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

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FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

|(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, 2004                       
|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.)
|---------------------------------------------------------------------------------------- |  | ----------------------------------------------
|41 Moores Rd.
P.O. Box 4011
Frazer, Pennsylvania(Address of Principal Executive Offices) |  | 19355(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, 2004, was approximately
$1.6 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, 2004. For purposes of
making this calculation only, the registrant has defined affiliates as including only directors and executive officers and shareholders holding greater than 10% of the voting stock of the registrant
as of June 30, 2004.

The
number of shares of the registrant's Common Stock outstanding as of March 7, 2005 was 58,030,839.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive proxy statement for its 2005 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 |  | ii                                                                                                          
|PART I                                              
|Item 1.                                              |  | Business                                                                                                     |  | 1   
|Item 2.                                              |  | Properties                                                                                                   |  | 22  
|Item 3.                                              |  | Legal Proceedings                                                                                            |  | 22  
|Item 4.                                              |  | Submission of Matters to a Vote of Security Holders                                                          |  | 23  
|PART II                                             
|Item 5.                                              |  | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 26  
|Item 6.                                              |  | Selected Financial Data                                                                                      |  | 28  
|Item 7.                                              |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                        |  | 30  
|Item 7A.                                             |  | Quantitative and Qualitative Disclosure About Market Risk                                                    |  | 68  
|Item 8.                                              |  | Financial Statements and Supplementary Data                                                                  |  | 69  
|Item 9.                                              |  | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure                         |  | 111 
|Item 9A.                                             |  | Controls and Procedures                                                                                      |  | 111 
|Item 9B.                                             |  | Other Information                                                                                            |  | 111 
|PART III                                            
|Item 10.                                             |  | Directors and Executive Officers of the Registrant                                                           |  | 112 
|Item 11.                                             |  | Executive Compensation                                                                                       |  | 112 
|Item 12.                                             |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | 112 
|Item 13.                                             |  | Certain Relationships and Related Transactions                                                               |  | 112 
|Item 14.                                             |  | Principal Accountant Fees and Services                                                                       |  | 112 
|PART IV                                              |  |                                                                                                             
|Item 15.                                             |  | Exhibits and Financial Statement Schedules                                                                   |  | 113 
|SIGNATURES                                           |  | 122                                                                                                         

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

In addition to historical facts or statements of current condition, this report and the documents into which this report is and will be incorporated contain
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Forward-looking statements contained in this report constitute our expectations or forecasts of future events as of the date this report was filed with the SEC 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 forward-looking statements
include, among others, statements about:



Any
or all of our forward-looking statements in this report 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. We discuss in more
detail the risks that we anticipate in the section included in Part II, 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 and
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. Through our wholly-owned subsidiary, CIMA LABS INC., we develop and manufacture orally disintegrating tablets using proprietary technologies that allow an active drug
ingredient to be formulated into a new dosage form that quickly disintegrates in the mouth without chewing or the need for water.

Our
three most important products PROVIGIL® (modafinil) Tablets [C-IV], ACTIQ® (oral transmucosal fentanyl citrate)
[C-II] and GABITRIL® (tiagabine hydrochloride), comprised approximately 90% of our worldwide net sales. Approximately 95% of PROVIGIL, ACTIQ and
GABITRIL sales for the year ended December 31, 2004 were in the U.S. market. We market our U.S. products through a nearly 500-person field sales and sales management team that calls
on primary care physicians (e.g., internists, general practitioners and family practitioners), neurologists, psychiatrists, oncologists and pain and sleep specialists. Outside of the United States, we
have a sales organization in France numbering approximately 140 persons detailing our products to office-based and hospital-based physicians, and sales and marketing organizations with approximately
70 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 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.

During
2004, we advanced our efforts to broaden the range of clinical uses that are approved by regulatory authorities, seek new and improved formulations of our currently marketed
products and license or acquire new product candidates. Some notable achievements include:



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We
also have significant discovery 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 and currently have three molecules in clinical development. One such molecule, CEP-1347, is being evaluated by us and our partner, H. Lundbeck
A/S, in an 800-patient, randomized, double-blind, placebo-controlled, Phase 2/3 clinical trial for the treatment of patients with early stage Parkinson's disease.

Our
future success is highly dependent on obtaining and maintaining patent protection for our products and technology. With respect to PROVIGIL, we have filed patent infringement
lawsuits against six generic companies based upon the abbreviated new drug applications (ANDAs) filed by these companies seeking FDA approval to market a generic version of modafinil. The first five
lawsuits are currently in the discovery phase; we anticipate that the first trial will begin no earlier than late 2005. We filed the sixth lawsuit in February 2005. See "Management's Discussion
and Analysis of Financial ConditionCertain Risks Related to Our Business." For ACTIQ, the patents covering the previous and current formulations of the product are set to expire as early
as May 2005 and September 2006, respectively. As a result of the License and Supply Agreement we entered into with Barr Laboratories, Inc. in July 2004, we could face
generic competition from Barr prior to September 2006 if we receive FDA approval of ORAVESCENT® fentanyl before this date. See "Acquisition of CIMA LABS INC." below. In
December 2004, we announced that FDA had acknowledged receipt of an ANDA filed by Barr seeking approval for a generic form of ACTIQ. In January 2005, we filed a patent infringement
lawsuit against Barr to defend our patents until the license effective date. Neither the ANDA filing nor the lawsuit modifies the existing license grant to Barr, and we do not expect any change in the
anticipated date of Barr's entry to the market (absent resolution of the lawsuit). We intend to vigorously defend the validity, and prevent infringement of, our patents. The loss of patent protection
on any of our existing products, whether by third-party challenge, invalidation, circumvention, license or patent expiration, would materially impact our results of operations.

