense was $1,718 and $1,694 for the three months ended March 31, 2007 and
      April 1, 2006, respectively. Interest expense for 2007 and 2006 principally
      includes interest payable on the Company’s convertible notes.


34


**Income
      Taxes**




The
      Company recorded a provision for income taxes of $22,353 and $2,457 for the
      three months ended March 31, 2007 and April 1, 2006, respectively. The
      Company’s effective tax rates for the three months ended March 31, 2007 and
      April 1, 2006 were 35% and 35%, respectively.





**FINANCIAL
      CONDITION**





**Liquidity
      and Capital Resources**





Cash
      and
      cash equivalents were $ 141,477  at
      March
      31, 2007 which represented an increase of $20,486 from $120,991 at December
      31,
      2006. Cash
      provided by operations was $36,687 for the three month period ended March 31,
      2007 driven by net income of $41,514 and adjusted for depreciation and
      amortization of $7,347, share-based compensation of $3,702 and accounts
      receivable reserves of $7,978 offset somewhat by an increase in accounts
      receivable of $55,965 from higher sales in the quarter primarily driven by
      the
      first quarter 2007 launch of propranolol HCl ER and to a lesser extent a
      decrease in accounts payable. Cash
      flows used in investing activities were $13,893 for the three months ended
      March
      31, 2007, principally due to the net purchases of available for sale securities
      and other investments of $5,330 and capital contributions to a joint venture
      of
      $1,244. Cash used in financing activities was $2,308 related to payments of
      short-term debt related to finance insurance premiums and principal payments
      under long-term debt and other borrowings of $1,825 and the purchase of treasury
      stock for $745, partially offset by proceeds from issuance of common stock
      of
      $124.




The
      Company’s working capital, current assets minus current liabilities, of $216,492
      at March 31, 2007 increased $91,324, from $125,168 at December 31, 2006. The
      working capital ratio, which is calculated by dividing current assets by current
      liabilities, was 1.57x at March 31, 2007 compared to 1.32x at December 31,
      2006.
      The Company believes that its strong working capital ratio indicates the ability
      to meet its ongoing and foreseeable obligations for
      the
      next 12 fiscal months .





In
      2004,
      the Board authorized the repurchase of up to $50,000 of the Company’s common
      stock. Repurchases are made, subject to compliance with applicable securities
      laws, from time to time in the open market or in privately negotiated
      transactions. Shares of common stock acquired through the repurchase program
      are
      available for general corporate purposes. The
      authorized amount remaining for stock repurchases under the repurchase program
      was $17.8 million as of March 31, 2007. On
      September 28, 2007, the Company announced that its Board approved an expansion
      of its share repurchase program allowing for the repurchase of up to $75 million
      of the Company’s common stock, inclusive of the $17.8 million remaining from the
      April 2004 authorization.





Available
      for sale debt and marketable equity securities of $119,754 included in current
      assets at March 31, 2007  were
      all
      available for immediate sale. The Company intends to continue to use its current
      liquidity to support the expansion of its business, entering into product
      license arrangements, potentially acquiring complementary businesses and
      products and for general corporate purposes.





As
      of
      March 31, 2007, the Company had payables due to distribution agreement partners
      of $89,635 related primarily to amounts due under profit sharing agreements,
      particularly including amounts owed to GSK with respect to fluticasone and
      to
      Pentech with respect to paroxetine. The Company paid these amounts, with the
      exception of the payables due to Pentech as a result of current litigation
      with
      it, out of its working capital during the second quarter of 2007. I n
      2004,
      Pentech filed a legal action against the Company alleging that the Company
      breached its contract with Pentech. The Company and Pentech are in dispute
      over
      the amount of gross profit share.




