UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-K

|(Mark One)                                                       |                                                                                         
|---------------------------------------------------------------- | ----------------------------------------------------------------------------------------
|ý                                                                | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|For the fiscal year ended December 31, 2003                     
|or                                                              
|o                                                                | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|For the transition period
from                                to

Commission file number 0-19119

CEPHALON, INC.(Exact name of registrant as specified in its charter)

|Delaware(State or other jurisdiction of
incorporation or organization)                     |  | 23-2484489(I.R.S. Employer Identification No.)
|------------------------------------------------------------------------------------------ |  | ----------------------------------------------
|145 Brandywine Parkway,
West Chester, Pennsylvania(Address of principal executive offices) |  | 19380-4245(Zip Code)                          

Registrant's telephone number, including area code:(610) 344-0200

Securities
registered pursuant to Section 12(b) of the Act:

|Title of each class |  | Name of each exchange on which registered
|------------------- |  | -----------------------------------------
|None                |  | None                                     

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $.01 per share

(Title of Class)

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Indicate
by check mark whether the registrant (1) has filed all reports 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 ý    No o.

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment
to this Form 10-K. o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Act of
1933). Yes ý    No o.

The aggregate market value of the voting stock held by non-affiliates of the registrant, as of June 30, 2003, was approximately
$2.265 billion. Such aggregate market value was computed by reference to the closing price of the Common Stock as reported on the Nasdaq National Market on June 30, 2003. For purposes of
making this calculation only, the registrant has defined affiliates as including all directors and executive officers.

The
number of shares of the registrant's Common Stock outstanding as of March 8, 2004 was 55,932,070.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive proxy statement for its 2004 annual meeting of stockholders are incorporated by reference into Items 10, 11, 12, 13, and 14
of Part III of this Form 10-K.



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TABLE OF CONTENTS

|                                                     |  |                                                                                                |  | Page
|---------------------------------------------------- |  | ---------------------------------------------------------------------------------------------- |  | ----
|Cautionary Note Regarding Forward-Looking Statements |  | 3                                                                                             
|PART I                                              
|Item 1.                                              |  | Business                                                                                       |  | 5   
|Item 2.                                              |  | Properties                                                                                     |  | 23  
|Item 3.                                              |  | Legal Proceedings                                                                              |  | 23  
|Item 4.                                              |  | Submission of Matters to a Vote of Security Holders                                            |  | 24  
|PART II                                             
|Item 5.                                              |  | Market for Registrant's Common Equity and Related Stockholder Matters                          |  | 26  
|Item 6.                                              |  | Selected Financial Data                                                                        |  | 26  
|Item 7.                                              |  | Management's Discussion and Analysis of Financial Condition and Results of Operations          |  | 28  
|Item 7A.                                             |  | Quantitative and Qualitative Disclosure About Market Risk                                      |  | 58  
|Item 8.                                              |  | Financial Statements and Supplementary Data                                                    |  | 59  
|Item 9.                                              |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           |  | 97  
|Item 9A.                                             |  | Controls and Procedures                                                                        |  | 97  
|PART III                                            
|Item 10.                                             |  | Directors and Executive Officers of the Registrant                                             |  | 98  
|Item 11.                                             |  | Executive Compensation                                                                         |  | 98  
|Item 12.                                             |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |  | 98  
|Item 13.                                             |  | Certain Relationships and Related Transactions                                                 |  | 98  
|Item 14.                                             |  | Principal Accountant Fees and Services                                                         |  | 98  
|PART IV                                              |  |                                                                                               
|Item 15.                                             |  | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                               |  | 99  
|SIGNATURES                                           |  | 107                                                                                           

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Our disclosure and analysis in this document and in the documents that are or will be incorporated by reference into this document contain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act. Forward-looking statements provide our current expectations or forecasts
of future events and are not statements of historical fact. You can identify these statements by the fact that they do not relate strictly to historical or current facts. Such statements may include
words such as "anticipate," "will," "estimate," "expect," "project," "intend," "should," "plan," "believe," "hope," and other words and terms of similar meaning in connection with any discussion of,
among other things, future operating or financial performance, strategic initiatives and business strategies, regulatory or competitive environments, our intellectual property and product development.
In particular, these include, among others, statements about:



Any
or all of our forward-looking statements in this document and in the documents we have referred you to may turn out to be wrong. They can be affected by inaccurate assumptions we
might make or by known or unknown risks and uncertainties. Therefore, you should not place undue reliance on any such forward-looking statements. The factors that could cause actual results to differ
from those expressed or implied by our forward-looking statements include, among others:



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We
do not intend to update publicly any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law. Risks that we anticipate
are discussed in more detail in the section included in Item 7 hereof and entitled "Certain Risks Related to our Business." This discussion is permitted by the Private Securities Litigation
Reform Act of 1995.

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PART I

ITEM 1.    BUSINESS

Overview

Cephalon is an international biopharmaceutical company dedicated to the discovery, development and marketing of innovative products to treat sleep disorders,
neurological disorders, cancer and pain. In addition to conducting an active research and development program, we market three products in the United States and numerous products in various countries
throughout Europe.

Our
corporate and research and development headquarters are in West Chester, Pennsylvania, and we have offices in Salt Lake City, Utah, France, the United Kingdom, Germany and
Switzerland. We operate manufacturing facilities in France for the production of modafinil, which is the active drug substance in PROVIGIL® (modafinil) tablets
[C-IV], and Salt Lake City, Utah, for the production of ACTIQ® (oral transmucosal fentanyl citrate) [C-II] for
worldwide distribution and sale.

Our
three biggest products in terms of product sales, PROVIGIL, ACTIQ and GABITRIL® (tiagabine hydrochloride), comprised approximately 86% of our worldwide net sales for the
year ended December 31, 2003. The majority of PROVIGIL, ACTIQ and GABITRIL sales are in the U.S. market. Outside the United States, our commercial activities are concentrated primarily in
France, the United Kingdom and Germany. The following table summarizes the major markets for our three most significant products:

|PRODUCT                            |  | BRAND NAME |  | COUNTRY                                                                            |  | INDICATION                                                                                                                                                                                     
|---------------------------------- |  | ---------- |  | ---------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Modafinil                          |  | PROVIGIL®  |  | United States                                                                      |  | To improve wakefulness in patients with excessive daytime sleepiness (EDS) associated with narcolepsy, shift work sleep disorder (SWSD) and obstructive sleep apnea/hypopnea syndrome (OSA/HS)*
|                                   |  |            |  | United Kingdom; Republic of Ireland                                                |  | EDS associated with narcolepsy and with OSA/HS                                                                                                                                                 
|                                   |  |            |  | Italy                                                                              |  | EDS associated with narcolepsy                                                                                                                                                                 
|                                   |  | MODIODAL®  |  | France; Spain                                                                      |  | Narcolepsy with or without cataplexy; idiopathic hypersomnia                                                                                                                                   
|                                   |  | VIGIL®     |  | Germany                                                                            |  | Narcolepsy with or without cataplexy and moderate to severe OSA/HS                                                                                                                             
|                                  
|Oral transmucosal fentanyl citrate |  | ACTIQ®     |  | United States; Germany; Republic of Ireland; France; United Kingdom; Spain         |  | Management of breakthrough cancer pain in patients who are opioid tolerant                                                                                                                     
|                                  
|Tiagabine hydrochloride            |  | GABITRIL®  |  | United States; France; United Kingdom; Republic of Ireland; Spain; Germany; Poland |  | As adjunctive therapy in the treatment of partial seizures in epilepsy                                                                                                                         

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On March 28, 2003, we filed a patent infringement lawsuit in U.S. District Court in New Jersey against Teva Pharmaceuticals
USA, Inc., Mylan Pharmaceuticals Inc., Ranbaxy Pharmaceuticals Inc., and Barr Laboratories, Inc. based upon the abbreviated new drug applications (ANDAs) filed by each of
these companies seeking FDA approval for a generic equivalent of modafinil. The lawsuit claims infringement of our U.S. Patent No. RE37516, which covers pharmaceutical compositions and methods of
treatment with the form of modafinil contained in PROVIGIL. We intend to vigorously defend the validity, and prevent infringement, of this patent. This litigation is currently in the discovery phase
and we expect that the trial will begin sometime in 2005. See "Certain Risks Related to Our Business." Our sales of ACTIQ also depend on various patents that protect the current
formulation, the first of which expires in the U.S. in September 2006, and the formulation of ACTIQ sold prior to June 2003, which expires in May 2005. If we perform an additional
clinical study in pediatric patients that is agreeable to the FDA, the FDA could grant us six months of additional exclusivity beyond the expiration of these patents. We intend to perform such a study
once a mutually agreed upon clinical protocol is reached with the FDA.

In
2003, we marketed our U.S. products through two specialty sales forces. For PROVIGIL and GABITRIL, we had an approximately 240-person field sales and sales management team
that detailed the products primarily to neurologists, psychiatrists and sleep specialists. For ACTIQ, our approximately 90-person field sales and sales management team detailed ACTIQ to
pain specialists and oncologists. Beginning in 2004, we consolidated these two sales teams into a single unit that will detail all three products to a broader group of physicians, including primary
care physicians (e.g., internists, general practitioners and family practitioners). In addition, we expanded the size of this combined force to nearly 500 persons.

Outside
of the United States, we have a sales organization in France numbering approximately 130 persons detailing products to office-based and hospital-based physicians, and sales and
marketing organizations with approximately 50 persons in the aggregate that support our presence in other European countries, including the United Kingdom, Germany, the Republic of Ireland,
Switzerland and Austria. In territories where we have not established our own sales and marketing groups, we have chosen to market our products through a select group of distribution companies with
expertise in the development, marketing and sale of pharmaceuticals in those territories. In most cases, we have granted rights to our distribution partners to market, sell and distribute our products
in their respective territories, and we supply finished product for resale in such territories. The revenues and net income generated from these arrangements were not significant to our results of
operations for 2003 and are not expected to be significant to our results of operations in 2004.

During
2003, we continued to pursue our strategy for both broadening the range of clinical uses that are approved by regulatory authorities and seeking new and improved formulations of
our currently marketed products. In January 2004, we received final approval from the FDA to expand the label for PROVIGIL to include improving wakefulness in patients with excessive sleepiness
(ES) associated with shift work sleep disorder (SWSD) and in patients with obstructive sleep apnea/hypopnea syndrome (OSA/HS). In late 2003, we initiated Phase 3 clinical trials of PROVIGIL in
children with attention deficit/hyperactivity disorder (ADHD) and of NUVIGIL (armodafinil), a single-isomer of PROVIGIL that an earlier placebo-controlled clinical trial demonstrated
maintained wakefulness and had a longer duration of effect than PROVIGIL. If the results of these trials are positive, we would expect to make FDA regulatory submissions in late 2004 or early 2005.
With respect to GABITRIL, we have completed pilot studies in the therapeutic areas of anxiety, neuropathic pain and insomnia. In the second quarter of 2003, we initiated larger Phase 2 studies of
GABITRIL in Generalized Anxiety Disorder and Post-Traumatic Stress Disorder, which should be completed in the first half of 2004. Depending on the results of these studies, we would expect
to begin a Phase 3 program in one of these indications in the second half of 2004. In addition, in early 2004 we initiated a

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Phase
2 study of GABITRIL in insomnia. We also expect to initiate in 2004 clinical development of a sugar-free formulation of ACTIQ.

In
addition to clinical programs aimed at further developing our marketed products, we have significant research programs focused on developing therapeutics to treat neurological and
oncological disorders. Our technology principally focuses on an understanding of kinases and the role they play in cellular survival and proliferation. We have coupled this knowledge with a library of
novel, small, synthetic molecules that are orally-active and inhibit the activities of specific kinases. This technology base has resulted in three molecules that are currently in clinical
development. With respect to neurology, we have a program with a molecule, CEP-1347, that has entered an 800-patient Phase 2/3 clinical trial for the treatment of patients with
early stage Parkinson's disease. In the cancer area, we have a program with a molecule, CEP-701, and are currently enrolling patients for Phase 2 clinical trials in patients suffering from
acute myeloid leukemia (AML) and prostate cancer. The Phase 2 study in AML is enrolling earlier stage patients than our previous Phase 2 study with CEP-701, and is utilizing a combination
of other therapies. The Phase 2 study in prostate cancer is enrolling a more homogeneous group of patients, specifically, hormone refractory patients, than the earlier Phase 2 study. Additionally, we
are conducting a Phase 1 program with another molecule, CEP-7055, to evaluate safety and tolerability in patients with treatment-refractory tumors. As part of our corporate strategy, we
often seek to share the risk of our research and development activities with corporate partners and, to that end, we have entered into agreements to share the costs of developing and/or
commercializing certain of these molecules.

For
the year ended December 31, 2003, our total revenues and net income were $714.8 million and $83.9 million, respectively. Our revenues from U.S. and European
operations are detailed in Note 16 to our consolidated financial statements included in Item 8 of this Form 10-K. The third quarter of 2001 was our first profitable quarter
from commercial operations since inception. Our accumulated deficit at December 31, 2003 was $321.3 million. These accumulated losses have resulted
principally from costs incurred in research and development, including clinical trials, and from selling, general and administrative costs associated with our pre-commercial and commercial
activities. Prior to 2001, we funded our operations principally from the proceeds of private and public sales of our equity and debt securities. While we seek to increase profitability and cash flow
from operations, we will need to continue to achieve growth of product sales and other revenues sufficient for us to attain these objectives. The rate of our future growth will depend, in part, upon
our ability to obtain additional regulatory approvals for our currently marketed products, or to successfully develop or acquire and commercialize new product candidates.

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We
are a Delaware corporation with our principal executive offices located at 145 Brandywine Parkway, West Chester, Pennsylvania, 19380. Our telephone number is
(610) 344-0200 and our web site address is www.cephalon.com. We make available free of charge through the Investor Relations section of our web site our Annual Reports on
Form 10-K, Quarterly Reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable
after such material is electronically filed with or furnished to the Securities and Exchange Commission. We include our web site address in this Annual Report on Form 10-K only as
an inactive textual reference and do not intend it to be an active link to our web site.

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Pending Acquisition of CIMA LABS INC.

On November 3, 2003, we entered into an Agreement and Plan of Merger with CIMA LABS INC. (CIMA). Pursuant to this agreement, we will acquire CIMA
through the merger of a wholly-owned subsidiary of Cephalon with and into CIMA, with CIMA surviving as a wholly-owned subsidiary of Cephalon. In connection with the merger, each outstanding share of
CIMA common stock will be

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converted
into the right to receive $34.00 per share in cash. Each outstanding employee stock option to purchase CIMA common stock, whether or not vested or exercisable, will be converted into the
right to receive in cash an amount equal to $34.00 less the exercise price for such option. The total value of the transaction is approximately $515 million, or $405 million net of
CIMA's cash and cash equivalents as of December 31, 2003. The completion of the transaction is subject to several conditions, including the approval of the merger by the stockholders of CIMA
and the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act). On January 23, 2004, we announced that
we had received a request for additional information from the Federal Trade Commission as part of its review of the transaction under the HSR Act. This request extends the waiting period under the HSR
Act during which the FTC is permitted to review the proposed transaction. We expect the merger will be completed in the second quarter of 2004.

PROVIGIL



Modafinil is the first in a new class of wakefulness-promoting agents. While its exact mechanism of action remains to be fully elucidated, modafinil appears to
act selectively in regions of the brain believed to regulate normal sleep and wakefulness. In December 1998, the FDA approved PROVIGIL to improve wakefulness in patients with EDS associated
with narcolepsy and we launched the product in the United States in February 1999. In clinical studies, PROVIGIL was found to be generally well tolerated, with a low incidence of adverse events
relative to placebo. The most commonly observed adverse events were headache, infection, nausea, nervousness, anxiety and insomnia.

Excessive
sleepiness is a common and debilitating symptom across many different disease states. The National Commission on Sleep Disorders Research estimated that as many as
40 million Americans suffer from various sleep disorders, the consequences of which include excessive daytime sleepiness. ES may negatively impact daytime functioning, including awareness,
judgment, productivity and quality of life and is characterized by difficulty in maintaining wakefulness and an increased likelihood of falling asleep in inappropriate situations. Over the past few
years, we have focused significant clinical development efforts on exploring the potential use of PROVIGIL in treating conditions beyond narcolepsy where ES is a significant clinical problem.

In
January 2004, we received FDA approval to expand the label for PROVIGIL to include improving wakefulness in patients with ES associated with OSA/HS and SWSD. For patients with
OSA/HS, PROVIGIL is indicated as an adjunct to standard treatments for the underlying condition. Outside of the U.S., modafinil currently is approved in more than 20 countries, including France, the
United Kingdom, Ireland, Italy and Germany, for the treatment of EDS associated with narcolepsy. In the United Kingdom, the Republic of Ireland and Germany, we also have approval to market modafinil
to treat EDS in patients with OSA/HS.

In
the United States we market PROVIGIL through an approximately 500-person field sales force that details all three of our U.S. products. Outside the United States, we
market modafinil using both our existing European sales force and through marketing collaborations with third parties.



Narcolepsy is a debilitating, lifelong sleep disorder whose symptoms often first arise in late childhood. Its most common symptom is an uncontrollable propensity
to fall asleep during the day. This sleep disorder impairs a person's ability to perform basic daily activities, significantly impacting quality of life. There is no known cure for narcolepsy, which
is estimated by the National Institutes of Health (NIH) to affect approximately 200,000 people in the United States of which 25% are diagnosed and receiving treatment for narcolepsy. PROVIGIL has been
recognized by the American Academy of Sleep Medicine as the standard of therapy for the treatment of EDS associated with narcolepsy.

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Individuals with OSA/HS experience frequent awakenings, sometimes occurring hundreds of times during the night as a result of blockage of the airway passage,
usually the relaxation and collapse of the soft tissue in the back of the throat during sleep. Symptoms of OSA/HS may include restless sleep, loud, heavy snoring (often interrupted by silence and then
gasps), falling asleep during the day, morning headaches, loss of energy, trouble concentrating, irritability, forgetfulness, mood or behavior changes, anxiety or depression, and obesity. According to
the National Center on Sleep Disorders Research, OSA is estimated to afflict at least 15 million Americans. Continuous positive airway pressure, or CPAP, a medical device that blows air through
the nasal passage, is the primary treatment for OSA/HS. However, approximately 30 percent of patients that use CPAP continue to experience ES, for which PROVIGIL may be an appropriate
adjunctive treatment.



SWSD is defined as a persistent or recurrent pattern of sleep disruption that leads to excessive sleepiness or insomnia due to a mismatch between the natural
circadian sleep-wake pattern and the sleep-wake schedule required by a person's environment. Characterized by extreme sleepiness, insomnia, headaches and difficulty
concentrating, SWSD particularly affects those who frequently rotate shifts or work at night, which is contrary to the body's natural circadian rhythms. According to the National Institutes of Health,
about 20 million U.S. adults, or 20 to 25 percent of the national labor force, perform shift work. Excessive sleepiness is a major problem for shift workers, with several million
experiencing this disorder.



While applicable laws and regulations prevent us from promoting our products for uses beyond those contained in the approved label, our analysis of prescription
data for PROVIGIL in the United States indicates that some physicians have elected to prescribe the product to treat conditions outside its currently labeled indications including for ES associated
with depression, fatigue associated with multiple sclerosis and for ADHD.

Our
ongoing clinical programs are focused on the exploration of the potential use of PROVIGIL in treating ES that may be caused by a variety of clinical conditions, as well as potential
use for ADHD in children. To that end, we have conducted clinical studies exploring the utility of PROVIGIL in ADHD in children. In September 2002, we announced positive results from an
investigational clinical study in
children suffering from ADHD. In the four-week, randomized, double-blind, placebo-controlled, parallel design study, 248 children and adolescents between the ages of six and 13 were
assigned to one of four daily dose regimens of PROVIGIL or placebo. The primary efficacy endpoint measure was the teacher-completed school version of the ADHD Rating Scale IV. All of the PROVIGIL
treated groups showed a reduction in symptoms of ADHD, with certain dosage groups reaching statistical significance compared to placebo (p<0.05) and with the dosage group receiving 300mg of
PROVIGIL, once a day, reaching statistical significance at the primary endpoint. PROVIGIL generally was well tolerated with the most commonly reported adverse events in this study consistent with
those described in the current product label. In late 2003, we initiated a Phase 3 program in ADHD in children.

Finally,
an important focus of our PROVIGIL strategy is the development of follow-on compounds. In December 2003, we commenced Phase 3 clinical trials with NUVIGIL,
the single R-isomer version of modafinil, that we believe has a longer duration of action than the current racemic PROVIGIL formulation. The efficacy portion of the Phase 3 program with
NUVIGIL consists of 2 twelve-week clinical trials in patients with OSA/HS and one in patients with narcolepsy. These randomized, double-blind, placebo-controlled clinical trials are
expected to include approximately 800

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patients.
The primary outcome measures of the trials are the Maintenance of Wakefulness Test (MWT) and the Clinical Global Impression of Change-Clinician (CGI-C). The trials are being
conducted concurrently at sites in the United States, Europe, Canada and Australia. If the results of the Phase 3 trials are positive, we would seek to file a New Drug Application (NDA) in late
2004 or early 2005 and launch this new compound in late 2005. We also will commence a study of NUVIGIL in patients with SWSD in early 2004 and, if the results are positive, expect to file a
supplemental NDA for that additional indication. In addition, we continue to engage in pre-clinical efforts and have identified second generation new chemical entities designed to provide
additional clinical benefits.



We own U.S. and foreign patent rights that expire between 2014 and 2015 covering pharmaceutical compositions and uses of modafinil and, more specifically,
covering certain particle sizes of modafinil contained in the pharmaceutical composition. Ultimately, these patents might be found invalid if challenged by a third party, or a potential competitor
could develop a competing product or product formulation that avoids infringement of these patents. To date, the FDA has accepted four ANDAs for pharmaceutical products containing modafinil. Each of
these ANDAs for modafinil filed with the FDA prior to December 2003 contained a Paragraph IV certification in which the ANDA applicant certified that the U.S. particle-size
modafinil patent covering PROVIGIL is either invalid or will not be infringed by the ANDA product. On March 28, 2003, we filed a patent infringement lawsuit in U.S. District Court in New Jersey
against Teva Pharmaceuticals USA, Inc., Mylan Pharmaceuticals Inc., Ranbaxy Pharmaceuticals Inc., and Barr Laboratories, Inc. based upon the ANDAs filed by each of these
companies with the FDA. The lawsuit claims infringement of our U.S. Patent No. RE37516. While we
intend to vigorously defend the validity of this patent and prevent infringement, these efforts will be both expensive and time consuming and, ultimately, may not be successful. This litigation is
currently in the discovery phase, and we expect the trial to begin sometime in 2005.

In
early 2004, Barr and Ranbaxy each announced the receipt of tentative FDA approval for their respective generic versions of PROVIGIL. If the court finds the particle-size
patent is invalid or not infringed, Barr and Ranbaxy could begin selling their modafinil-based products upon the expiration of our FDA orphan drug exclusivity, currently in December 2005, which
would significantly and negatively impact revenues from PROVIGIL. We do not know whether the ANDAs filed by Teva and Mylan have been, or will be, tentatively approved by the FDA.

If
we perform an additional clinical study of PROVIGIL in pediatric patients that is agreeable to the FDA, the FDA could grant us a six-month extension of our orphan drug
exclusivity (to June 2006) and six months of exclusivity beyond the 2014 expiration of the particle-size patent term. However, we cannot be sure that we will be able to reach an
agreement with the FDA with respect to an appropriate pediatric study.

The
U.S. composition of matter patent for modafinil expired in 2001. Corresponding patents outside the United States have expired, with the exception of Italy where a patent extension
beyond the original 1998 expiration remains possible.

We
own composition of matter patents directed to NUVIGIL that are set to expire in May 2007 in the United States and in January 2007 outside the United States. Assuming
positive clinical trial results and success in attaining FDA approval for this compound in late 2005, we would expect to receive a three year period of marketing exclusivity (until late 2008). In
addition, assuming this same timetable for approval, we would anticipate that the term of this patent would be extended under the Hatch-Waxman Act until approximately late 2008. If we perform an
additional clinical study of this product in pediatric patients, the FDA could grant us six months of exclusivity beyond the expiration of the patent and the three-year period of marketing
exclusivity (until mid-2009). We intend to perform such a study once a mutually agreed upon clinical protocol is reached with the FDA. We hold patents covering a

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method
of treating ADHD with modafinil, and the modafinil formulation for ADHD, that currently are set to expire in 2020 and 2022, respectively. Assuming positive clinical trial results and FDA
approval, we would expect to receive a three year period of marketing exclusivity for the use of modafinil in ADHD. We also hold rights to other patents and patent applications directed to further
compounds, pharmaceutical compositions, manufacturing processes and uses of next generation modafinil products. We own rights to various trademarks covering pharmaceutical products containing the
active drug substance modafinil.



At our manufacturing facilities in Mitry-Mory, France, we produce the active drug substance modafinil. In 2004, we expect to complete a $25 million
modernization and expansion project at this facility. We have two qualified manufacturers of finished commercial supplies of PROVIGIL, DSM Pharmaceutical and Patheon, Inc. Any future change in
manufacturers or manufacturing processes requires regulatory approval. We seek to maintain inventories of active drug substance and finished products to protect against supply disruptions.



There are several other products used for the treatment of narcolepsy or ES in the United States and in our other licensed territories, namely methylphenidate
products such as RITALIN® by Novartis. Many of these products have been available for a number of years and are available in inexpensive generic forms.

ACTIQ



ACTIQ is approved in the United States for the management of breakthrough cancer pain in opioid tolerant patients. It was approved by the FDA in
November 1998 and was launched in the United States in March 1999. Following our acquisition of Anesta Corp. in October 2000, we relaunched ACTIQ in February 2001. In
October 2002, we reacquired rights to ACTIQ in twelve countries, principally in Europe, from Elan Pharma International Limited.

ACTIQ
uses our proprietary oral transmucosal delivery system (OTS) to deliver fentanyl citrate, a powerful, Schedule II opioid analgesic. The OTS delivery system
consists of a drug matrix that is mounted on a handle. It is designed to achieve rapid absorption of fentanyl through the oral mucosa (the lining of the mouth) and into the bloodstream. Side effects
of ACTIQ are typical of
opioid products and include somnolence, nausea, vomiting and dizziness. The greatest risk from improper use of ACTIQ, as with all opioid-based products, is the potential for respiratory depression,
which can be life-threatening. We market ACTIQ under a comprehensive risk management program of educational and safe use messages that inform health care professionals, patients and their
families of proper use, storage, handling and disposal of the product.

In
2003, we marketed ACTIQ in the United States through an approximately 90-person field sales and sales management team that detailed the product to pain specialists and
oncologists. In 2004, our expanded 500-person field sales force is detailing all three of our U.S. products to a broader group of physicians.



One of the most challenging components of cancer pain is breakthrough pain. Breakthrough pain is a flare of moderate to severe pain that "breaks through" the
medication patients use to control their

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persistent
pain. Breakthrough pain may be related to a specific activity, or may occur spontaneously and unpredictably.

Breakthrough
cancer pain typically develops rapidly and often reaches maximum intensity in three to five minutes. It has a duration that varies from minutes to several hours and can be
extremely painful and debilitating. Cancer patients who suffer from breakthrough pain may suffer a number of episodes every day.

The
ideal management of breakthrough pain requires rescue medication that has a rapid onset of action and the ability for dosing to be tailored to the individual characteristics of the
breakthrough pain episodes, such as intensity and duration. With ACTIQ, a patient places the product between his or her cheek and gum and moves it from side to side. A portion of the fentanyl citrate
is rapidly absorbed through the mucosal tissues into the blood stream, while the remaining dose is swallowed and absorbed more slowly through the gastro-intestinal tract. Pain relief may begin within
15 minutes. ACTIQ is available in six dosage strengths to allow individualization of dosing.



We hold an exclusive license to the U.S. patent covering the currently approved compressed powder pharmaceutical composition and method for administering fentanyl
via this composition that is set to expire in September 2006. If we are able to reach agreement with the FDA on an appropriate pediatric study, complete such study and submit the results of the
study to the FDA, the FDA could grant us six months of exclusivity beyond the expiration of these patents. However, we cannot be sure that we will reach an agreement with the FDA. Corresponding
patents in foreign countries expire between 2009 and 2010.

Our
patent protection with respect to the ACTIQ formulation we sold in the United States prior to June 2003 will expire in May 2005. If we complete an ACTIQ pediatric study
prior to May 2005, the FDA could grant us six months of exclusivity beyond the expiration of this patent until November 2005. The loss of patent protection on ACTIQ, beginning in 2005,
could significantly and negatively impact our revenues from the sale of ACTIQ.

Other
issued patents and pending patent applications in the United States and foreign countries that are owned or licensed by us are directed to various formulation processes for
manufacturing the product, methods of using the product and disposal containers required by the FDA to be provided as part of the product. We also hold the rights to the ACTIQ trademark covering
pharmaceuticals for oral transmucosal delivery containing fentanyl as the active drug substance.



At our facility in Salt Lake City, Utah, we manufacture ACTIQ for sale in the United States and international markets. In 2004, we expect to begin a nearly
$70 million, two-year capital expansion project at our Salt Lake City facility that will increase our ACTIQ manufacturing and packaging capacity and provide us with flexibility to
manufacture other products at this facility. Prior to the change to the current compressed powder ACTIQ formulation in June 2003, Abbott Laboratories manufactured the previous formulation for
us for sale in the United States.

Fentanyl,
the active ingredient in ACTIQ, is a Schedule II controlled substance under the Controlled Substances Act. Our purchases of fentanyl for use in the production of ACTIQ
are subject to quota that is approved by the U.S. Drug Enforcement Administration. Supply disruption could result from delays in obtaining DEA approvals or the receipt of approvals for quantities of
fentanyl that are insufficient to meet current or projected product demand. The quota system also limits our ability to build inventories as a method of insuring against possible supply disruptions.

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The market for opioids used in cancer pain is dominated by three long-acting opioid analgesics currently marketed for chronic pain: Johnson &
Johnson's DURAGESIC® and Purdue Pharmaceuticals' OXYCONTIN® and MS-CONTIN®. Physicians may attempt to manage breakthrough pain by increasing the dose of
these long-acting opioids until the patient no longer experiences breakthrough pain. Contrasted with ACTIQ, these products have a relatively slower onset of action and a longer duration of
action. ACTIQ is intended to be used as adjunctive breakthrough pain therapy for patients using long-acting opioids to treat their persistent pain.

Cancer
pain also is treated with short-acting opioid tablets, capsules and elixirs, as well as quick-acting invasive (i.e., intravenous, intramuscular and subcutaneous) opioid delivery
systems, many of which have been available for many years and are available in inexpensive generic form. The overwhelming majority of prescriptions written to treat breakthrough cancer pain are
written for short-acting opioids, such as Oxycodone and morphine sulfate, and quick-acting invasive opioids other than ACTIQ. We also are aware of numerous other companies developing other
technologies for rapidly delivering opioids to treat breakthrough pain, including transmucosal, transdermal, nasal spray and inhaled delivery systems, among others. For example, in
September 2003, Johnson & Johnson filed an NDA with the FDA for E-Trans®, a battery-powered transdermal patch that allows on-demand delivery of
fentanyl with rapid absorption. If these technologies are successfully developed and approved over the next few years, they could represent significant competition for ACTIQ.

We
continue to focus our research efforts on developing improved formulations of ACTIQ with enhanced clinical benefits, including a sugar-free formulation. In addition to
providing significant patient benefit, we believe these efforts could yield enhanced intellectual property protection.

GABITRIL



GABITRIL is a selective GABA (gamma-aminobutyric acid) reuptake inhibitor approved for use as adjunctive therapy in the treatment of partial seizures in epileptic
patients. GABA is an important inhibitory transmitter in the central nervous system and is widely distributed in all regions of the brain. The FDA approved GABITRIL in September 1997 and it was
launched in the United States in 1998 by Abbott. In late 2000, we acquired all U.S. rights to GABITRIL from Abbott in exchange for payments totaling $100 million over five years. We also made
an additional payment to Abbott of $10 million when Abbott obtained an extension to 2011 of the composition patent covering the active drug substance contained in GABITRIL. In
December 2001, we acquired product rights to GABITRIL worldwide, excluding Canada, Latin America and Japan, from Sanofi-Synthelabo and the product inventor, Novo Nordisk A/S. We are also
selling GABITRIL in France, the United Kingdom, Germany, Austria and Switzerland through Cephalon affiliates and in numerous other countries throughout the world through third-party distributors. In
2003, GABITRIL was supported in the United States by our 240-person field sales and sales management and support team that also promoted PROVIGIL. Beginning in 2004, our expanded
500-person field sales force will detail all three of our U.S. products.

While
applicable laws and regulations prevent us from promoting our products for uses beyond those contained in the approved label, our analysis of prescription data in the United States
for GABITRIL indicates that some physicians have elected to prescribe the product to treat conditions outside of its currently labeled indication, including generalized anxiety disorder and
neuropathic pain.

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Epilepsy is a chronic disorder characterized by seizures that cause sudden, involuntary, time-limited alteration in behavior, including changes in
motor activities, autonomic functions, consciousness or sensations, and accompanied by an abnormal electrical discharge in the brain. A partial seizure arises from a disorder emanating from a
distinct, identifiable region of the brain and produces a given set of symptoms depending on the area of onset. A general seizure arises from a general dysfunction of biochemical mechanisms throughout
the brain and may produce different types of convulsions. Epilepsy usually begins in early childhood, but can appear at any time during an individual's lifespan. It is estimated that more than
1 million adult Americans suffer from epilepsy.