As
a biopharmaceutical company, our activities and operations are subject to significant government regulations and oversight. In September 2004, we announced that we had received
subpoenas from the U.S. Attorney's Office in Philadelphia with respect to PROVIGIL, ACTIQ and GABITRIL. This investigation is ongoing and appears to be focused on our sales and promotional practices.
We are cooperating with the investigation and are providing documents to the government. In addition, we have engaged in ongoing discussions with the Attorney General in Pennsylvania regarding recent
media reports of instances of abuse and diversion of ACTIQ. We have had similar discussions with the Office of the Connecticut Attorney General; in September 2004, we received a voluntary
request for information from the Office of the Connecticut Attorney General asking us to provide information generally relating to our sales and promotional practices for our U.S. products. We have
agreed to comply with this voluntary request. Each of these matters may involve the bringing of criminal charges
and fines, and/or civil penalties. We cannot predict or determine the outcome of these matters or reasonably estimate the amount or range of amounts of any fines or penalties that might result from an
adverse outcome. However, an adverse outcome could have a material adverse effect on our financial position, liquidity and results of operations.

For
the year ended December 31, 2004, our total revenues and net loss were $1.0 billion and $73.8 million, respectively. Our revenues from U.S. and European
operations are detailed in Note 18 to

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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, 2004 was $395.1 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 and maintain adequate intellectual property
protection 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 41 Moores Rd., P.O. Box 4011, Frazer, Pennsylvania, 19355. Our telephone number is
(610) 344-0200 and our web site address iswww.cephalon.com. Our research and development headquarters are located in West Chester,
Pennsylvania and we also have offices in Salt Lake City, Utah, suburban Minneapolis-St. Paul, Minnesota, 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, ATTENACE and NUVIGIL. We also have manufacturing facilities in Salt Lake City, Utah, for the
production of ACTIQ for worldwide distribution and sale, and Eden Prairie and Brooklyn Park, Minnesota, for the production of orally disintegrating versions of drugs for pharmaceutical company
partners.

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
are available free of charge through the Investor Relations section of our web site 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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ACQUISITION OF CIMA LABS INC.

On August 12, 2004, we completed our acquisition of CIMA LABS INC. Under the Agreement and Plan of Merger dated November 3, 2003, we acquired
each outstanding share of CIMA LABS common stock for $34.00 per share in cash. The total cash paid to CIMA LABS stockholders in the transaction was approximately $482.5 million, net of CIMA
LABS' existing cash on hand, or $409.4 million, net of its cash, cash equivalents and investments. As a result of the acquisition, we obtained the rights to CIMA LABS' ORAVESCENT fentanyl
product candidate, which is currently in Phase 3 clinical trials for the treatment of breakthrough cancer pain in opioid-tolerant patients. ORAVESCENT fentanyl utilizes an enhanced absorption
transmucosal drug delivery technology that we believe may facilitate the rapid onset of pain relief in such patients. We are targeting approval of this product by the FDA in late 2006.

CIMA
LABS also develops and manufactures orally disintegrating tablets using its proprietary technologies, OraSolv® and DuraSolv®, that allow an active drug
ingredient to be formulated into a new dosage form that quickly disintegrates in the mouth without chewing or the need for water. CIMA LABS enters into collaborative agreements with pharmaceutical
companies to develop products based on its oral drug delivery technologies. It currently manufactures for its partners, including AstraZeneca, N.V. Organon and Wyeth, five prescriptions and three
over-the-counter pharmaceutical brands incorporating either the OraSolv or DuraSolv technologies. Revenues from these arrangements consist of net sales of manufactured product
to partners, product development and licensing fees and royalties.

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For
the period August 13, 2004 to December 31, 2004, revenues attributable to CIMA LABS totaled $28.4 million. CIMA LABS has facilities in Eden Prairie and Brooklyn Park,
Minnesota, which house its executive offices, manufacturing facility, research and product development center and warehouse space.

To
secure FTC clearance of the CIMA LABS acquisition, we entered into a license and supply agreement with Barr whereby we agreed to license to Barr our U.S. rights to any intellectual
property related to ACTIQ. The license to ACTIQ will become effective upon the earliest to occur of (i) final FDA approval of ORAVESCENT fentanyl, (ii) September 5, 2006, if we
have not received either (A) an approvable letter from FDA for the sugar free formulation of ACTIQ by July 1, 2005 (or final FDA approval within 180 days of such approvable
letter) or (B) a pediatric extension for ACTIQ or (iii) February 3, 2007, if we have received a pediatric extension for ACTIQ. As we currently expect to receive both a pediatric
extension for ACTIQ prior to September 2006 and FDA approval for the sugar-free formulation of ACTIQ within the timeframe agreed upon with the FTC, we
anticipate that the Barr license will be effective upon ORAVESCENT fentanyl approval. Under the agreement, Barr also may receive a license to the sugar-free formulation of ACTIQ under
development; this license would become effective upon ORAVESCENT fentanyl approval by the FDA or if the sugar-free approval timelines described above are not achieved. We have filed an
sNDA with the FDA requesting approval for the sugar-free formulation of ACTIQ, and we anticipate final FDA approval of this formulation by mid-2005.

Under
the license and supply agreement, we also agreed to transfer to Barr our technological know-how and intellectual property related to ACTIQ and to sell to Barr, for
period of up to three years, a generic form of ACTIQ for resale in the United States if Barr is unable to manufacture an FDA-approved generic version of ACTIQ by the date the license takes
effect. In addition, we have agreed to forbear from asserting any remaining patent rights in ACTIQ against other parties beginning on the earlier of August 3, 2007 or six months following the
effective date of Barr's license.