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





In
      addition to its internal research and development costs, the Company, from
      time
      to time, enters into agreements with third parties for the development of new
      products and technologies. To date, the Company has entered into agreements
      and
      advanced funds and has commitments or contingent liabilities with several
      non-affiliated companies for products in various stages of development. These
      contingent payments or commitments are generally dependent on the third party
      achieving certain milestones or the timing of third-party research and
      development or legal expenses. Due to the uncertainty of the timing and/or
      realization of such contingent commitments, these obligations are not included
      in the contractual obligations table presented as of December 31, 2006 in the
      Company’s Form 10-K. Payments made pursuant to these agreements are either
      capitalized or expensed in accordance with the Company’s accounting policies.
      The total amount that ultimately could be due under agreements with
      contingencies is approximately $3,000 as of March 31, 2007. See “Subsequent
      Events” below.


35




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





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





**Financing**





At
      March
      31, 2007, the Company’s total outstanding short and long-term debt, including
      the current portion, was $202,632. The amount consisted primarily of senior
      subordinated convertible notes, financing for product liability insurance and
      capital leases of computer equipment. In 2003, the Company sold an aggregate
      principal amount of $200,000 of senior subordinated convertible notes pursuant
      to Rule 144A under the Securities Act of 1933, as amended.  The notes bear
      interest at an annual rate of 2.875%, payable semi-annually on March 30 and
      September 30 of each year. The notes are convertible into shares of common
      stock
      of the Company at an initial conversion price of $88.76 per share, only upon
      the
      occurrence of certain events. Upon redemption, the Company has agreed to satisfy
      the conversion obligation in cash in an amount equal to the principal amount
      of
      the notes converted. The notes mature on September 30, 2010, unless earlier
      converted or repurchased.  The Company may not redeem the notes prior
      to the maturity date. The Trustee under the Indenture governing the Notes has
      alleged that the Company has defaulted in the performance of its obligations
      under the Indenture and has instituted a lawsuit in connection therewith.
      Accordingly, until the matter is resolved, the Company is recording the payment
      obligations under the Notes as a current liability on the Company’s condensed
      consolidated balance sheet as of March 31, 2007. Refer to notes to condensed
      consolidated financial statements - Note 14 - “Commitments, Contingencies and
      Other Matters.”





**Critical
      Accounting Policies and Use of Estimates**




The
      Company’s critical accounting policies are set forth in its Annual Report on
      Form 10-K for the fiscal year ended December 31, 2006. There has been no change,
      update or revision to the Company’s critical accounting policies subsequent to
      the filing of the Company’s Form 10-K for the fiscal year ended December 31,
      2006, except as discussed below.





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




**Subsequent
      Events**





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





In
      June
      2007, the Company’s investment in a fund that invests in various floating rate
      structured finance securities, included in the Company’s available for sale debt
      and marketable equity securities, experienced a severe reduction in value.
      As of
      March 31, 2007, this investment had a cost basis of $6.0 million and an
      associated fair value of approximately $6.2 million. During the second quarter,
      the underlying assets of the fund were affected by the lack of liquidity in
      and
      deterioration of the collateralized debt obligation market that includes
      financial instruments derived from subprime home mortgage bonds. In July 2007,
      the Company received notice from the fund that the fund’s fair value is
      estimated to be less than 10% of its cost basis and that the fund would be
      liquidated over the next few months. In August 2007, the Company received a
      second notice from the fund that the Company was not going to receive any
      proceeds from the liquidation of the fund. There is a high probability of a
      total loss in this investment. The Company accordingly recorded a realized
      investment loss for the entire cost basis of the investment in the fund as
      of
      June 30, 2007.