Because GABITRIL works selectively to increase the amount of available GABA in the brain, it may be useful in treating conditions where additional GABA may prove
effective. Based upon the putative mechanism of action of GABITRIL established in animal models, and certain preclinical and clinical study results, we believe GABITRIL may prove effective in treating
anxiety, neuropathic pain and insomnia.

In
the second quarter of 2003, we initiated two, 200-plus patient, Phase 2 studies of GABITRIL in Generalized Anxiety Disorder and Post-Traumatic Stress Disorder,
which should be completed in the second quarter of 2004. Depending on the results of these studies, we would expect to begin a Phase 3 program in one of these indications in the second half of 2004.
In addition, in early 2004 we initiated a Phase 2 study of GABITRIL in insomnia.



GABITRIL is our trademark that is used in connection with pharmaceuticals containing tiagabine as the active drug substance. This product is covered by U.S. and
foreign patents that are held by Novo-Nordisk A/S. The U.S. patents have been licensed in the United States exclusively to Abbott Laboratories. We have an exclusive sublicense from Abbott
to these patents in the United States and exclusive licenses from Novo-Nordisk to corresponding foreign patents.

There
are three U.S. composition-of-matter patents covering the currently approved product: a patent claiming tiagabine, the active drug substance in GABITRIL; a
patent claiming crystalline tiagabine hydrochloride monohydrate and its use as an anti-epileptic agent; and a patent claiming anhydrous crystalline tiagabine hydrochloride and processes
for its preparation. These patents currently are set to expire in 2011, 2012 and 2017, respectively. There also is a pharmaceutical composition patent covering the currently approved product and
processes for its preparation, which is set to expire in 2016. Supplemental Protection Certificates based upon corresponding foreign patents covering this product are set to expire in 2011.



Abbott is required to supply us with finished commercial supplies of GABITRIL for the U.S. market until at least October 2005. Outside of the United
States, we have an agreement with Sanofi-Synthelabo to supply us with GABITRIL until January 2005. We have identified a third party manufacturer for the future worldwide production of the
active drug substance tiagabine and finished commercial supplies of GABITRIL. We are in the process of qualifying this manufacturer with appropriate U.S. and European regulatory authorities. We seek
to maintain inventories of finished commercial supplies of GABITRIL to protect against supply disruptions.



The pharmaceutical market for the treatment of partial seizures in epileptic patients generally is well served with a number of available therapeutics, several of
which are recent entrants to the market.

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The
market is dominated by Pfizer's NEURONTIN® (gabapentin). In addition, several treatments for partial seizures are available in inexpensive generic forms. Growth of pharmaceutical
products in this market tends to be slow both because of the number of therapies available and also because physicians are unlikely to change the medication of a patient whose condition is well
controlled.

OTHER PRODUCTS

In addition to PROVIGIL, ACTIQ and GABITRIL, we are engaged in the sale and marketing of other of our products and certain third party products in various
international markets, principally in France, the United Kingdom and Germany. For the year ended December 31, 2003, aggregate worldwide net sales from these products accounted for approximately
14% of our total net sales, with the majority of this revenue relating to sales of our products in France. The following is a summary of certain other products we market and sell.

|Product               |                                        | Country |         | Indication |                                                          | Third Party |                                   | Contract
Expiration
|--------------------- | -------------------------------------- | ------- | ------- | ---------- | -------------------------------------------------------- | ----------- | --------------------------------- | -------------------
|Cephalon Products:    |                                        |         |         |            |                                                          |             |                                   |                    
|                      | SPASFON® (phloroglucinol)              |         | France  |            | Biliary/urinary tract spasm and
irritable bowel syndrome |             | n/a                               |                    
|                      | FONZYLANE® (buflomedil)                |         | France  |            | Cerebral vascular disorders                              |             | n/a                               |                    
|                      | PROXALYOC® (piroxicam)                 |         | France  |            | Non-steroid anti-inflammatory                            |             | n/a                               |                    
|                      | PARALYOC® (paracetamol)                |         | France  |            | Analgesic                                                |             | n/a                               |                    
|                      | LOPERAMIDE LYOC®
(loperamide)          |         | France  |            | Acute and chronic diarrhea                               |             | n/a                               |                    
|Third Party Products: |                                        |         |         |            |                                                          |             |                                   |                    
|                      | APOKINON® (apomorphine
hydrochloride)  |         | France  |            | Levadopa therapy fluctuations in
Parkinson's Disease     |             | Laboratoire Aguettant S.A.        |                    
|                      | OTRASEL® (selegeline
hydrochloride)    |         | France  |            | Parkinson's Disease                                      |             | Elan Pharma International Limited |                    
|                      | TEGRETOL® (carbamezipine)              |         | U.K.    |            | Epilepsy                                                 |             | Novartis Pharma AG                |                    
|                      | RITALIN® (methylphenidate)             |         | U.K.    |            | ADHD                                                     |             | Novartis Pharma AG                |                    
|                      | LIORESAL® (baclofen)                   |         | U.K.    |            | Spasticity                                               |             | Novartis Pharma AG                |                    
|                      | ANAFRAIL® (clomipramine
hydrochloride) |         | U.K.    |            | Depression and obsessive
compulsive disorder             |             | Novartis Pharma AG                |                    
|                      | XILOPAR® (selegeline
hydrochloride)    |         | Germany |            | Parkinson's Disease                                      |             | Elan Pharma International Limited |                    
|                      | APO-GO® (apomorphine
hydrochloride)    |         | Germany |            | Levadopa therapy fluctuations in
Parkinson's Disease     |             | Britannia Pharmaceuticals, Ltd.   |                    
|                      | QUILONUM® (lithium)                    |         | Germany |            | Bipolar disorder                                         |             | GlaxoSmithKline Inc.              |                    

We manufacture certain of the Cephalon products above at our manufacturing facilities in Mitry-Mory and Nevers, France. We perform
warehousing, packaging and distribution activities for France and other export territories from our facilities in Maisons-Alfort, France. We have a sales organization in France numbering approximately
130 persons detailing our products to office-based and hospital-based physicians. Outside of France, we have sales and marketing organizations with approximately 50 persons in the aggregate that
support sales of our products and third party products in other European countries, including the United Kingdom, Germany, the Republic of Ireland, Switzerland and Austria

Our
largest product in terms of product sales in France is SPASFON. SPASFON is an antimuscarinic, antispasmodic muscle relaxant indicated for biliary tract spasms, irritable bowel

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syndrome,
urinary tract spasm and the treatment of certain gynecological-related spasms. The product is sold in a variety of formats, including solid oral tablets, fast-dissolve tablets
(LYOC) and suppositories. French government efforts to control healthcare costs may result in both price reductions on our products and the rapid growth of generic competition to our proprietary
products.

Under
an exclusive collaboration arrangement with Novartis Pharma AG established in November 2000, we market PROVIGIL, TEGRETOL, RITALIN, ANAFRANIL and LIORESAL in the United
Kingdom. We share with Novartis the earnings from sales of the four Novartis neurology products and PROVIGIL in the United Kingdom. We now face competition from generic versions of many of the branded
products included in the collaboration. European Union pricing laws also allow the parallel importation of branded drugs between member countries. Due to pricing variations within the European Union,
it is possible that our overall margins on our branded drugs could be impacted negatively as a result of the importation of product from relatively lower-margin member countries to relatively
higher-margin member countries.

RESEARCH AND DEVELOPMENT

In addition to our clinical programs focused on our marketed products, our research and development efforts focus primarily on two therapeutic areas:
neurodegenerative disorders and cancers. Neurodegenerative disorders are characterized by the death of neurons (i.e., the specialized conducting cells of the nervous system) which, in turn, results in
the loss of certain functions such as memory and motor coordination. Cancers are characterized by the uncontrolled proliferation of cells that may form tumors. Our research has focused on an
understanding of kinases and the role they play in cellular survival and proliferation. We have coupled this knowledge with a library of novel, small, orally-active synthetic molecule inhibitors of
kinases that allows us to intervene in these processes. This technology base has resulted in three molecules that are currently in clinical development: CEP-1347, CEP-701 and
CEP-7055. For the years ended December 31, 2003, 2002 and 2001, we expended $170.3 million, $128.3 million, and $83.0 million, respectively, on our research and
development efforts.

Neurology

A growing body of evidence, substantiated by our own research findings, suggests that neuronal death is caused by a series of biochemical events that are
themselves precipitated by the activation of intracellular signaling pathways. Our research, and that of others, has demonstrated that one of the
initial events involved in the cell death process is the activation of the stress-activated protein kinase pathway. Thus, we believe inhibition of this pathway should lead to neuronal survival and
result clinically in the inhibition of the progression of neurodegenerative diseases. We have identified targets within this pathway known as mixed lineage kinases (MLK), whose inhibition in
preclinical models results in inactivation of the cell death process. We are pursuing the development of certain potent inhibitors of the MLK for the treatment of Parkinson's disease, as described
below.



We have discovered several proprietary compounds that are potent MLK inhibitors and that are also efficacious in preclinical models in preventing neuronal death.
We are developing one such MLK inhibitor, CEP-1347, for use as a potential treatment for Parkinson's disease. Parkinson's disease is a progressive disorder of the central nervous system
affecting over one million Americans. The primary pathology of the disease is the degeneration of the dopamine neurons in the substantia nigra region of the brain, which results in a slowing of
spontaneous movements, gait difficulty, postural instability, rigidity and tremor. In a variety of preclinical models of Parkinson's disease, CEP-1347 demonstrated therapeutic potential in
inhibiting the progression of Parkinson's disease. Specifically, in non-human primate models, CEP-1347 protected against loss of dopamine neurons in the regions of the brain
affected by Parkinson's disease and prevented the appearance of the associated behavioral symptoms. Our rights to develop and market CEP-1347 in the United States stem from our 1992
collaboration

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with
Kyowa Hakko Kogyo Co., Ltd. In 1999, we entered into a collaborative agreement with H. Lundbeck A/S, a Danish pharmaceutical company, to discover, develop and market in Europe products to
treat neurodegenerative disorders, such as Parkinson's and Alzheimer's diseases. This collaboration covers the development and marketing of CEP-1347 and other proprietary small molecules
that may be useful in treating these diseases.

In
2002, Cephalon and Lundbeck initiated an 800-patient randomized, double-blind, placebo-controlled, multi-dose Phase 2/3 clinical trial of CEP-1347
in patients with early stage Parkinson's disease. Sixty-five study centers in the United States and Canada are participating in this clinical trial. We expect this study to be fully
enrolled in 2004. The objective of the study is to determine whether or not CEP-1347 may be effective in delaying disability due to progression of Parkinson's disease. Patients enrolled
into the study are expected to be treated for two years and will receive either placebo or CEP-1347. We anticipate completion of the study in early 2006. We have a supply agreement with
Abbott under which it supplies the key chemical intermediate used for the manufacture of CEP-1347 under contract to Cephalon. Lundbeck then uses that intermediate for the manufacture of
CEP-1347 for use in clinical trials.

Oncology

In normal tissues, cellular proliferation is balanced by cellular death, and these processes are governed in part by a class of soluble protein molecules
(commonly referred to as growth factors) that serve as communication signals between cells. The uncontrolled proliferation of cells associated with cancer may be linked to inappropriate signaling from
growth factors. Many of these growth factors bind to cell surface receptors (many of which are kinases) and trigger intracellular signals that maintain cell survival or direct the cell to proliferate.
Inhibition of these kinases provides a novel therapeutic strategy for treating a variety of oncological disorders without the undesirable side effects associated with traditional chemotherapeutics.



We have synthesized a class of small, orally active molecules that are selective inhibitors of the nerve growth factor receptor tyrosine kinase (trk). Trk may
play an important role in the development and propagation of prostate and pancreatic cancers; inhibiting trk antagonizes the "survival" signal elicited by this receptor in such tumors. Our lead
compound in this area, CEP-701, is administered orally. We have licensed our rights to develop and market CEP-701 from Kyowa Hakko. We have a supply agreement with Abbott under
which it supplies the key chemical intermediate found in CEP-701.

Our
scientists have discovered that CEP-701, in addition to its trk activity, is also a potent inhibitor of the flt-3 kinase. Flt-3 kinase has been
shown to be mutated in patients suffering from AML who are treatment resistant, which results in a poor prognosis. Thus, inhibition of this kinase may lead to a novel treatment for AML.

We
have completed Phase 2 studies with CEP-701 to study its effect in patients refractory to other therapies and suffering from prostate cancer and AML. In early studies in
prostate cancer and AML, we observed positive signals from the use of CEP-701, although the treatment effect seen was not sufficient to justify continued studies as monotherapy in
refractory patients. In 2003, we initiated additional Phase 2 studies with CEP-701 in these areas utilizing higher doses of CEP-701 in combination with other therapies. The
Phase 2 study in AML is enrolling earlier stage patients than our previous Phase 2 study with CEP-701, and is utilizing a combination of other therapies. The Phase 2 study in prostate
cancer is enrolling a more homogeneous group of patients, specifically, hormone refractory patients, than the earlier Phase 2 study.

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As cancer cells aggregate and form solid tumors, they secrete growth factors that promote the formation of new blood vessels necessary for providing nutrients to
the growing tumor; this process is called angiogenesis. Angiogenesis is promoted by a number of these growth factors but appears to be particularly dependent upon the vascular endothelial growth
factor (VEGF). VEGF acts at its receptor kinase to initiate blood vessel growth into the tumor. We believe that inhibition of the receptor kinase for VEGF will result in inhibition of the angiogenesis
process thus starving the tumor of needed nutrients. We believe that this approach has potential utility in the treatment of solid tumors.

We
have synthesized a number of proprietary, orally active molecules that are potent and selective inhibitors of the VEGF receptor kinase. These molecules have been shown to slow the
growth of a variety of tumors in preclinical models. Our lead compound in this area is CEP-7055. We have filed an Investigational New Drug application (IND) and are conducting Phase 1
clinical trials with CEP-7055. In December 2001, we entered into a collaborative agreement with Sanofi-Synthelabo to discover, develop and market worldwide products that inhibit
angiogenesis, excluding nervous system and opthalmic disorders. The collaboration covers the development and marketing of CEP-7055 and other proprietary small molecules.

Drug Delivery Technologies



We
are continuing to invest in research and development of our OTS technology platform to expand our position within our current therapeutic areas. For example, we currently are pursuing
both sugar free and novel delivery formulations of ACTIQ that utilize our OTS technology. In addition, we continue to assess the potential uses of our OTS technology, as well as other proprietary
buccal delivery systems, in several therapeutic areas in which we focus.



We continue to develop our LYOC technology, which is used to create fast-dissolving oral tablets. We currently manufacture and sell several drugs in
France using our LYOC technology, including SPASFON LYOC, PARALYOC, PROXALYOC, and LOPERAMIDE LYOC, and are considering other compounds that may be suitable for formulation using this technology.

Neurotrophic Factors

Under a collaboration with Chiron Corporation that was terminated in February 2001, we conducted clinical trials using IGF-I, also known as
MYOTROPHIN® (mecasermin) Injection, in patients in North America and Europe suffering from amyotrophic lateral sclerosis (ALS). ALS is a fatal disorder of the nervous system characterized
by the chronic, progressive degeneration of motor neurons, which leads to muscle weakness, muscle atrophy and, eventually, to the patient's death. In February 1997, we submitted an NDA to the
FDA for approval to market MYOTROPHIN in the United States for the treatment of ALS. In May 1998, the FDA issued a letter stating that the NDA was "potentially approvable," under certain
conditions. We do not believe those conditions can be met without conducting an additional Phase 3 clinical study, and we have no plans to conduct such a study at this time. However, certain
physicians have obtained governmental and non-governmental funding to be used to conduct such a study. We have agreed with these physicians to allow reference to our IND and have agreed to
supply MYOTROPHIN in quantities sufficient for them to conduct the study in exchange for the right to use any clinical data generated by such study in support of FDA approval of our pending NDA. These
physicians commenced the study in mid-2003 and are continuing to enroll patients as of early 2004; if the study is not fully enrolled by early 2005, we may be unable to provide quantities
of MYOTROPHIN sufficient to complete the study. Even if this additional study is concluded, the results will not be available for several years and may not be sufficient to obtain

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regulatory
approval to market the product. Furthermore, we do not have a source for finished commercial supply of MYOTROPHIN in the event regulatory approval is obtained.

Other Discovery Research Efforts

Since our inception, we have been engaged in research to discover innovative medicines. To date, we have focused our efforts on neurodegenerative diseases and
cancer. This research has resulted in the discovery of compounds that could potentially be useful in treating important clinical conditions beyond those for which we have active development programs.
In these and other cases, we often seek to establish collaborative partnerships with companies whose clinical development and marketing capabilities will maximize the value of these discoveries.

In
addition to our research programs discussed above, we are pursuing a variety of other innovative discovery research efforts. For example, we have a multi-year research
collaboration with TransTech Pharma, Inc. The collaboration is utilizing TransTech's Translational Technology, a highly automated and fully integrated proprietary drug discovery
process, to discover and develop small molecules for up to three therapeutic targets.

Scientific and Medical Advisory Board

We maintain a Scientific and Medical Advisory Board consisting of individuals with expertise in neuroscience and oncology research, as well as related fields.
Members of the Scientific and Medical Advisory Board advise us on issues concerning long-term scientific planning, research and development, and also periodically evaluate our research
programs, clinical development plans and clinical trials. We compensate the members for their services. The current members of our Scientific and Medical Advisory Board are as follows:

|Stanley H. Appel, M.D., Baylor College of Medicine                       | Steven T. DeKosky, M.D., University of Pittsburgh Medical Center           
|------------------------------------------------------------------------ | ---------------------------------------------------------------------------
|Arthur K. Asbury, M.D., University of Pennsylvania School of Medicine    | John T. Isaacs, M.D., Johns Hopkins University, Sidney Kimmel Cancer Center
|Robert L. Barchi, M.D., Ph.D., University of Pennsylvania Medical Center | Richard T. Johnson, M.D., Johns Hopkins University School of Medicine      
|Bruce A. Chabner, M.D., Massachusetts General Hospital                   | Robert Y. Moore, M.D., Ph.D., University of Pittsburgh                     
|Stanley Cohen, Ph.D., retired, Vanderbilt University School of Medicine  | Robert H. Roth, Ph.D., Yale University School of Medicine                  

OTHER INTELLECTUAL PROPERTY

We also own issued and pending U.S. patents and applications claiming compositions and/or uses of certain kinase inhibitors, including two novel classes of small
molecules referred to as "indolocarbazoles" and "fused pyrrolocarbazoles." We have filed foreign counterparts of these patents in other countries, as appropriate. We also have licensed U.S. and
European composition-of-matter and use patents and applications for novel compositions under our collaborative agreement with Kyowa Hakko, including compositions and uses of
certain indolocarbazoles for the treatment of pathological conditions of the prostate (including prostate cancer) and for the treatment of neurological disorders. We own issued and pending U.S. and
foreign patents and applications claiming compositions and/or uses of inhibitors of certain proteases, including novel classes of small molecules for inhibition of calpain, and novel classes of small
molecules for inhibition of the multicatalytic protease.

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Through
collaborative agreements with researchers at several academic institutions, we have licenses to or the right to license, generally on an exclusive basis, patents and patent
applications issued or filed in the United States and certain other countries arising under or related to such collaborations.

CUSTOMERS

Our principal customers are wholesale drug distributors. These customers comprise a significant part of the distribution network for pharmaceutical products in
the United States. A small number of large wholesale distributors control a significant share of this network. For the year ended December 31, 2003, our three largest U.S. wholesale drug
distributors were Cardinal Health, Inc., McKesson Corporation and AmerisourceBergen Corporation. These three distributors, in the aggregate, accounted for 82% of our worldwide net sales. The
loss or bankruptcy of any of these customers could have an adverse affect on our results of operation and financial condition.

COMPETITION

We face intense competition and rapid technological change in the pharmaceutical marketplace. Large and small companies, academic institutions, governmental
agencies, and other public and private research organizations conduct research, seek patent protection and establish collaborative arrangements for product development in competition with us. Products
developed by any of these entities may compete directly with those we develop or sell. In addition, many of the companies and institutions that compete against us have substantially greater capital
resources, research and development staffs and facilities than we have, and substantially greater experience in conducting clinical trials, obtaining regulatory approvals and manufacturing and
marketing pharmaceutical products. These entities represent significant competition for us. Our products also face potential competition from companies seeking to develop and sell generic formulations
of our products at a substantial price discount to the current price of our products. In addition, competitors who are developing products for the treatment of neurological or oncological disorders
might succeed in developing technologies and products that are more effective than any that we develop or sell or that would render our technology and products obsolete or noncompetitive. Competition
and innovation from these or other sources potentially could negatively affect sales of our products or make them obsolete. Advances in current treatment methods also may adversely affect the market
for such products. In addition, we may be at a competitive marketing disadvantage against companies that have broader product lines and whose sales personnel are able to offer more complementary
products than we can. Any failure to maintain our competitive position could adversely affect our business and results of operations.

As
discussed in more detail above, our products face competition in the marketplace. We cannot be sure that we will be able to demonstrate the potential advantages of our products to
prescribing physicians and their patients on an absolute basis and/or in comparison to other presently marketed products. We also need to demonstrate to physicians, patients and third party payors
that the cost of
our products is reasonable and appropriate in the light of their safety and efficacy, the price of competing products and the related health care benefits to the patient.

GOVERNMENT REGULATION

The manufacture and sale of therapeutics are subject to extensive regulation by U.S. and foreign governmental authorities. In particular, pharmaceutical products
are subject to rigorous preclinical and clinical trials and other approval requirements as well as other post-approval requirements by the FDA under the Federal Food, Drug, and Cosmetic
Act and by analogous agencies in countries outside the United States.

As
an initial step in the FDA regulatory approval process, preclinical studies are typically conducted in animals to identify potential safety problems and, in some cases, to evaluate
potential efficacy. The results of the preclinical studies are submitted to regulatory authorities as a part of an

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IND
that is filed with regulatory agencies prior to beginning studies in humans. However, for several of our drug candidates, no animal model exists that is potentially predictive of results in
humans. As a result, no in vivo indication of efficacy is available until these drug candidates progress to human clinical trials.

Clinical
trials are typically conducted in three sequential phases, although the phases may overlap. Phase 1 typically begins with the initial introduction of the drug into human
subjects prior to introduction into patients. In Phase 1, the compound is tested for safety, dosage tolerance, absorption, biodistribution, metabolism, excretion and clinical pharmacology, as well as,
if possible, to gain early information on effectiveness. Phase 2 typically involves studies in a small sample of the intended patient population to assess the efficacy of the drug for a specific
indication, determine dose tolerance and the optimal dose range, and to gather additional information relating to safety and potential adverse effects. Phase 3 trials are undertaken to further
evaluate clinical safety and efficacy in an expanded patient population, generally at multiple study sites, to determine the overall risk-benefit ratio of the drug and to provide an
adequate basis for product labeling. Each trial is conducted in accordance with certain standards under protocols that detail the objectives of the study, the parameters to be used to monitor safety
and the efficacy criteria to be evaluated. In the United States, each protocol must be submitted to the FDA as part of the IND. Further, one or more independent Institutional Review Boards must
evaluate each clinical study. The Institutional Review Board considers, among other things, ethical factors, the safety of the study, the adequacy of informed consent by human subjects and the
possible liability of the institution. Similar procedures and requirements must be fulfilled to conduct studies in other countries. The process of completing clinical trials for a new drug is likely
to take a number of years and require the expenditure of substantial resources.

Promising
data from preclinical and clinical trials are submitted to the FDA in an NDA for marketing approval and to foreign regulatory authorities under applicable requirements.
Preparing an NDA or foreign application involves considerable data collection, verification, analyses and expense, and there can be no assurance that the applicable regulatory authority will accept
the application or grant an approval on a timely basis, if at all. The marketing or sale of pharmaceuticals in the United States may not begin without FDA approval. The approval process is affected by
a number of factors, including primarily the safety and efficacy demonstrated in clinical trials and the severity of the disease. Regulatory authorities may deny an application if, in their sole
discretion, they determine that applicable regulatory criteria have not been satisfied or if, in their judgment, additional testing or information is required to ensure the efficacy and safety of the
product. One of the conditions for initial marketing approval, as well as continued post-approval marketing, is that a prospective manufacturer's quality control and manufacturing
procedures conform to the current Good Manufacturing Practice regulations of the regulatory authority. In complying with these regulations, a manufacturer must continue to expend time, money and
effort in the area of production, quality control and quality assurance to ensure full compliance. Manufacturing establishments, both foreign and domestic, also are subject to inspections by or under
the authority of the FDA and by other federal, state, local or foreign agencies. Discovery of previously unknown problems with a product or manufacturer may result in restrictions on such product or
manufacturer, including withdrawal of the product from the market.

After
regulatory approval has been obtained, further studies, including Phase 4 post-marketing studies, may be required to provide additional data on safety, to validate
surrogate efficacy endpoints, or for other reasons, and the failure of such studies can result in a range of regulatory actions, including withdrawal of the product from the market. Further studies
will be required to gain approval for the use of a product as a treatment for clinical indications other than those for which the product was initially approved. Results of post-marketing
programs may limit or expand the further marketing of the products. Further, if there are any modifications to the drug, including any change in indication, manufacturing process, labeling or
manufacturing facility, it may be necessary to submit an application seeking approval of such changes to the FDA or foreign regulatory authority. Finally, the FDA can

21

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place
restrictions on approval and marketing utilizing its authority under applicable regulations. For example, ACTIQ was approved subject to restrictions that include compliance with a rigorous Risk
Management Program (RMP). The approval and RMP give the FDA authority to pre-approve promotional materials and permits an expedited market withdrawal procedure if issues arise regarding
the safe use of ACTIQ. Moreover, marketed products are subject to continued regulatory oversight by the Office of Medical Policy Division of Drug Marketing, Advertising, and Communications, and the
failure to comply with applicable regulations could result in marketing restrictions, financial penalties and/or other sanctions.

Whether
or not FDA approval has been obtained, approval of a product by regulatory authorities in foreign countries must be obtained prior to the commencement of commercial sales of the
product in such countries. The requirements governing the conduct of clinical trials and product approvals vary widely from country to country, and the time required for approval may be longer or
shorter than that required for FDA approval. Although there are procedures for unified filings for most European
countries, in general, each country also has its own additional procedures and requirements, especially related to pricing of new pharmaceuticals. Further, the FDA and other federal agencies regulate
the export of products produced in the United States and, in some circumstances, may prohibit or restrict the export even if such products are approved for sale in other countries.

In
the United States, the Orphan Drug Act provides incentives to drug manufacturers to develop and manufacture drugs for the treatment of rare diseases, currently defined as diseases
that affect fewer than 200,000 individuals in the United States, or for a disease that affects more than 200,000 individuals in the United States, where the sponsor does not realistically anticipate
its product becoming profitable. The FDA has granted PROVIGIL orphan drug status for use in treating excessive daytime sleepiness associated with narcolepsy and has designated MYOTROPHIN as an orphan
drug for use in treating ALS, because each indication currently affects fewer than 200,000 individuals in the United States. Under the Orphan Drug Act, a manufacturer of a designated orphan product
can seek certain tax benefits, and the holder of the first FDA approval of a designated orphan product will be granted a seven-year period of marketing exclusivity for that product for the
orphan indication. While the marketing exclusivity of an orphan drug would prevent other sponsors from obtaining approval of the same drug compound for the same indication unless the subsequent
sponsors could demonstrate clinical superiority or a market shortage occurs, it would not prevent other sponsors from obtaining approval of the same compound for other indications or the use of other
types of drugs for the same use as the orphan drug. Orphan drug designation generally does not confer any special or preferential treatment in the regulatory review process. The U.S. Congress has
considered, and may consider in the future, legislation that would restrict the duration or scope of the market exclusivity of an orphan drug and, thus, we cannot be sure that the benefits of the
existing statute will remain in effect. Additionally, we cannot be sure that other governmental regulations applicable to our products will not change.

In
addition to the market exclusivity period under the Orphan Drug Act, the U.S. Drug Price Competition and Patent Term Restoration Act of 1984 permits a sponsor to apply for a maximum
five-year extension of the term of a patent for a period of time following the initial FDA approval of an NDA for a New Chemical Entity (NCE). The statute specifically allows a patent
owner acting with due diligence to extend the term of the patent for a period equal to one-half the period of time elapsed between the approval of the IND and the filing of the
corresponding NDA, plus the period of time between the filing of the NDA and FDA approval, up to a maximum of five years of patent term extension. Any such extension, however, cannot extend the patent
term beyond a maximum term of fourteen years following FDA approval and is subject to other restrictions. Additionally, under this statute, five years of marketing exclusivity is granted for the first
approval of an NCE. During this period of exclusivity, sponsors generally may not file and the FDA may not approve an ANDA or a 505(b)(2) application for a drug product equivalent or identical to the
NCE. An ANDA is the application form typically used by manufacturers seeking approval of a generic version of an approved drug. There is also a possibility that Congress will revise the underlying
statute in the next few years,

22

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which
may affect these provisions in ways that we cannot foresee. Additionally, the FDA regulates the labeling, storage, record keeping, advertising and promotion of prescription pharmaceuticals. Drug
manufacturing establishments must register with the FDA and list their products with the FDA.

The
Controlled Substances Act imposes various registration, record-keeping and reporting requirements, procurement and manufacturing quotas, labeling and packaging requirements, security
controls and a restriction on prescription refills on certain pharmaceutical products. A principal factor in determining the particular requirements of this act, if any, applicable to a product is its
actual or potential abuse profile. A pharmaceutical product may be listed as a Schedule II, III, IV or V substance, with Schedule II substances considered to present the highest risk of
substance abuse and Schedule V substances the lowest. Modafinil, the active drug substance in PROVIGIL, has been scheduled under the Controlled Substances Act as a Schedule IV substance.
Schedule IV substances are allowed no more than five prescription refills during a six-month period and are subject to special handling procedures relating to the storage, shipment,
inventory control and disposal of the product. Fentanyl, the active ingredient in ACTIQ, is a Schedule II controlled substance. Schedule II substances are subject to even stricter
handling and record keeping requirements and prescribing restrictions than Schedule III or IV products. In addition to federal scheduling, both PROVIGIL and ACTIQ are subject to state
controlled substance regulation, and may be placed in more restrictive schedules than those determined by the U.S. Drug Enforcement Agency and FDA. However, to date, neither modafinil nor fentanyl has
been placed in a more restrictive schedule by any state.

In
addition to the statutes and regulations described above, we also are subject to regulation under the Occupational Safety and Health Act, the Environmental Protection Act, the Toxic
Substances Control Act, the Resource Conservation and Recovery Act and other federal, state and local regulations.

EMPLOYEES

As of December 31, 2003, we had a total of 1,646 full-time employees, of which 1,085 were employed in the United States and 561 were located at
our various facilities in Europe. We believe that we have been successful in attracting skilled and experienced personnel; however, competition for such personnel is intense.

ITEM 2.    PROPERTIES

We own our corporate headquarters, which is located in West Chester, Pennsylvania and consists of approximately 160,000 square feet of administrative offices and
research facilities. We also lease approximately 62,000 square feet of administrative offices that are near our owned facilities in West Chester. In 2004, we signed agreements to lease approximately
190,000 square feet of administrative office space in Malvern, Pennsylvania, and expect to convert a significant portion of the administrative office space in our West Chester location to research
facilities. In Salt Lake City, Utah, we house administrative, research, manufacturing and warehousing operations in approximately 123,000 square feet that we lease.

We
lease office space for our European operations in the U.K. as well as space for our satellite offices in Switzerland and Germany. In France, we own administrative facilities, an
executive and research facility, a manufacturing facility, a packaging facility and various warehouses totaling approximately 285,000 square feet. We also lease the site of our other manufacturing
facility in France totaling approximately 29,000 square feet. We believe that our current facilities are adequate for our present purposes.

ITEM 3.    LEGAL PROCEEDINGS

On March 28, 2003, we filed a patent infringement lawsuit in U.S. District Court in New Jersey against Teva Pharmaceuticals USA, Inc., Mylan
Pharmaceuticals Inc., Ranbaxy Pharmaceuticals Inc.,

23

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and
Barr Laboratories, Inc. based upon the ANDAs filed by each of these companies seeking FDA approval for a generic equivalent of modafinil. The lawsuit claims infringement of our U.S. Patent
No. RE37516, which covers the pharmaceutical compositions and uses of modafinil. The litigation currently is in the discovery phase, and we expect that the trial will begin sometime in 2005. We
intend to vigorously defend the validity, and prevent infringement, of this patent.

We
are a party to certain other litigation in the ordinary course of our business, including, among others, U.S. patent interference proceedings, European patent oppositions, and matters
alleging employment discrimination, product liability and breach of commercial contract. We are vigorously defending ourselves in all of these actions and do not believe these matters, even if
adversely adjudicated or settled, would have a material adverse effect on our financial condition or results of operations.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

We did not submit any matters to the vote of security holders during the fourth quarter of fiscal 2003.