PROVIGIL



Modafinil, the active ingredient in PROVIGIL, 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 excessive daytime sleepiness associated with narcolepsy and we launched the product in the United States in February 1999. In January 2004, we received FDA approval to
expand the label for PROVIGIL to include improving wakefulness in patients with excessive sleepiness associated with OSA/HS and SWSD. For patients with OSA/HS, PROVIGIL is indicated as an adjunct to
standard treatments for the underlying condition. 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.

Outside
of the U.S., modafinil currently is approved in more than 30 countries, including France, the United Kingdom, Ireland, Italy and Germany, for the treatment of excessive daytime
sleepiness associated with narcolepsy. In certain of these countries, including the United Kingdom, France, the Republic of Ireland and Germany, we also have approval to market modafinil to treat
excessive daytime sleepiness in patients with OSA/HS. In the United Kingdom, PROVIGIL also is indicated for excessive sleepiness associated with SWSD.



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.

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This
sleep disorder impairs a person's ability to perform basic daily activities, significantly impacting their 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 many remain undiagnosed and untreated. PROVIGIL has been recognized by the American Academy of
Sleep Medicine as a standard of therapy for the treatment of excessive daytime sleepiness associated with narcolepsy.



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 excessive sleepiness, 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 many physicians have elected to prescribe the product to treat conditions outside its currently labeled indications, including for excessive
sleepiness associated with depression, fatigue associated with multiple sclerosis and for ADHD.

Our
ongoing clinical programs have been focused on the exploration of the potential use of modafinil in treating other clinical conditions. To that end, in December 2004 we
submitted an sNDA to the FDA seeking marketing approval of ATTENACE, a new proprietary once-daily dosage form of modafinil for the treatment of ADHD in children and adolescents between the
ages of six and 17. The sNDA was based on the results of three multi-center clinical trials that show that new proprietary once-daily dosage forms of ATTENACE significantly improve
symptoms of ADHD in children and adolescents. In three nine-week, double-blind, placebo-controlled studies, 600 children and adolescents between the ages of six and 17 with ADHD were
randomized to either placebo or ATTENACE. The primary endpoint in all studies was the teacher-completed school version of the ADHD Rating Scale IV. All of the ATTENACE-treated groups showed a highly
statistically significant improvement on the primary endpoint compared to placebo. ATTENACE was generally well tolerated, and the most common side effects observed in these studies were consistent
with those observed in other studies of this compound and included insomnia, headache and loss of appetite. We are targeting launch of ATTENACE by early 2006.

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Finally,
an important focus of our PROVIGIL strategy is the development of follow-on compounds. In early 2005, we announced that Phase 3 clinical trials of 150-
and 250-milligram daily doses of NUVIGIL in patients suffering from either excessive sleepiness associated with narcolepsy, SWSD or OSA/HS show that NUVIGIL significantly improves
wakefulness and the overall clinical condition of patients as compared to placebo. The 12-week, double-blind, randomized, placebo-controlled Phase 3 studies of approximately 1,000 patients
included one study of excessive sleepiness in narcolepsy, one study in SWSD and two studies in OSA/HS. The primary endpoints in all studies were measures of objective sleep latency (Maintenance of
Wakefulness Test or Multiple Sleep Latency Test) and the physician rating of Clinical Global Impression-Change. These primary endpoints are identical to those studied for the currently approved
indications for PROVIGIL. In each study, patients treated with NUVIGIL showed a highly statistically significant improvement on both primary endpoints compared to placebo. In these studies, NUVIGIL
was generally well tolerated. The most common adverse effects observed included headache,
nausea, dizziness, insomnia and anxiety. Based on the results of the Phase 3 trials, we expect to file an NDA for NUVIGIL in March 2005 and launch this new compound in the first quarter of
2006.



We own U.S. and foreign patent rights that expire between 2014 and 2015 and cover pharmaceutical compositions and uses of modafinil, specifically, 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 six ANDAs for pharmaceutical products containing modafinil. Each of these ANDAs for
modafinil filed with the FDA contain a Paragraph IV certification in which the ANDA applicant certified that the U.S. particle-size modafinil patent covering PROVIGIL is invalid or
will not be infringed by the ANDA product. We have filed patent infringement lawsuits in U.S. District Court in New Jersey against Teva Pharmaceuticals USA, Inc., Mylan
Pharmaceuticals Inc., Ranbaxy Pharmaceuticals Inc., Barr Laboratories, Inc., and Sandoz Inc. based upon the ANDAs filed by each of these companies with the FDA. The
lawsuits claim infringement of our U.S. Patent No. RE37,516, which covers pharmaceutical compositions and methods of treatment with the form of modafinil contained in PROVIGIL. Each of the defendants
has asserted defenses and/or counterclaims for non-infringement and patent invalidity, and defendants Teva, Ranbaxy and Mylan have moved to amend their answers and counterclaims to state
inequitable conduct as a defense to our claims (we have opposed the motions and a decision is pending). These lawsuits are currently in the discovery phase; we expect a trial to begin no earlier than
late 2005. We also recently filed suit against Carlsbad Technology, Inc. with respect to the ANDA they have filed with the FDA, and discovery in this action has not yet commenced. 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.

Barr,
Mylan and Ranbaxy have each announced the receipt of tentative FDA approval for their respective generic versions of PROVIGIL. Under the provisions of the Hatch-Waxman Act, we are
entitled to a 30-month stay of final FDA approval of these generic versions of PROVIGIL. This stay precludes these companies from selling a modafinil-based product until the earlier to
occur of the conclusion of the lawsuit or June 2006. However, if the court finds the particle-size patent is invalid or not infringed, these companies 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, Sandoz or Carlsbad have been, or will be, tentatively approved by the FDA.

If
we complete clinical studies of PROVIGIL in pediatric patients that are 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.