36




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




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




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




In
      August
      2007, the Company announced
      that it acquired the North American commercial rights to Zensana TM (ondansetron
      HCl) Oral Spray from Hana. Ondansetron is used to prevent nausea and vomiting
      after chemotherapy, radiation and surgery, and following successful development
      and approval, Zensana TM could
      be
      among the first in its class of 5-HT3 antagonist anti-emetic therapies to be
      available in an oral spray form. Under terms of the agreement, the Company
      made
      a $5.0 million equity investment in Hana at a contractually agreed premium
      to
      the prevailing market price. Of this amount, $1.2 million was charged to
      research and development expense in the third quarter of 2007. In addition,
      Hana
      would receive milestone payments and royalties on future sales of
      Zensana TM .
      The
      Company also announced that it has entered into an agreement with NovaDel to
      collaborate in the reformulation of Zensana TM .
      Following completion of reformulation efforts already under way, the Company
      will reconfirm the product's pharmacokinetic profile and resubmit the NDA to
      the
      FDA. In addition, as part of the Company’s strategy to continue to concentrate
      resources on supportive care in AIDS and oncology, the Company has returned
      to
      NovaDel the rights to NitroMist TM ,
      NovaDel’s proprietary oral spray form of the drug used to treat angina pectoris.




In
      August
      2007, the Company announced that it entered into a stock purchase agreement
      to
      acquire an equity interest in IPC Ltd., a Delaware company. The $5.0 million
      stock purchase that represents a 4.2 percent equity interest in IPC Corp.,
      the
      operating subsidiary of IPC Ltd. Concurrently, the Company announced that it
      entered into a separate agreement with IPC Corp. to collaborate in the
      development and marketing of four modified release generic drug products. IPC
      Corp. is a Toronto-based specialty pharmaceutical company with which the Company
      previously has entered into single-product agreements covering the development
      and marketing of two modified release generic drug products. Under the terms
      of
      the new agreement, IPC Corp. will develop the four modified release products
      and
      the Company will provide development, regulatory and legal support for the
      applications. IPC Corp. will be eligible to receive development and post-launch
      milestone payments. The Company will have exclusive rights to market, sell
      and
      distribute the products in the U.S. and receive a majority share of the profits
      from the sales of each product.





In
      September 2007, the Company announced that its Board approved an expansion
      of
      its share repurchase program allowing for the repurchase of up to $75 million
      of
      the Company’s common stock, inclusive of the $17.8 million remaining from the
      April 2004 authorization.





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





In
      October 2007, the Company entered into a product development, manufacturing
      and
      supply agreement with Aveva under which the Company received an exclusive
      license to commercialize in the United States a generic drug product to be
      developed by Aveva. Under the terms of the agreement, the Company paid Aveva
      an
      initial development payment. The Company will also pay Aveva milestone
      payments if certain development milestones are achieved, and the Company
      will pay Aveva a portion of the net profits of any future sales of
      the product .





37


**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 debt securities including governmental agency securities
      and
      auction rate securities. These instruments are classified as available for
      sale
      securities for financial reporting purposes and have minimal interest risk
      due
      to their short-term natures. Professional portfolio managers managed 100% of
      these available for sale securities at March 31, 2007. Additional investments
      are made in overnight deposits and money market funds. These instruments are
      classified as cash and cash equivalents for financial reporting purposes and
      also have minimal or no interest risk due to their short-term natures. For
      cash,
      cash equivalents and available for sale debt securities, a 10 percent decrease
      in interest rates would decrease interest income by approximately $1.0 million.
      The Company does not have any financial obligations exposed to variability
      in
      interest rates.




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


**March
                    31,**
                  **2007**
            
            **December
                    31,**
                  **2006**Securities
                issued by government agencies
            
            $
            46,051
            
            $
            65,897Debt
                securities issued by various state and local municipalities and
                agencies
            