Executive Officers of the Registrant

The names, ages and positions held by our executive officers as of December 31, 2003 are as follows:

|Name                      |  | Age |  | Position                                                       
|------------------------- |  | --- |  | ---------------------------------------------------------------
|Frank Baldino, Jr., Ph.D. |  | 50  |  | Chairman and Chief Executive Officer                           
|Paul Blake, F.R.C.P.      |  | 56  |  | Senior Vice President, Clinical Research and Regulatory Affairs
|J. Kevin Buchi            |  | 48  |  | Senior Vice President and Chief Financial Officer              
|Peter E. Grebow, Ph.D.    |  | 57  |  | Senior Vice President, Worldwide Technical Operations          
|John E. Osborn            |  | 46  |  | Senior Vice President, General Counsel and Secretary           
|Robert P. Roche, Jr.      |  | 48  |  | Senior Vice President, Pharmaceutical Operations               
|Carl A. Savini            |  | 54  |  | Senior Vice President, Human Resources                         
|Jeffry L. Vaught, Ph.D.   |  | 53  |  | Senior Vice President and President, Research and Development  

All
executive officers are elected by the Board of Directors to serve in their respective capacities until their successors are elected and qualified or until their earlier resignation
or removal.

Dr. Baldino
founded Cephalon and has served as Chief Executive Officer and a director since its inception. He was appointed Chairman of the Board of Directors in
December 1999. Dr. Baldino received his Ph.D. degree from Temple University, holds several adjunct academic appointments and is a trustee of Temple University. Dr. Baldino
currently serves as a director of Pharmacopeia, Inc., a developer of proprietary technology platforms for pharmaceutical companies, ViroPharma, Inc., a biopharmaceutical company,
Acusphere, Inc., a specialty pharmaceutical company, and NicOx S.A., a company engaged in the research, development and commercialization of nitric oxide therapeutics.

24

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Dr. Blake
joined Cephalon in March 2001 as Senior Vice President, Clinical Research and Regulatory Affairs. From 1999 to 2001, Dr. Blake served as Chief Medical
Officer for MDS Proteomics Inc., a Canadian health and life sciences company. From 1998 to 1999, Dr. Blake served as President and Chief Executive Officer of Proliance
Pharmaceuticals, Inc., a drug development company. Prior to that, he spent six years with SmithKline Beecham Pharmaceuticals (currently known as GlaxoSmithKline), most recently as Senior Vice
President and Medical Director. Dr. Blake received his medical degree from London University, Royal Free Hospital and completed his clinical training in Internal Medicine and Cardiology.
Dr. Blake is a fellow of the Royal College of Physicians (UK), a fellow of the Faculty of Pharmaceutical Medicine and a fellow of the American College of Clinical Pharmacology.

Mr. Buchi
joined Cephalon as Controller in March 1991 and held several financial positions with the Company prior to being appointed Senior Vice President and Chief
Financial Officer in April 1996. Between 1985 and 1991, Mr. Buchi served in a number of financial positions with E.I. du Pont de Nemours and Company. Since February 2003,
Mr. Buchi has served as a member of the board of directors of Lorus Therapeutics Inc., a publicly-traded Canadian biotechnology company. Mr. Buchi received a master of management
degree from the J.L. Kellogg Graduate School of Management, Northwestern University in 1982.

Dr. Grebow
joined Cephalon in January 1991 and served as Senior Vice President, Business Development prior to holding his current position as Senior Vice President,
Worldwide Technical Operations. From 1988 to 1990, Dr. Grebow served as Vice President of Drug Development for Rorer Central Research, a division of Rhone-Poulenc Rorer
Pharmaceuticals Inc., a pharmaceutical company. Dr. Grebow received a Ph.D. in chemistry from the University of California, Santa Barbara.

Mr. Osborn
joined Cephalon in March 1997 and was appointed Senior Vice President, General Counsel and Secretary in December 1998. From 1992 to 1997,
Mr. Osborn was employed by The DuPont Merck Pharmaceutical Company, last as Vice President & Associate General Counsel. Prior to that, he served in the George H.W. Bush administration with the
U.S. Department of State, practiced corporate law with Hale and Dorr in Boston, and clerked for a U.S. Court of Appeals judge. Mr. Osborn earned a law degree from the University of Virginia and
a masters degree in international studies from The Johns
Hopkins University. He holds a visiting appointment in politics at Princeton University, and has been elected to membership in the American Law Institute and the Council on Foreign Relations.

Mr. Roche
joined Cephalon in January 1995 and has served as Senior Vice President, Pharmaceutical Operations since November 2000. Prior to that, he was appointed to
Senior Vice President of Sales and Marketing in June 1999 and prior to that as Vice President, Sales and Marketing. Previously, Mr. Roche was Director and Vice President, Worldwide
Strategic Product Development, for SmithKline Beecham's central nervous system and gastrointestinal products business, and held senior marketing and management positions with that company in the
Philippines, Canada and Spain. Mr. Roche graduated from Colgate University and received a master of business administration degree from The Wharton School, University of Pennsylvania.

Mr. Savini
joined Cephalon in June 1993 and has served as Senior Vice President, Human Resources since January 2000. Prior to that he served as Director, Human
Resources and was appointed Vice President, Human Resources in January 1995. From 1983 to 1993, Mr. Savini was employed by Bristol-Myers Squibb Company and from 1981 to 1983 he was
employed by Johnson & Johnson's McNeil Pharmaceuticals. Mr. Savini graduated from The Pennsylvania State University and received a master of business administration degree from La Salle
College.

Dr. Vaught
has been responsible for Cephalon's research operations since joining the Company in August 1991, and currently serves as Senior Vice President and President,
Research and Development. Prior to joining Cephalon, Dr. Vaught was employed by the R. W. Johnson Pharmaceutical Research Institute, a subsidiary of Johnson & Johnson. Dr. Vaught
received a Ph.D. in pharmacology from the University of Minnesota.

25

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PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our common stock is quoted on the NASDAQ National Market under the symbol "CEPH." The following table sets forth the range of high and low sale prices for the
common stock as reported on the NASDAQ National Market for the periods indicated below.

|     |                | High |   | Low  
|---- | -------------- | ---- | - | -----
|2002 |                |      |   |      
|     | First Quarter  |      | $ | 78.88
|     | Second Quarter |      |   | 66.97
|     | Third Quarter  |      |   | 49.00
|     | Fourth Quarter |      |   | 59.20
|2003 |                |      |   |      
|     | First Quarter  |      | $ | 54.95
|     | Second Quarter |      |   | 48.70
|     | Third Quarter  |      |   | 50.71
|     | Fourth Quarter |      |   | 49.46

As
of March 8, 2004 there were 590 holders of record of our common stock. On March 8, 2004, the last reported sale price of our common stock as reported on
the NASDAQ National Market was $58.85 per share.

We
have not paid any dividends on our common stock since our inception and do not anticipate paying any dividends on our common stock in the foreseeable future.

ITEM 6.    SELECTED FINANCIAL DATA

In October 2000, we completed a merger with Anesta Corp. under which we acquired all of the outstanding shares of Anesta in a tax-free,
stock-for-stock transaction. The merger has been accounted for as a pooling-of-interests and, accordingly, all of our prior period consolidated
financial statements have been restated to include the results of operations, financial position, and cash flows of Anesta. Information concerning common stock and per share data has been restated on
an equivalent share basis.

On
December 28, 2001, we completed the acquisition of the outstanding shares of capital stock of Group Lafon. This acquisition has been accounted for as a purchase and,
accordingly, the estimated fair value of assets acquired and liabilities assumed has been recorded as of the date of the acquisition.

|                                                                           |  | Year Ended December 31, |        
|-------------------------------------------------------------------------- |  | ----------------------- | -------
|
|
|Sales                                                                      |  | $                       | 685,250
|Other revenues                                                             |  |                         | 29,557 
|                                                                           |  |                         |        
|Total revenues                                                             |  |                         | 714,807
|Acquired in-process research and development                               |  |                         |       
|Debt exchange expense                                                      |  |                         |       
|Income tax (expense) benefit, net                                          |  |                         | (46,456
|Income (loss) before cumulative effect of a change in accounting principle |  | $                       | 83,858 
|Cumulative effect of a change in accounting principle                      |  |                         |       
|                                                                           |  |                         |        
|Net income (loss)                                                          |  |                         | 83,858 
|Dividends on convertible exchangeable preferred stock                      |  |                         |       
|                                                                           |  |                         |        
|Net income (loss) applicable to common shares                              |  | $                       | 83,858 
|                                                                           |  |                         |        

26

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|Basic income (loss) per common share:                                      |  |   |        |  |   |        |   |   |        |   |   |        |   |   |        |  
|-------------------------------------------------------------------------- |  | - | ------ |  | - | ------ | - | - | ------ | - | - | ------ | - | - | ------ | -
|Income (loss) before cumulative effect of a change in accounting principle |  | $ | 1.51   |  | $ | 3.17   |   | $ | (1.27  | ) | $ | (2.51  | ) | $ | (2.31  | )
|Cumulative effect of a change in accounting principle                      |  |   |       |  |   | (.06   | ) |   |       |   |   | (.19   | ) |   |       |  
|                                                                           |  |   |        |  |   |        |   |   |        |   |  
|                                                                           |  | $ | 1.51   |  | $ | 3.11   |   | $ | (1.27  | ) | $ | (2.70  | ) | $ | (2.31  | )
|                                                                           |  |   |        |  |   |        |   |   |        |   |  
|Diluted income (loss) per common share:                                    |  |   |        |  |   |        |   |   |        |   |   |        |   |   |        |  
|Income (loss) before cumulative effect of a change in accounting principle |  | $ | 1.44   |  | $ | 2.84   |   | $ | (1.27  | ) | $ | (2.51  | ) | $ | (2.31  | )
|Cumulative effect of a change in accounting principle                      |  |   |       |  |   | (.05   | ) |   |       |   |   | (.19   | ) |   |       |  
|                                                                           |  |   |        |  |   |        |   |   |        |   |  
|                                                                           |  | $ | 1.44   |  | $ | 2.79   |   | $ | (1.27  | ) | $ | (2.70  | ) | $ | (2.31  | )
|                                                                           |  |   |        |  |   |        |   |   |        |   |  
|Weighted average number of shares outstanding                              |  |   | 55,560 |  |   | 55,104 |   |   | 48,292 |   |   | 40,893 |   |   | 35,887 |  
|                                                                           |  |   |        |  |   |        |   |   |        |   |  
|Weighted average number of shares outstandingassuming dilution            |  |   | 64,072 |  |   | 67,442 |   |   | 48,292 |   |   | 40,893 |   |   | 35,887 |  
|                                                                           |  |   |        |  |   |        |   |   |        |   |  

|                                       |  | As of December 31, |          
|-------------------------------------- |  | ------------------ | ---------
|
|
|Cash, cash equivalents and investments |  | $                  | 1,155,163
|Total assets                           |  |                    | 2,381,656
|Long-term debt                         |  |                    | 1,409,417
|Accumulated deficit                    |  |                    | (321,305 
|Stockholders' equity                   |  |                    | 770,370  

Pro Forma Results

The following data represents pro forma financial results assuming a retroactive adoption of a change in accounting principle. Effective January 1, 2000,
we adopted the SEC's Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements."

|                                                      |  | Year Ended December 31, |         
|----------------------------------------------------- |  | ----------------------- | --------
|
|
|Total revenues                                        |  | $                       | 111,790 
|Net loss                                              |  | $                       | (93,744 
|Dividends on convertible exchangeable preferred stock |  |                         | (9,063  
|                                                      |  |                         |         
|Loss applicable to common shares                      |  | $                       | (102,807
|                                                      |  |                         |         
|Basic and diluted loss per common share               |  | $                       | (2.51   
|Weighted average number of shares outstanding         |  |                         | 40,893  

27

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ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our audited financial statements, including the related notes, presented in
this Annual Report on Form 10-K.

EXECUTIVE SUMMARY

Cephalon is an international biopharmaceutical company dedicated to the discovery, development and marketing of innovative products to treat sleep disorders,
neurological disorders, cancer and pain. In addition to conducting an active research and development program, we market three products in the United States and numerous products in various countries
throughout Europe. Our three biggest products in terms of product sales, PROVIGIL, ACTIQ and GABITRIL, comprised approximately 86% of our worldwide net sales for the year ended December 31,
2003. We market PROVIGIL, ACTIQ and GABITRIL in the United States through our approximately 500-person sales force.

Our
corporate and research and development headquarters are in West Chester, Pennsylvania, and we have offices in Salt Lake City, Utah, France, the United Kingdom, Germany and
Switzerland. We operate manufacturing facilities in France for the production of modafinil, which is the active drug substance in PROVIGIL, and Salt Lake City, Utah, for the production of ACTIQ for
worldwide distribution and sale.

On
November 3, 2003, we entered into an Agreement and Plan of Merger with CIMA LABS INC. (CIMA). Pursuant to this agreement, we will acquire CIMA, and each outstanding
share of CIMA common stock will be converted into the right to receive $34.00 per share in cash. The total value of the transaction is approximately $405 million, net of CIMA's cash and cash
equivalents as of December 31, 2003. The completion of the transaction is subject to several conditions, including the
approval of the merger by the stockholders of CIMA and the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR
Act). On January 23, 2004, we announced that we had received a request for additional information from the Federal Trade Commission as part of its review of the transaction under the HSR Act.
This request extends the waiting period under the HSR Act during which the FTC is permitted to review the proposed transaction. We expect the merger will be completed in the second quarter of 2004. As
part of our business strategy in the future, we expect to consider and, as appropriate, consummate acquisitions of other technologies, products and businesses.

Our
future success is highly dependent on obtaining and maintaining patent protection for our products and technology. With respect to PROVIGIL, we have filed a patent infringement suit
against four generic companies. Depending on the results of this litigation, we could face generic competition as early as December 2005. For ACTIQ, the patents covering the previous and
current formulations are set to expire as early as May 2005 and September 2006, respectively. The loss of patent protection on any of our existing products, whether by third-party
challenge, invalidation or circumvention or by patent expiration, would materially impact our results of operations.

Over
the past few years, we have pursued a strategy of both broadening the range of clinical uses that are approved by regulatory authorities and seeking new and improved formulations of
our currently marketed products. Our efforts resulted in FDA approval in January 2004 of an expanded label for PROVIGIL and will continue in 2004 as we conduct Phase 3 clinical trials of
PROVIGIL in ADHD and NUVIGIL in narcolepsy, OSA/HS and SWSD and Phase 2 studies of GABITRIL in Generalized Anxiety Disorder, Post-Traumatic Stress Disorder and insomnia. We also expect to
initiate in 2004 clinical development of a sugar-free formulation of ACTIQ.

We
also have devoted significant resources to the development of therapeutics to treat neurological and oncological disorders. In the neurology area, we have a program with a molecule,
CEP-1347, that has entered into an 800-patient Phase 2/3 clinical trial for the treatment of patients with early stage Parkinson's disease. In the cancer area, we have a
program with a molecule, CEP-701, and are currently enrolling patients for Phase 2 clinical trials in patients suffering from prostate cancer and acute myeloid

28

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leukemia
(AML) and a Phase 1 program with another molecule, CEP-7055, to evaluate safety and tolerability in patients with treatment refractory tumors. In the pharmaceutical industry, the
regulatory approval for the sale of new pharmaceutical products remains highly uncertain because the majority of therapeutic candidates fail to show the human safety and efficacy necessary for
regulatory approval and successful commercialization. In addition, these efforts require substantial time, effort and financial resources. Our success in developing and commercializing these product
candidates, or new or improved formulations of existing products, will be a significant factor in our future success.

We
have significant levels of indebtedness outstanding, the majority of which consists of convertible notes with stated conversion prices or restricted conversion prices higher than our
stock price as of the
date of this filing. Of our outstanding convertible notes, $600.0 million matures in 2006. The rate of our future growth and our ability to generate sufficient cash flows from operations
necessary to service and repay our indebtedness ultimately will depend, in large part, on our ability to maintain patent protection on our existing products and successfully acquire or develop new
products.

RESULTS OF OPERATIONS

Year ended December 31, 2003 compared to year ended December 31, 2002

|                     |          | For the year ended
December 31, |         |         |   |         |        
|-------------------- | -------- | ------------------------------- | ------- | ------- | - | ------- | -------
|
|
|Sales:               |          |                                 |         |         |   |         |        
|                     | PROVIGIL |                                 | $       | 290,465 |   | $       | 207,204
|                     | ACTIQ    |                                 |         | 237,467 |   |         | 126,725
|                     | GABITRIL |                                 |         | 63,699  |   |         | 48,760 
|                     | Other    |                                 |         | 93,619  |   |         | 83,254 
|                     |          |                                 |         |         |   |         |        
|Total sales          |          |                                 | 685,250 |         |   | 465,943 |        
|Total other revenues |          |                                 | 29,557  |         |   | 40,954  |        
|                     |          |                                 |         |         |   |         |        
|Total revenues       |          | $                               | 714,807 |         | $ | 506,897 |        
|                     |          |                                 |         |         |   |         |        

---

RevenuesTotal sales in 2003 increased 47% over total sales in 2002. The increase is attributable to a number of factors
including:



29

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Total
other revenues in 2003 and 2002 is mainly comprised of revenue recognized under collaborative agreements. The decrease of 28% from period to period is primarily due to lower
clinical research-related expenditures on our CEP-7055 program combined with a decrease in the contractually stated reimbursement rate, partially offset by increased expenditures on our
CEP-1347 program. The level of other revenue recognized from period to period may continue to fluctuate based on the status and activity of each related project and terms of each
collaboration agreement. Therefore, past levels of other revenues may not be indicative of future levels.

|                    |                                     | For the year ended
December 31, |         |         |   |         |        
|------------------- | ----------------------------------- | ------------------------------- | ------- | ------- | - | ------- | -------
|
|
|Costs and expenses: |                                     |                                 |         |         |   |         |        
|                    | Cost of sales                       |                                 | $       | 92,375  |   | $       | 74,237 
|                    | Research and development            |                                 |         | 170,277 |   |         | 128,276
|                    | Selling, general and administrative |                                 |         | 252,033 |   |         | 172,782
|                    | Depreciation and amortization       |                                 |         | 44,073  |   |         | 35,457 
|                    |                                     |                                 |         |         |   |         |        
|                    |                                     | $                               | 558,758 |         | $ | 410,752 |        
|                    |                                     |                                 |         |         |   |         |        

Cost of SalesThe cost of sales was approximately 13% of net sales for 2003 and 16% of net sales for 2002. The decrease is due
to cost savings realized from our transfer of U.S. ACTIQ manufacturing from Abbott Laboratories to our Salt Lake City facility beginning in June 2003 and to higher than normal GABITRIL
inventory costs recorded in 2002 associated with our acquisition of GABITRIL product rights in territories other than the United States.

Research and Development ExpensesResearch and development expenses increased $42.0 million, or 33%, in 2003 as
compared to 2002. Approximately $34.9 million of this increase is due to costs associated with (1) additional clinical studies conducted in 2003 to explore the utility of GABITRIL beyond
its current indication, (2) increased expenditures associated with the ongoing Phase 2/3 study of CEP-1347 in Parkinson's Disease, and (3) costs incurred with Phase 1 and
Phase 3 studies of NUVIGIL. Research and development expenses incurred by our Cephalon France subsidiary increased $3.8 million primarily as a result of the strengthening of the Euro as
compared to the U.S. dollar. Additionally, in 2003, we recorded a $2.0 million charge relating to the write-off as R&D expense of the value of an investment in an unaffiliated
entity. These increases were partially offset by a decrease in expenditures in 2003 primarily associated with the conclusion of clinical studies of PROVIGIL in shift work sleep disorder and adult
attention deficit/hyperactivity disorder of $6.6 million and by a

30

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decrease
in expenditures of $6.3 million related predominantly to producing clinical supplies in 2002 for our Phase 1 studies of CEP-7055 in collaboration with
Sanofi-Synthélabo.

Selling, General and Administrative ExpensesSelling, general and administrative expenses increased $79.3 million, or
46%, in 2003 as compared to 2002. Sales and marketing costs increased $65.3 million in the U.S. as a result of the expansion of our field sales forces, additional product promotional expenses
and an increased number of medical education programs.

Depreciation and Amortization ExpensesDepreciation and amortization expenses increased by $8.6 million, or 24%, in
2003 as compared to 2002, of which $3.5 million is attributable to amortization in 2003 associated with the October 2002 acquisition of ACTIQ marketing rights in certain countries.
Depreciation expenses increased by $2.1 million in 2003, in part, as a result of increased capital spending on capitalized software and building improvements at our West Chester location.
Additionally, during 2003, the estimated useful life of certain building improvements was changed from 40 years to 15 years, resulting in an increase of $1.1 million in
depreciation expense.

For the year endedDecember 31,% Change2003

2002

ChangeOther income and (expense):Interest income

$
11,298

$
14,095

$
(2,797
)
(20
)%Interest expense


(28,905
)

(38,215
)

9,310

24Charge on early extinguishment of debt


(9,816
)

(7,142
)

(2,674
)
(37
)Other income (expense), net


1,688


(2,450
)

4,138

169$
(25,735
)
$
(33,712
)
$
7,977

24
%


Other Income and ExpenseTotal other expenses, net, decreased $8.0 million, or 24%, in 2003 from 2002 due to:



31

---







For the year endedDecember 31,% Change2003

2002

ChangeIncome tax (expense) benefit, net

$
(46,456
)
$
112,629

$
(159,085
)
(141
)%Cumulative effect of a change in accounting principle





(3,534
)

3,534

100
%


Income Tax (Expense) Benefit, NetWe recognized $46.5 million of income tax expense in 2003 based on an
overall estimated annual effective tax rate of approximately 36%. This includes $0.4 million of additional valuation allowance attributable to deferred tax assets that are unlikely to be
realized. In 2002, we recorded a net income tax benefit of $112.6 million. This benefit was partially offset by income tax expense primarily associated with Group Lafon. In light of our
expectations for continued profitability, during the fourth quarter of 2002, we concluded that it was probable that we would realize a portion of the deferred tax assets related to the benefit of
accumulated international, federal and state net operating losses, and federal research and development credits. We reduced the valuation allowance against certain of these deferred tax assets
accordingly. In 2003, the valuation allowance increased in total by $3.9 million. The increase is primarily attributable to an increase of $8.2 million for state net operating losses
that we believe are unlikely to be realized in the future, partially offset by a decrease in the valuation allowances for federal R&D credits that we now expect will be realized due to our increasing
profits.

Cumulative Effect of Changing Inventory Costing Method from FIFO to LIFOEffective January 1, 2002, we changed our
method of valuing domestic inventories from the first-in, first-out, or FIFO method, to the last-in, first-out, or LIFO method. We recognized a charge
of $3.5 million in the first quarter of 2002 as the cumulative effect of adopting the LIFO inventory costing method.

32

---

Year ended December 31, 2002 compared to year ended December 31, 2001

For the year endedDecember 31,% Change2002 *

2001

ChangeSales:PROVIGIL

$
207,204

$
150,305

$
56,899

38
%ACTIQ


126,725


51,197


75,528

148GABITRIL


48,760


24,630


24,130

98Other


83,254





83,254

Total sales


465,943


226,132


239,811

106Total other revenues


40,954


35,863


5,091

14Total revenues

$
506,897

$
261,995

$
244,902

93
%


---

RevenuesTotal sales in 2002 increased 106% over 2001. The increase was attributable to a number of factors
including:



Amounts
recorded as other revenues consisted primarily of amortization of up-front fees, ongoing research and development funding, milestone payments and certain payments
under co-promotional or managed services agreements. Total other revenues increased 14% from year to year. The increase was

33

---

predominantly
a result of the recognition of a full year of revenue recorded in 2002 under our collaboration agreement with Sanofi-Synthelabo which became effective in the fourth quarter of 2001.

For the year endedDecember 31,% Change2002

2001

ChangeCosts and expenses:Cost of sales

$
74,237

$
44,946

$
29,291

65
%Research and development


128,276


83,037


45,239

54Selling, general and administrative


172,782


96,179


76,603

80Depreciation and amortization


35,457


14,434


21,023

146Merger and integration





50


(50
)
(100
)Acquired in-process research and development





20,000


(20,000
)
(100
)$
410,752

$
258,646

$
152,106

59
%


Cost of SalesThe cost of sales in 2002 decreased to 16% of product sales from 20% in 2001, principally due to the improvement
in PROVIGIL margins as a result of our acquisition of Group Lafon.

Research and Development ExpensesResearch and development expenses increased 54% to $128.3 million for 2002 from
$83.0 million for 2001. $19.8 million of the increase was the result of research and development expenses incurred at Group Lafon during 2002 for which there are no comparable amounts in
2001. Approximately $15.6 million of this increase was due to higher expenditures on our clinical trials, including Phase 2/3 clinical studies for CEP-1347, studies related to our
efforts to expand the label for PROVIGIL and to explore the utility of GABITRIL beyond their respective indications, and increased infrastructure costs to support the growing number of ongoing
clinical trials. Approximately $8.0 million of the increase was attributable to expenditures on development costs for compounds that progressed into later stages of development.

Selling, General and Administrative ExpensesSelling, general and administrative expenses increased 80% to
$172.8 million for 2002 from $96.2 million for 2001, primarily as a result of $38.8 million of Group Lafon expenses for which there were no comparable amounts in 2001, and
$21.4 million associated with the expansion of both our U.S. field sales force and promotional expenses for our products.

Depreciation and Amortization ExpensesDepreciation and amortization expenses increased to $35.5 million during 2002
from $14.4 million during 2001, of which $11.0 million was attributable to amortization of intangible assets acquired in our acquisition of Group Lafon and $4.8 million was
attributable to depreciation for property and equipment acquired from Group Lafon and depreciation from capitalized building improvements at our West Chester and Salt Lake City locations. The
remainder of the increase was due to amortization expense associated with the capitalization of various payments in 2002 for additional PROVIGIL, ACTIQ and GABITRIL product rights.

Acquired In-Process Research and DevelopmentIn connection with our acquisition of Group Lafon in
December 2001, we acquired the rights to certain early stage technologies. Based on an independent appraisal of the assets acquired from Group Lafon, the fair value of these technologies of
$20.0 million was recorded as acquired in-process research and development expense in 2001 because, at the date of the acquisition, the technologies acquired had not progressed to a
stage where they met technological feasibility and there existed a significant amount of uncertainty as to our ability to complete the development of the technologies and achieve market acceptance
within a reasonable timeframe. In

34

---

addition,
the acquired in-process technologies did not have an alternative future use to us that had reached technological feasibility.

For the year endedDecember 31,% Change2002

2001

ChangeOther income and (expense):Interest income

$
14,095

$
12,170

$
1,925

16
%Interest expense


(38,215
)

(20,630
)

(17,585
)
(85
)Debt exchange expense





(52,444
)

52,444

100Gain (charge) on early extinguishment of debt


(7,142
)

3,016


(10,158
)
(337
)Other expense, net


(2,450
)

(945
)

(1,505
)
(159
)$
(33,712
)
$
(58,833
)
$
25,121

43
%


Other Income and ExpenseTotal other expenses, net, decreased $25.1 million, or 43%, in 2002 from 2001 due to:



35

---



For the year endedDecember 31,2002

2001

Change

% ChangeIncome tax benefit, net

$
112,629

$


$
112,629


%Cumulative effect of a change in accounting principle


(3,534
)




(3,534
)
Dividends on convertible exchangeable preferred stock

$


$
(5,664
)
$
5,664

100
%


Income Tax Benefit, NetWe recorded a net income tax benefit of $112.6 million in 2002. In light of our expectations
for continued profitability, we concluded that it was more likely than not that we would realize a portion of the benefit of the accumulated international, federal and state net operating losses, and
federal research and development credits. We reduced the valuation allowance against these deferred tax assets accordingly. The recognition of these deferred tax assets had no impact on our 2002 cash
flows. This income tax benefit was partially offset by income tax expense primarily associated with our Group Lafon operations.

Cumulative Effect of Changing Inventory Costing Method from FIFO to LIFOEffective January 1, 2002, we changed our
method of valuing domestic inventories from the first-in, first-out, or FIFO method, to the last-in, first-out, or LIFO method. We recognized a charge
of $3.5 million in the first quarter of 2002 as the cumulative effect of adopting the LIFO inventory costing method. The acquisition of Group Lafon's manufacturing operations and the planned
expansion of our internal manufacturing capacity for ACTIQ reduced our reliance on third party manufacturers and allowed us to benefit from efficiencies of scale and corresponding lower per unit
inventory costs. The LIFO method reflects these changes to manufacturing costs on the statement of operations on a more timely basis, resulting in a better matching of current costs of products sold
with product revenues. Cost of product sales under
the lifo inventory costing method was $17.9 million lower in 2002 than it would have been under the FIFO method.

Dividends on Convertible Exchangeable Preferred StockDuring 1999, we sold 2,500,000 shares of convertible exchangeable
preferred stock. As of December 31, 2001, all outstanding preferred shares had converted into shares of our common stock and, therefore, no dividends were recorded in 2002.

LIQUIDITY AND CAPITAL RESOURCES

Cash, cash equivalents and investments at December 31, 2003 were $1.2 billion, representing 49% of total assets, up from $582.7 million, or
34% of total assets, at December 31, 2002. A large portion of the increase of $572.5 million was due to net proceeds of $646.8 million received from the sale in June 2003
of zero coupon convertible subordinated notes and the related sale of warrants and purchase of hedge options, partially offset by the retirement of $195.0 million in convertible subordinated
notes.

Working
capital, which is calculated as current assets less current liabilities, was $1.2 billion at December 31, 2003 compared to $666.3 million at
December 31, 2002.

Net Cash Provided by Operating Activities

Net cash provided by operating activities was $200.2 million for the year ended December 31, 2003 as compared to $102.6 million for 2002. The
increase in cash provided by operating activities was due primarily to higher income from operations in 2003 as a result of our increased sales.

36

---

Net Cash Used for Investing Activities

Net cash used for investing activities was $17.6 million for the year ended December 31, 2003 as compared to $145.8 million for 2002.
Significant acquisitions of intangible assets in 2002 included a payment of $50.0 million for the October 2002 acquisition of ACTIQ marketing rights in certain countries from Elan and a
payment of $10.0 million to Abbott pursuant to the extension of the GABITRIL composition of matter patent. During 2003 we had net reductions to our investment portfolio of $55.8 million
as compared to net additions of $39.0 million in 2002. Our investment approach during 2003 has been to maintain liquidity in order to expediently access our funds for any potential mergers and
acquisitions. During 2003, we purchased non-marketable securities totaling $33 million, including securities of MDS Proteomics Inc., a privately-held Canadian
company. We made capital expenditures of $40.5 million in 2003 and $27.3 million in 2002. These expenditures were primarily for facilities improvements at our West Chester, Salt Lake
City and France locations to accommodate our growth and also for manufacturing equipment at our Salt Lake City location for the production of ACTIQ for the U.S. and European markets.

Net Cash Provided by (Used for) Financing Activities

Net cash provided by financing activities was $437.9 million for the year ended December 31, 2003, as compared to net cash used for financing
activities of $28.9 million in 2002. The change is primarily the result of net proceeds of $727.1 million received from the sale of zero coupon convertible subordinated notes partially
offset by the retirement of $195.0 million in convertible subordinated notes. Concurrent with the sale of the zero coupon notes, we purchased a Convertible Note Hedge for $258.6 million
and sold warrants for $178.3 million.

Commitments and Contingencies

Legal Proceedings

On
March 28, 2003, we filed a patent infringement lawsuit in U.S. District Court in New Jersey against Teva Pharmaceuticals USA, Inc., Mylan Pharmaceuticals Inc.,
Ranbaxy Pharmaceuticals Inc., and Barr
Laboratories, Inc. based upon the ANDAs filed by each of these companies seeking FDA approval for a generic version of modafinil. The lawsuit claims infringement of our U.S. Patent No. RE37516,
which covers pharmaceutical compositions and methods of treatment with the form of modafinil contained in PROVIGIL. We intend to vigorously defend the validity, and prevent infringement, of this
patent. This litigation is currently in the discovery phase and we expect that the trial will begin sometime in 2005.

We
are a party to certain other litigation in the ordinary course of our business, including, among others, U.S. patent interference proceedings, European patent oppositions, and matters
alleging employment discrimination, product liability and breach of commercial contract. We are vigorously defending ourselves in all of the actions against us and do not believe these matters, even
if adversely adjudicated or settled, would have a material adverse effect on our financial condition, results of operations or cash flows.

Cephalon Clinical Partners, L.P.

In
August 1992, we exclusively licensed our rights to MYOTROPHIN for human therapeutic use within the United States, Canada and Europe to Cephalon Clinical Partners, L.P. (CCP). A
subsidiary of Cephalon is the sole general partner of CCP. We developed MYOTROPHIN on behalf of CCP under a research and development agreement. Under this agreement, CCP granted an exclusive license
to us to manufacture and market MYOTROPHIN for human therapeutic use within the United States, Canada and Europe, and we agreed to make royalty payments equal to a percentage of product sales and a
milestone payment of approximately $16.0 million upon regulatory approval. We have a

37

---

contractual
option, but not an obligation, to purchase all of the limited partnership interests of CCP, which is exercisable upon the occurrence of certain events following the first commercial sale
of MYOTROPHIN. If, and only if, we decide to exercise this purchase option, we would make an advance payment of approximately $40.3 million in cash or, at our election, approximately
$42.4 million in shares of common stock or a combination thereof. If we discontinue development of MYOTROPHIN, or if we do not exercise this purchase option, our license will terminate and all
rights to manufacture or market MYOTROPHIN in the United States, Canada and Europe will revert to CCP, which may then commercialize MYOTROPHIN itself or license or assign its rights to a third party.
In that event, we would not receive any benefits from such commercialization, license or assignment of rights.