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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
success in attaining FDA approval for this compound in early 2006, we would expect to receive a three year period of marketing exclusivity (until early 2009). 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 early 2009. 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 a patent covering a method of treating ADHD with modafinil, and patent applications
covering the ATTENACE formulation, that currently are set to expire in 2020 and 2022, respectively. Assuming FDA approval, we would expect to receive a three year period of marketing exclusivity for
the use of ATTENACE in ADHD (until early 2009). We also hold rights to other patents and patent applications directed to manufacturing processes, formulations, and uses of modafinil and to next
generation modafinil products. We also own rights to various trademarks for our pharmaceutical products containing the active drug substance modafinil.



At our manufacturing facility in Mitry-Mory, France, we produce the active drug substance modafinil. In 2004, we continued a $30 million
modernization and expansion project at this facility. We have two qualified manufacturers of finished commercial supplies of PROVIGIL, DSM Pharmaceuticals, Inc. 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. We are in the process of qualifying manufacturers for finished commercial supplies of ATTENACE. We expect to qualify two suppliers of the active pharmaceutical ingredient and two
manufacturers of finished commercial supplies for NUVIGIL.



With respect to PROVIGIL, and, if approved, NUVIGIL, there are several other products used for the treatment of excessive sleepiness or narcolepsy in the United
States. Many of these products, including methylphenidate products such as RITALIN® by Novartis, have been available for a number of years and are available in inexpensive generic forms.
Moreover, as described above, we could face generic competition to PROVIGIL as early as December 2005, which would significantly and negatively impact our future sales of PROVIGIL and
potentially NUVIGIL, if approved. If we are successful in obtaining FDA approval of ATTENACE for the treatment of ADHD in children and adolescents, we will face significant competition from
established stimulants such as RITALIN® by Novartis, STRATERRA® by Eli Lilly, and CONCERTA® by McNeil Consumer, as well as from amphetamines such as
DEXEDRINE® by GlaxoSmithKline and ADDERALL® by Shire.

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. While applicable laws and regulations prevent us from promoting
our product for uses beyond those contained in the approved label, our analysis of prescription data for ACTIQ in the United States indicated that many physicians have elected to prescribe the product
to treat conditions outside its labeled indication.

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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. 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. 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.



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 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 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.



To secure FTC clearance of the CIMA LABS acquisition, we entered into a license and supply agreement with Barr Laboratories, Inc. whereby we agreed to
license to Barr our U.S. rights to any intellectual property related to ACTIQ. The license to ACTIQ will become effective upon the earliest to occur of (i) final FDA approval of ORAVESCENT
fentanyl, (ii) September 5, 2006, if we have not received either (A) an approvable letter from FDA for the sugar free formulation of ACTIQ by July 1, 2005 (or final FDA
approval within 180 days of such approvable letter) or (B) a pediatric extension for
ACTIQ or (iii) February 3, 2007, if we have received a pediatric extension for ACTIQ. As we currently expect approval of ORAVESCENT fentanyl in the late 2006 and FDA approval for the
sugar-free formulation of ACTIQ within the timeframe agreed upon with the FTC, we anticipate that the Barr license will be effective upon approval of ORAVESCENT fentanyl by the FDA. Under
the agreement, Barr also may receive a license to the sugar-free formulation of ACTIQ under development; this license would become effective upon ORAVESCENT fentanyl approval by the FDA or
if the sugar-free approval timelines described above are not achieved. We have filed an sNDA with the FDA requesting approval for the sugar-free formulation of ACTIQ, and we
anticipate final FDA approval of this formulation by mid-2005.

Under
the license and supply agreement, we also agreed to transfer to Barr our technological know-how and intellectual property related to ACTIQ and to sell to Barr, for
period of up to three years, a generic form of ACTIQ for resale in the United States if Barr is unable to manufacture an FDA-approved generic version of ACTIQ by the date the license takes
effect. In addition, we have agreed to forbear from asserting any remaining patent rights in ACTIQ against other parties beginning on the earlier of August 3, 2007 or six months following the
effective date of Barr's license.

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We hold an exclusive license to the U.S. patents covering the currently approved compressed powder pharmaceutical composition and the method for administering
fentanyl via this composition that are set to expire in September 2006. If we complete a clinical study of ACTIQ in pediatric patients prior to September 2006, the FDA could grant us six
months of exclusivity beyond the September 2006 patent expiration. As described above, we have agreed to license to Barr our U.S. rights to any intellectual property related to ACTIQ.
Corresponding patents covering the current formulation of ACTIQ 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 expires in May 2005. The entry of a generic competitor with this
formulation as a result of the loss of patent protection on ACTIQ beginning in May 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 formulations (including a sugar
free formulation), processes for manufacturing the product, methods of using the product and disposable 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 began 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.

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.



Both long-acting and short-acting formulations are prescribed to treat cancer pain. Persistent pain is typically treated by
around-the-clock administration of long- or short-acting opioids. Breakthrough cancer pain is usually treated with short-acting product, such as ACTIQ, that is used
in conjunction with an around-the-clock formulation. ACTIQ is intended for treatment of breakthrough cancer pain in patients already taking opioids for persistent pain.

Long-acting
products, which have a slower onset and longer duration of action relative to ACTIQ, are commonly prescribed to treat persistent pain. Three
long-acting opioid analgesics currently marketed for chronic pain dominate this market: Johnson & Johnson's DURAGESIC® and Purdue Pharmaceuticals' OXYCONTIN®
and MS-CONTIN®. Persistent cancer pain also is treated with short-acting opioid tablets, capsules and elixirs, as well as quick-acting invasive opioid delivery systems (i.e.,
intravenous, intramuscular and subcutaneous), 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 for short-acting opioids other than ACTIQ, such as morphine and combination products (with
acetaminophen and oxycodone or hydrocodone), as well as quick-acting opioids delivered via invasive

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delivery
systems. In some cases, physicians also may attempt to manage breakthrough pain by increasing the dose of a long-acting opioid.