            
            13,763
            
            
            13,755Other
                debt securities
            
            
            20,818
            
            
            15,870Auction
                rate securities
            
            
            31,550
            
            
            4,250Marketable
                equity securities
            
            
            12,282
            
            
            -Total
            
            $
            124,464
            
            $
            99,772


*Available
      for Sale Securities and Other Investments*




The
      primary objectives for the Company’s investment portfolio are liquidity and
      safety of principal. Investments are made with the intention to achieve a
      relatively high rate of return while, at the same time, retaining safety of
      principal. The Company’s investment policy limits investments to certain types
      of instruments issued by institutions and U.S. governmental agencies with
      investment-grade credit ratings. A significant change in prevailing interest
      rates could affect the market value of the portion of the $124,464, as of March
      31, 2007, in available for sale securities that have a maturity greater than
      one
      year. Included in the $124,464 is an investment in a fund that invests in
      various floating rate structured finance securities which in June 2007
      experienced a severe reduction in value. As of March 31, 2007, this investment
      had a fair value of approximately $6.2 million. The Company received notice
      from
      the fund manager that based on the liquidating procedures, there was no
      remaining equity for limited partners. The Company recorded an investment loss
      of $6,040 in June 2007.




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




In
      April
      2005, the Company acquired shares of the Series C preferred stock of Optimer,
      a
      privately-held biotechnology company located in San Diego, California, for
      $12,000. In February 2007, Optimer became a public company via an initial public
      offering (“IPO”). On February 20, 2007, the Company sold approximately 1.050
      million shares for approximately $6.8 million and recognized a pre-tax gain
      of
      $1.4 million for the three-month period ended March 31, 2007. As of March 31,
      2007, the Company held 1.3 million shares of Optimer common stock and the fair
      market value of the Optimer common stock held by the Company was $12.3 million
      based on the market value of Optimer’s common stock at that date. The Company
      included an unrealized gain of $5.7 million for the three-months ended March
      31,
      2007, which was included in “other comprehensive income.” In October 2007, the
      Company sold its investment in Optimer common stock for $9.6 million and will
      recognize a pre-tax gain on the sale of $3.1 million in the fourth quarter
      of
      2007. As of March 31, 2007, the Company reclassified its investment in Optimer
      common stock from “Other investments” (noncurrent asset) to “Available for sale
      debt and marketable equity securities” as part of current assets on the
      condensed consolidated balance sheet.




In
      December 2004, the Company acquired a 5% limited partnership interest in Abrika,
      a privately-held specialty generic pharmaceutical company located in Sunrise,
      Florida for $8,361, including costs. Additionally, the Company entered into
      an
      agreement with Abrika to collaborate on the marketing of five products to be
      developed by Abrika. The first product is expected to be a transdermal fentanyl
      patch for the management of chronic pain. This patch is a generic version of
      Duragesic® marketed by Janssen Pharmaceutica Products, L.P., a division of
      Johnson & Johnson. Pursuant to the agreement, the Company was required to
      pay up to $9,000 to Abrika at the time of the commercial launch of this product,
      subject to the attainment of certain profit targets. In February 2006, the
      Company and Abrika amended their collaboration agreement and the Company
      advanced Abrika $9,000. Abrika will earn the funds only upon the Food and Drug
      Administration’s (“FDA”) final and unconditional approval of the transdermal
      fentanyl patch. Abrika has agreed to repay the advance if it does not receive
      FDA approval within two years of the amendment. The Company also holds a
      convertible promissory note in the principal amount of $3,000, plus interest
      accruing at 8.0% annually for money loaned to Abrika. Both the $9,000 advance
      and the $3,000 promissory note are recorded in deferred charges and other
      assets, and were subsequently collected by the Company in the second quarter
      of
      2007. In July 2007, the Company and Abrika amended their collaboration agreement
      to remove all of the Company’s rights in, benefits from, and obligations arising
      as a result of the development and commercialization of the transdermal fentanyl
      patch. As a result of this amendment, the Company no longer has an obligation
      to
      pay Abrika the $9,000 upon FDA approval of the transdermal fentanyl patch.
      Because Abrika is privately-held and accounted for under the cost method, the
      Company monitors the investment on a periodic basis to evaluate whether any
      declines in value becomes other-than-temporary. In November 2006, Abrika agreed
      to be purchased by a wholly-owned subsidiary of the Actavis group. Based on
      the
      terms of the merger agreement the Company is to receive approximately $4.6
      million for its equity stake in Abrika. The Company wrote down its investment
      by
      approximately $3.8 million in the second quarter of 2006 based on the terms
      of
      the merger agreement between Abrika and Actavis that indicated that its
      investment was impaired. The merger transaction was completed in April 2007.