In
January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest Entities." Subsequently, in December 2003, the FASB issued a revised version of FIN
46 (FIN 46R). FIN 46 and FIN 46R require a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's
activities or entitled to receive a majority of the entity's residual returns or both. FIN 46 and FIN 46R also require disclosures about variable interest entities that a company is not required to
consolidate but in which it has a significant variable interest. The consolidation requirements of FIN 46 and FIN 46R apply immediately to variable interest entities created after January 31,
2003 and to existing special purpose entities in the first fiscal year or interim period ending after December 15, 2003. For all other entities, the requirements of FIN
46 and FIN 46R apply in the first period ending after March 15, 2004. As a result of the adoption of the standards, CCP has been consolidated in our financial statements at December 31,
2003. This consolidation did not have a material impact on our financial statements.



Under the terms of certain of our lease agreements, we must maintain a minimum balance in unrestricted cash and investments of $30.0 million or deliver to
the lessor an irrevocable letter of credit in the amount of the then outstanding balance under such leases. As of December 31, 2003, the amount due under such leases was $1.2 million.



The following table summarizes our obligations to make future payments under current contracts (in thousands):

|                                             |  | Payments due by period
|-------------------------------------------- |  | ----------------------
|
|Other long-term debt                         |  | $                     
|Capital lease obligations                    |  |                       
|Operating leases                             |  |                       
|Convertible notes                            |  |                       
|Other long-term liabilities on balance sheet |  |                       
|                                             |  |                       
|Total contractual cash obligations           |  | $                     
|                                             |  |                       

In
addition to the above, we have committed to make potential future "milestone" payments to third parties as part of our in-licensing and development programs. Payments
under these agreements generally become due and payable only upon the achievement of certain developmental, regulatory and/or commercial milestones. Because the achievement of these milestones is
neither probable nor reasonably estimable, we have not recorded a liability on our balance sheet for any such contingencies. We also have agreed to acquire CIMA LABS, subject to the satisfaction of
certain closing conditions, for a net transaction value of approximately $405 million. See "Outlook" below.

38

---

Outlook

Cash, cash equivalents and investments at December 31, 2003 were $1.2 billion. We expect to use our remaining cash, cash equivalents and investments
for working capital and general corporate purposes, including the acquisition of businesses, products, product rights, or technologies, the payment of contractual obligations, including scheduled
interest payments on our convertible notes, and/or the purchase, redemption or retirement of our convertible notes. Prior to 2001, we had negative cash flows from operations and used the proceeds of
public and private placements of our equity and debt securities to fund operations. At this time, we cannot accurately predict the effect of certain developments on the rate of sales growth in 2005
and beyond, such as the degree of market acceptance and exclusivity of our products, competition, the effectiveness of our sales and marketing efforts and the outcome of our current efforts to
demonstrate the utility of our products in indications beyond those already included in the FDA approved labels. However, we expect that sales of our three most significant marketed products,
PROVIGIL, ACTIQ and GABITRIL, in combination with other revenues, should allow us to continue to generate profits and positive cash flows from operations in the near term.

Analysis
of prescription data for PROVIGIL in the United States indicates physicians have elected to prescribe the product to treat a number of indications outside of its currently
labeled indication of excessive daytime sleepiness associated with narcolepsy. Our strategy for PROVIGIL is to broaden the range of clinical uses that are approved by the FDA and European regulatory
agencies to include many of its currently prescribed uses. In January 2004, we received approval from the FDA to expand the label for PROVIGIL to include improving wakefulness in patients with
excessive sleepiness associated with SWSD and OSA/HS. In the first quarter of 2004, we launched PROVIGIL for these new indications with an expanded sales force of nearly 500 persons. We expect the
addition of these new indications, coupled with a larger sales force, to have a meaningful and positive impact on PROVIGIL sales in 2004.

Continued
sales growth of PROVIGIL beyond the December 2005 expiration of orphan drug exclusivity depends, in part, on our maintaining protection on the modafinil
particle-size patent through its expiration beginning in 2014. If we perform an additional clinical study of PROVIGIL in pediatric patients that is agreeable to the FDA, the FDA could
grant us a six-month extension of our orphan drug exclusivity (to June 2006) and six months of exclusivity beyond the 2014 expiration of the particle-size patent term.
We intend to perform such a study when we reach an agreement with the FDA.

On
March 28, 2003, we filed a patent infringement lawsuit in U.S. District Court in New Jersey against Teva Pharmaceuticals USA, Inc., Mylan Pharmaceuticals Inc.,
Ranbaxy Pharmaceuticals Inc., and Barr Laboratories, Inc. based upon the ANDAs filed by each of these companies seeking FDA approval for a generic equivalent of modafinil. The lawsuit
claims infringement of our U.S. Patent No. RE37516, which covers the pharmaceutical compositions and uses of modafinil. This litigation is currently in the discovery phase and we expect that the trial
will begin sometime in 2005. While we intend to vigorously defend the validity, and prevent infringement, of this patent, these efforts will be both expensive and time consuming and, ultimately, may
not be successful. See "Certain Risks Related to Our Business." Our sales of ACTIQ also depend on our existing patent protection for the approved
compressed powder formulation, which expires in the U.S. in September 2006, and for the formulation of ACTIQ we sold prior to June 2003, which expires in May 2005. If we perform
an additional clinical study in pediatric patients that is agreeable to the FDA, the FDA could grant us six months of exclusivity beyond the expiration of these patents. We intend to perform such a
study once a mutually agreed upon clinical protocol is reached with the FDA.

We
expect to continue to incur significant expenditures associated with conducting additional clinical studies to explore the utility of these products in treating disorders beyond those
currently

39

---

approved
in their respective labels. With respect to PROVIGIL, we are currently enrolling patients into Phase 3 clinical programs in ADHD in children and have commenced a Phase 3 program for NUVIGIL,
the R-isomer of modafinil. With respect to GABITRIL, we have completed dose ranging studies in the therapeutic areas of anxiety, neuropathic pain and insomnia. In the second quarter of
2003, we initiated larger Phase 2 studies for GABITRIL in Generalized Anxiety Disorder and Post Traumatic Stress Disorder, which should be completed in the first half of 2004. Depending on the results
of these studies, we would expect to begin a Phase 3 program in one of these indications in the second half of 2004. In early 2004, we initiated an additional Phase 2 study of GABITRIL in insomnia. In
2004, we also expect to conduct studies of a sugar-free formulation of ACTIQ and to continue our Phase 2/3 studies of CEP-1347 for the treatment of Parkinson's Disease. In the
future, we expect to continue to incur significant expenditures to fund research and development activities, including clinical trials, for our other product candidates and for improved formulations
for our existing products. In the future, we may seek to mitigate the risk in our research and development programs by seeking sources of funding for a portion of these expenses through collaborative
arrangements with third parties. However, we intend to retain a portion of the commercial rights to these programs and, as a result, we still expect to spend significant funds on our share of the cost
of these programs, including the costs of research, preclinical development, clinical research and manufacturing.

We
also expect to incur significant expenditures in 2004 associated with manufacturing, selling and marketing our products. For example, in 2004 we expect to begin a nearly
$70 million capital expansion of our production facility in Salt Lake City that will be substantially complete by late 2006 and that will increase our ACTIQ capacity and provide us with
flexibility to manufacture other products at this facility. With respect to our sales and marketing efforts, we anticipate significantly higher expenditures in 2004 compared to 2003, primarily as a
result of the recent expansion of our sales force.

We
may have significant fluctuations in quarterly results based primarily on the level and timing of:



40

---



We
have significant indebtedness outstanding, consisting principally of indebtedness on convertible subordinated notes. The following table summarizes the principal terms of our
convertible subordinated notes outstanding as of December 31, 2003:

|Security                                                                 |  | Outstanding
(in millions) |       | Conversion
Price |   | Other  | 
|------------------------------------------------------------------------ |  | ------------------------- | ----- | ---------------- | - | ------ | 
|2.5% Convertible Subordinated Notes due December 2006                    |  | $                         | 600.0 |                  | $ | 81.00  | 
|3.875% Convertible Subordinated Notes due March 2007                     |  | $                         | 43.0  |                  | $ | 70.36  | 
|Zero Coupon Convertible Notes due June 2033, first putable June 15, 2008 |  | $                         | 375.0 |                  | $ | 59.50* | 
|Zero Coupon Convertible Notes due June 2033, first putable June 15, 2010 |  | $                         | 375.0 |                  | $ | 56.50* | 

---

The
annual interest payments on the $1,393.0 million of convertible notes outstanding as of December 31, 2003 are $16.7 million, payable at various
dates throughout the year. In the future, we may agree to exchanges of the notes for shares of our common stock or may determine to use a portion of our existing cash on hand to purchase, redeem or
retire all or a portion of the outstanding convertible notes. In January 2003, we entered into an interest rate swap agreement with a financial institution relating to our $600.0 million
2.5% convertible notes in the aggregate notional amount of $200.0 million. Under the swap, we agreed to pay a variable interest rate on this $200.0 million notional amount equal to
LIBOR-BBA + .29% in exchange for the financial institution's agreement to pay a fixed rate of 2.5%. The variable interest rate is re-calculated at the beginning
of each quarter. Effective January 1, 2004, the interest rate is 1.45%. We also agreed to provide the financial institution with cash collateral to support our obligations under the agreement.
The current collateral amount is $3.0 million and is recorded in Other Assets in our consolidated balance sheet.

As
part of our business strategy, we plan to consider and, as appropriate, make acquisitions of other businesses, products, product rights or technologies. On November 3, 2003, we
announced that we had signed a definitive agreement to acquire by merger all of the outstanding shares of CIMA

41

---

LABS INC.
for $34 cash per share. The total value of the transaction is approximately $405 million net of CIMA's cash and cash equivalents as of December 31, 2003, which we would
expect to fund from our existing cash, cash equivalents and investments. The merger is subject to certain closing conditions, including the approval of the merger agreement by the stockholders of CIMA
and the expiration or termination of the applicable waiting period under the HSR Act. On January 23, 2004, we received a request for additional information from the Federal Trade Commission
pertaining to the pending merger. This request extends the waiting period under the HSR Act during which the FTC is permitted to review the proposed transaction. If the HSR condition is not satisfied
and the transaction is not closed by June 30, 2004 (unless the parties mutually agree to an extension), we will be required to pay CIMA a break fee in the amount of $16.25 million.
Although we have sufficient cash and cash equivalents on hand to complete this transaction, in the future our cash reserves and other liquid assets may be inadequate to consummate future acquisitions
and it may be necessary for us to raise substantial additional funds to complete these transactions. In addition, as a result of our acquisition efforts, we are likely to experience significant
charges to earnings for merger and related expenses (whether or not our efforts are successful) that may include transaction costs, closure costs or acquired in-process research and
development charges.

In
February 2004, we filed with the SEC a $1.0 billion universal shelf registration statement covering the issuance and sale from time to time, of common and preferred
stock, debt securities and warrants. While we have no current plans to access the capital markets, the shelf registration statement would allow us to expediently access capital markets periodically in
the future.

Based
on our current level of operations and projected sales of our products combined with other revenues and interest income, we believe that we will be able to service our existing
debt and meet our capital expenditure and working capital requirements in the near term. However, we cannot be sure
that our anticipated revenue growth will be realized or that we will continue to generate significant positive cash flow from operations. We may need to obtain additional funding for future
significant strategic transactions, to repay our outstanding indebtedness or for our future operational needs, and we cannot be certain that funding will be available on terms acceptable to us, or at
all.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management's Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting
period. These estimates and assumptions are developed, and challenged periodically, by management based on historical experience and on various other factors that we believe are reasonable under the
circumstances. Actual results may differ from these estimates under different assumptions or conditions.

Our
significant accounting policies are described in Note 1 to the consolidated financial statements for the year ended December 31, 2003 included in Item 8 of this
Form 10-K. The SEC defines critical accounting policies as those that are, in management's view, most important to the portrayal of the company's financial condition and results of
operations and most demanding of their judgment. Management considers the following policies to be critical to an understanding of our consolidated financial statements and the uncertainties
associated with the complex judgments made by us that could impact our results of operations, financial position and cash flows.

Revenue recognitionIn the United States, we sell our products to pharmaceutical wholesalers, the largest three of which
account for approximately 82% of our current worldwide net sales. Decisions made by these wholesalers regarding the levels of inventories they hold can materially affect the level of our sales in any
period. We attempt to minimize these fluctuations, both by providing, from time to

42

---

time,
discounts to our customers to stock normal amounts of inventory and by canceling orders if we believe a particular customer is speculatively buying inventory in anticipation of possible price
increases. We have no agreements, understandings, or business practices under which we extend incentives based on levels of inventory held by wholesalers, and any incentives we may offer are not
intended to have any relation to the wholesaler's cost of carrying inventory. We believe that wholesaler inventories as of December 31, 2003 for all three of our products were within a normal
range. At December 31, 2003, inventory levels maintained by wholesalers and retail pharmacy chains were approximately one month's supply for all three of our U.S. products according to IMS
Health. Sales recorded for the year ended December 31, 2003 were generally representative of underlying demand for the products.

Product
sales are recognized upon the transfer of ownership and risk of loss for the product to the customer. In the United States, we sell all commercial products F.O.B. shipping point.
Transfer of ownership and risk of loss for the product pass to the customer at the point that the product is picked up by a common carrier for shipment to the customer. In Europe, product sales are
recognized predominantly upon customer receipt of the product, except in certain contractual arrangements where different terms may be specified. We record product sales net of estimated reserves for
contractual allowances, discounts and returns. Contractual allowances result from sales under contracts with managed care organizations and government agencies.

Other
revenue, which includes revenues from collaborative agreements, consists primarily of up-front fees, ongoing research and development funding, milestone payments and
payments under co-promotional or managed services agreements. Non-refundable up-front fees are deferred and amortized to revenue over the related performance
period. We estimate our performance period based on the specific terms of each collaborative agreement. We adjust the performance periods, if appropriate, based upon available facts and circumstances.
We recognize periodic payments over the period that we perform the related activities under the terms of the agreements. Revenue resulting from the achievement of milestone events stipulated in the
agreements is recognized when the milestone is achieved. Milestones are based upon the occurrence of a substantive element specified in the contract or as a measure of substantive progress towards
completion under the contract.

Payments
under co-promotional or managed services agreements are recognized over the period when the products are sold or the promotional activities are performed. The
portion of the payments that represent reimbursement of our expenses is recognized as an offset to those expenses in our results of operations.

InventoriesOur inventories are valued at the lower of cost or market, and include the cost of raw materials, labor, overhead
and shipping and handling costs. Cost is computed on domestic inventories using the last-in, first-out (LIFO) method. For the majority of our foreign inventories, the
first-in, first-out (FIFO) method is utilized. The majority of our inventories are subject to expiration dating. We regularly evaluate the carrying value of our inventories and
when, in our opinion, factors indicate that impairment has occurred, we establish a reserve against the inventories' carrying value. Our determination that a valuation reserve might be required, in
addition to the quantification of such reserve, requires us to utilize significant judgment. We base our analysis, in part, on the level of inventories on hand in relation to our estimated forecast of
product demand, production requirements over the next 12 months and the expiration dates of raw materials and finished goods. Although we make every effort to ensure the accuracy of forecasts
of future product demand, any significant unanticipated decreases in demand could have a material impact on the carrying value of our inventories and our reported operating results. To date, inventory
adjustments have not been material.

Valuation of Property and Equipment, Intangible Assets, Goodwill and InvestmentsOur property and equipment have been recorded
at cost and are being depreciated on a straight-line basis over the estimated useful life of those assets.

Our
intangible assets (which consist primarily of developed technology, trademarks, and product and marketing rights), are amortized over estimated useful lives which are intended to
approximate the

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estimated
pattern of economic benefits generated by the asset. Determining the "estimated pattern of economic benefit" for an intangible asset is a highly subjective and difficult assessment. To the
extent that the pattern cannot be reliably determined, a straight line amortization method has been used.

In
conjunction with acquisitions of businesses or product rights, we allocate the purchase price based upon the relative fair values of the assets acquired and liabilities assumed.
Goodwill represents the excess of purchase price over net assets acquired. In certain circumstances, fair value may be assigned to purchased in-process research and development and, as
such, expensed immediately.

We
regularly assess whether intangibles, long-lived assets and goodwill have been impaired and adjust the carrying values of these assets whenever events or changes in
circumstances indicate that some or all of the carrying value of the assets may not be recoverable. Our judgments regarding the existence of impairment indicators are based on legal factors, market
conditions and operating performances of our businesses and products. Future events could cause us to conclude that impairment indicators exist and that the carrying values of our property and
equipment, intangible assets or goodwill are impaired. Any resulting impairment loss could have a material adverse impact on our financial position and results of operations. If we determine that
events or changes in circumstances have occurred that could have a material adverse effect on the fair value of our company and its goodwill, we would consult with one or more valuation specialists in
estimating the impact of these on our estimate of fair value. We believe the estimation methods are reasonable and reflective of common valuation practices. No impairment losses on intangibles,
long-lived assets or goodwill have been recorded to date.

We
evaluate the recoverability and measure the possible impairment of our goodwill under Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets." The impairment test is a two-step process that begins with the estimation of the fair value of the reporting unit. The first step screens for potential impairment, and the second
step measures the amount of the impairment, if any. Our estimate of fair value considers publicly available information regarding the market capitalization of our company, as well as
(i) publicly available information regarding comparable publicly-traded companies in the pharmaceutical industry, (ii) the financial projections and future prospects of our business,
including our growth opportunities and likely operational improvements, and (iii) comparable sales prices, if available. As part of the first step to assess potential impairment, we compare our
estimate of fair value for the company to the book value of our consolidated net assets. If the book value of our consolidated net assets were greater than our estimate of fair value, we would then
proceed to the second step to measure the impairment, if any. The second step measures the amount of impairment by comparing the implied fair value of goodwill with its carrying value. The implied
fair value is determined by allocating the fair value of the reporting unit to all of the assets and liabilities of that unit as if the reporting unit had been acquired in a business combination, and
the fair value of the reporting unit was the purchase price paid to acquire the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to its
assets and liabilities is the implied fair value of goodwill. If the carrying amount of the reporting unit goodwill is greater than its implied fair value, an impairment loss will be recognized in the
amount of the excess.

We
performed our annual test of impairment of goodwill as of July 1, 2003. We have only one reporting unit, a pharmaceutical unit, that constitutes our entire business. We
compared the fair value of this reporting unit with its carrying value. The quoted market value of the outstanding shares of our common stock on the NASDAQ National Market at July 1, 2003 was
used as the fair value of the reporting unit. Since the fair value of the reporting unit exceeded its carrying value at July 1, 2003, no adjustment to our goodwill for impairment was necessary.

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We evaluate our investments in non-marketable securities of outside entities on a quarterly basis by reviewing key indicators of the entities' financial performance,
condition and outlook. We review the entities' most recent financial statements and discuss the entities' current and future financial and operational strategies with their senior management
personnel. We also discuss with our senior research and development personnel the current status of and future expectations for any collaborative agreements we have with those entities. Based on this
information, we make a determination as to whether any impairment in the carrying value of our investments exists. This determination is a highly subjective process that is based on the evaluation of
qualitative information and numerous assumptions as to future events. Nonetheless, we believe our evaluation process provides a reasonable basis for our determination. In 2003, we recorded a
$2.0 million charge relating to the write-off as R&D expense of the value of an investment in an unaffiliated entity. Any additional impairment loss on one or more of our
investments could have a material adverse impact on our financial position and results of operations.

Income taxesWe provide for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes," which requires
the recognition of deferred tax assets and liabilities for the expected tax consequences of temporary differences between the tax and financial reporting bases of assets and liabilities.

Prior
to 2002, we had a history of losses from our operations, which generated significant international, federal and state net operating loss carryforwards. We record a valuation
allowance against deferred tax assets if we believe that we are not likely to realize future tax benefits. Based on our profitability for the year ended December 31, 2002 and projected future
results, in the fourth quarter of 2002, we concluded that it was likely that we would be able to realize a significant portion of the deferred tax assets, and therefore, we reversed a significant
portion of the valuation allowance. As a result, beginning in 2003, we began providing for income taxes at a rate equal to our estimated annual combined federal, state and foreign statutory effective
rates. Subsequent adjustments to our estimates of our ability to recover the deferred tax assets or other changes in circumstances or estimates could cause our provision for income taxes to vary from
period to period. We also adjust our remaining valuation allowance periodically based on our evaluation of the ability to realize the future tax benefits of our deferred tax assets.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143, "Accounting for Asset Retirement Obligations," which requires
recognition of the fair value of liabilities associated with the retirement of long-lived assets when a legal obligation to incur such costs arises as a
result of the acquisition, construction, development and/or the normal operation of a long-lived asset. SFAS 143 requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount
of the long-lived asset and subsequently allocated to expense over the asset's useful life. We adopted SFAS 143 on January 1, 2003. The adoption of this new standard did not
impact our current financial statements.

In
April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
This Statement amends or rescinds certain existing authoritative pronouncements including SFAS No. 4, "Reporting Gains and Losses on Extinguishment of Debt," such that the provisions of
Accounting Principles Board Opinion (APB) No. 30 "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions" must now be followed to determine if the early extinguishment of debt should be classified as an extraordinary item. In addition, any gain or loss on extinguishment
of debt that was classified as an extraordinary item in prior periods that does not meet the criteria in APB 30 must be reclassified. SFAS 145 is

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effective
for fiscal years beginning after May 15, 2002. We adopted this new standard effective December 31, 2002 and reclassified all gains and losses on early extinguishment of debt as
other income and expense, rather than extraordinary items, in our current financial statements.

In
June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal Activities." This Statement addresses the recognition, measurement and reporting of costs that
are associated with exit and disposal activities, including restructuring activities that are currently accounted for pursuant to the guidance in Emerging Issues Task Force Issue
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The Statement
requires that costs associated with exit or disposal activities be recorded at their fair values when a liability has been incurred. SFAS 146 is effective for disposal activities initiated
after December 31, 2002. The adoption of this new standard did not impact our current financial statements.

In
December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure." SFAS 148 amends SFAS 123, "Accounting for
Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this
Statement amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. We adopted the additional disclosure requirements of SFAS 148 effective January 1, 2003.

In
November 2002, the FASB issued FASB Interpretation (FIN) No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees." This Interpretation requires that
upon the issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under that guarantee. FIN 45 is effective for guarantees issued or modified
after December 31, 2002. The adoption of this new statement did not impact our current financial statements.

In
January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest Entities." Subsequently, in December 2003, the FASB issued a revised version of FIN
46 (FIN 46R). FIN 46 and FIN 46R require a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's
activities or entitled to receive a majority of the entity's residual returns or both. FIN 46 and FIN 46R also require disclosures about variable interest entities that a company is not required to
consolidate but in which it has a significant variable interest. The consolidation requirements of FIN 46 and FIN 46R apply immediately to variable interest entities created after January 31,
2003 and to existing special purpose entities in the first fiscal year or interim period ending after December 15, 2003. For all other entities, the requirements of FIN 46 and FIN 46R apply in
the first period ending after March 15, 2004. As a result of the adoption of the standards, Cephalon Clinical Partners, L.P. has been consolidated in our financial statements at
December 31, 2003. This consolidation did not have a material impact on our financial statements. Our investments in non-marketable securities of other entities are not considered
variable interest entities and, therefore, we have not consolidated these entities.

In
April 2003, the FASB issued SFAS No. 149, "Amendment of FASB Statement 133 on Derivative Instruments and Hedging Activities." This Statement amends and clarifies
financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities
under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This Statement clarifies under what circumstances a contract with an initial net investment meets the
characteristic of a derivative discussed in SFAS No. 133, clarifies when a derivative contains a financing component, amends the definition of an "underlying" to conform it to language used in
FIN No. 45, and amends certain other existing pronouncements. This Statement is effective for contracts entered into or modified after June 30, 2003

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and
for hedging relationships designated after June 30, 2003. The adoption of this new standard did not impact our current financial statements.

In
May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." This Statement establishes
standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that
is within its scope as a liability (or an asset in some circumstances). This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15, 2003. This new standard has been considered in accounting for our Convertible Note Hedge and Warrants.

In
May 2003, the FASB's Emerging Issues Task Force reached consensus on Issue 00-21. This Issue addresses certain aspects of the accounting by a vendor for
arrangements under which it will perform multiple revenue-generating activities. Specifically, this Issue addresses how to determine whether an arrangement involving multiple deliverables contains
more than one unit of accounting. In applying this Issue, separate contracts with the same entity or related parties that are entered into at or near the same time are presumed to have been negotiated
as a package and should, therefore, be evaluated as a single arrangement in considering whether there are one or more units of accounting. That presumption may be overcome if there is sufficient
evidence to the contrary. This Issue also addresses how arrangement consideration should be measured and allocated to the separate units of accounting in the arrangement. The guidance in this Issue is
effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The application of this Issue did not impact our current financial statements.

In
December 2003, the FASB issued a revision to SFAS No. 132 "Employers' Disclosures about Pensions and Other Postretirement Benefits." This Statement requires additional
disclosures about the assets, obligations, cash flows, and net periodic benefit costs of defined benefit plans and other defined benefit postretirement plans. This Statement is effective for fiscal
years ending after December 15, 2003, except for certain disclosures about foreign plans which are effective for fiscal years ending after June 15, 2004. Since all of our pension and
postretirement benefit plans are foreign plans, we will adopt the additional disclosure requirements of this statement in 2004.

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CERTAIN RISKS RELATED TO OUR BUSINESS

You should carefully consider the risks described below, in addition to the other information contained in this report, before making an
investment decision. Our business, financial condition or results of operations could be harmed by any of these risks. The risks and uncertainties described below are not the only ones we face.
Additional risks not presently known to us or other factors not perceived by us to present significant risks to our business at this time also may impair our business
operations.

A significant portion of our revenues is derived from U.S. sales of our three largest products, and our future success will depend on the continued acceptance and growth of
these products.

For
the year ended December 31, 2003, approximately 86% of our worldwide net sales were derived from sales of PROVIGIL, ACTIQ and GABITRIL. We cannot be certain that these
products will
continue to be accepted in their markets. Specifically, the following factors, among others, could affect the level of market acceptance of PROVIGIL, ACTIQ and GABITRIL:



Any
material adverse developments with respect to the sale or use of PROVIGIL, ACTIQ and GABITRIL could significantly reduce our product revenues and have a material adverse effect on
our ability to generate net income and positive net cash flow from operations.

We may be unsuccessful in our efforts to expand the number and scope of authorized uses of PROVIGIL or GABITRIL, which would significantly hamper sales and earnings
growth.

Even
with the broader approval in January 2004 of a label for PROVIGIL, the markets for the approved indications of PROVIGIL and GABITRIL remain relatively small. Analysis of
prescription data indicates that a significant portion of our product sales is derived from the use of these products
outside of their labeled indications. We believe that the growth of PROVIGIL and GABITRIL will be greater if we are able to further expand the approved indications for these products.

To
this end, we are developing a proprietary formulation of modafinil for the treatment of ADHD in children and are currently enrolling patients into a Phase 3 program. We also have
initiated Phase 2 studies of GABITRIL in Generalized Anxiety Disorder and Post Traumatic Stress Disorder and, in early 2004, an additional Phase 2 study of GABITRIL in insomnia. If the results of
these Phase 2 GABITRIL studies are positive, we will need to conduct additional studies before we can apply to regulatory authorities to expand the authorized uses of GABITRIL for these indications.
We do not know whether these current or future studies will demonstrate safety and efficacy, or if they do, whether we will succeed in receiving regulatory approval to market these products for these
or other disorders. If the results of some of these additional studies are negative, this could undermine physician and patient comfort with the product, limit its commercial success, and diminish its
acceptance. Even if the results of these studies are positive, the impact on sales of these products may be minimal unless we are able to obtain FDA and foreign medical authority approval to expand
the authorized uses of this product. FDA regulations limit our ability to communicate the results of additional clinical studies to patients and physicians without first obtaining regulatory approval
for any expanded uses.

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We may not be able to maintain adequate protection for our intellectual property or market exclusivity for certain of our products and, therefore, competitors may develop
competing products, which could result in a decrease in sales and market share, cause us to reduce prices to compete successfully and limit our commercial success.

We
place considerable importance on obtaining patent protection for new technologies, products and processes. To that end, we file applications for patents covering the compositions or
uses of our drug candidates or our proprietary processes. The patent positions of pharmaceutical and biotechnology companies can be highly uncertain and involve complex legal, scientific and factual
questions. To date, no consistent policy has emerged regarding breadth of claims in such companies' patents. Accordingly, the patents and patent applications relating to our products, product
candidates and technologies may be challenged, invalidated or circumvented by third parties and might not protect us against competitors with similar products or technology. Patent disputes in our
industry are frequent and can preclude commercialization of products. If we ultimately engage in and lose any such disputes, we could be subject to competition or significant liabilities, we could be
required to enter into third party licenses or we could be required to cease using technology or product in dispute. In addition, even if such licenses are available, the terms of any license
requested by a third party could be unacceptable to us.

The
U.S. composition of matter patent for modafinil expired in 2001. We own U.S. and foreign patent rights that expire between 2014 and 2015 covering pharmaceutical compositions and uses
of modafinil and, more specifically, covering certain particle sizes of modafinil contained in the pharmaceutical composition. Ultimately, these patents might be found invalid as the result of a
challenge by a third
party, or a potential competitor could develop a competing product or product formulation that avoids infringement of these patents. To date, the FDA has accepted four ANDAs, for pharmaceutical
products containing modafinil. Each of these ANDAs contained a Paragraph IV certification in which the ANDA applicant certified that the U.S. particle-size modafinil patent covering
PROVIGIL either is invalid or will not be infringed by the ANDA product. On March 28, 2003, we filed a patent infringement lawsuit in U.S. District Court in New Jersey against Teva
Pharmaceuticals USA, Inc., Mylan Pharmaceuticals Inc., Ranbaxy Pharmaceuticals Inc., and Barr Laboratories, Inc. based upon the ANDAs filed by each of these companies with
the FDA. The lawsuit claims infringement of our U.S. Patent No. RE37516. While we intend to vigorously defend the validity of this patent and prevent infringement, these efforts will be both expensive
and time consuming and, ultimately, may not be successful. This litigation is currently in the discovery phase, and we expect that the trial will begin sometime in 2005.

In
early 2004, Barr and Ranbaxy each announced the receipt of tentative FDA approval for their respective generic versions of PROVIGIL. If the court finds the particle-size
patent is invalid or not infringed, Barr and Ranbaxy could begin selling their modafinil-based products upon the expiration of our FDA orphan drug exclusivity, currently in December 2005, which
would significantly and negatively impact revenues from PROVIGIL. We do not know whether the ANDAs filed by Teva and Mylan have been, or will be, tentatively approved by the FDA

If
we perform an additional clinical study of PROVIGIL in pediatric patients that is acceptable to the FDA, the FDA could grant us a six-month extension of our orphan drug
exclusivity (to June 2006) and six months of exclusivity beyond the 2014 expiration of the particle size patent term. However, we cannot be sure that we will be able to reach an agreement with
the FDA with respect to an appropriate pediatric study.

With
respect to ACTIQ, we hold an exclusive license to a U.S. patent covering the currently approved compressed powder pharmaceutical composition and methods for administering fentanyl
via this composition that is set to expire in September 2006, though the FDA could grant us a six-month extension of these patents when we perform a clinical study in pediatric
patients. However, we cannot be sure that we will be able to reach an agreement with the FDA with respect to an appropriate

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pediatric
study. Corresponding patents in foreign countries are set to expire between 2009 and 2010. Our patent protection with respect to the ACTIQ formulation we sold prior to June 2003 will
expire in May 2005. The loss of patent protection on ACTIQ, beginning as early as May 2005 in the United States, could significantly and negatively impact our revenues from the sale of
ACTIQ.

We
also rely on trade secrets, know-how and continuing technological advancements to support our competitive position. Although we have entered into confidentiality and
invention rights agreements with our employees, consultants, advisors and collaborators, these parties could fail to honor such agreements or we could be unable to effectively protect our rights to
our unpatented trade
secrets and know-how. Moreover, others could independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets and
know-how. In addition, many of our scientific and management personnel have been recruited from other biotechnology and pharmaceutical companies where they were conducting research in
areas similar to those that we now pursue. As a result, we could be subject to allegations of trade secret violations and other claims.

Manufacturing, supply and distribution problems may create supply disruptions that could result in a reduction of product sales revenue and an increase in costs of sales, and
damage commercial prospects for our products.

The
manufacture, supply and distribution of pharmaceutical products, both inside and outside the United States, is highly regulated and complex. We, and the third parties we rely upon
for the manufacturing and distribution of our products, must comply with all applicable regulatory requirements of the FDA and foreign authorities, including current Good Manufacturing Practice
regulations. In addition, we must comply with all applicable regulatory requirements of the Drug Enforcement Administration and analogous foreign authorities for certain of our products that contain
controlled substances. The facilities used to manufacture, store and distribute our products also are subject to inspection by regulatory authorities at any time to determine compliance with
regulations. These regulations are complex, and any failure to comply with them could lead to remedial action, civil and criminal penalties and delays in production or distribution of material.