We
are aware of numerous companies developing other technologies for rapidly delivery opioids to treat breakthrough pain, including transmucosal, transdermal, nasal spray, inhaled
delivery systems, among others. If these technologies are successfully developed and approved over the next few years, they could represent significant competition for ACTIQ and, if approved,
ORAVESCENT fentanyl. Even without new competitive products, we will face at least one generic competitor to ACTIQ in late 2006 to early 2007 as a result of the license to Barr, which will have a
significant and negative impact on ACTIQ sales thereafter. The availability of inexpensive generic forms of ACTIQ could potentially have a negative impact on sales of ORAVESCENT fentanyl, if approved.

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 made an
additional $10 million payment to Abbott upon the 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 also market 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.

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 many physicians have elected to prescribe the product to treat conditions outside of its currently labeled indication, including generalized anxiety disorder and
neuropathic pain. In February 2005, working with the FDA, we updated our prescribing information for GABITRIL to include a bolded warning describing the risk of new onset seizures in
non-induced patients without epilepsy.



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 one
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. One such condition is generalized anxiety disorder. According to the National Institute of Mental Health, GAD is characterized by chronic, exaggerated worry and tension that is unfounded or
much more severe than

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the
normal anxiety most people experience. Many people with GAD also have physical symptoms, such as fatigue, trembling, muscle tension, headaches, irritability or hot flashes. According to NIMH,
about 2.8 percent of U.S. adults have been diagnosed with GAD.

In
the third quarter of 2004, we initiated a Phase 3 clinical program evaluating GABITRIL for the treatment of GAD. We expect to enroll at least 1,600 patients in multiple studies and
are targeting a product launch in 2007. Our decision to move forward with a Phase 3 clinical program was based on data from an eight-week, double-blind, randomized, multi-center,
placebo-controlled Phase 2 study with a flexible-dose design. The study included 260 adult patients with
GAD and was designed to determine the dose, time of onset and magnitude of GABITRIL's effect in GAD. Statistically significant improvements were seen at weeks one and eight of the study
in patients receiving GABITRIL, versus those receiving placebo, as measured by the Hamilton Anxiety Scale.



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 four 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; a patent claiming the pharmaceutical formulation and a patent claiming anhydrous
crystalline tiagabine hydrochloride and processes for its preparation. These patents currently are set to expire in 2011, 2012, 2016 and 2017, respectively. 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 December 2008. Outside of the United
States, our agreement with Sanofi-Synthelabo to supply GABITRIL expired in January 2005, although Sanofi has agreed to continue to produce GABITRIL through the end of the second quarter of
2005. We have identified a third party manufacturer for the future production of the active drug substance tiagabine and finished commercial supplies of GABITRIL outside the United States and 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. For non-U.S. markets, we have on hand approximately 12 months supply of GABITRIL and expect to have 24 months supply by the expiration of the
Sanofi-Synthelabo extension.



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. 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.

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OTHER PRODUCTS



In addition to PROVIGIL, ACTIQ and GABITRIL, we are engaged in the sale and marketing 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, 2004, aggregate worldwide net sales of these other products accounted for approximately 10% of
our total net sales, with the majority of this revenue derived from 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.      |                    
|                      | NAXY® and MONO- NAXY®
(clarithromycin)  |         | France  |            | Antibiotic                                               |             | Abbott France                   |                    
|                      | OTRASEL® (selegeline
hydrochloride)     |         | France  |            | Parkinson's Disease                                      |             | Zeneus Pharma Ltd.              |                    
|                      | TEGRETOL® (carbamezipine)               |         | U.K.    |            | Epilepsy                                                 |             | Novartis Pharma AG              |                    
|                      | RITALIN®
(methylphenidate)              |         | U.K.    |            | ADHD                                                     |             | Novartis Pharma AG              |                    
|                      | LIORESAL® (baclofen)                    |         | U.K.    |            | Spasticity                                               |             | Novartis Pharma AG              |                    
|                      | ANAFRANIL® (clomipramine
hydrochloride) |         | U.K.    |            | Depression and obsessive
compulsive disorder             |             | Novartis Pharma AG              |                    
|                      | XILOPAR® (selegeline
hydrochloride)     |         | Germany |            | Parkinson's Disease                                      |             | Zeneus Pharma Ltd.              |                    
|                      | APO-GO® (apomorphine
hydrochloride)     |         | Germany |            | Levadopa therapy fluctuations
in Parkinson's Disease     |             | Britannia Pharmaceuticals, Ltd. |                    
|                      | QUILONUM® (lithium)                     |         | Germany |            | Bipolar disorder                                         |             | GlaxoSmithKline GmbH            |                    

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
140 persons detailing our products to office-based and hospital-based physicians. Outside of France, we have sales and marketing organizations with approximately 70 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
syndrome, urinary tract spasm and the treatment of certain gynecological-related spasms. The product

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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 the rapid
growth of generic competition to our proprietary products in France.

In
December 2004, Cephalon France purchased Sanofi-Synthelabo France's rights to promote, distribute and sell NAXY and MONO-NAXY in France and French overseas
territories. The purchase price for these product rights was approximately $44.3 million. Abbott France holds the underlying rights to the product. Abbott France manufactures clarithromycin and
also promotes, distributes and sells clarithromycin under the trademark ZECLAR® in the French market.

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.