38




**ITEM
      4. CONTROLS AND PROCEDURES**





***Disclosure
      Controls and Procedures***




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





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




There
      have been no significant changes in the Company's internal control over
      financial reporting identified during the quarter ended March 31, 2007, except
      for the implementation of measures described below under “Remediation of
      Material Weaknesses.”





***Remediation
      of Material Weaknesses***




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





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




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




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





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





39


**PART
      II. OTHER INFORMATION**





**ITEM
      1. LEGAL PROCEEDINGS**




**Corporate
      Litigation**




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




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





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




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




40




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




**Patent
      Related Matters**




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




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




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




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




41




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




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




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




42




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




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




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





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




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


43




On
      September 13, 2007, Santarus, Inc., and The Curators of the University of
      Missouri filed a lawsuit against the Company in the United States District
      Court
      for the District of Delaware. The complaint alleges infringement of U.S. Patent
      Nos. 6,699,885; 6,489,346; and 6,645,988 because the Company submitted a
      Paragraph IV certification to the FDA for approval of 20 mg and 40 mg
      omeprazole/sodium bicarbonate capsules. The Company is preparing to answer
      and
      counterclaim and will assert all available defenses in addition to seeking
      a
      declaration of non-infringement and invalidity of the patents.





**** On
      October 1, 2007, Elan Corporation, PLC filed a lawsuit against the Company
      in
      the United States District Court for the District of Delaware. The complaint
      alleges infringement of U.S. Patent Nos. 6,228,398 and 6,730,325 because the
      Company submitted a Paragraph IV certification to the FDA for approval of 5,
      10,
      15, and 20 mg dexmethylphenidate hydrochloride extended release capsules. The
      Company is preparing to answer and counterclaim and will assert all available
      defenses in addition to seeking a declaration of non-infringement and invalidity
      of the patents.





On September 21, 2007, Sanofi-Aventis and Sanofi-Aventis U.S., LLC filed a
      lawsuit against the Company and Actavis South Atlantic LLC ("Actavis") in the
      United States District Court for the District of Delaware. The complaint alleges
      infringement of U.S. Patent Nos. 4,661,491 and 6,149,940 because the Company
      and
      Actavis submitted a Paragraph IV certification to the FDA for approval of 10
      mg
      alfuzosin hydrochloride extended release tablets. The Company and Actavis are
      preparing to answer and counterclaim and will assert all available defenses
      in
      addition to seeking a declaration of non-infringement and invalidity of the
      patents.





On
      September 24, 2007, Sanofi-Aventis filed a lawsuit against the Company and
      its
      development partner, Actavis, in the United States District Court for the
      District of Delaware. The complaint alleges infringement of U.S. Patent Nos.
      4,661,491 and 6,149,940 because the Company and Actavis submitted a Paragraph
      IV
      certification to the FDA for approval of 10 mg alfuzosin hydrochloride extended
      release tablets. The Company and Actavis will assert all available defenses
      and
      counterclaims including seeking a declaration of non-infringement and invalidity
      of the patents.





On
      October 1, 2007, Elan filed a lawsuit against the Company and its development
      partner, IPC in the United States District Court for the District of Delaware.
      On October 5, 2007, Celgene and Novartis filed a lawsuit against IPC in the
      United States District Court for the District of New Jersey. The complaints
      allege infringement of U.S. Patent Nos. 6,228,398; 6,730,325; 5,908,850;
      6,355,656; 6,528,530; 5,837,284; and 6,635,284 because the Company and IPC
      submitted a Paragraph IV certification to the FDA for approval of 5, 10, 15,
      and
      20 mg dexmethylphenidate extended release capsules. The Company and IPC will
      assert all available defenses and counterclaims including seeking a declaration
      of non-infringement and invalidity of the patents.