In
April 2003, we initiated a voluntary recall of certain batches of ACTIQ that were distributed in Europe based upon our determination that some units in these batches might
contain levels of fentanyl that were higher than those established in the product specifications. The recall resulted in a reduction of sales revenue and an increase in cost of sales in the first half
of 2003, with an aggregate financial impact in the amount of $2.2 million.

We
predominately depend upon single sources for the manufacture of both the active drug substances contained in our products and for finished commercial supplies. For example:



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The
process of changing or adding a manufacturer or changing a formulation requires prior FDA and/or European medical authority approval and is very time-consuming. If we are
unable to manage this process effectively or if an unforeseen event occurs at any facility, we could face supply disruptions that would result in significant costs and delays, undermine goodwill
established with physicians and patients, damage commercial prospects for our products and adversely affect operating results. We also rely on third parties to distribute our products, perform
customer service activities and accept and process product returns.

As our products are used commercially, unintended side effects, adverse reactions or incidents of misuse may occur that could result in additional regulatory controls and
reduced sales of our products.

During
research and development, the use of pharmaceutical products, such as ours, is limited principally to clinical trial patients under controlled conditions and under the care of
expert physicians. The widespread commercial use of our products could produce undesirable or unintended side effects that have not been evident in our clinical trials or the relatively limited
commercial use to date. In addition, in patients who take multiple medications, drug interactions could occur that can be difficult to predict. Additionally, incidents of product misuse, product
diversion or theft may occur. These events, among others, could result in additional regulatory controls that could limit the circumstances under which the product is prescribed or even lead to the
withdrawal of the product from the market. More specifically, ACTIQ has been approved under regulations concerning drugs with certain safety profiles, under which the FDA has established special
restrictions to ensure safe use. Any violation of these special restrictions could lead to the imposition of further restrictions or withdrawal of the product from the market.

We face significant product liability risks, which may have a negative effect on our financial performance.

The
administration of drugs to humans, whether in clinical trials or commercially, can result in product liability claims whether or not the drugs are actually at fault for causing an
injury. Furthermore, our products may cause, or may appear to have caused, adverse side effects (including death) or potentially dangerous drug interactions that we may not learn about or understand
fully until the drug has been administered to patients for some time. As our products are used more widely and in patients with varying medical conditions, the likelihood of an adverse drug reaction,
unintended side effect or incidence of misuse may increase. Product liability claims can be expensive to defend and may result in large judgments or settlements against us, which could have a negative
effect on our financial performance. The costs of product liability insurance have increased dramatically in recent years, and the availability of coverage has decreased. Nevertheless, we maintain
product liability insurance in amounts we believe to be commercially reasonable. Any claims could easily exceed our coverage limits. Even if a product liability claim is not successful, the adverse
publicity and time and expense of defending such a claim may interfere with our business.

Our activities and products are subject to significant government regulations and approvals, which are often costly and could result in adverse consequences to our business if
we fail to comply.

We
currently have a number of products that have been approved for sale in the United States, foreign countries or both. All of our approved products are subject to extensive continuing
regulations relating to, among other things, testing, manufacturing, quality control, labeling, and promotion. The failure to comply with any rules and regulations of the FDA or any foreign medical
authority, or the post-approval discovery of previously unknown problems relating to our products, could result in, among other things:



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It is both costly and time-consuming for us to comply with these regulations. Additionally, incidents of adverse drug reactions, unintended side effects or misuse relating to
our products could result in additional regulatory controls or restrictions, or even lead to withdrawal of a product from the market.

With
respect to our product candidates and for new therapeutic indications for our existing products, we conduct research, preclinical testing and clinical trials. We cannot market these
product candidates or these new indications in the United States or other countries without receiving approval from the FDA or the appropriate foreign medical authority. The approval process is highly
uncertain and requires substantial time, effort and financial resources. Ultimately, we may never obtain approval in a timely manner, or at all. Without these required approvals, our ability to
substantially grow revenues in the future could be adversely affected.

In
addition, because PROVIGIL and ACTIQ contain active ingredients that are controlled substances, we are subject to regulation by the DEA and analogous foreign organizations relating to
the manufacture, shipment, sale and use of the applicable products. These regulations also are imposed on prescribing physicians and other third parties, making the storage, transport and use of such
products relatively complicated and expensive. With the increased concern for safety by the FDA and the DEA with respect to products containing controlled substances, it is possible that these
regulatory agencies could impose additional restrictions on marketing or even withdraw regulatory approval for such products. In addition, adverse publicity may bring about rejection of the product by
the medical community. If the DEA, FDA or a foreign medical authority withdrew the approval of, or placed additional significant restrictions on the marketing of any of our products, our product sales
and ability to promote our products could be substantially affected.

We may be unable to repay our substantial indebtedness and other obligations.

As
of December 31, 2003, we had $1,419.1 million of indebtedness outstanding, including $1,393.0 million outstanding under convertible notes with stated conversion
prices or restricted conversion prices higher than our stock price as of the date of this filing. Of our outstanding convertible notes, $600.0 million matures in 2006. There are no restrictions
on our use of our existing cash, cash equivalents and investments, and we cannot be sure that these funds will be available or sufficient in the future to enable us to repay our indebtedness. In the
future, these factors, among other things, could make it difficult for us to service, repay or refinance our indebtedness or to obtain additional financing in the future, or limit our future
flexibility and make us more vulnerable in the event of a downturn in our business. Unless we are able to generate cash flow from operations that, together with our available cash on hand, is
sufficient to repay our indebtedness, we will be required to raise additional funds. Because the financing markets may be unwilling to provide funding to us or may only be willing to
provide funding on terms that we would consider unacceptable, we may not have cash available or be able to obtain funding to permit us to meet our repayment obligations, thus adversely affecting the
market price for our securities.

Our product sales and related financial results will fluctuate, and these fluctuations may cause our stock price to fall, especially if investors do not anticipate
them.

A
number of analysts and investors who follow our stock have developed models to attempt to forecast future product sales and expenses, and have established earnings expectations based
upon those models. These models, in turn, are based in part on estimates of projected revenue and earnings that we disclose publicly. Forecasting future revenues is difficult, especially when we only
have a few years of commercial history and when the level of market acceptance of our products is uncertain. Forecasting is further complicated by the difficulties in estimating both existing stocking
levels at pharmaceutical wholesalers and retail pharmacies and the timing of their purchases to replenish these stocks. As a result, it is likely that our revenues will fluctuate significantly, which
may not meet with

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market
expectations and which also may adversely affect our stock price. There are a number of other factors that could cause our financial results to fluctuate unexpectedly, including:



The efforts of government entities and third party payers to contain or reduce the costs of health care may adversely affect our sales and limit the commercial success of our
products.

In
certain foreign markets, pricing or profitability of pharmaceutical products is subject to various forms of direct and indirect governmental control, including the control over the
amount of reimbursements provided to the patient who is prescribed specific pharmaceutical products. For example, we are aware of governmental efforts in France to limit or eliminate reimbursement for
some of our products, which could impact revenues from our French operations.

In
the United States, there have been, and we expect there will continue to be, various proposals to implement similar controls. The commercial success of our products could be limited
if federal or state governments adopt any such proposals. In addition, in the United States and elsewhere, sales of pharmaceutical products depend in part on the availability of reimbursement to the
consumer from third party payers, such as government and private insurance plans. These third party payers increasingly challenge the prices charged for pharmaceutical products and seek to limit
reimbursement levels offered to consumers for such products. These third party payers could focus their cost control efforts on our products, especially with respect to prices of and reimbursement
levels for products prescribed outside their labeled indications. In these cases, their efforts could negatively impact our product sales and profitability.

We experience intense competition in our fields of interest, which may adversely affect our business.

Large
and small companies, academic institutions, governmental agencies and other public and private research organizations conduct research, seek patent protection and establish
collaborative arrangements for product development in competition with us. Products developed by any of these entities may compete directly with those we develop or sell.

The
conditions that our products treat, and some of the other disorders for which we are conducting additional studies, are currently treated with several drugs, many of which have been
available for a number of years or are available in inexpensive generic forms. With respect to PROVIGIL, there are several other products used for the treatment of excessive sleepiness or narcolepsy
in the United States, including methylphenidate products such as RITALIN® by Novartis, and in our other territories, many of which have been available for a number of years and are
available in inexpensive generic forms. With respect to ACTIQ, we face competition from numerous short- and long-acting opioid products, including three
productsJohnson & Johnson's DURAGESIC®, Purdue Pharmaceutical's OXYCONTIN® and MS-CONTIN®that dominate the market. We
also are aware of numerous other companies developing other technologies for rapidly delivering opioids to treat breakthrough pain, including transmucosal, transdermal, nasal spray and inhaled
delivery systems, among others. For example, in September 2003, Johnson & Johnson filed an NDA with the FDA for E-Trans®, a battery-powered transdermal patch that
allows on-demand delivery of fentanyl with rapid absorption. With respect to GABITRIL, there are several products, including NEURONTIN® (gabapentin) by Pfizer, used as
adjunctive therapy for the partial seizure market. Some are well-established therapies that have been on the market for several years while others have recently

53

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entered
the partial seizure marketplace. In addition, several treatments for partial seizures are available in inexpensive generic forms. Thus, we need to demonstrate to physicians, patients and third
party payers that the cost of our products is reasonable and appropriate in the light of their safety and efficacy, the price of competing products and the related health care benefits to the patient.

Many
of our competitors have substantially greater capital resources, research and development staffs and facilities than we have, and substantially greater experience in conducting
clinical trials, obtaining regulatory approvals and manufacturing and marketing pharmaceutical products. These entities represent significant competition for us. In addition, competitors who are
developing products for the treatment of neurological or oncological disorders might succeed in developing technologies and products that are more effective than any that we develop or sell or that
would render our technology and products obsolete or noncompetitive. Competition and innovation from these or other sources, including advances in current treatment methods, could potentially affect
sales of our products negatively or make our products obsolete. Furthermore, we may be at a competitive marketing disadvantage against companies that have broader product lines and whose sales
personnel are able to offer more complementary products than we can. Any failure to maintain our competitive position could adversely affect our business and results of operations.

We plan to consider and, as appropriate, make acquisitions of technologies, products and businesses, which may subject us to a number of risks and/or result in us experiencing
significant charges to earnings that may adversely affect our stock price, operating results and financial condition.

On
November 3, 2003, we signed a definitive agreement to acquire by merger all of the outstanding shares of CIMA LABS INC. for $34.00 per share in cash. The merger is
subject to certain closing conditions, including the approval of the merger agreement by CIMA LABS stockholders and the
expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 ("HSR"). On January 23, 2004, we received a request for
additional information from the Federal Trade Commission pertaining to the pending merger. If the HSR condition is not satisfied and the transaction is not closed by June 30, 2004 (unless the
parties mutually agree to an extension), we will be required to pay CIMA LABS a break fee in the amount of $16.25 million. If the transaction does not close for any reason, we will not realize
the anticipated benefits of the CIMA LABS transaction.

As
part of our review of CIMA LABS, we conducted business, legal and financial due diligence with the goal of identifying and evaluating material risks involved in the transaction.
Despite our efforts, we ultimately may be unsuccessful in ascertaining or evaluating all such risks and, as a result, we might not realize the intended advantages of the acquisition. We also must
consolidate and integrate the operations of CIMA LABS with our business. Integration efforts often take a significant amount of time, place a significant strain on our managerial, operational and
financial resources and could prove to be more difficult and expensive than we predicted. If we fail to realize the expected benefits from this acquisition, or from acquisitions we may consummate in
the future, whether as a result of unidentified risks, integration difficulties, regulatory setbacks or otherwise, our business, results of operations and financial condition could be adversely
affected.

In
addition, as a result of our efforts to acquire businesses or to enter into other significant transactions, such as CIMA LABS, we have experienced, and will likely continue to
experience, significant charges to earnings for merger and related expenses (whether or not our efforts are successful) that may include transaction costs, closure costs, acquired
in-process research and development charges or break fees. These costs also may include substantial fees for investment bankers, attorneys, accountants and other advisers, as well as
severance and other closure costs associated with the elimination of duplicate operations and facilities. Our incurrence of these charges could adversely affect our results of operations for
particular quarterly or annual periods.

54

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The results and timing of our research and development activities, including future clinical trials, are difficult to predict, subject to potential future setbacks and,
ultimately, may not result in viable pharmaceutical products, which may adversely affect our business.

In
order to sustain our business, we focus substantial resources on the search for new pharmaceutical products. These activities include engaging in discovery research and process
development, conducting preclinical and clinical studies and seeking regulatory approval in the United States and abroad. In all of these areas, we have relatively limited resources and compete
against larger, multinational pharmaceutical companies. Moreover, even if we undertake these activities in an effective and efficient manner, regulatory approval for the sale of new pharmaceutical
products remains highly uncertain because the majority of compounds discovered do not enter clinical studies and the majority of therapeutic candidates fail to show the human safety and efficacy
necessary for regulatory approval and successful commercialization.

Preclinical
testing and clinical trials must demonstrate that a product candidate is safe and efficacious. The results from preclinical testing and early clinical trials may not be
predictive of results obtained in subsequent clinical trials, and these clinical trials may not demonstrate the safety and efficacy necessary to obtain regulatory approval for any product candidates.
A number of companies in the biotechnology and pharmaceutical industries have suffered significant setbacks in advanced clinical trials, even after obtaining promising results in earlier trials. For
ethical reasons, certain clinical trials are conducted with patients having the most advanced stages of disease and who have failed treatment with alternative therapies. During the course of
treatment, these patients often die or suffer other adverse medical effects for reasons that may not be related to the pharmaceutical agent being tested. Such events can have a negative impact on the
statistical analysis of clinical trial results.

The
completion of clinical trials of our product candidates may be delayed by many factors, including the rate of enrollment of patients. Neither we nor our collaborators can control the
rate at which patients present themselves for enrollment, and the rate of patient enrollment may not be consistent with our expectations or sufficient to enable clinical trials of our product
candidates to be completed in a timely manner or at all. In addition, we may not be permitted by regulatory authorities to undertake additional clinical trials for one or more of our product
candidates. Even if such trials are conducted, our product candidates may not prove to be safe and efficacious or receive regulatory approvals. Any significant delays in, or termination of, clinical
trials of our product candidates could impact our ability to generate product sales from these product candidates in the future.

Our research and development and marketing efforts are often dependent on corporate collaborators and other third parties who may not devote sufficient time, resources and
attention to our programs, which may limit our efforts to develop and market potential products.

Because
we have limited resources, we have entered into a number of collaboration agreements with other pharmaceutical companies, including H. Lundbeck A/S with respect to our research
efforts in Parkinson's Disease, and with a number of marketing partners for our products in certain countries outside the United States. In some cases, our collaboration agreements call for our
partners to control:



In
each of these areas, our partners may not support fully our research and commercial interests because our program may compete for time, attention and resources with the internal
programs of our corporate collaborators. As such, our program may not move forward as effectively, or advance as rapidly, as it might if we had retained complete control of all research, development,
regulatory and commercialization decisions. We also rely on some of these collaborators and other third parties for the production of compounds and the manufacture and supply of pharmaceutical
products. Additionally, we

55

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may
find it necessary from time to time to seek new or additional partners to assist us in commercializing our products, though we might not be successful in establishing any such new or additional
relationships.

The price of our common stock has been and may continue to be highly volatile, which may make it difficult for holders to sell our common stock when desired or at attractive
prices.

The
market price of our common stock is highly volatile, and we expect it to continue to be volatile for the foreseeable future. For example, from January 1, 2003 through
March 8, 2004, our common stock traded at a high price of $60.98 and a low price of $36.91. Negative announcements, including, among others:



could
trigger significant declines in the price of our common stock. In addition, external events, such as news concerning economic conditions, our competitors, changes in government regulations
impacting the biotechnology or pharmaceutical industries or the movement of capital into or out of our industry, also are likely to affect the price of our common stock, regardless of our operating
performance.

A portion of our revenues and expenses is subject to exchange rate fluctuations in the normal course of business, which could adversely affect our reported results of
operations.

Historically,
a portion of our revenues and expenses has been earned and incurred, respectively, in currencies other than the U.S. dollar. For the year ended December 31, 2003,
approximately 19% of our revenues was denominated in currencies other than the U.S. dollar. We translate revenues earned and expenses incurred into U.S. dollars at the average exchange rate applicable
during the relevant period. A weakening of the U.S. dollar would, therefore, increase both our revenues and expenses. Fluctuations in the rate of exchange between the U.S. dollar and the euro and
other currencies may affect period-to-period comparisons of our operating results. Historically, we have not hedged our exposure to these fluctuations in exchange rates.

We are involved, or may become involved in the future, in legal proceedings that, if adversely adjudicated or settled, could materially impact our financial
condition.

As
a biopharmaceutical company, we are or may become a party to litigation in the ordinary course of our business, including, among others, matters alleging employment discrimination,
product liability, patent or other intellectual property rights infringement, patent invalidity or breach of commercial contract. In general, litigation claims can be expensive and time consuming to
bring or defend against and could result in settlements or damages that could significantly impact results of operations and financial condition. We currently are vigorously defending ourselves
against certain litigation matters. While we currently do not believe that the settlement or adverse adjudication of these lawsuits would materially impact our results of operations or financial
condition, the final resolution of these matters and the impact, if any, on our results of operations, financial condition or cash flows could be material.

Our customer base is highly concentrated.

Our principal customers are wholesale drug distributors. These customers comprise a significant part of the distribution network for pharmaceutical products in
the United States. Three large wholesale distributors control a significant share of the market. For the year ended December 31, 2003, these wholesaler customers, Cardinal Health, Inc.,
McKesson Corporation and AmerisourceBergen Corporation, in the aggregate, accounted for 82% of our worldwide net sales. The loss or bankruptcy of

56

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any
of these customers could materially and adversely affect our results of operations and financial condition.

Our dependence on key executives and scientists could impact the development and management of our business.

We
are highly dependent upon our ability to attract and retain qualified scientific, technical and managerial personnel. There is intense competition for qualified personnel in the
pharmaceutical and biotechnology industries, and we cannot be sure that we will be able to continue to attract and retain the qualified personnel necessary for the development and management of our
business. Although we do not believe the loss of one individual would materially harm our business, our research and development programs and our business might be harmed by the loss of the services
of multiple existing personnel, as well as the failure to recruit additional key scientific, technical and managerial personnel in a timely manner. Much of the know-how we have developed
resides in our scientific and technical personnel and is not readily transferable to other personnel. While we have employment agreements with our key executives, we do not ordinarily enter into
employment agreements with our other key scientific, technical and managerial employees. We do not maintain "key man" life insurance on any of our employees.

We may be required to incur significant costs to comply with environmental laws and regulations, and our related compliance may limit any future
profitability.

Our
research and development activities involve the controlled use of hazardous, infectious and radioactive materials that could be hazardous to human health and safety or the
environment. We store these materials, and various wastes resulting from their use, at our facilities pending ultimate use and disposal. We are subject to a variety of federal, state and local laws
and regulations governing the use, generation, manufacture, storage, handling and disposal of these materials and wastes, and we may be required to incur significant costs to comply with related
existing and future environmental laws and regulations.

While
we believe that our safety procedures for handling and disposing of these materials comply with foreign, federal, state and local laws and regulations, we cannot completely
eliminate the risk of accidental injury or contamination from these materials. In the event of an accident, we could be held liable for any resulting damages, which could include fines and remedial
costs. These damages could require payment by us of significant amounts over a number of years, which would be reflected in our results of operations and financial condition.

Anti-takeover provisions may delay or prevent changes in control of our management or deter a third party from acquiring us, limiting our stockholders' ability to
profit from such a transaction.

Our
board of directors has the authority to issue up to 5,000,000 shares of preferred stock, $0.01 par value, of which 1,000,000 have been reserved for issuance in connection with our
stockholder rights plan, and to determine the price, rights, preferences and privileges of those shares without any further vote or action by our stockholders. Our stockholder rights plan could have
the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock.

We
are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which prohibits us from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of the transaction in which the person becomes an interested stockholder, unless the business combination is approved in a
prescribed manner. The application of Section 203 could have the effect of delaying or preventing a change of control of Cephalon. Section 203, the rights plan, and certain provisions of
our certificate of incorporation, our bylaws and Delaware corporate law, may have the effect of deterring hostile takeovers, or delaying or preventing changes in control of our management, including
transactions in which stockholders might otherwise receive a premium for their shares over then-current market prices.

57

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ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

We are exposed to foreign currency exchange risk related to our operations in European subsidiaries that have transactions, assets, and liabilities denominated in
foreign currencies that are translated into U.S. dollars for consolidated financial reporting purposes. Historically, we have not hedged any of these foreign currency exchange risks. For the year
ended December 31, 2003, an average 10% weakening of the U.S. dollar relative to the currencies in which our European subsidiaries operate would have resulted in an increase of
$13.8 million in reported total revenues and a corresponding increase in
reported expenses. This sensitivity analysis of the effects of changes in foreign currency exchange rates does not assume any changes in the level of operations of our European subsidiaries.

In
January 2003, we entered into an interest rate swap agreement with a financial institution, relating to our $600.0 million 2.5% convertible subordinated notes, in the
aggregate notional amount of $200.0 million. We pay interest under the swap based on the 3-month LIBOR-BBA rate plus 29 basis points, adjusted quarterly. At inception,
we recognized a premium on the value of the bonds of $2.2 million that we will amortize and recognize as interest expense over the remaining term of the notes. We also recognize adjustments to
interest expense based on changes in the fair values of the bonds and the swap agreement each quarter. If LIBOR increases or decreases by 100 basis points, our annual interest expense would change by
$2.0 million. Changes in interest rates and the price and volatility of our common stock would also affect the fair values of the notes and the swap agreement, resulting in adjustments to
interest expense.

In
January 2003, we entered into a foreign exchange contract to protect against fluctuations in the Australian Dollar against the U.S. Dollar related to our unsuccessful bid for
SIRTeX Medical Limited. We terminated this contract in the second quarter of 2003.

Except
for the interest rate swap agreement described above, our exposure to market risk for a change in interest rates relates to our investment portfolio, since all of our outstanding
debt is fixed rate. Our investments are classified as short-term and as "available for sale." We do not believe that short-term fluctuations in interest rates would materially
affect the value of our securities.

58

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ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Shareholders of Cephalon Inc:

In
our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) on page 99 present fairly, in all material respects, the financial position
of Cephalon, Inc. and its subsidiaries at December 31, 2003 and 2002, and the results of its operations and its cash flows for each of the three years in the period ended
December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index
appearing under Item 15(a)(2) on page 99 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial
statements. These financial statements and the financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America,
which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As
discussed in Note 1, on January 1, 2002 the Company changed its method of valuing certain inventory and of accounting for business combinations and goodwill.

| |  | By: | /s/PRICEWATERHOUSECOOPERS LLP
| |  | --- | -----------------------------

Philadelphia, Pennsylvania
March 11, 2004

59

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CEPHALON, INC. AND SUBSIDIARIES  CONSOLIDATED BALANCE SHEETS

|(In thousands, except share data)       |                                                                                                                                                        | December 31,
2003         |           | December 31,
2002 |          
|--------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------- | --------- | ----------------- | ---------
|ASSETS                                  |                                                                                                                                                       
|CURRENT ASSETS:                         |                                                                                                                                                        |                           |           |                   |          
|                                        | Cash and cash equivalents                                                                                                                              |                           | $         | 1,115,699         |          
|                                        | Investments                                                                                                                                            |                           |           | 39,464            |          
|                                        | Receivables, net                                                                                                                                       |                           |           | 86,348            |          
|                                        | Inventory, net                                                                                                                                         |                           |           | 61,249            |          
|                                        | Deferred tax asset                                                                                                                                     |                           |           | 57,972            |          
|                                        | Other current assets                                                                                                                                   |                           |           | 9,198             |          
|                                        |                                                                                                                                                        |                           |           |                   |          
|                                        |                                                                                                                                                        | Total current assets      |           |                   | 1,369,930
|PROPERTY AND EQUIPMENT, net             |                                                                                                                                                        |                           | 126,442   |                   |          
|GOODWILL                                |                                                                                                                                                        |                           | 298,769   |                   |          
|OTHER INTANGIBLE ASSETS, net            |                                                                                                                                                        |                           | 326,445   |                   |          
|DEBT ISSUANCE COSTS, net                |                                                                                                                                                        |                           | 35,250    |                   |          
|DEFERRED TAX ASSET, net                 |                                                                                                                                                        |                           | 168,506   |                   |          
|OTHER ASSETS                            |                                                                                                                                                        |                           | 56,314    |                   |          
|                                        |                                                                                                                                                        |                           |           |                   |          
|                                        |                                                                                                                                                        | $                         | 2,381,656 |                   | $        
|                                        |                                                                                                                                                        |                           |           |                   |          
|LIABILITIES AND STOCKHOLDERS' EQUITY    |                                                                                                                                                       
|CURRENT LIABILITIES:                    |                                                                                                                                                        |                           |           |                   |          
|                                        | Current portion of long-term debt                                                                                                                      |                           | $         | 9,637             |          
|                                        | Accounts payable                                                                                                                                       |                           |           | 28,591            |          
|                                        | Accrued expenses                                                                                                                                       |                           |           | 99,038            |          
|                                        | Current portion of deferred revenues                                                                                                                   |                           |           | 422               |          
|                                        |                                                                                                                                                        |                           |           |                   |          
|                                        |                                                                                                                                                        | Total current liabilities |           |                   | 137,688  
|LONG-TERM DEBT                          |                                                                                                                                                        |                           | 1,409,417 |                   |          
|DEFERRED REVENUES                       |                                                                                                                                                        |                           | 1,736     |                   |          
|DEFERRED TAX LIABILITIES                |                                                                                                                                                        |                           | 45,665    |                   |          
|OTHER LIABILITIES                       |                                                                                                                                                        |                           | 16,780    |                   |          
|                                        |                                                                                                                                                        |                           |           |                   |          
|                                        |                                                                                                                                                        | Total liabilities         |           |                   | 1,611,286
|                                        |                                                                                                                                                        |                           |           |                   |          
|COMMITMENTS AND CONTINGENCIES (Note 12) |                                                                                                                                                        |                           |          |                   |          
|STOCKHOLDERS' EQUITY:                   |                                                                                                                                                        |                           |           |                   |          
|                                        | Preferred stock, $.01 par value, 5,000,000 shares authorized, 2,500,000 shares issued, and none outstanding                                            |                           |           |                  |          
|                                        | Common stock, $.01 par value, 200,000,000 shares authorized, 55,842,510 and 55,425,841 shares issued, and 55,533,682 and 55,152,984 shares outstanding |                           |           | 558               |          
|                                        | Additional paid-in capital                                                                                                                             |                           |           | 1,052,059         |          
|                                        | Treasury stock, 308,828 and 272,857 shares outstanding, at cost                                                                                        |                           |           | (13,692           | )        
|                                        | Accumulated deficit                                                                                                                                    |                           |           | (321,305          | )        
|                                        | Accumulated other comprehensive income                                                                                                                 |                           |           | 52,750            |          
|                                        |                                                                                                                                                        |                           |           |                   |          
|Total stockholders' equity              |                                                                                                                                                        |                           | 770,370   |                   |          
|                                        |                                                                                                                                                        |                           |           |                   |          
|                                        |                                                                                                                                                        | $                         | 2,381,656 |                   | $        
|                                        |                                                                                                                                                        |                           |           |                   |          

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

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CEPHALON, INC. AND SUBSIDIARIES  CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                                           |                                                                                             | Year Ended December 31, |        
|-------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------- | ----------------------- | -------
|
|REVENUES:                                                                  |                                                                                             |                         |        
|                                                                           | Sales                                                                                       |                         | $      
|                                                                           | Other revenues                                                                              |                         |        
|                                                                           |                                                                                             |                         |        
|                                                                           |                                                                                             |                         | 714,807
|                                                                           |                                                                                             |                         |        
|COSTS AND EXPENSES:                                                        |                                                                                             |                         |        
|                                                                           | Cost of sales                                                                               |                         |        
|                                                                           | Research and development                                                                    |                         |        
|                                                                           | Selling, general and administrative                                                         |                         |        
|                                                                           | Depreciation and amortization                                                               |                         |        
|                                                                           | Merger and integration costs                                                                |                         |        
|                                                                           | Acquired in-process research and development                                                |                         |        
|                                                                           |                                                                                             |                         |        
|                                                                           |                                                                                             |                         | 558,758
|                                                                           |                                                                                             |                         |        
|INCOME FROM OPERATIONS                                                     |                                                                                             |                         | 156,049
|                                                                           |                                                                                             |                         |        
|OTHER INCOME AND EXPENSE                                                   |                                                                                             |                         |        
|                                                                           | Interest income                                                                             |                         |        
|                                                                           | Interest expense                                                                            |                         |        
|                                                                           | Debt exchange expense                                                                       |                         |        
|                                                                           | Gain (charge) on early extinguishment of debt                                               |                         |        
|                                                                           | Other income (expense), net                                                                 |                         |        
|                                                                           |                                                                                             |                         |        
|                                                                           |                                                                                             |                         | (25,735
|                                                                           |                                                                                             |                         |        
|INCOME (LOSS) BEFORE INCOME TAXES                                          |                                                                                             |                         | 130,314
|INCOME TAX (EXPENSE) BENEFIT, NET                                          |                                                                                             |                         | (46,456
|                                                                           |                                                                                             |                         |        
|INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE |                                                                                             |                         | 83,858 
|CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE                      |                                                                                             |                         |       
|                                                                           |                                                                                             |                         |        
|NET INCOME (LOSS)                                                          |                                                                                             |                         | 83,858 
|DIVIDENDS ON CONVERTIBLE EXCHANGEABLE PREFERRED STOCK                      |                                                                                             |                         |       
|                                                                           |                                                                                             |                         |        
|NET INCOME (LOSS) APPLICABLE TO COMMON SHARES                              |                                                                                             | $                       | 83,858 
|                                                                           |                                                                                             |                         |        
|BASIC INCOME (LOSS) PER COMMON SHARE:                                      |                                                                                             |                         |        
|                                                                           | Income (loss) per common share before cumulative effect of a change in accounting principle |                         | $      
|                                                                           | Cumulative effect of a change in accounting principle                                       |                         |        
|                                                                           |                                                                                             |                         |        
|                                                                           |                                                                                             | $                       | 1.51   
|                                                                           |                                                                                             |                         |        
|DILUTED INCOME (LOSS) PER COMMON SHARE:                                    |                                                                                             |                         |        
|                                                                           | Income (loss) per common share before cumulative effect of a change in accounting principle |                         | $      
|                                                                           | Cumulative effect of a change in accounting principle                                       |                         |        
|                                                                           |                                                                                             |                         |        
|                                                                           |                                                                                             | $                       | 1.44   
|                                                                           |                                                                                             |                         |        
|WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING                       |                                                                                             |                         | 55,560 
|                                                                           |                                                                                             |                         |        
|WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING-ASSUMING DILUTION     |                                                                                             |                         | 64,072 
|                                                                           |                                                                                             |                         |        