Through our wholly-owned subsidiary, CIMA LABS INC., we pursue collaborative relationships with pharmaceutical companies that leverage the capabilities of
these partners with our drug delivery and manufacturing capabilities to deliver new products incorporating our OraSolv® or DuraSolv® orally disintegrating drug delivery
technologies. Revenues from these arrangements consist of net sales of manufactured products to partners, product development and licensing fees and royalties. For the period August 13, 2004 to
December 31, 2004, revenues earned by CIMA LABS totaled $28.4 million, or 2.8% of our total revenue for the year ended December 31, 2004. The following table summarizes our major
collaborative relationships:

|Partner                    |  | Product                      |  | Indication                                                |  | Technology |  | Current Status                                                          
|-------------------------- |  | ---------------------------- |  | --------------------------------------------------------- |  | ---------- |  | ------------------------------------------------------------------------
|Alamo Pharmaceuticals, LLC |  | FazaClo (clozapine)          |  | Antipsychotic                                             |  | OraSolv    |  | Commercially available in U.S.                                          
|AstraZeneca                |  | Zomig ZMT
(zolmitriptan)     |  | Anti-migraine                                             |  | DuraSolv   |  | Commercially available in U.S., Europe, Canada, South America and Japan 
|Novartis                   |  | Triaminic Soft-chews         |  | Non-prescription pediatric cold, cough and allergy remedy |  | OraSolv    |  | Commercially available in U.S. and Canada                               
|N.V. Organon               |  | Remeron SolTab
(mirtazapine) |  | Antidepressant                                            |  | OraSolv    |  | Commercially available in U.S., Canada, Europe, Mexico and South America
|Schwarz Pharma, Inc.       |  | NuLev                        |  | Irritable bowel syndrome                                  |  | DuraSolv   |  | Commercially available in U.S.                                          
|Schwarz Pharma, Inc.       |  | Parcopa                      |  | Parkinson's disease                                       |  | DuraSolv   |  | Commercially available in U.S.                                          
|Wyeth                      |  | Alavert (loratadine)         |  | Non-sedating anti-histamine                               |  | DuraSolv   |  | Commercially available in U.S.                                          
|Wyeth                      |  | Dimetapp ND                  |  | Non-sedating anti-histaminic                              |  | DuraSolv   |  | Commercially available in U.S.                                          
|Aventis Pharmaceuticals    |  | Allegra
(fexofenadine)       |  | Non-sedating antihistamine                                |  | OraSolv    |  | In development                                                          
|Schering-Plough            |  | Undisclosed                  |  | Undisclosed                                               |  | OraSolv    |  | In development                                                          
|Schwarz Pharma, Inc.       |  | Six undisclosed products     |  | Undisclosed                                               |  | DuraSolv   |  | In development                                                          

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We currently have three manufacturing lines at our Eden Prairie, Minnesota facility for product requiring blister packaging and a manufacturing
line at our Brooklyn Park, Minnesota facility for bottled product. We also have granulation and taste masking capabilities at our Eden Prairie facility. We believe that our production capacity will be
adequate to meet our partners' needs for the foreseeable future.

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.

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); inhibition of MLK 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 substantial 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 characteristic neuronal cell death associated with 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 are derived from our 1992 collaboration 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 and develop 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 inhibit the MLK family of kinases.

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In 2002, Cephalon and Lundbeck initiated an 800-patient randomized, double-blind, placebo-controlled, multi-dose, sixty-five center Phase 2/3 clinical
trial of CEP-1347 in patients with early stage Parkinson's disease. 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. The study is fully
enrolled. In mid-2005, an independent third party will conduct an interim analysis of the data to determine whether treatment with CEP-1347 has the potential to demonstrate
statistical significance compared to placebo. So long as the results of this analysis do not indicate futility, we anticipate complete study results will be available in 2006. We have a supply
agreement with Abbott under which it supplies the key chemical intermediate used for the manufacture of CEP-1347. 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 for 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 a subset of patients suffering from Acute Myeloid Leukemia (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 AML. In early studies in 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. We initiated
additional Phase 2 studies with CEP-701 in this area utilizing higher doses of CEP-701 in combination with other therapies. Our Phase 2 studies are enrolling earlier stage
patients than were included in our previous Phase 2 study with CEP-701, and are utilizing a combination of other therapies.



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.

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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.

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 expect to complete study enrollment by the third quarter of 2005; if the study is not fully enrolled by early 2006, 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
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. We also have collaboration with Euroscreen s.a. to discover and develop small molecule therapeutics targeting
G-Protein Coupled Receptors, or GPCR, a family of receptors that play a major role in cell signaling. This collaboration strengthens our internal efforts to provide a more diverse
therapeutic breadth and depth to our research efforts.

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DRUG DELIVERY TECHNOLOGIES



Drug delivery technologies have been developed for a variety of therapeutic compounds, improving safety, efficacy, ease of patient use and patient compliance. In
addition, drug delivery technologies can be used to expand markets for existing products, as well as to develop new products.

We
have focused our research and development efforts on developing new product applications using two primary drug delivery technologies: Orally Disintegrating Tablet (ODT) technologies
and Oral Transmucosal technologies (OTM). Orally disintegrating tablet technology has emerged as an important drug delivery technology that enables tablets to disintegrate quickly in the mouth without
the use of water or chewing. ODT may improve compliance with a prescribed drug regimen, as orally disintegrating medications are easier to swallow and may taste better than non-taste
masked alternatives. In addition, ODT technology may improve dosing accuracy relative to liquid formulations. Finally, and most importantly, ODT technology may provide a significant commercial
benefit, as studies we have conducted indicate that patients often prefer it to conventional tablets and other formulations. OTM technologies are designed to increase the absorption of active drug
ingredients across the mucosal membranes lining the oral cavity, gastrointestinal tract and colon.

We
believe that pharmaceutical companies are attracted to our technologies because of the advantages such as rapid development timelines, excellent taste masking, proven commercial
manufacturing
capabilities, and applicability to a wide range of pharmaceutical compounds, enhanced convenience and other patient benefits.