On
      July
      6, 2007, Sanofi-Aventis and Debiopharm, S.A. filed a lawsuit against the Company
      and its development partner, MN, in the United States District Court for the
      District of New Jersey. The complaint alleges infringement of U.S. Patent Nos.
      5,338,874 and 5,716,988 because the Company and MN submitted a Paragraph IV
      certification to the FDA for approval of 50 mg/10 ml, 100 mg/20 ml, and 200
      mg/40 ml oxaliplatin by injection. The Company and MN will assert all available
      defenses and counterclaims including seeking a declaration of non-infringement
      and invalidity of the patents.





**Industry
      Related Matters**





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


44





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




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




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





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





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




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





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




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




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




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




45




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




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




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





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





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




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




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




**Other**




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





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




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


46








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




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


**Quarter
      Ending March 31, 2007**


**Period**
            
            **Total
                Number of**
              **Shares
                of**
              **Common
                Stock**
              **Purchased****(3)**
            
            **Average**
              **Price
                Paid**
              **per
                Share of**
              **Common
                Stock**
            
            **Total
                Number of**
              **Shares
                of**
              **C****ommon
                Stock**
              **Purchased
                as Part**
              **of
                Publicly**
              **Announced
                Plans**
              **or
                Programs**
            
            **Maximum
                Number of**
              **Shares
                of Common**
              **Stock
                that May Yet Be**
              **Purchased
                Under the**
              **Plans
                or Programs****(2)**January
                1, 2007 through January 27, 2007
            
            31,313
            
            N/A
            
            -
            
            709,475January
                28, 2007 through February 24, 2007
            
            -
            
            N/A
            
            -
            
            709,475February
                25, 2007 through March 31, 2007
            
            -
            
            N/A
            
            -
            
            709,475Total
            
            31,313
            
            N/A
            
            -




(1)
            In
                April 2004, the Board authorized the repurchase of up to $50,000
                of the
                Company’s common stock. Repurchases are made, subject to compliance with
                applicable securities laws, from time to time in the open market
                or in
                privately negotiated transactions,whenever
                it appears prudent to do so.
                Shares of common stock acquired through the repurchase program are
                available for reissuance for general corporate purposes.The
                authorized amount remaining for stock repurchases under the repurchase
                program was $17.8 million, as of March 31, 2007. The repurchase program
                has no expiration date.On
                September 28, 2007, the Company announced that its Board approved
                an
                expansion of its share repurchase program allowing for the repurchase
                of
                up to $75 million of the Company’s common stock, inclusive of the $17.8
                million remaining from the April 2004 authorization.




(2)
            Based
                on the closing price of the Company’s common stock on the New York Stock
                Exchange $25.12 at March 30, 2007.




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








**ITEM
      6. EXHIBITS**





31.1
            Certification
                of the Principal Executive Officer (filed
                herewith.)




31.2
            Certification
                of the Principal Financial Officer (filed
                herewith.)




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




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





47




**SIGNATURES**







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





PAR
              PHARMACEUTICAL COMPANIES, INC.(Registrant)November
              21, 2007
            /s/
              Patrick G. LePorePatrick
              G. LePore*Chairman,
              President and Chief Executive Officer*November
              21, 2007
            /s/
              Gerard A. MartinoGerard
              A. Martino*Executive
              Vice President and Chief Operating Officer*November
              21, 2007
            /s/
              Veronica A. LubatkinVeronica
              A. Lubatkin*Executive
              Vice President and Chief Financial
              Officer*




48


**EXHIBIT
      INDEX**







Exhibit
                      Number
                    Description


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





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




32.1
              Certification
                  by the President and Chief Executive Officer pursuant to 18 U.S.C.
                  Section
                  1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
                  Act of
                  2002.
 31.2
                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.
 
 49