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

61

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CEPHALON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

|                           |                                                                              |  |   |         |   | Preferred Stock |          | Common Stock |            |   |    | Treasury Stock |            |           |   | Accumulated
Other
Comprehensive
Income
|-------------------------- | ---------------------------------------------------------------------------- |  | - | ------- | - | --------------- | -------- | ------------ | ---------- | - | -- | -------------- | ---------- | --------- | - | --------------------------------------
|
|
|BALANCE, JANUARY 1, 2001   |                                                                              |  |   |         | $ | 165,193         |          | 2,500,000    |            | $ | 25 |                | 42,478,225 |           | $ | 425                                   
|                           | Loss                                                                         |  | $ | (55,484 | ) |                 | (55,484  | )            |           |   |    |               |            |           |   |                                       
|                           |                                                                              |  |   |         |   |                 |          |              |            |   |    |                |            |           |   |                                       
|                           | Foreign currency translation gain                                            |  |   | 368     |   |                 |          |              |            |   |    |                |            |           |   |                                       
|                           | Unrealized investment gains                                                  |  |   | 504     |   |                 |          |              |            |   |    |                |            |           |   |                                       
|                           |                                                                              |  |   |         |   |                 |          |              |            |   |    |                |            |           |   |                                       
|                           | Other comprehensive income                                                   |  |   | 872     |   |                 | 872      |              |           |   |    |               |            |           |   |                                       
|                           |                                                                              |  |   |         |   |                 |          |              |            |   |    |                |            |           |   |                                       
|                           | Comprehensive loss                                                           |  | $ | (54,612 | ) |                 |          |              |            |   |    |                |            |           |   |                                       
|                           |                                                                              |  |   |         |   |                 |          |              |            |   |    |                |            |           |   |                                       
|                           | Conversion of preferred stock into common stock                              |  |   |         |   |                 |         |              | (2,500,000 | ) |    | (25            | )          | 6,974,998 |   |                                       
|                           | Issuance of common stock upon conversion of convertible notes                |  |   |         |   |                 | 262,590  |              |            |   |    |                |            | 3,691,705 |   |                                       
|                           | Stock options exercised                                                      |  |   |         |   |                 | 25,542   |              |            |   |    |               |            | 1,327,303 |   |                                       
|                           | Stock purchase warrants exercised                                            |  |   |         |   |                 | 2,679    |              |            |   |    |               |            | 265,800   |   |                                       
|                           | Restricted stock award plan                                                  |  |   |         |   |                 | 5,349    |              |            |   |    |               |            | 150,650   |   |                                       
|                           | Employer contributions to employee benefit plan                              |  |   |         |   |                 | 1,283    |              |            |   |    |               |            | 20,852    |   |                                       
|                           | Dividends declared on convertible preferred stock                            |  |   |         |   |                 | (5,664   | )            |            |   |    |               |            |           |   |                                       
|                           | Treasury stock acquired                                                      |  |   |         |   |                 | (3,629   | )            |            |   |    |               |            |           |   |                                       
|                           |                                                                              |  |   |         |   |                 |          |              |            |   |    |                |            |           |   |                                       
|BALANCE, DECEMBER 31, 2001 |                                                                              |  |   |         |   | 398,731         |          |             |            |   |   |                | 54,909,533 |           |   | 549                                   
|                           | Income                                                                       |  | $ | 171,528 |   |                 | 171,528  |              |            |   |    |               |            |           |   |                                       
|                           |                                                                              |  |   |         |   |                 |          |              |            |   |    |                |            |           |   |                                       
|                           | Foreign currency translation gain                                            |  |   | 20,367  |   |                 |          |              |            |   |    |                |            |           |   |                                       
|                           | Unrealized investment gains                                                  |  |   | 2,406   |   |                 |          |              |            |   |    |                |            |           |   |                                       
|                           |                                                                              |  |   |         |   |                 |          |              |            |   |    |                |            |           |   |                                       
|                           | Other comprehensive income                                                   |  |   | 22,773  |   |                 | 22,773   |              |            |   |    |               |            |           |   |                                       
|                           |                                                                              |  |   |         |   |                 |          |              |            |   |    |                |            |           |   |                                       
|                           | Comprehensive income                                                         |  | $ | 194,301 |   |                 |          |              |            |   |    |                |            |           |   |                                       
|                           |                                                                              |  |   |         |   |                 |          |              |            |   |    |                |            |           |   |                                       
|                           | Stock options exercised                                                      |  |   |         |   |                 | 5,940    |              |            |   |    |               |            | 347,686   |   |                                       
|                           | Tax benefit from the exercise of stock options                               |  |   |         |   |                 | 40,998   |              |            |   |    |               |            |           |   |                                       
|                           | Restricted stock award plan                                                  |  |   |         |   |                 | 2,828    |              |            |   |    |               |            | 129,900   |   |                                       
|                           | Employer contributions to employee benefit plan                              |  |   |         |   |                 | 2,133    |              |            |   |    |               |            | 38,722    |   |                                       
|                           | Treasury stock acquired                                                      |  |   |         |   |                 | (2,346   | )            |            |   |    |               |            |           |   |                                       
|                           |                                                                              |  |   |         |   |                 |          |              |            |   |    |                |            |           |   |                                       
|BALANCE, DECEMBER 31, 2002 |                                                                              |  |   |         |   | 642,585         |          |             |            |   |   |                | 55,425,841 |           |   | 554                                   
|                           | Income                                                                       |  | $ | 83,858  |   |                 | 83,858   |              |            |   |    |               |            |           |   |                                       
|                           |                                                                              |  |   |         |   |                 |          |              |            |   |    |                |            |           |   |                                       
|                           | Foreign currency translation gain                                            |  |   | 28,995  |   |                 |          |              |            |   |    |                |            |           |   |                                       
|                           | Unrealized investment losses                                                 |  |   | (1,291  | ) |                 |          |              |            |   |    |                |            |           |   |                                       
|                           |                                                                              |  |   |         |   |                 |          |              |            |   |    |                |            |           |   |                                       
|                           | Other comprehensive income                                                   |  |   | 27,704  |   |                 | 27,704   |              |            |   |    |               |            |           |   |                                       
|                           |                                                                              |  |   |         |   |                 |          |              |            |   |    |                |            |           |   |                                       
|                           | Comprehensive income                                                         |  | $ | 111,562 |   |                 |          |              |            |   |    |                |            |           |   |                                       
|                           |                                                                              |  |   |         |   |                 |          |              |            |   |    |                |            |           |   |                                       
|                           | Sale of warrants associated with convertible subordinated notes              |  |   |         |   |                 | 178,315  |              |            |   |    |               |            |           |   |                                       
|                           | Purchase of Convertible Hedge associated with convertible subordinated notes |  |   |         |   |                 | (258,584 | )            |            |   |    |                |            |           |   |                                       
|                           | Tax benefit from the purchase of Convertible Hedge                           |  |   |         |   |                 | 90,500   |              |            |   |    |                |            |           |   |                                       
|                           | Stock options exercised                                                      |  |   |         |   |                 | 4,528    |              |            |   |    |               |            | 299,056   |   |                                       
|                           | Tax benefit from the exercise of stock options                               |  |   |         |   |                 | 944      |              |            |   |    |                |            |          |   |                                       
|                           | Restricted stock award plan                                                  |  |   |         |   |                 | 1,394    |              |            |   |    |               |            | 99,025    |   |                                       
|                           | Employer contributions to employee benefit plan                              |  |   |         |   |                 | 829      |              |            |   |    |               |            | 18,588    |   |                                       
|                           | Treasury stock acquired                                                      |  |   |         |   |                 | (1,703   | )            |            |   |    |               |            |           |   |                                       
|                           |                                                                              |  |   |         |   |                 |          |              |            |   |    |                |            |           |   |                                       
|BALANCE, DECEMBER 31, 2003 |                                                                              |  |   |         | $ | 770,370         |          |             |            | $ |   |                | 55,842,510 |           | $ | 558                                   
|                           |                                                                              |  |   |         |   |                 |          |              |            |   |    |                |            |           |   |                                       

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

62

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CEPHALON, INC. AND SUBSIDIARIES  CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                             |                                                                                            | Year Ended December 31,                                                                               |                                                         
|------------------------------------------------------------ | ------------------------------------------------------------------------------------------ | ----------------------------------------------------------------------------------------------------- | --------------------------------------------------------
|
|CASH FLOWS FROM OPERATING ACTIVITIES:                        |                                                                                            |                                                                                                       |                                                         
|                                                             | Net income (loss)                                                                          |                                                                                                       | $                                                       
|                                                             | Adjustments to reconcile net income (loss) to net cash provided by operating activities:   |                                                                                                       |                                                         
|                                                             |                                                                                            | Deferred income taxes                                                                                 |                                                         
|                                                             |                                                                                            | Tax benefit from exercise of stock options                                                            |                                                         
|                                                             |                                                                                            | Depreciation and amortization                                                                         |                                                         
|                                                             |                                                                                            | Amortization of debt issuance costs                                                                   |                                                         
|                                                             |                                                                                            | Cumulative effect of changing inventory costing method from FIFO to LIFO                              |                                                         
|                                                             |                                                                                            | Stock-based compensation expense                                                                      |                                                         
|                                                             |                                                                                            | In-process research and development expense                                                           |                                                         
|                                                             |                                                                                            | Debt exchange expense                                                                                 |                                                         
|                                                             |                                                                                            | Non-cash charge (gain) on early extinguishment of debt                                                |                                                         
|                                                             |                                                                                            | Other                                                                                                 |                                                         
|                                                             |                                                                                            | Increase (decrease) in cash due to changes in assets and liabilities, net of effect from acquisition: |                                                         
|                                                             |                                                                                            |                                                                                                       | Receivables                                             
|                                                             |                                                                                            |                                                                                                       | Inventory                                               
|                                                             |                                                                                            |                                                                                                       | Other assets                                            
|                                                             |                                                                                            |                                                                                                       | Accounts payable, accrued expenses and deferred revenues
|                                                             |                                                                                            |                                                                                                       | Other liabilities                                       
|                                                             |                                                                                            |                                                                                                       |                                                         
|                                                             |                                                                                            |                                                                                                       | Net cash provided by operating activities               
|                                                             |                                                                                            |                                                                                                       |                                                         
|CASH FLOWS FROM INVESTING ACTIVITIES:                        |                                                                                            |                                                                                                       |                                                         
|                                                             | Purchases of property and equipment                                                        |                                                                                                       |                                                         
|                                                             | Investments in non-marketable securities                                                   |                                                                                                       |                                                         
|                                                             | Acquistion of Group Lafon, net of cash acquired                                            |                                                                                                       |                                                         
|                                                             | Acquistion of intangible assets                                                            |                                                                                                       |                                                         
|                                                             | Sales and maturities (purchases) of investments, net                                       |                                                                                                       |                                                         
|                                                             |                                                                                            |                                                                                                       |                                                         
|                                                             |                                                                                            |                                                                                                       | Net cash used for investing activities                  
|                                                             |                                                                                            |                                                                                                       |                                                         
|CASH FLOWS FROM FINANCING ACTIVITIES:                        |                                                                                            |                                                                                                       |                                                         
|                                                             | Proceeds from exercises of common stock options, warrants and employee stock purchase plan |                                                                                                       |                                                         
|                                                             | Payments to acquire treasury stock                                                         |                                                                                                       |                                                         
|                                                             | Preferred dividends paid                                                                   |                                                                                                       |                                                         
|                                                             | Principal payments on and retirements of long-term debt                                    |                                                                                                       |                                                         
|                                                             | Net proceeds from issuance of convertible subordinated notes                               |                                                                                                       |                                                         
|                                                             | Proceeds from sale of warrants                                                             |                                                                                                       |                                                         
|                                                             | Purchase of Convertible Hedge                                                              |                                                                                                       |                                                         
|                                                             |                                                                                            |                                                                                                       |                                                         
|                                                             |                                                                                            |                                                                                                       | Net cash (used for) provided by financing activities    
|                                                             |                                                                                            |                                                                                                       |                                                         
|EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS |                                                                                            |                                                                                                       | 9,026                                                   
|                                                             |                                                                                            |                                                                                                       |                                                         
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS         |                                                                                            |                                                                                                       | 629,602                                                 
|CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                 |                                                                                            |                                                                                                       | 486,097                                                 
|                                                             |                                                                                            |                                                                                                       |                                                         
|CASH AND CASH EQUIVALENTS, END OF YEAR                       |                                                                                            | $                                                                                                     | 1,115,699                                               
|                                                             |                                                                                            |                                                                                                       |                                                         
|Supplemental disclosures of cash flow information:           |                                                                                            |                                                                                                       |                                                         
|                                                             | Cash payments for interest                                                                 |                                                                                                       |                                                         
|                                                             | Cash payments for French income taxes                                                      |                                                                                                       |                                                         
|Non-cash investing and financing activities:                 |                                                                                            |                                                                                                       |                                                         
|                                                             | Capital lease additions                                                                    |                                                                                                       |                                                         
|                                                             | Tax benefit from the purchase of Convertible Hedge                                         |                                                                                                       |                                                         
|                                                             | Conversion of convertible notes into common stock                                          |                                                                                                       |                                                         

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

63

---



CEPHALON, INC. AND SUBSIDIARIES        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        (In thousands, except share data)

1.    NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business

Cephalon is an international biopharmaceutical company dedicated to the discovery, development and marketing of products to treat sleep disorders, neurological
and psychiatric disorders, cancer and pain. In addition to conducting an active research and development program, we market three products in the United States and a number of products in various
countries throughout Europe.

Our
corporate and research and development headquarters are in West Chester, Pennsylvania, and we have offices in Salt Lake City, Utah, France, the United Kingdom, Germany and
Switzerland. We operate manufacturing facilities in France for the production of modafinil, which is the active drug substance in PROVIGIL® (modafinil) tablets
[C-IV], and other products marketed primarily in France. We also operate manufacturing facilities in Salt Lake City, Utah for the production of ACTIQ®
(oral transmucosal fentanyl citrate) [C-II] for distribution and sale in the European Union and the United States.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosure of assets and liabilities. Actual results may differ from those estimates.

Principles of Consolidation

The consolidated financial statements include the results of our operations and our wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated. In December 2001, we acquired all of the outstanding shares of capital stock of Financiere Lafon S.A. and Organisation de Synthese Mondiale Orsymonde S. A.
(collectively, Group Lafon) in a transaction accounted for as a purchase. See Note 2.

Foreign Currency

For foreign operating entities with currencies other than the U.S. Dollar, the local currency is the functional currency and we translate asset and liability
balances at exchange rates in effect at the end of the period, and income and expense transactions at the average exchange rates in effect during the period. Resulting translation adjustments are
reported as a separate component of accumulated other comprehensive income included in stockholders' equity. Gains and losses from foreign currency transactions are included in the consolidated
statements of operations.

Statement
of Financial Accounting Standards (SFAS) No. 95, "Statement of Cash Flows" requires that the effect of exchange rate changes on cash held in foreign currencies be
reported as a separate item in the reconciliation of beginning and ending cash and cash equivalents. All other foreign currency cash flows are reported in the applicable line of the consolidated
statement of cash flows using an approximation of the exchange rate in effect at the time of the cash flows.

64

---

Cash Equivalents and Investments

Cash equivalents include investments in liquid securities with original maturities of three months or less from the date of purchase. In accordance with SFAS
No. 115, "Accounting for Certain Investments in Debt and Equity Securities," we consider our investments to be "available for sale." We classify these investments as short-term and
carry them at fair market value. Unrealized gains and losses have been recorded as a separate component of accumulated other comprehensive income included in stockholders' equity. All realized gains
and losses on our available for sale securities are recognized in results of operations.

Major Customers and Concentration of Credit Risk

% of total trade
accounts receivable
For the period ended
December 31,

% of worldwide
net product sales
For the year ended
December 31,2003

2002

2003

2002Major customers:AmerisourceBergen Corporation

19
%
24
%
22
%
22
%Cardinal Health, Inc.

23

30

33

30McKesson Corporation

28

22

27

25Total

70
%
76
%
82
%
77
%


We
sell our products primarily to a limited number of pharmaceutical wholesalers without requiring collateral. We periodically assess the financial strength of these customers and
establish allowances for anticipated losses if necessary.

Inventory

Inventory is stated at the lower of cost or market value. Effective January 1, 2002, we began using the last-in, first-out (LIFO)
method for our domestic inventories. We use the first-in, first-out (FIFO) method for the majority of our foreign inventories. See Note 6.

Property and Equipment

Property and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the assets, which range
from three to forty years. Property and equipment under capital leases are depreciated or amortized over the shorter of the lease term or the expected useful life of the assets. Expenditures for
maintenance and repairs are charged to expense as incurred, while major renewals and betterments are capitalized.

65

---

Fair Value of Financial Instruments

The carrying values of cash, cash equivalents, short-term investments, accounts receivable, accounts payable and accrued expenses approximate the
respective fair values. The market value of our 2.50% convertible notes was $569.4 million as compared to a carrying value of $600.9 million, and the market value of our zero coupon
convertible notes was $738.5 million as compared to a carrying value of $750.0 million, at December 31, 2003, based on quoted market values. None of our other debt instruments
that were outstanding as of December 31, 2003 have readily ascertainable market values; however, management believes that the carrying values approximate the respective fair values.

Goodwill, Intangible Assets and Other Long-Lived Assets

Goodwill represents the excess of purchase price over net assets acquired. In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets" which we
adopted on January 1, 2002, goodwill is not amortized; rather, goodwill is subject to a periodic assessment for impairment by applying a fair-value-based test. We have only recorded
goodwill related to our acquisition of Group Lafon effective December 28, 2001 and amortization expense related to goodwill for the period December 28, 2001 to December 31, 2001
was immaterial. On January 1, 2002, our transitional impairment test indicated that there was no impairment of goodwill upon our adoption of SFAS 142. In addition, we performed our
annual test of impairment of goodwill as of July 1, 2003. We have only one reporting unit, a pharmaceutical unit, that constitutes our entire commercial business, and we compared the fair value
of this reporting unit with its carrying value. Our quoted market value at July 1, 2003 was used as the fair value of the reporting unit. Since the fair value of the reporting unit exceeded its
carrying value at July 1, 2003, no adjustment to our goodwill for impairment was necessary.

In
accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," we review amortizable assets for impairment on an annual basis or
whenever changes in circumstances indicate the carrying value of the asset may not be recoverable. If impairment is indicated, we measure the amount of such impairment by comparing the carrying value
of the assets to the present value of the expected future cash flows associated with the use of the asset. In 2003, we recorded a $2.0 million charge relating to the write-off as
R&D expense of the value of an investment in an unaffiliated entity. Management believes the future cash flows to be received from all other long-lived assets will exceed the assets'
carrying value, and, accordingly, we have not recognized any additional impairment losses through December 31, 2003.

Revenue Recognition

In the United States, we sell our products to pharmaceutical wholesalers, the largest three of which account for 82% of our worldwide net sales. Decisions made by
these wholesalers regarding the levels of inventories they hold can materially affect the level of our sales in any period. We attempt to minimize these fluctuations, both by providing, from time to
time, discounts to our customers to stock normal amounts of inventory and by canceling orders if we believe a particular customer is speculatively buying inventory in anticipation of possible price
increases. We have no agreements, understandings, or business practices under which we have agreed to extend incentives based on levels of inventory held by wholesalers, and any incentives we may
offer are not intended to have any relation to the wholesaler's cost of carrying inventory. We believe that wholesaler inventories as of

66

---

December 31,
2003 for all three of our products were within a normal range. At December 31, 2003, inventory levels maintained by wholesalers and chains were approximately one month's
supply for all three of our U.S. products according to IMS Health. Sales recorded for the year ended December 31, 2003 were generally representative of underlying demand for the products.

Product
sales are recognized upon the transfer of ownership and risk of loss for the product to the customer. In the United States, we sell all commercial products F.O.B. shipping point.
Transfer of ownership and risk of loss for the product pass to the customer at the point that the product is picked up by a common carrier for shipment to the customer. In Europe, product sales are
recognized predominantly upon customer receipt of the product except in certain contractual arrangements where different terms may be specified. We record product sales net of estimated reserves for
contractual allowances, discounts and returns. Contractual allowances result from sales under contracts with managed care organizations and government agencies.

Other
revenue, which includes revenues from collaborative agreements, consists primarily of up-front fees, ongoing research and development funding, milestone payments and
payments under co-promotional or managed services agreements. Non-refundable up-front fees are deferred and amortized to revenue over the related performance
period. We estimate our performance period based on the specific terms of each collaborative agreement. We adjust the performance periods, if appropriate, based upon available facts and circumstances.
We recognize periodic payments over the period that we perform the related activities under the terms of the agreements. Revenue resulting from the achievement of milestone events stipulated in the
agreements is recognized when the milestone is achieved. Milestones are based upon the occurrence of a substantive element specified in the contract or as a measure of substantive progress towards
completion under the contract.

Reimbursement
rates of research and development activities under collaborative agreements vary according to the terms of the individual agreements. Costs incurred related to
collaborative agreements
and reflected in our operating expenses approximated $46.1 million, $44.0 million, $21.8 million for the years ended December 31, 2003, 2002, and 2001, respectively.

Payments
under co-promotional or managed services agreements are recognized when the products are sold or the promotional activities are performed. The portion of the
payments that represents reimbursement of our expenses is recognized as an offset to those expenses in our statement of income.

As
of December 31, 2003, we have recorded $2.2 million of deferred revenues of which $0.4 million is classified as current. These deferred revenues will be
recognized over future periods in accordance with the revenue recognition policies described above.

Research and Development

All research and development costs are charged to expense as incurred.

Acquired In-Process Research and Development

Purchased in-process research and development represents the estimated fair value assigned to research and development projects acquired in a purchase
business combination that have not been

67

---

completed
at the date of acquisition and which have no future alternative use. Accordingly, these costs are charged to expense as of the acquisition date.

Other Comprehensive Income

We follow SFAS No. 130, "Reporting Comprehensive Income." This statement requires the classification of items of other comprehensive income by their nature
and disclosure of the accumulated balance of other comprehensive income, separately within the equity section of the balance sheet. The balance in accumulated other comprehensive income due to foreign
currency translation adjustments was
$50.9 million and $21.9 million as of December 31, 2003 and 2002, respectively. The balance in accumulated other comprehensive income due to unrealized investment gains was
$1.9 million and $3.2 million as of December 31, 2003 and 2002, respectively.

Earnings Per Share

We compute income per common share in accordance with SFAS No. 128, "Earnings Per Share." Basic income per common share is computed based on the weighted
average number of common shares outstanding during the period. Diluted income per common share is computed based on the weighted average shares outstanding and the dilutive impact of common stock
equivalents outstanding during the period. The dilutive effect of employee stock options and restricted stock awards is measured using the treasury stock method. The dilutive effect of convertible
notes is measured using the "if-converted" method. Common stock equivalents are not included in periods where there is a loss, as they are anti-dilutive. Because of the
inclusion of the restricted convertibility terms of the Zero Coupon Convertible Subordinated Notes, our diluted income per common share calculation does not give effect to the dilution from the
conversion of the notes until our share price exceeds the 120% conversion price premium. See Note 10. The following is a reconciliation of net income and weighted average common shares
outstanding for purposes of calculating basic and diluted income per common share:

Year ended December 31,2003

2002

2001Basic income (loss) per share computation:Numerator:Income (loss) before cumulative effect of a change in accounting principle

$
83,858

$
175,062

$
(55,484
)Cumulative effect of a change in accounting principle





(3,534
)

Net income (loss)


83,858


171,528


(55,484
)Dividends on convertible exchangeable preferred stock








(5,664
)Net income (loss) used for basic income (loss) per common share

$
83,858

$
171,528

$
(61,148
)


68

---

Denominator:Weighted average shares used for basic income (loss) per common share


55,560,000


55,104,000


48,292,000Basic income (loss) per common share:Income (loss) per common share before cumulative effect of a change in accounting principle

$
1.51

$
3.17

$
(1.27
)Cumulative effect of a change in accounting principle





(0.06
)

$
1.51

$
3.11

$
(1.27
)Diluted income (loss) per share computation:Numerator:Income (loss) before cumulative effect of a change in accounting principle

$
83,858

$
175,062

$
(55,484
)Cumulative effect of a change in accounting principle





(3,534
)

Net income (loss)


83,858


171,528


(55,484
)Dividends on convertible exchangeable preferred stock








(5,664
)Net income (loss) used for basic income (loss) per common share


83,858


171,528


(61,148
)Interest on convertible notes (net of tax)


8,425


16,259


Net income (loss) used for diluted income (loss) per common share

$
92,283

$
187,787

$
(61,148
)Denominator:Weighted average shares used for basic income (loss) per common share


55,560,000


55,104,000


48,292,000Effect of dilutive securities:Convertible subordinated notes


7,407,000


10,466,000


Employee stock options and restricted stock awards


1,105,000


1,872,000


Weighted average shares used for diluted income (loss) per common share


64,072,000


67,442,000


48,292,000


69

---

Diluted income (loss) per common share:Income (loss) per common share before cumulative effect of a change in accounting principle

$
1.44

$
2.84

$
(1.27
)Cumulative effect of a change in accounting principle





(0.05
)

$
1.44

$
2.79

$
(1.27
)


The
following reconciliation shows the shares excluded from the calculation of diluted income per common share as the inclusion of such shares would be anti-dilutive:

Year ended December 31,2003

2002

2001Weighted average shares excluded:Employee stock options

5,793,000

2,331,000

5,431,000Convertible subordinated notes

9,148,000



3,977,00014,941,000

2,331,000

9,408,000


The
potential impact of the Zero Coupon Convertible Notes on the calculation of diluted shares is described in the table below:

Principal
amount

Conversion
price per
share

Resulting
conversion
shares

120%
conversion
price*Zero Coupon notes first putable June 2008

$
375,000

$
59.50

6,302,521

$
71.40Zero Coupon notes first putable June 2010


375,000

$
56.50

6,637,168

$
67.80$
750,000




12,939,689


---

At
the end of each period, FAS 128 requires that we use the if-converted method to determine the dilutive impact of the 2008 Notes and the 2010 Notes. Since the terms
of these notes include restrictions which prevent the holder from converting the notes until our share price exceeds the 120% Conversion Price, there will be no impact of these notes on the total
diluted shares figure for a particular reporting period unless our stock price exceeds the 120% Conversion Price on the last day of that reporting period. If that occurs, the 2008 Notes and the 2010
Notes will increase the total diluted shares figure by 6.3 million shares and 6.6 million shares, respectively, for both that current reporting period and the corresponding
year-to-date reporting period. Under the if-converted method, we must recalculate this analysis each quarter to determine if the diluted shares from the 2008 Notes
and 2010 Notes should be included our diluted shares figures.

70

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As
described in Note 10, we purchased Convertible Note Hedges and sold Warrants which, in combination, have the effect of reducing the dilutive impact of the Zero Coupon
Convertible Notes by increasing the effective conversion price for these Notes from our perspective to $72.08. FAS 128, however, requires us to analyze the impact of the Convertible Note Hedges
and Warrants on diluted EPS separately. As a result, the purchase of the Convertible Note Hedge is excluded because its impact will always be anti-dilutive. FAS 128 further requires
that the impact of the sale of the Warrants be computed using the treasury stock method. For example, using the treasury stock method, if the average price of our stock during the period ended
December 31, 2003 had been $72.08, $80.00 or $90.00, the shares from the Warrants to be included in diluted EPS would have been zero, 1.0 million and 2.1 million shares,
respectively. The total number of shares that could potentially be included under the Warrants is 12.9 million. Since the average share price of our stock during the year ended
December 31, 2003 did not exceed the Conversion Price of $72.08, there was no impact of these Warrants on diluted shares or diluted EPS during that period.

Stock-based Compensation

We account for stock-based employee compensation arrangements in accordance with provisions of APB Opinion No. 25, "Accounting for Stock Issued to
Employees." Compensation cost, if any, is measured as the excess of the quoted market price of the stock at the date of grant over the amount an employee must pay to acquire the stock. We have opted
to disclose only the provisions of SFAS 123, "Accounting for Stock-Based Compensation," and SFAS 148, "Accounting for Stock-Based CompensationTransition and
DisclosureAn Amendment to FASB Statement No. 123," as they pertain to financial statement recognition of compensation expense attributable to option grants. As such, no
compensation cost has been recognized for our stock option plans. If we had elected to recognize compensation cost based on the fair value of granted stock options as prescribed by SFAS 123 and
SFAS 148, the pro forma income and income per share amounts would have been as follows:

Year ended December 31,2003

2002

2001Income applicable to common shares, as reported

$
83,858

$
171,528

$
(61,148
)Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects


(33,903
)

(34,660
)

(37,302
)Pro forma income applicable to common shares for basic income per share calculation

$
49,955

$
136,868

$
(98,450
)Earnings per share:Basic income per share, as reported

$
1.51

$
3.11

$
(1.27
)Basic income per share, pro forma

$
0.90

$
2.48

$
(2.04
)Diluted income per share, as reported

$
1.44

$
2.79

$
(1.27
)Diluted income per share, pro forma

$
0.88

$
2.27

$
(2.04
)


The
2002 pro forma diluted income per share has been adjusted from the $2.03 previously reported to recognize the elimination of interest on dilutive securities.

71

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Income Taxes

We account for income taxes using the liability method under SFAS No. 109, "Accounting for Income Taxes." This method generally provides that deferred tax
assets and liabilities be recognized for temporary differences between the financial reporting basis and the tax basis of the assets and liabilities and expected benefits of utilizing net operating
loss and tax credit carryforwards. We record a valuation allowance for certain temporary differences for which it is more likely than not that we will not generate future tax benefits. The impact on
deferred taxes of changes in tax rates and laws, if any, are applied to the years during which temporary differences are expected to be settled and reflected in the consolidated financial statements
in the period of enactment.

Reclassifications

Certain reclassifications of prior year amounts have been made to conform to the current year presentation.

Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143, "Accounting for Asset Retirement Obligations," which requires
recognition of the fair value of liabilities associated with the retirement of long-lived assets when a legal obligation to incur such costs arises as a result of the acquisition,
construction, development and/or the normal operation of a
long-lived asset. SFAS 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable
estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset and subsequently allocated to expense over
the asset's useful life. We adopted SFAS 143 on January 1, 2003. The adoption of this new standard did not impact our current financial statements.

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In
April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
This Statement amends or rescinds certain existing authoritative pronouncements including SFAS No. 4, "Reporting Gains and Losses on Extinguishment of Debt," such that the provisions of
Accounting Principles Board Opinion (APB) No. 30 "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions" must now be followed to determine if the early extinguishment of debt should be classified as an extraordinary item. In addition, any gain or loss on extinguishment
of debt that was classified as an extraordinary item in prior periods that does not meet the criteria in APB 30 must be reclassified. SFAS 145 is effective for fiscal years beginning after
May 15, 2002. We adopted this new standard effective December 31, 2002 and reclassified all gains and losses on early extinguishment of debt as other income and expense, rather than
extraordinary items, in our current financial statements.

In
June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal Activities." This Statement addresses the recognition, measurement and reporting of costs that
are associated with exit and disposal activities, including restructuring activities that are currently accounted for pursuant to the guidance in Emerging Issues Task Force Issue
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The Statement
requires that costs associated with exit or disposal activities be recorded at their fair values when a liability has been incurred. SFAS 146 is effective for disposal activities initiated
after December 31, 2002. The adoption of this new standard did not impact our current financial statements.

In
December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure." SFAS 148 amends SFAS 123, "Accounting for
Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this
Statement amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. We adopted the additional disclosure requirements of SFAS 148 effective January 1, 2003.

In
November 2002, the FASB issued FASB Interpretation (FIN) No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees." This Interpretation requires that
upon the issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under that guarantee. FIN 45 is effective for guarantees issued or modified
after December 31, 2002. The adoption of this new statement did not impact our current financial statements.

In
January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest Entities." Subsequently, in December 2003, the FASB issued a revised version of FIN
46 (FIN 46R). FIN 46 and FIN 46R require a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's
activities or entitled to receive a majority of the entity's residual returns or both. FIN 46 and FIN 46R also require disclosures about variable interest entities that a company is not required to
consolidate but in which it has a significant variable interest. The consolidation requirements of FIN 46 and FIN 46R apply immediately to variable interest entities created after January 31,
2003 and to existing special purpose entities in the first fiscal year or interim period ending after December 15, 2003. For all other entities, the requirements of FIN 46 and FIN 46R apply in

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the
first period ending after March 15, 2004. As a result of the adoption of the standards, Cephalon Clinical Partners, L.P. has been consolidated in our financial statements at
December 31, 2003 (see Note 12). This consolidation did not have a material impact on our financial statements. Our investments in non-marketable securities of other entities
are not considered variable interest entities and, therefore, we have not consolidated these entities.

In
April 2003, the FASB issued SFAS No. 149, "Amendment of FASB Statement 133 on Derivative Instruments and Hedging Activities." This Statement amends and clarifies
financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities
under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This Statement clarifies under what circumstances a contract with an initial net investment meets the
characteristic of a derivative discussed in SFAS No. 133, clarifies when a derivative contains a financing component, amends the definition of an "underlying" to conform it to language used in
FIN No. 45, and amends certain other existing pronouncements. This Statement is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships
designated after June 30, 2003. The adoption of this new standard did not impact our current financial statements.

In
May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." This Statement establishes
standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that
is within its scope as a liability (or an asset in some circumstances). This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15, 2003. This new standard has been considered in accounting for our Convertible Note Hedge and
Warrantssee Note 10.

In
May 2003, the FASB's Emerging Issues Task Force reached consensus on Issue 00-21. This Issue addresses certain aspects of the accounting by a vendor for
arrangements under which it will perform multiple revenue-generating activities. Specifically, this Issue addresses how to determine whether an arrangement involving multiple deliverables contains
more than one unit of accounting. In applying this Issue, separate contracts with the same entity or related parties that are entered into at or near the same time are presumed to have been negotiated
as a package and should, therefore, be evaluated as a single arrangement in considering whether there are one or more units of accounting. That presumption may be overcome if there is sufficient
evidence to the contrary. This Issue also addresses how arrangement consideration should be measured and allocated to the separate units of accounting in the arrangement. The guidance in this Issue is
effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The application of this Issue did not impact our current financial statements.

In
December 2003, the FASB issued a revision to SFAS No. 132 "Employers' Disclosures about Pensions and Other Postretirement Benefits." This Statement requires additional
disclosures about the assets, obligations, cash flows, and net periodic benefit costs of defined benefit plans and other defined benefit postretirement plans. This Statement is effective for fiscal
years ending after December 15, 2003, except for certain disclosures about foreign plans which are effective for fiscal years ending after June 15, 2004. Since all of our pension and
postretirement benefit plans are foreign plans, we will adopt the additional disclosure requirements of this statement in 2004.

74

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2.    MERGERS AND ACQUISITIONS

Group Lafon

On December 28, 2001, we completed our acquisition of the outstanding shares of capital stock of Group Lafon. The results of operations for Group Lafon
have not been included in our consolidated statements in 2001 since operations between the acquisition date and December 31, 2001 were immaterial.

The
purchase price of $454.2 million was funded in part by the proceeds of our December 11, 2001 offering of $600.0 million of 2.50% convertible subordinated notes.
Of the purchase price, $450.0 million
was paid in cash to the sellers with the remainder primarily representing transaction costs of the acquisition and severance payments to certain Group Lafon employees. The purchase accounting for the
acquisition was finalized effective December 31, 2002 and resulted in a $2.8 million decrease in the amount of goodwill originally recorded at the date of acquisition.