Our two primary ODT drug delivery technologies are OraSolv® and DuraSolv®. Our OraSolv technology incorporates taste masked active drug
ingredients in orally disintegrating tablets. The low level of compaction pressure applied to OraSolv tablets allows higher porosity, faster disintegration time and larger amounts of taste masked
active drug ingredients to be compressed into the tablets. The core U.S. patent for our OraSolv technology expires in 2010. We have developed and manufacture several important OraSolv formulations,
which include Triaminic Soft-chews for Novartis, FazaClo for Alamo Pharmaceuticals and Remeron SolTab and its equivalent for markets outside the U.S. for Organon. In addition, we are
developing OraSolv formulations of Allegra for Aventis and three other products for other partners.

Our
DuraSolv technology uses higher compaction forces than OraSolv to produce orally disintegrating tablets incorporating active drug ingredients in a more durable orally disintegrating
tablet. Due to their greater durability, DuraSolv tablets are easier to handle and package, and may cost less to produce and package. The core U.S. patent for our DuraSolv technology expires in 2018.
We have developed and currently manufacture several important DuraSolv formulations, which include Alavert and Dimetapp ND for Wyeth, Zomig-ZMT and its equivalents marketed outside the
U.S. for AstraZeneca, and NuLev and Parcopa for Schwarz. In addition, we are developing several new prescription products based on our DuraSolv technology.

In
addition to our OraSolv and DuraSolv technologies, we continue to develop our LYOC technology to create ODT using freeze drying methods to manufacture tablets. We have a fully
dedicated LYOC manufacturing site in Nevers, France, which we expect to expand to increase capacity. Once complete, we will have additional capacity for both in-house and third party
manufacturing. In late 2004, we signed an agreement with Schwarz Pharma to manufacture two of their products at this facility. We currently manufacture and sell several drugs in France using our LYOC
technology, including SPASFON LYOC, PARALYOC, PROXALYOC, and LOPERAMIDE LYOC, and we are considering other compounds that may be suitable for formulation using this technology.

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In the area of OTM technologies, we are investing in research and development of our proprietary ORAVESCENT technologies. Our ORAVESCENT drug delivery
technologies include ORAVESCENT SL for drug delivery under the tongue ("sublingual") and ORAVESCENT BL for drug delivery between the gum and the cheek ("buccal"). An additional ORAVESCENT technology,
ORAVESCENT SS, is designed for site-specific administration, which may allow an active drug ingredient to be transported to a specific part of the gastrointestinal tract where it is
released for absorption. We originally designed and continue to design our ORAVESCENT technologies to improve the transport of active drug ingredients across mucosal membranes in the oral cavity or
the gastrointestinal tract. The core U.S. patents for our ORAVESCENT technology expire in 2019. In addition to our ORAVESCENT technologies, we continue to assess the potential uses of certain other
proprietary buccal delivery systems in several therapeutic areas in which we focus.

OTHER INTELLECTUAL PROPERTY

We 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, as appropriate. We also have licensed U.S. and foreign
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.

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 all pharmaceutical products
sold in the United States. Three large wholesale distributors, Cardinal Health, Inc., McKesson Corporation and AmerisourceBergen Corporation, control a significant share of this network. These
three wholesaler customers, in the aggregate, accounted for 87% of our worldwide net sales for the year ended December 31, 2004.
Fluctuations in the buying patterns of these customers, which may result from seasonality, wholesaler buying decision or other factors outside of our control, could significantly affect the level of
our net sales on a period to period basis. Because of this, the amounts purchased by these customers during any quarterly or annual period may not correlate to the level of underlying demand evidenced
by the number of prescriptions written for such products, as reported by IMS Health Incorporated. Furthermore, the loss or bankruptcy of any of these customers could materially and adversely affect
our results of operations 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

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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 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

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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 place restrictions on approval
and marketing utilizing its authority under applicable regulations. For example, ACTIQ was approved under subpart H of FDA approval regulations, which gives the FDA the 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

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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, 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
and ORAVESCENT fentanyl, 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.

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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.

LEGAL MATTERS

For a summary of legal matters see Part I, Item 3 "Legal Proceedings" below.

EMPLOYEES

As of December 31, 2004, we had a total of 2,173 full-time employees, of which 1,571 were employed in the United States and 602 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 lease our corporate headquarters, which is located in Frazer, Pennsylvania and consists of approximately 190,000 square feet of administrative office space. We
own approximately 160,000 square feet of research and office space in West Chester, Pennsylvania, at the site of our former corporate headquarters. We also lease approximately 110,000 square feet of
administrative, research and warehouse space that is near our West Chester facilities. In Salt Lake City, Utah, we house administrative, research, manufacturing and warehousing operations in
approximately 123,000 square feet that we lease. In 2004, we also purchased approximately 20 acres of property adjoining our current facilities in Salt Lake City. At our CIMA LABS facilities in Eden
Prairie and Brooklyn Park, Minnesota, we own approximately 200,000 square feet of space, most of which is dedicated to our manufacturing and warehousing operations.

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

We have filed patent infringement lawsuits in U.S. District Court in New Jersey against Teva Pharmaceuticals USA, Inc., Mylan Pharmaceuticals Inc.,
Ranbaxy Pharmaceuticals Inc., Barr Laboratories, Inc. and Sandoz Inc. based upon the ANDAs filed by each of these companies with the FDA seeking approval to market a generic form
of modafinil. The lawsuits claim infringement of our U.S. Patent No. RE37,516 which covers the pharmaceutical compositions and methods of treatment with the form of modafinil contained in PROVIGIL.
Each of the defendants has asserted defenses and/or counterclaims for non-infringement and patent invalidity, and defendants Teva, Ranbaxy and Mylan have moved to amend their answers and
counterclaims to state inequitable conduct as a defense to our claims (we have opposed these motions and a decision is pending). These lawsuits are currently in the discovery phase; we expect a trial
to begin no earlier than late 2005. We also recently received notice that Carlsbad Technology, Inc. filed an ANDA seeking to market a generic form of modafinil and we have filed suit against
them. Discovery in this action has not yet commenced. 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.