At
December 31, 2001, $4.9 million was recorded as a net accrual for transaction costs in our consolidated balance sheet. All such amounts were paid in 2002.

The
following table summarizes the fair values of assets acquired and liabilities assumed at the date of acquisition.

Current assets

$
63,407Property, plant and equipment


25,281Intangible assets


148,000Acquired in-process research and development


20,000Goodwill


298,769Other assets


4,898Total assets acquired


560,355Current liabilities


(38,148
)Deferred tax liabilities


(52,666
)Other liabilities


(15,349
)Total liabilities assumed


(106,163
)Net assets acquired

$
454,192


Of
the $148.0 million of acquired intangible assets, $16.0 million was assigned to trademarks and tradenames with an estimated useful life of 15 years with the
remaining $132.0 million assigned to developed technology for existing pharmaceutical products with a weighted average estimated useful life of approximately 14 years. The
$298.8 million of goodwill was assigned to the pharmaceutical segment. None of this goodwill is expected to be deductible for income tax purposes.

In
accordance with SFAS 142, goodwill is not amortized, but is subject to a periodic assessment for impairment by applying a fair-value-based test. We performed our
annual test of impairment of goodwill as of July 1, 2003. We have only one reporting unit, a pharmaceutical unit, that constitutes our entire commercial business, and we compared the fair value
of this reporting unit with its carrying value. Our quoted market value at July 1, 2003 was used as the fair value of the reporting unit. Since the fair value of the reporting unit exceeded its
carrying value at July 1, 2003, no adjustment to our goodwill for impairment was necessary.

75

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In
connection with the acquisition of Group Lafon, we allocated approximately $20.0 million of the purchase price to in-process research and development projects. This
allocation represented the estimated fair value based on risk-adjusted cash flows related to the incomplete research and development projects. At the date of acquisition, the development
of these projects had not yet reached technological feasibility, and the research and development in progress had no alternative future uses. Accordingly, these costs were charged to expense as of the
acquisition date.

In
determining the purchase price allocation, management considered present value calculations of income, an analysis of project accomplishments and remaining outstanding items, an
assessment of overall contributions, as well as project risks. The value assigned to purchased in-process technology was determined by independent appraisal by estimating the costs to
develop the acquired technology into commercially viable products, estimating the resulting net cash flows from the projects, and discounting the net cash flows to their present value. The revenue
projections used to value the in-process research and development were, in some cases, reduced based on the probability of success in developing a new drug, and considered the relevant
market sizes and growth factors, expected trends in technology, and the nature and expected timing of new product introductions by us and our competitors. The resulting net cash flows from such
projects are based on management's estimates of cost of sales, operating expenses, and income taxes from such projects.

The
rates utilized to discount the net cash flows to their present value were based on estimated cost of capital calculations. Due to the nature of the forecast and the risks associated
with the projected growth and profitability of the developmental projects, discount rates ranging from 25 to 40 percent were considered appropriate for the in-process research and
development. These discount rates were commensurate with the projects' stages of development and the uncertainties in the economic estimates described above.

If
these projects are not successfully developed, the sales and profitability of the combined company may be adversely affected in future periods. Additionally, the value of other
acquired intangible assets may become impaired. We believed that the foregoing assumptions used in the in-process research and development analysis were reasonable at the time of the
acquisition. We cannot be sure, however, that the underlying assumptions used to estimate expected project sales, development costs or profitability, or the events associated with such projects, will
transpire as estimated.

3.    JOINT VENTURE

In December 2001, we formed a joint venture with unaffiliated third party investors to fund additional commercial activities in support of PROVIGIL and
GABITRIL in the United States. In exchange for our transfer to the joint venture of certain intellectual property and other rights related to these two products, we received a Class B interest,
representing a 50% interest in the joint venture. In exchange for a contribution of $50.0 million in cash to the joint venture, the investors received Class A interests, also
representing a 50% interest in the joint venture. As of December 31, 2001, the $50.0 million investors' Class A interest was recorded on our balance sheet as long-term
debt, and the joint venture's cash balance of $50.0 million was included in our balance of cash and cash equivalents.

76

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On
March 29, 2002, we acquired the investors' Class A interests and ended the joint venture by issuing to the investors, through a private placement, $55.0 million
aggregate principal amount of 3.875% convertible subordinated notes due March 2007. See Note 10.

The
purchase of the investor's Class A interests in the joint venture resulted in the recognition of a charge of $7.1 million on the early extinguishment of debt during the
first quarter of 2002. The following table summarizes the calculation of this charge:

Carrying value of the debt as of December 31, 2001

$
50,000Interest accreted during the first quarter 2002 at 20%


2,500Carrying value of the debt as of March 29, 2002


52,500Less: unamortized joint venture formation costs as of March 29, 2002


(4,642
)47,858Fair value of subordinated notes issued on March 29, 2002


(55,000
)Charge on early extinguishment of debt

$
(7,142
)


In
addition, our statement of operations for the year ended December 31, 2002 included certain charges related to the operations of the joint venture, as follows:

Selling, general and administrative expenses

$
3,508Interest expense


3,163Interest income


(190
)Total

$
6,481


4.    CASH, CASH EQUIVALENTS AND INVESTMENTS

At December 31, cash, cash equivalents and investments consisted of the following:

2003

2002Cash and cash equivalents:Demand deposits

$
194,480

$
486,097Repurchase agreements


388,816


Commercial paper


407,403


Asset-backed securities


125,000


1,115,699


486,097Short-term investments (at market value):U.S. government agency obligations





4,994Asset-backed securities


16,537


65,796Bonds


22,927


25,80139,464


96,591$
1,155,163

$
582,688


77

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The
contractual maturities of our investments in cash, cash equivalents, and investments at December 31, 2003 are as follows:

Less than one year

$
1,115,719Greater than one year but less than two years


1,114Greater than two years but less than three years


38,330$
1,155,163


Some
of our lease agreements contain covenants that obligate us to maintain a minimum balance in unrestricted cash and investments of $30.0 million or deliver to the lessor an
irrevocable letter of credit in the amount of the then outstanding balance due on all equipment leased under the agreements. At December 31, 2003, the balance due under these lease agreements
was $1.2 million.

5.    RECEIVABLES

At December 31, receivables consisted of the following:

2003

2002Trade receivables

$
75,851

$
63,659Receivables from collaborations


11,281


12,321Other receivables


7,990


12,25195,122


88,231Less reserve for sales discounts, returns and allowances


(8,774
)

(5,101
)$
86,348

$
83,130


6.    INVENTORY

At December 31, inventory consisted of the following:

2003

2002Raw material

$
23,647

$
28,628Work-in-process


10,295


2,448Finished goods


27,307


23,223$
61,249

$
54,299


Effective
January 1, 2002, we changed our method of valuing domestic inventories from the first-in, first-out, or FIFO method, to the last-in,
first-out, or LIFO method. We recognized a charge of $3.5 million in the first quarter of 2002 as the cumulative effect of adopting the LIFO inventory costing method. The
acquisition of additional manufacturing operations at the end of 2001 and the expansion of our internal manufacturing capacity for ACTIQ has reduced our reliance on third party manufacturers. The
expansion of our internal manufacturing capabilities should allow us to benefit from efficiencies of scale and lead to lower per unit inventory costs. The LIFO method will reflect these expected
changes to manufacturing costs on the statement of operations on a more timely basis, resulting in a better matching of currents costs of

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products
sold with product revenues. The excess of current or replacement cost over LIFO inventory value was $0.8 million and $2.9 million at December 31, 2003 and 2002,
respectively.

The
majority of our foreign inventories are valued using the first-in, first-out (FIFO) method. Inventories valued using FIFO were $24.4 million and
$22.6 million at December 31, 2003 and 2002, respectively.

7.    PROPERTY AND EQUIPMENT

At December 31, property and equipment consisted of the following:

Estimated
Useful Lives

2003

2002Land and improvements



$
5,681

$
4,612Buildings and improvements

10-40 years


74,921


54,556Laboratory, machinery and other equipment

3-10 years


68,510


45,335Construction in progress




31,510


18,686180,622


123,189Less accumulated depreciation and amortization




(54,180
)

(33,123
)$
126,442

$
90,066


Depreciation
and amortization expense was $11.0 million, $7.8 million, and $3.0 million for the years ended December 31, 2003, 2002 and 2001, respectively.

8.    OTHER INTANGIBLE ASSETS, NET

Other intangible assets consisted of the following:

|                                          |  |             |  | December 31, 2003 |         | December 31, 2002
|----------------------------------------- |  | ----------- |  | ----------------- | ------- | -----------------
|
|Developed technology acquired from Lafon  |  | 10-15 years |  | $                 | 132,000 |                  
|Trademarks/tradenames acquired from Lafon |  | 15 years    |  |                   | 16,000  |                  
|GABITRIL product rights                   |  | 9-15 years  |  |                   | 116,585 |                  
|Novartis CNS product rights               |  | 10 years    |  |                   | 41,641  |                  
|ACTIQ marketing rights                    |  | 10 years    |  |                   | 75,465  |                  
|Modafinil marketing rights                |  | 10 years    |  |                   | 9,469   |                  
|Other product rights                      |  | 5-14 years  |  |                   | 14,341  |                  
|                                          |  |             |  |                   |         |                  
|                                          |  |             |  | $                 | 405,501 |                  
|                                          |  |             |  |                   |         |                  

Other intangible assets are amortized over their estimated useful economic life using the straight line method. Amortization expense was
$33.1 million, $27.7 million, and $11.5 million for the years ended December 31, 2003, 2002 and 2001, respectively. Estimated amortization expense of intangible assets for
each of the next five years is approximately $33.0 million.

79

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9.    ACCRUED EXPENSES

At December 31, accrued expenses consisted of the following:

2003

2002Accrued compensation and benefits

$
12,579

$
14,433Accrued income taxes


22,918


13,242Accrued professional and consulting fees


12,183


7,476Accrued clinical trial fees and related expenses


13,503


7,065Accrued license fees and royalties


3,696


7,985Accrued contractual sales allowances


12,840


6,145Accrued interest


789


2,900Other accrued expenses


20,530


21,198$
99,038

$
80,444


10.    LONG-TERM DEBT

At December 31, long-term debt consisted of the following:

|                                                                   |  | 2003 |           | 2002 |  
|------------------------------------------------------------------ |  | ---- | --------- | ---- | -
|5.25% convertible subordinated notes due May 2006                  |  | $    |          |      | $
|2.5% convertible subordinated notes due December 2006              |  |      | 600,920   |      |  
|3.875% convertible subordinated notes due March 2007               |  |      | 43,000    |      |  
|Zero Coupon convertible subordinated notes first putable June 2008 |  |      | 375,000   |      |  
|Zero Coupon convertible subordinated notes first putable June 2010 |  |      | 375,000   |      |  
|Due to Abbott Laboratories                                         |  |      | 6,725     |      |  
|Mortgage and building improvement loans                            |  |      | 10,354    |      |  
|Capital lease obligations                                          |  |      | 2,289     |      |  
|Other                                                              |  |      | 5,766     |      |  
|                                                                   |  |      |           |      |  
|Total debt                                                         |  |      | 1,419,054 |      |  
|Less current portion                                               |  |      | (9,637    | )    |  
|                                                                   |  |      |           |      |  
|Total long-term debt                                               |  | $    | 1,409,417 |      | $
|                                                                   |  |      |           |      |  

Aggregate
maturities of long-term debt are as follows:

2004

$
9,6372005


46,8712006


603,3432007


2,4412008


377,9282009 and thereafter


378,834$
1,419,054


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Subordinated Convertible Notes

In the second quarter of 2001, we completed a private placement of $400.0 million of 5.25% convertible subordinated notes due May 2006. Debt
issuance costs of $14.4 million were capitalized in other assets
and are being amortized over the term of the notes. Interest on the notes is payable each May 1 and November 1. The notes are convertible, at the holder's option, into our common stock
at a conversion price of $74.00 per share, subject to adjustment in certain circumstances. Upon early redemption, we were required to pay interest that would have been due up through May 5,
2003. During the fourth quarter of 2001, certain note holders approached us, and we agreed, to exchange $217.0 million of these outstanding notes into 3,691,705 shares of our common stock. We
recognized debt exchange expense of $52.4 million in the fourth quarter of 2001 relating to these early exchanges in accordance with SFAS No. 84, "Induced Conversion of Convertible
Debt."

In
December 2001, we completed a private placement of $600.0 million of 2.50% convertible subordinated notes due December 2006. Debt issuance costs of
$21.3 million were capitalized in other assets and are being amortized over the term of the notes. Interest on the notes is payable each June 15 and December 15, beginning
June 15, 2002. The notes are convertible into our common stock at a conversion price of $81.00 per share, subject to adjustment in certain circumstances. We may redeem the notes on or after
December 20, 2004.

In
March 2002, we issued and sold $55.0 million of aggregate principal in a private placement of 3.875% convertible notes due March 2007. These notes were issued in
connection with our purchase of the investor's Class A interests in the joint venture and sold to the purchaser in a transaction exempt from registration requirements of the Securities Act of
1933, as amended, because the offer and sale of the notes did not involve a public offering. Interest on the notes is payable at a rate of 3.875% per year on each of April 15 and
October 15. The notes also are convertible into our common stock, at the option of the holders, at a price of $70.36 per share, subject to adjustment upon certain events. The holders of these
notes may elect to require us to redeem the notes on March 28, 2005 at a redemption price equal to 100% of the principal amount of notes submitted for redemption, plus accrued and unpaid
interest. Beginning with our reporting period ending March 31, 2004, these notes will be classified as current portion of long-term debt in our accompanying balance sheet. In
certain other circumstances, at the option of the holders, we may be required to repurchase the notes at 100% of the principal amount of the notes submitted for repurchase, plus accrued and unpaid
interest.

In
March 2003, we purchased $2.0 million of the 5.25% notes in the open market at a 2.5% discount. In April 2003, we purchased $7.0 million of the 5.25% notes
in the open market at par value. In July 2003, we redeemed for cash all of the $174.0 million outstanding 5.25% notes at a redemption price of 103.15% per $1,000 aggregate principal
amount of notes. In July 2003, we purchased $12.0 million of the 3.875% notes from one of the holders in a private transaction at a price of 106%

81

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of
the face amount of the notes. During the third quarter of 2003, $9.8 million was recognized in our financial statements as a charge on early extinguishment of debt as follows:

Principal
Amount

Premium

Write-off of
unamortized
debt issuance
costs

Total charge on early extinguishment
of debt5.25% Notes redeemed in July 2003

$
174,000

$
5,481

$
3,598

$
9,0793.875% Notes purchased in July 2003


12,000


720


17


737$
186,000

$
6,201

$
3,615

$
9,816




In January 2003, we entered into an interest rate swap agreement with a financial institution, relating to our $600.0 million 2.5% convertible
subordinated notes, in the aggregate notional amount of $200.0 million. Under the swap, we agreed to pay a variable interest rate on this $200.0 million notional amount equal to
LIBOR-BBA + .29% in exchange for the financial institution's agreement to pay a fixed rate of 2.5%. The variable interest rate is re-calculated at the beginning
of each quarter. The interest rate in effect during the fourth quarter of 2003 was 1.43%. We also agreed to provide the financial institution with cash collateral to support our obligations under the
agreement. The initial collateral amount was $3.0 million and was recorded in Other Assets in our consolidated balance sheet. We increased the carrying value of the subordinated notes by
$2.2 million at the time the agreement was made. This amount is being amortized over the four-year term of the agreement. At the end of each quarter, we record an adjustment to the
carrying value of the subordinated notes and the amount due for settling the interest rate swap based on their fair values as of that date. The carrying value of the interest rate swap was $(0.8)
million as of December 31, 2003 and is recorded in Other Liabilities in our consolidated balance sheet.

Zero Coupon Convertible Subordinated Notes

On June 11, 2003, we issued and sold in a private placement $750.0 million of Zero Coupon Convertible Subordinated Notes (the "Notes"). The interest
rate on the Notes is zero and the notes will not accrete interest. The Notes were issued in two tranches and have the following salient terms:



82

---



The
aggregate commissions and other debt issuance costs incurred with respect to the Notes were $22.9 million, which have been capitalized in Debt Issuance Costs on our
consolidated balance sheet and are being amortized over five and seven years. The Notes are subordinate to our existing and future senior indebtedness. The outstanding principal balance of the 2008
and 2010 Notes will be first classified as Current Portion of Long-Term Debt during the twelve months prior to the respective dates on which the Notes are first putable.

The
Notes also contain restricted convertibility terms that do not affect the conversion price of the notes but, instead, place restrictions on a holder's ability to convert their notes
into shares of our common stock ("conversion shares"). A holder may convert the notes if one or more of the following conditions are satisfied:



Because
of the inclusion of the restricted convertibility terms of the Notes, our diluted income per common share calculation does not give effect to the dilution from the conversion of
the Notes until our share price exceeds the 20% conversion price premium or one of the other conditions above is satisfied.

83

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Concurrent with the private placement of the Notes, we purchased a Convertible Note Hedge from Credit Suisse First Boston International (CSFBI) at a cost of
$258.6 million. We also sold to CSFBI warrants to purchase an aggregate of 12,939,689 shares of our common stock and received net proceeds from the sale of $178.3 million. Taken
together, the Convertible Note Hedge and warrants have the effect of increasing the effective conversion price of the notes from our perspective to $72.08, a 50% premium to the last reported NASDAQ
composite bid for our common stock on the day preceding the date of these agreements. At our option, the Convertible Note Hedge and warrants may be settled in either net cash or net shares. If we
elect to settle both instruments in cash, we would receive an amount equal to zero if the market price per share of our stock is at or below $56.50 to a maximum of $182.6 million if the market
price per share is at or above $72.08. If we elect to settle the Convertible Note Hedge and warrants in shares, we would receive shares of our stock from CSFBI, not to exceed 2.5 million
shares, with a value equal to the amount otherwise receivable on cash settlement. In accordance with Emerging Issues Task Force Issue No. 00-19, "Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled In, a Company's Own Stock" and SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,"
we have recorded the Convertible Note Hedge and warrants in additional paid in capital as of June 30, 2003, and will not recognize subsequent changes in fair value. We also recognized a
deferred tax asset of $90.5 million in the second quarter of 2003 for the effect of the future tax benefits related to the Convertible Note Hedge.

The
warrants have a strike price of $72.08. Of the total warrants sold, 6,302,521 warrants expire on June 15, 2008, with the remaining 6,637,168 warrants expiring on
June 15, 2010. The warrants are exercisable only on the respective expiration dates (European style) or upon the conversion of the notes, if earlier.

Due to Abbott Laboratories

In March 2000, we purchased the U.S. marketing rights to ACTIQ from Abbott Laboratories for $29.2 million. At December 31, 2003,
$2.1 million is outstanding and payable through 2005.

In
October 2000, we agreed to purchase the product rights to market and sell GABITRIL in the United States from Abbott Laboratories for $100.0 million due through 2004, of
which $40.0 million was paid immediately. We recorded $54.2 million of debt which represented the net present value of the remaining $60.0 million obligation, based on an
incremental borrowing rate of 7.5%. We made payments of $24.0 million in 2001, $21.0 million in 2002 and $10.0 million in 2003. At December 31, 2003, $4.6 million is
outstanding and payable in 2004.

Mortgage and Building Improvement Loans

In March 1995, we purchased the buildings housing our administrative offices and research facilities in West Chester, Pennsylvania for
$11.0 million. We financed the purchase through the assumption of an existing $6.9 million first mortgage and from $11.6 million in state funding provided by the Commonwealth of
Pennsylvania. The first mortgage has a 15-year term with an annual interest rate of 9.625%. The state funding has a 15-year term with an annual interest rate of 2%. The loans

84

---

require
annual aggregate principal and interest payments of $1.8 million. The loans are secured by the buildings and by all our equipment located in Pennsylvania that is otherwise unsecured.

In
November 2002, the Pennsylvania Industrial Development Board (PIDA) authorized the write-off of the outstanding principal balance of $5.3 million due on a
loan granted by PIDA in 1995, contingent upon the commencement of construction of a new headquarters facility in the Commonwealth of Pennsylvania no later than June 30, 2004, unless an
extension is approved by the PIDA Board. Until the earlier of the commencement of actual and direct construction of a headquarters facility or June 30, 2004 (or later date if extended), no
further interest will accrue on the outstanding balance and no payments are required by PIDA. As of the date hereof, it does not appear that we will commence construction of a headquarters facility by
the June 30 deadline. We plan to request from PIDA an extension of this deadline and remain committed to constructing a new headquarters facility in Pennsylvania. If the PIDA Board determines
not to grant an extension, interest and principal payments will proceed with the amortization schedule previously established in the original loan agreement. The outstanding loan balance of
$5.3 million at December 31, 2003 is reflected in our balance sheets as a long-term liability.

Capital Lease Obligations

We currently lease certain property and laboratory, production and computer equipment with a cost of $7.6 million. Under the terms of certain of the lease
agreements, we must maintain a minimum balance in unrestricted cash and investments of $30.0 million or deliver to the lessor an irrevocable letter of credit in the amount of the then
outstanding balance due on all equipment leased under the agreements. At December 31, 2003, the balance due under these lease agreements was $1.2 million. Our lease agreements provide us
with an option to purchase the leased equipment at the conclusion of the lease.

Notes Payable/Other

In December 2001, we acquired Group Lafon, which included the assumption of $13.5 million of notes payable, bank debt and outstanding amounts under
lines of credit. At December 31, 2003, $5.8 million is outstanding with fixed and variable interest rates ranging from 4.2% to 6.0%, such amounts are payable through 2011.

11.    PENSIONS AND OTHER POSTRETIREMENT BENEFITS

We have a defined benefit pension plan and other postretirement benefit plans covering employees at our French subsidiaries. These plans provide retirement
bonuses paid to employees upon retirement, health care benefits for retirees, pensions paid to surviving spouses of former employees, and bonuses paid to employees based on length of service or length
of career. We have maintained and recognized a liability for these plans since our acquisition of Group Lafon in December 2001 (see Note 2). These plans are noncontributory and are not
funded; benefit payments are funded from operations. We account for these plans using actuarial models required by SFAS No. 87, "Employers' Accounting for Pensions", and SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than

85

---

Pensions".
A summary of our change in benefit obligation as of the end of the last two fiscal years, and the components of net periodic benefit costs for each of the last two fiscal years, is as
follows:

Pension Benefits

Other Benefits2003

2002

2003

2002Change in benefit obligation:Benefit obligation at beginning of year

$
5,559

$
10,528

$
4,713

$
930Service cost


376


301


376


296Interest cost


290


256


257


198Actuarial gain





(225
)

(6
)

(73
)Amortization of prior improvements








(259
)

Purchase price adjustments





(6,667
)




3,243Benefits paid


(695
)

(605
)

(65
)

(86
)Foreign currency translation


1,097


1,971


984


205Benefit obligation at end of year

$
6,627

$
5,559

$
6,000

$
4,713


The
purchase price adjustments represent revisions to the fair values of the liabilities for pension and other postretirement benefit plans measured as of the date of
acquisition of Group Lafon (see Note 2) based on updated actuarial valuations performed as of the acquisition date.

Pension Benefits

Other Benefits2003

2002

2003

2002Components of net periodic benefit cost:Service cost

$
376

$
301

$
376

$
296Interest cost


290


256


257


198Amortization of prior improvements








(259
)

Actuarial gain





(225
)

(6
)

(73
)Net periodic benefit cost

$
666

$
332

$
368

$
421


The
following table presents the significant assumptions used:

Pension Benefits

Other Benefits2003

2002

2003

2002Discount rate

5.0
%
5.0
%
5.0
%
5.0
%Rate of compensation increase

3.0
%
3.0
%
3.0
%
3.0
%Rate of health care cost increase

4.0
%
4.0
%
4.0
%
4.0
%


A
1% change in the assumed health care cost trend rate would have the following effects:

1-Percentage-
Point Increase

1-Percentage-
Point DecreaseEffect on total service and interest cost components

$
16

$
(15
)Effect on postretirement benefit obligation

$
155

$
(131
)


86

---

The
accumulated benefit obligation for the defined benefit pension plan was $4.7 million and $4.2 million at December 31, 2003 and 2002,
respectively.

12.    COMMITMENTS AND CONTINGENCIES

Leases

We lease certain of our offices and automobiles under operating leases in the U.S. and Europe that expire at various times through 2018. Lease expense under all
operating leases totaled $6.9 million, $4.3 million, and $3.3 million in 2003, 2002, and 2001, respectively. Estimated lease expense for each of the next five years is as follows:

2004

$
6,9772005


5,3402006


3,3362007


1,3082008


1,2812009 and thereafter


3,912$
22,154


Cephalon Clinical Partners, L.P.

In August 1992, we exclusively licensed our rights to MYOTROPHIN for human therapeutic use within the United States, Canada and Europe to Cephalon Clinical
Partners, L.P. (CCP). Development and
clinical testing of MYOTROPHIN is performed on behalf of CCP under a research and development agreement with CCP.

CCP
has granted us an exclusive license to manufacture and market MYOTROPHIN for human therapeutic use within the United States, Canada and Europe in return for royalty payments equal to
a percentage of product sales and a milestone payment of approximately $16.0 million that will be made if MYOTROPHIN receives regulatory approval.

We
have a contractual option, but not an obligation, to purchase all of the limited partnership interests of CCP, which is exercisable upon the occurrence of certain events following the
first commercial sale of MYOTROPHIN. If, and only if, we decide to exercise this purchase option, we would make an advance payment of approximately $40.3 million in cash or, at our election,
approximately $42.4 million in shares of common stock or a combination thereof. Should we discontinue development of MYOTROPHIN, or if we do not exercise this purchase option, our license will
terminate and all rights to manufacture or market MYOTROPHIN in the United States, Canada and Europe will revert to CCP, which may then commercialize MYOTROPHIN itself or license or assign its rights
to a third party. In that event, we would not receive any benefits from such commercialization, license or assignment of rights.

87

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In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest Entities." Subsequently, in December 2003, the FASB issued a
revised version of FIN 46 (FIN 46R). FIN 46 and FIN 46R require a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the
variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. FIN 46 and FIN 46R also require disclosures about variable interest entities that a
company is not required to consolidate but in which it has a significant variable interest. The consolidation requirements of FIN 46 and FIN 46R apply immediately to variable interest entities created
after January 31, 2003 and to existing special purpose entities in the first fiscal year or interim period ending after December 15, 2003. For all other entities, the requirements of FIN
46 and FIN 46R apply in the first period ending after March 15, 2004. As a result of the adoption of the standards, CCP has been consolidated in our financial statements at December 31,
2003. This consolidation did not have a material impact on our financial statements.

Legal Proceedings

On March 28, 2003, we filed a patent infringement lawsuit in U.S. District Court in New Jersey against Teva Pharmaceuticals USA, Inc., Mylan
Pharmaceuticals Inc., Ranbaxy Pharmaceuticals Inc., and Barr Laboratories, Inc. based upon the ANDAs filed by each of these companies seeking FDA approval for a generic version of
modafinil. The lawsuit claims infringement of our U.S. Patent No. RE37516, which covers pharmaceutical compositions and methods of treatment with the form of modafinil contained in PROVIGIL. We intend
to vigorously defend the validity, and prevent infringement, of this patent. This litigation is currently in the discovery phase and we expect that the trial will begin sometime in 2005.

We
are a part to certain other litigation in the ordinary course of our business, including, among others, U.S. patent interference proceedings. European patent oppositions, and matters
alleging employment discrimination, product liability and breach of commercial contract. We are vigorously defending ourselves in all of these actions and do not believe these matters, event if
adversely adjudicated or settled, would have a material adverse effect on our financial condition or results of operations.

Acquisition of CIMA LABS INC.

On November 3, 2003, we entered into an Agreement and Plan of Merger with CIMA LABS INC. Pursuant to this agreement, we will acquire CIMA through
the merger of a wholly-owned subsidiary of Cephalon with and into CIMA, with CIMA surviving as a wholly-owned subsidiary of Cephalon. In connection with the merger, each outstanding share of CIMA
common stock will be converted into the right to receive $34.00 per share in cash. Each outstanding employee stock option to purchase CIMA common stock, whether or not vested or exercisable, will be
converted into the right to receive in cash an amount equal to $34.00 less the exercise price for such option. The total value of the transaction is approximately $515 million, or
$405 million net of CIMA's cash and cash equivalents as of December 31, 2003. The completion of the transaction is subject to several conditions, including the approval of the merger by
the stockholders of CIMA and the expiration or termination of the applicable waiting period under the HSR Act. On January 23, 2004, we announced that we had received a request for additional
information from the Federal Trade Commission as part of its review

88

---

of
the transaction under the HSR Act. This request extends the waiting period under the HSR Act during which the FTC is permitted to review the proposed transaction. If the HSR condition is not
satisfied and the transaction is not closed by June 30, 2004 (unless the parties mutually agree to an extension), we will be required to pay CIMA a break fee in the amount of
$16.25 million.

13.    STOCKHOLDERS' EQUITY

Convertible Exchangeable Preferred Stock

During the third quarter of 1999, we completed a private offering to institutional investors of 2,500,000 shares of convertible exchangeable preferred stock at
$50 per share. Dividends on the preferred stock were payable quarterly and were cumulative at the annual rate of $3.625 per share. We recognized $5.7 million of preferred dividends in 2001. The
preferred stock was convertible into an aggregate of approximately 6,975,000 shares of our common stock at a conversion price of $17.92 per share, subject to adjustment in certain circumstances.

In
May 2001, the holders of 2,344,586 shares of the 2,500,000 shares outstanding of our convertible exchangeable preferred stock converted their preferred shares into an aggregate
of 6,541,394 shares of our common stock. As an inducement to the remaining holders to convert their preferred stock prior to
August 2001, when we were initially permitted to redeem the preferred stock, we agreed to pay immediately all dividends accrued through the date of conversion as well as all dividends that
would have accrued on the converted shares through the August 2001 redemption date. In the second quarter of 2001, we recorded an additional $1.1 million of dividend expense associated
with the early conversion. In September 2001, the remaining 155,414 shares of our convertible exchangeable preferred stock were converted into an aggregate of 433,604 shares of our common
stock.

Equity Compensation Plans

We have established equity compensation plans for our employees, directors and certain other individuals. All grants and terms are authorized by the Compensation
Committee of our Board of Directors. We may grant non-qualified stock options under the 1995 Equity Compensation Plan and the 2000 Equity Compensation Plan, and also may grant incentive
stock options and restricted stock awards under 1995 Plan. The options and restricted stock awards generally become exercisable or vest ratably over four years from the grant date, and the options
must be exercised within ten years of the grant date.

89

---

The
following tables summarize the aggregate option activity under the plans for the years ended December 31:

2003

2002

2001Shares

Weighted
Average
Exercise
Price

Shares

Weighted
Average
Exercise
Price

Shares

Weighted
Average
Exercise
PriceOutstanding, January 1,

7,576,941

$
48.52

5,607,595

$
45.36

5,253,730

$
28.44Granted

2,882,400


47.75

2,497,200


51.88

2,035,100


70.32Exercised

(299,056
)

16.01

(347,686
)

17.43

(1,339,380
)

19.71Canceled

(279,185
)

56.54

(180,168
)

50.98

(341,855
)

31.88Outstanding, December 31,

9,881,100

$
49.04

7,576,941

$
48.52

5,607,595

$
45.36Exercisable at end of year

4,071,207

$
43.68

2,829,136

$
35.16

1,937,125

$
22.91Weighted average fair value of options granted during the year



$
29.55



$
23.79



$
41.78


The
fair value of the options granted during 2003, 2002 and 2001 were estimated on the date of grant using the Black-Scholes option-pricing model based on the following assumptions:

2003

2002

2001Risk free interest rate

3.53
%
3.30
%
4.89
%Expected life

6 years

6 years

6 yearsExpected volatility

69
%
43
%
59
%Expected dividend yield

0
%
0
%
0
%


Options Outstanding

Options ExercisableRange of Exercise Price

Shares

Weighted
Average
Remaining
Contractual
Life (yrs)

Weighted
Average
Exercise
Price

Shares

Weighted
Average
Exercise
Price$6.00-$14.99

715,410

4.4

$
9.16

715,410

$
9.16$15.00-$29.99

638,918

5.3


24.89

638,918


24.89$30.00-$50.99

3,135,447

9.6


46.97

227,028


37.00$51.00-$59.99

3,494,750

8.1


51.91

1,550,400


52.11$60.00-$71.96

1,896,575

7.9


70.37

939,451


70.469,881,100

8.0

$
49.04

4,071,207

$
43.68


In
2002, the 1995 and 2000 Equity Compensation Plans were amended to increase the number of shares subject to the annual grants awarded under all of the plans by 1,200,000 and 1,700,000
shares. In 2003, the 1995 Equity Compensation Plan was amended further to increase the number of shares subject to the annual grants awarded under the Plan by 2,500,000 shares. At December 31,
2003, 597,434 shares were available for future grant under all of the plans.

90

---

During
2003, 2002, and 2001, we received net proceeds of $4.5 million, $5.9 million, and $25.5 million, respectively, from the exercise of stock options. During 2002
and 2001, some stock options were exercised by tendering mature shares as consideration for the exercise price, resulting in the recording of treasury stock of $0.1 million and
$1.8 million, respectively.

The
following table summarizes restricted stock award activity for the years ended December 31:

2003

2002

2001Outstanding, January 1,


133,275


268,875


446,850Granted


195,000





Vested


(99,775
)

(129,900
)

(150,650
)Canceled


(5,325
)

(5,700
)

(27,325
)Outstanding, December 31,


223,175


133,275


268,875Compensation expense recognized

$
1,394

$
2,828

$
5,349


Warrants

At December 31, 2001, no warrants to purchase common stock remained outstanding and no warrants were issued during 2002 and 2003, other than the warrants
sold in conjunction with the issuance of the Zero Coupon Convertible Subordinated Notes (see Note 10).

Qualified Savings and Investment Plan

We have a profit sharing plan pursuant to section 401(k) of the Internal Revenue Code whereby eligible employees may contribute up to 20% of their annual
salary to the plan, subject to statutory maximums. The plan provided for discretionary matching contributions by us in cash or a combination of cash and shares of our common stock. Our contributions
for the years 2001 through 2003 was 100% of the first 6% of employee salaries. Effective July 1, 2003, 100% of our matching contributions are made in cash. Our contribution for the years 2000
through June 30, 2003 was at a ratio of 50% cash and 50% Cephalon stock. We contributed $4.1 million, $3.6 million, and $3.0 million, in cash and common stock to the plan
for the years 2003, 2002, and 2001, respectively.

Pro forma Aggregate Conversions or Exercises

At December 31, 2003, the conversion or exercise of all outstanding options and convertible subordinated notes into shares of Cephalon common stock in
accordance with their terms would
increase the outstanding number of shares of common stock by approximately 30,839,000 shares, or 55%.

Preferred Share Purchase Rights

In November 1993, our Board of Directors declared a dividend distribution of one right for each outstanding share of common stock. In addition, a right
attaches to and trades with each new issue of our common stock. Each right entitles each registered holder, upon the occurrence of certain events, to purchase from us a unit consisting of one
one-hundredth of a share of our Series A Junior Participating

91

---

Preferred
Stock, or a combination of securities and assets of equivalent value, at a purchase price of $200.00 per unit, subject to adjustment.

14.    INCOME TAXES

The components of total income (loss) from operations before income taxes and the cumulative effect of a change in accounting principle were:

2003

2002

2001United States

$
134,194

$
70,562

$
(34,589
)Foreign


(3,880
)

(8,129
)

(20,895
)Total

$
130,314

$
62,433

$
(55,484
)


The
components of the provision (benefit) for income taxes are as follows:

2003

2002

2001Current taxes:United States

$
2,170

$
19,997

$
Foreign


7,379


13,041


State


3,526


1,067


13,075


34,105


Deferred taxes:United States


36,887


9,224


(19,004
)Foreign


(3,913
)

2,138


(5,949
)State





3,182


(19,657
)32,974


14,544


(44,610
)Change in valuation allowance


407


(161,278
)

44,61033,381


(146,734
)

Total

$
46,456

$
(112,629
)
$



A
reconciliation of the United States Federal statutory rate to our effective tax rate is as follows:

2003

2002

2001U.S. Federal statutory rateexpense (benefit)

35.0
%
35.0
%
(35.0
)%Non-deductible expenses

1.3

6.8

1.7Debt conversion expense





33.1Revision of prior years' estimates

2.0



(27.1
)State income taxes, net of U.S. federal tax benefit

1.8

1.7

Tax rate differential on foreign income

(4.5
)
13.6

2.2Change in valuation allowance

0.1

(236.5
)
25.4Other



(1.0
)
(0.3
)Consolidated effective tax rate

35.7
%
(180.4
)%
%


92

---

The
tax benefits associated with employee exercises of non-qualified stock options and disqualifying dispositions of stock acquired with incentive stock options reduce taxes
payable. Tax benefits of $0.9 million and $41.0 million associated with the exercise of employee stock options were recorded to additional paid-in capital in 2003 and 2002,
respectively.

Net
unremitted deficit of foreign subsidiaries at December 31, 2003 and December 31, 2002 amounted to approximately $38.5 million and $27.9 million,
respectively. To the extent a subsidiary has unremitted earnings, such amounts have been included in the consolidated financial statements without giving effect to deferred taxes since it is
management's intent to reinvest such earnings in foreign operations.

Deferred
income taxes reflect the tax effects of temporary differences between the bases of assets and liabilities recognized for financial reporting purposes and tax purposes, and net
operating loss and tax credit carryforwards. Significant components of net deferred tax assets and deferred tax liabilities as of December 31 are as follows:

2003

2002

2001Net operating loss carryforwards

$
93,884

$
120,610

$
140,536Original issue discount


84,315





Capitalized research and development expenditures


42,563


52,479


69,505Research and development tax credits


21,358


17,354


12,833Acquired product rights and intangible assets


8,495


11,921


7,544Reserves and accrued expenses


9,153


6,072


2,776Alternative minimum tax credit carryforwards


1,693





Deferred revenue


757


1,028


2,783Other, net


12,935


5,376


5,901Total deferred tax assets


275,153


214,840


241,878Valuation allowance


(48,675
)

(44,768
)

(241,878
)Net deferred tax assets

$
226,478

$
170,072

$
Deferred tax liabilities:Purchase accounting adjustments for foreign acquisition

$
44,916

$
52,666

$
52,666Other


749


173


173Total deferred tax liabilities

$
45,665

$
52,839

$
52,839


At
December 31, 2002, $0.2 million of other deferred tax liabilities are classified as accrued expenses in the accompanying balance sheets. At December 31, 2003, we
had gross operating loss carryforwards for U.S. federal income tax purposes of approximately $228.5 million that will begin to expire in 2004, and state gross operating losses of approximately
$274.6 million that will expire in varying years starting in 2004. We also have international gross operating loss carryforwards of approximately $10.6 million with indefinite expiration
dates. The net operating loss carryforwards differ from the accumulated deficit principally due to differences in the recognition of certain research and development expenses for financial and federal
income tax reporting. Federal research tax credits of

93

---

$19.9 million
are available to offset future tax liabilities, and begin to expire in 2004. The amount of U.S. federal net operating loss carryforwards which can be utilized in any one period
will be limited by federal income tax regulations since a change in ownership as defined in Section 382 of the Internal Revenue Code occurred in the prior years. We do not believe that such
limitation will have a material adverse impact on the utilization of the net operating loss carryforwards, but we do believe it will affect utilization of tax credit carryforwards.

In
the fourth quarter of 2002, we determined that all of our domestic net operating loss carryforwards, portions of international operating loss carryforwards, domestic tax credits, and
certain other deferred tax assets were more likely than not to be recovered. The remaining valuation allowance of $48.7 million at December 31, 2003 relates to certain tax credits,
international and state operating loss carryforwards and temporary differences that we believe are not likely to be recovered.

15.    SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)

2003 Quarter EndedDecember 31,

September 30,

June 30,

March 31,Statement of Operations Data:Net sales

$
202,505

$
184,877

$
160,275

$
137,593Gross profit


175,413


162,293


138,114


117,055Net income applicable to common shares

$
31,225

$
22,272

$
18,123

$
12,238Basic income per common share

$
0.56

$
0.40

$
0.33

$
0.22Weighted average number of shares outstanding


55,706,000


55,573,000


55,504,000


55,452,000Diluted income per common share

$
0.52

$
0.38

$
0.31

$
0.21Weighted average number of shares outstanding-assuming dilution


64,766,000


64,552,000


64,435,000


57,090,000


94

---



2002 Quarter EndedDecember 31,

September 30,

June 30,

March 31,Statement of Operations Data:Net sales

$
139,009

$
122,364

$
108,767

$
95,803Gross profit


113,591


102,862


93,295


81,958Income before cumulative effect of a change in accounting principle


139,994


19,976


14,429


663Cumulative effect of a change in accounting principle











(3,534
)Net income (loss) applicable to common shares

$
139,994

$
19,976

$
14,429

$
(2,871
)Basic income (loss) per common share:Income per common share before cumulative effect of a change in accounting principle

$
2.53

$
0.36

$
0.26

$
0.01Cumulative effect of a change in accounting principle











(0.06
)$
2.53

$
0.36

$
0.26

$
(0.05
)Weighted average number of shares outstanding


55,250,000


55,128,000


55,071,000


54,963,000Diluted income (loss) per common share:Income per common share before cumulative effect of a change in accounting principle

$
2.13

$
0.35

$
0.25

$
0.01Cumulative effect of a change in accounting principle











(0.06
)$
2.13

$
0.35

$
0.25

$
(0.05
)Weighted average number of shares outstanding-assuming dilution


67,619,000


56,730,000


57,033,000


54,963,000


16.    SEGMENT AND SUBSIDIARY INFORMATION

On December 28, 2001, we completed our acquisition of Group Lafon. As a result, we now have significant sales, manufacturing, and research operations
conducted by several subsidiaries located in Europe. Prior to 2002, our European operations were immaterial.

Although
we now have significant European operations, we have determined that all of our operations have similar economic characteristics and may be aggregated with our United States

95

---

operations
into a single operational segment for reporting purposes. Summarized revenue and long-lived asset information by geographic region is provided below:

Revenues
for the year ended December 31:

2003

2002United States

$
576,327

$
395,738Europe


138,480


111,159Total

$
714,807

$
506,897


Long-lived
assets:

At December 31,2003

2002United States

$
474,112

$
383,768Europe


537,614


519,342Total

$
1,011,726

$
903,110


96

---



ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A.    CONTROLS AND PROCEDURES

(a)   Evaluation of Disclosure Controls and Procedures

Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our
disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures as of the end of the period covered by this report have been designed and are functioning effectively to provide reasonable assurance that the information required to be
disclosed by us in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. We believe
that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

(b)   Change in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.

97

---

PART III

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Directors

The information required by Item 10 is incorporated herein by reference to the information contained under the caption "Proposal 1Election of
Directors" in our definitive proxy statement related to the 2004 annual meeting of stockholders.

Executive Officers

The information concerning our executive officers required by this Item 10 is provided under the caption "Executive Officers of the Registrant" in Part I
hereof.

Section 16(a) Beneficial Ownership Reporting Compliance

The information concerning Section 16(a) Beneficial Ownership Reporting Compliance by our directors and executive officers is incorporated by reference to
the information contained under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in our definitive proxy statement related to the 2004 annual meeting of stockholders.

ITEM 11.    EXECUTIVE COMPENSATION

The information required by this Item 11 is incorporated by reference to the information contained in our definitive proxy statement for the 2004 annual meeting
of stockholders.

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by Item 12 is incorporated by reference to the information contained in our definitive proxy statement for the 2004 annual meeting of
stockholders.

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by Item 13 is incorporated by reference to the information contained in our definitive proxy statement for the 2004 annual meeting of
stockholders.

ITEM 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by Item 14 is incorporated by reference to the information contained in our definitive proxy statement for the 2004 annual meeting of
stockholders.

98

---

PART IV

ITEM 15.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)   DOCUMENTS FILED AS PART OF THIS REPORT

The following is a list of our consolidated financial statements and our subsidiaries and supplementary data included in this report under Item 8 of
Part II hereof:

1.    FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

Report of Independent Auditors.



2. FINANCIAL STATEMENT SCHEDULES



(b)   REPORTS ON FORM 8-K

During the fourth quarter ended December 31, 2003, we filed the following Current Reports on Form 8-K:



In
addition, on November 3, 2003, we furnished on Item 12 a Current Report on Form 8-K that included a press release dated November 3, 2003 publicly
announcing our third quarter 2003 financial results.

99

---

(c)   Exhibits

The following is a list of exhibits filed as part of this annual report on Form 10-K. Where so indicated by footnote, exhibits that were
previously filed are incorporated by reference. For exhibits incorporated by reference, the location of the exhibit in the previous filing is indicated.

|Exhibit No. |  | Description                                                                                                                                                                                                                                                   
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1         |  | Agreement and Plan of Merger, dated July 14, 2000 by and among Cephalon, Inc., Anesta Corp. and C Merger Sub, Inc., filed as Exhibit 99.1 to the Company's Current Report on Form 8-K filed July 21, 2000.                                                    
|2.2         |  | Agreement and Plan of Merger dated as of November 3, 2003 by and between Cephalon, Inc., CIMA LABS Inc., and C MergerCo, Inc., filed as Exhibit 2.1 to the Company's Current Report on Form 8-K dated November 3,
2003.                                       
|3.1(a)      |  | Restated Certificate of Incorporation, as amended, filed as Exhibit 3.1 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996.                                                                                              
|3.1(b)      |  | Certificate of Amendment of Restated Certificate of Incorporation, filed as Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the period ending June 30, 2002.                                                                                   
|3.2         |  | Bylaws of the Registrant, as amended and restated, filed as Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the period ending June 30, 2003.                                                                                                   
|4.1         |  | Specimen copy of stock certificate for shares of Common Stock of the Registrant, filed as Exhibit 4.1 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993.                                                                
|4.2(a)      |  | Amended and Restated Rights Agreement, dated as of January 1, 1999 between Cephalon, Inc. and StockTrans, Inc. as Rights Agent, filed as Exhibit 1 to the Company's Form 8-A/A (12G) filed January 20, 1999.                                                  
|4.2(b)      |  | First Amendment to Amended and Restated Rights Agreement, dated July 31, 2000 between Cephalon, Inc. and StockTrans, Inc. as Rights Agent, filed as Exhibit 1 to the Company's Form 8-A/12G filed on August 2,
2000.                                          
|4.2(c)      |  | Second Amendment to Amended and Restated Rights Agreement, dated October 27, 2003 between Cephalon, Inc. and StockTrans, Inc. as Rights Agent, filed as Exhibit 1 to the Company's Form 8-A/12G on October 27,
2003.                                          
|4.3(a)      |  | Form of Series A Warrant to purchasers of Units including a limited partnership interest in Cephalon Clinical Partners, L.P., filed as Exhibit 10.4 to the Company's Registration Statement on Form S-3 (Registration No.
333-56816) filed on January 7, 1993.
|4.3(b)      |  | Form of Series B Warrant to purchasers of Units including a limited partnership interest in Cephalon Clinical Partners, L.P., filed as Exhibit 10.5 to the Company's Registration Statement on Form S-3 (Registration No.
333-56816) filed on January 7, 1993.
|4.3(c)      |  | Incentive Warrant to purchase 115,050 shares of Common Stock of Cephalon, Inc. issues to PaineWebber Incorporated, filed as Exhibit 10.6 to the Company's Registration Statement on Form S-3 (Registration No. 333-56816)
filed on January 7, 1993.           
|4.3(d)      |  | Fund Warrant to purchase 19,950 shares of Common Stock of Cephalon, Inc. issued to PaineWebber R&D Partners III, L.P., filed as Exhibit 10.7 to the Company's Registration Statement on Form S-3 (Registration No.
333-56816) filed on January 7, 1993.       
|4.4(a)      |  | Indenture, dated as of December 11, 2001 between Cephalon, Inc. and State Street Bank and Trust Company, as Trustee, filed as Exhibit 4.1 to the Company's Registration Statement on Form S-3 (Registration No. 333-82788)
filed on February 14, 2002.        
|            |  |                                                                                                                                                                                                                                                               

100

---

|4.4(b)   |  | Registration Rights Agreement, dated as of December 11, 2001 between Cephalon, Inc. and Credit Suisse First Boston Corporation, Robertson Stephens, Inc., CIBC World Markets Corp., SG Cowen Securities Corporation, UBS
Warburg LLC, U.S. Bancorp Piper Jaffray Inc., Adams Harkness & Hill, Inc. and Banc of America Securities, as the Initial Purchasers, filed as Exhibit 4.2 to the Company Registration Statement on Form S-3 (Registration No. 333-82788) filed on
February 14, 2002.
|-------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.5(a)   |  | Form of 37/8% Convertible Promissory Note Due March 29, 2007, filed as Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the period ended March 31, 2002.                                                                                                                                                                                                                                                                                                                       
|4.5(b)   |  | Registration Rights Agreement between Cephalon, Inc. and Anthem Investors, LLC dated March 29, 2002, filed as Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q for the period ended March 31, 2002.                                                                                                                                                                                                                                                                                
|4.6(a)   |  | Indenture dated as of June 11, 2003 between the Registrant and U.S. Bank National Association, filed as Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2003.                                                                                                                                                                                                                                                                                      
|4.6(b)   |  | Registration Rights Agreement, dated as of June 11, 2003, between Cephalon, Inc. and Credit Suisse First Boston LLC, CIBC World Markets Corp., J.P. Morgan Securities Inc., Morgan Stanley & Co. Incorporated, SG Cowen
Securities Corporation, ABN AMRO Rothschild LLC, Citigroup Global Markets Inc. and Lehman Brothers Inc., as Initial Purchasers, filed as Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2003.                             
|10.1(a) |  | Executive Severance Agreement between Frank Baldino, Jr. and Cephalon, Inc. dated July 25, 2002, filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the period ending June 30, 2002.                                                                                                                                                                                                                                                                                   
|10.1(b) |  | Form of Executive Severance Agreement between Certain Executives and Cephalon, Inc. dated July 25, 2002, filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the period ending June 30,
2002.                                                                                                                                                                                                                                                                           
|10.2(a) |  | Consulting Agreement dated October 1, 2001 between Cephalon, Inc. and Martyn D. Greenacre, filed as Exhibit 10.18 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001.                                                                                                                                                                                                                                                                                   
|10.2(b) |  | Amendment to Consulting Agreement between Cephalon, Inc. and Martyn D. Greenacre dated April 1, 2002, filed as Exhibit 10.18(b) to the Company's Quarterly Report on Form 10-Q for the period ended June 30,
2002.                                                                                                                                                                                                                                                                           
|10.2(c) |  | Second Amendment to Consulting Agreement between Cephalon, Inc. and Martyn D. Greenacre dated December 10, 2002, filed as Exhibit 10.3 to the Company's Annual Report on Form 10-K for the period ended December 31,
2002.                                                                                                                                                                                                                                                                   
|10.2(d) |  | Termination of Consulting Agreement between Cephalon, Inc. and Martyn D. Greenacre dated March 31, 2003, filed as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2003.                                                                                                                                                                                                                                                                            
|10.3(a) |  | Cephalon, Inc. Amended and Restated 1987 Stock Option Plan, filed as Exhibit 10.7 to the Transition Report on Form 10-K for transition period January 1, 1991 to December 31, 1991, as amended by Amendment No. 1 filed on
September 4, 1992.                                                                                                                                                                                                                                                
|10.3(b) |  | Cephalon, Inc. Equity Compensation Plan, as amended and restated, effective as of May 15, 2002, filed as Exhibit 99.1 to the Company's Registration Statement on Form S-8 (Registration No. 333-106112) filed on June 13,
2003.                                                                                                                                                                                                                                                              
|         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

101

---

|10.3(c) |  | Cephalon, Inc. Non-Qualified Deferred Compensation Plan, filed as Exhibit 10.6(b) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993.                                                                                                                                                                         
|-------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.3(d) |  | Cephalon, Inc. 2000 Equity Compensation Plan for Employees and Key Advisors, as amended and restated, effective as of May 15, 2002, filed as Exhibit 99.1 to the Company's Registration Statement on Form S-8 (Registration
No. 333-106115) filed on June 13, 2003.                                                                                
|10.4(a)  |  | License Agreement, dated May 15, 1992 between Cephalon, Inc. and Kyowa Hakko Kogyo Co., Ltd., filed as Exhibit 10.6 to the Transition Report on Form 10-K for transition period January 1, 1991 to December 31, 1991, as
amended by Amendment No. 1 filed on September 4, 1992 on Form 8.                                                          
|10.4(b)  |  | Letter agreement, dated March 6, 1995 amending the License Agreement between Cephalon, Inc. and Kyowa Hakko Kogyo Co., Ltd., filed as Exhibit 10.4(b) to the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994.                                                                                                     
|10.4(c)  |  | Letter agreement, dated May 11, 1999 amending the License Agreement between Cephalon, Inc. and Kyowa Hakko Kogyo Co., Ltd., filed as Exhibit 10.4(c) to the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1999. (1)                                                                                                  
|10.5(a)  |  | Amended and Restated Agreement of Limited Partnership, dated as of June 22, 1992 by and among Cephalon Development Corporation, as general partner, and each of the limited partners of Cephalon Clinical Partners, L.P.,
filed as Exhibit 10.1 to the Company's Registration Statement on Form S-3 (Registration No. 33-56816) on January 7, 1993.
|10.5(b)  |  | Amended and Restated Product Development Agreement, dated as of August 11, 1992 between Cephalon, Inc. and Cephalon Clinical Partners, L.P., filed as Exhibit 10.2 to the Company's Registration Statement on Form S-3
(Registration No. 33-56816) filed on January 7, 1993.                                                                       
|10.5(c)  |  | Purchase Agreement, dated as of August 11, 1992 by and between Cephalon, Inc. and each of the limited partners of Cephalon Clinical Partners, L.P., filed as Exhibit 10.3 to the Company's Registration Statement on Form S-3
(Registration No. 33-56816) filed on January 7, 1993.                                                                
|10.5(d)  |  | Pledge Agreement, dated as of August 11, 1992 by and between Cephalon, Inc. and Cephalon Clinical Partners, L.P., filed as Exhibit 10.8 to the Company's Registration Statement on Form S-3 (Registration No. 33-56816) filed
on January 7, 1993.                                                                                                  
|10.5(e)  |  | Promissory Note, dated as of August 11, 1992 issued by Cephalon Clinical Partners, L.P. to Cephalon, Inc., filed as Exhibit 10.9 to the Company's Registration Statement on Form S-3 (Registration No. 33-56816) filed on
January 7, 1993.                                                                                                         
|10.5(f)  |  | Form of Promissory Note, issued by each of the limited partners of Cephalon Clinical partners, L.P. to Cephalon Clinical Partners, L.P., filed as Exhibit 10.10 to the Company's Registration Statement on Form S-3
(Registration No. 33-56816) filed on January 7, 1993.                                                                          
|10.6     |  | Supply, Distribution and License Agreement, dated as of July 27, 1993 between Kyowa Hakko Kogyo Co., Ltd. and Cephalon, Inc., filed as Exhibit 10.3 to the Company's Registration Statement on Form S-3 (Registration No.
33-73896) filed on January 10, 1994. (1)                                                                                 
|10.7(a)  |  | GABITRIL Product Agreement, dated October 31, 2000 between Cephalon, Inc. and Abbott Laboratories, filed as Exhibit 10.13(b) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000.
(1)                                                                                                                          
|         |  |                                                                                                                                                                                                                                                                                                                                                    

102

---

|10.7(b)   |  | Toll Manufacturing and Packaging Agreement, dated October 31, 2000 between Cephalon, Inc. and Abbott Laboratories, filed as Exhibit 10.13(c) to the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 2000. (1)                                                                                                                                                                   
|--------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.8      |  | Joint Research, Development and License Agreement, dated May 28, 1999 between Cephalon, Inc. and H. Lundbeck A/S, filed as Exhibit 10.14 to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1999.
(1)                                                                                                                                                                             
|10.9(a)   |  | Managed Services Agreement, dated November 27, 2000 between Cephalon (UK) Limited and Novartis Pharmaceuticals UK Limited, filed as Exhibit 10.17(a) to the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2000. (1)                                                                                                                                                           
|10.9(b)   |  | License Agreement, dated November 27, 2000 between Cephalon, Inc. and Novartis AG, filed as Exhibit 10.17(b) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000. (1)                                                                                                                                                                                                   
|10.9(c)   |  | Collaboration Agreement, dated November 27, 2000 between Cephalon, Inc. and Novartis AG, filed as Exhibit 10.17(c) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000. (1)                                                                                                                                                                                             
|10.9(d)   |  | Distribution Agreement, dated November 27, 2000 between Cephalon, Inc. and Novartis AG, filed as Exhibit 10.17(d) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000. (1)                                                                                                                                                                                              
|10.10(a)  |  | Distribution, License and Supply Agreement, dated December 7, 1999, between Anesta Corp. and Elan Pharma International Limited, filed as Exhibit 10.18 to Anesta Corp.'s Annual Report on Form 10-K for the fiscal year ended
December 31, 1999. (1)                                                                                                                                                        
|10.10(b)  |  | Intellectual Property Sale, Amendment and Termination Agreement dated October 2, 2002, amending the Distribution, License and Supply Agreement, dated as of December 7, 1999, and as amended from time to time thereafter, by
and between Anesta Corp. and Elan Pharma International Limited, filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the period ending September 30, 2002.
|10.10(c)  |  | Termination and Asset Sale and Purchase Agreement, dated March 13, 2000 between Abbott Laboratories, Inc. and Anesta Corp., filed as Exhibit 10.19 to Anesta Corp.'s Quarterly Report on Form 10-Q for the period ending
March 31, 2000. (1)                                                                                                                                                                
|10.10(d)  |  | Technology License Agreement, dated September 16, 1985, as amended through December 3, 1993 between Anesta Corp. and the University of Utah Research Foundation, filed as Exhibit 10.6 to Anesta Corp.'s Registration
Statement on Form S-1 (File No. 33-72608) filed May 31, 1996. (1)                                                                                                                     
|10.10(e)  |  | Wiley Post Plaza Lease, dated December 7, 1994 between Anesta Corp. and Asset Management Services, filed as Exhibit 10.13 to Anesta Corp.'s Annual Report on Form 10-K (File No. 0-23160) for the fiscal year ended December
31, 1994.                                                                                                                                                                      
|*10.10(f) |  | Amendment No. 1 to Wiley Post Plaza Lease between Anesta Corp. and Asset Management Services dated October 26, 1996.                                                                                                                                                                                                                                                                                        
|*10.10(g) |  | Amendment No. 2 to Wiley Post Plaza Lease between Anesta Corp. and Asset Management Services dated January 7, 1997.                                                                                                                                                                                                                                                                                         
|*10.10(h) |  | Amendment No. 3 to Wiley Post Plaza Lease between Anesta Corp. and Asset Management Services dated September 30, 1998.                                                                                                                                                                                                                                                                                      
|*10.10(i) |  | Amendment No. 4 to Wiley Post Plaza Lease between Anesta Corp. and Asset Management Services dated February 29, 2000.                                                                                                                                                                                                                                                                                       
|          |  |                                                                                                                                                                                                                                                                                                                                                                                                             

103

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|*10.10(j) |  | Amendment No. 5 to Wiley Post Plaza Lease between Anesta Corp. and Asset Management Services dated July 20, 2001.                                                                                                                                                                                                                                                                      
|--------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*10.10(k) |  | Amendment No. 6 to Wiley Post Plaza Lease between Anesta Corp. and Asset Management Services dated July 20, 2001.                                                                                                                                                                                                                                                                      
|*10.10(l) |  | Amendment No. 7 to Wiley Post Plaza Lease between Anesta Corp. and Asset Management Services dated July 20, 2001.                                                                                                                                                                                                                                                                      
|*10.10(m) |  | Amendment No. 8 to Wiley Post Plaza Lease between Anesta Corp. and Asset Management Services dated October 14, 2002.                                                                                                                                                                                                                                                                   
|*10.10(n) |  | Amendment No. 9 to Wiley Post Plaza Lease between Anesta Corp. and Asset Management Services dated May 15, 2003. (2)                                                                                                                                                                                                                                                                   
|10.11(a)  |  | Toll Manufacturing and Packaging Agreement, dated August 24, 1999 between Cephalon, Inc. and Catalytica Pharmaceuticals, Inc. (now DSM Pharmaceuticals, Inc.), filed as Exhibit 10.16(a) to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2001. (1)                                                                                                  
|10.11(b)  |  | Amendment No. 1 to the Toll Manufacturing and Packaging Agreement, dated July 3, 2001 between Cephalon, Inc. and Catalytica Pharmaceuticals, Inc. (now DSM Pharmaceuticals, Inc.), filed as Exhibit 10.16(b) to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 2001. (1)                                                                              
|10.11(c)  |  | Amendment No. 2 to Toll Manufacturing and Packaging Agreement, dated October 9, 2001 between Cephalon, Inc. and Catalytica Pharmaceuticals, Inc. (now DSM Pharmaceuticals, Inc.), filed as Exhibit 10.16(c) to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 2001. (1)                                                                               
|10.11(d)  |  | Amendment No. 3 to Toll Manufacturing and Packaging Agreement, dated June 21, 2002 between Cephalon, Inc. and DSM Pharmaceuticals, Inc., filed as Exhibit 10.13(d) to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2002. (1)                                                                                                                        
|*10.11(e) |  | Amendment No. 4 to Toll Manufacturing and Packaging Agreement, dated April 28, 2003 between Cephalon, Inc. and DSM Pharmaceuticals, Inc. (2)                                                                                                                                                                                                                                           
|*10.11(f) |  | Amendment No. 5 to Toll Manufacturing and Packaging Agreement, dated August 15, 2003 between Cephalon, Inc. and DSM Pharmaceuticals, Inc. (2)                                                                                                                                                                                                                                          
|10.12(a)  |  | 5% Secured Convertible Note due January 7, 2010 by MDS Proteomics Inc. in favor of Cephalon, Inc., filed as Exhibit 10.14(a) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
2002.                                                                                                                                                                  
|10.12(b)  |  | Security Agreement dated January 7, 2003 between MDS Proteomics Inc. and Cephalon, Inc., filed as Exhibit 10.14(b) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2002.                                                                                                                                                                            
|10.13(a)  |  | ISDA Master Agreement dated January 22, 2003, between Credit Suisse First Boston International and Cephalon, Inc., including Schedule to the Master Agreement dated as of January 22, 2003, filed as Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the period ended March 31, 2003.                                                                                  
|10.13(b)  |  | ISDA Credit Support Annex to the Schedule to the ISDA Master Agreement dated as of January 22, 2003 between Credit Suisse First Boston International and Cephalon, Inc., including the Elections and Variables to the ISDA
Credit Support Annex dated as of January 22, 2003, filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the period ended March 31, 2003.
|          |  |                                                                                                                                                                                                                                                                                                                                                                                        

104

---

|10.13(c) |  | Letter Agreement Confirmation dated January 22, 2003, between Credit Suisse First Boston International and Cephalon, Inc, filed as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the period ended March 31,
2003.
|-------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*10.14   |  | Manufacturing Services Agreement dated January 1, 2003 between Patheon, Inc. and Cephalon, Inc. (2)                                                                                                                                
|*21      |  | List of Subsidiaries                                                                                                                                                                                                               
|*23.1    |  | Consent of Pricewaterhouse Coopers LLP                                                                                                                                                                                             
|*31.1    |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                             
|*31.2    |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                             
|*32.1    |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                             
|*32.2    |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                             

---

105

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CEPHALON, INC. AND SUBSIDIARIES    SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS    (In thousands)

|Year Ended December 31,                              |      | Balance at
Beginning of
the Year |   | Additions
(Deductions)(1) |  | Additions(2) |        | Other
Deductions |   | Balance
at End of
the Year
|---------------------------------------------------- | ---- | -------------------------------- | - | ------------------------- |  | ------------ | ------ | ---------------- | - | --------------------------
|Reserve for sales discounts, returns and allowances: |      |                                  |   |                           |  |              |        |                  |   |                           
|                                                     | 2003 |                                  | $ | 5,101                     |  | $            | 19,417 |                  | $ |                          
|                                                     | 2002 |                                  | $ | 2,331                     |  | $            | 12,243 |                  | $ |                          
|                                                     | 2001 |                                  | $ | 1,136                     |  | $            | 6,663  |                  | $ | 160                       
|Reserve for inventories:                             |      |                                  |   |                           |  |              |        |                  |   |                           
|                                                     | 2003 |                                  | $ | 3,797                     |  | $            | 615    |                  | $ |                          
|                                                     | 2002 |                                  | $ | 1,188                     |  | $            | 2,609  |                  | $ |                          
|                                                     | 2001 |                                  | $ |                          |  | $            | 3      |                  | $ | 1,185                     

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106

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

Date:
March 12, 2004

| |  | CEPHALON, INC.
| |  | --------------
| |  | By:           

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.

|Signature                                      |  | Title                                                                                       |  | Date          
|---------------------------------------------- |  | ------------------------------------------------------------------------------------------- |  | --------------
|                                               |  |                                                                                             |  |               
|/s/FRANK BALDINO, JR.Frank Baldino, Jr., Ph.D. |  | Chairman and Chief Executive Officer (Principal executive officer)                          |  | March 12, 2004
|/s/J. KEVIN BUCHIJ. Kevin Buchi                |  | Sr. Vice President and Chief Financial Officer (Principal financial and accounting officer) |  | March 12, 2004
|/s/WILLIAM P. EGANWilliam P. Egan              |  | Director                                                                                    |  | March 12, 2004
|/s/ROBERT J. FEENEYRobert J. Feeney Ph.D.      |  | Director                                                                                    |  | March 12, 2004
|/s/MARTYN D. GREENACREMartyn D. Greenacre      |  | Director                                                                                    |  | March 12, 2004
|/s/CHARLES A. SANDERSCharles A. Sanders, M.D.  |  | Director                                                                                    |  | March 12, 2004
|/s/GAIL R. WILENSKYGail R. Wilensky, Ph.D.     |  | Director                                                                                    |  | March 12, 2004
|/s/DENNIS L. WINGERDennis L. Winger            |  | Director                                                                                    |  | March 12, 2004
|/s/HORST WITZELHorst Witzel, Dr.-Ing.          |  | Director                                                                                    |  | March 12, 2004

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