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In
January 2005, we filed a patent infringement lawsuit in U.S. District Court in Delaware against Barr Laboratories, Inc., based on the ANDA filed by Barr seeking approval
for generic form of ACTIQ. Neither the ANDA filing nor the lawsuit modifies the existing license grant to Barr, and we do not expect any change in the anticipated date of Barr's entry to the market
(absent resolution of the lawsuit). At the same time we continue to comply in good faith with the FTC Decision and Order requiring us to provide Actiq manufacturing process and other information to
Barr to assist its efforts to manufacture a licensed generic version of Actiq when Barr's license becomes effective. While we intend to vigorously defend the validity of the ACTIQ patents and prevent
infringement by Barr until the license effective date, these efforts will be both expensive and time consuming and, ultimately, may not be successful.

In
September 2004, we announced that we had received subpoenas from the U.S. Attorney's Office in Philadelphia with respect to PROVIGIL, ACTIQ and GABITRIL. This investigation is
ongoing and appears to be focused on our sales and promotional practices. We are cooperating with the investigation and are providing documents to the Government. In addition, we have engaged in
ongoing discussions with the Attorney General in Pennsylvania regarding recent media reports of
instances of abuse and diversion of ACTIQ. We have had similar discussions with the Office of the Connecticut Attorney General; in September 2004, we received a voluntary request for
information from the Office of the Connecticut Attorney General asking us to provide information generally relating to our sales and promotional practices for our U.S. products. We have agreed to
comply with this voluntary request. These matters may involve the bringing of criminal charges and fines, and/or civil penalties. We cannot predict or determine the outcome of these matters or
reasonably estimate the amount or range of amounts of any fines or penalties that might result from an adverse outcome. However, an adverse outcome could have a material adverse effect on our
financial position, liquidity and results of operations.

We
are a party to certain other litigation in the ordinary course of our business, including, among others, 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.

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 2004.

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Executive Officers of the Registrant

The names, ages and positions held by our executive officers as of December 31, 2004 are as follows:

|Name                      |  | Age |  | Position                                                       
|------------------------- |  | --- |  | ---------------------------------------------------------------
|Frank Baldino, Jr., Ph.D. |  | 51  |  | Chairman and Chief Executive Officer                           
|Paul Blake, F.R.C.P.      |  | 57  |  | Senior Vice President, Clinical Research and Regulatory Affairs
|J. Kevin Buchi            |  | 49  |  | Senior Vice President and Chief Financial Officer              
|Peter E. Grebow, Ph.D.    |  | 58  |  | Senior Vice President, Worldwide Technical Operations          
|John E. Osborn            |  | 47  |  | Senior Vice President, General Counsel and Secretary           
|Robert P. Roche, Jr.      |  | 49  |  | Senior Vice President, Pharmaceutical Operations               
|Carl A. Savini            |  | 55  |  | Senior Vice President, Administration                          
|Jeffry L. Vaught, Ph.D.   |  | 54  |  | 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.

Dr. Blake
joined Cephalon in March 2001 as Senior Vice President, Clinical Research and Regulatory Affairs. Effective February 14, 2005, Dr. Blake's title was
changed to Executive Vice President, Worldwide 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. He also serves on the board of directors of Protez Pharmaceuticals, a
privately-held anti-infective discovery company.

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. Mr. Buchi received a master
of management degree from the J.L. Kellogg

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Graduate
School of Management, Northwestern University in 1982. Mr. Buchi serves as a member of the board of directors of Lorus Therapeutics Inc., a publicly-traded Canadian
biotechnology company, and Encysive Pharmaceuticals Inc., a publicly-traded pharmaceutical company.

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. Effective February 14, 2005, Dr. Grebow's title was changed to Executive 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 and 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 master's degree from The Johns Hopkins
University School of Advanced International Studies. 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. In 2004, he was appointed by then-U.S. Secretary of State Colin Powell to the board of governors of the East-West Center in Honolulu, an education
and research organization established by the U.S. Congress to study the Asia Pacific region and its relationship with the United States.

Mr. Roche
joined Cephalon in January 1995 and has served as Senior Vice President, Pharmaceutical Operations since November 2000. Effective February 14, 2005,
Mr. Roche's title was changed to Executive Vice President, Worldwide Pharmaceutical Operations. In June 1999, he was appointed to Senior Vice President of Sales and Marketing and prior to that
was Vice President, Sales and Marketing. Previously, Mr. Roche served as 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, Administration since October 2004 and was Senior Vice President, Human Resources
from January 2000 to October 2004. Effective February 14, 2005, Mr. Savini's title was changed to Senior Vice President and Chief Administrative Officer. Prior to
January 2000, Mr. Savini 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
joined Cephalon in August 1991, and since that time has been responsible for directing Cephalon's research operations. He 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.

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PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

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  
|---- | -------------- | ---- | - | -----
|2003 |                |      |   |      
|     | First Quarter  |      | $ | 54.95
|     | Second Quarter |      |   | 48.70
|     | Third Quarter  |      |   | 50.71
|     | Fourth Quarter |      |   | 49.46
|2004 |                |      |   |      
|     | First Quarter  |      | $ | 60.98
|     | Second Quarter |      |   | 60.10
|     | Third Quarter  |      |   | 54.96
|     | Fourth Quarter |      |   | 51.73

As
of March 7, 2005 there were 543 holders of record of our common stock. On March 7, 2005, the last reported sale price of our common stock as reported on the NASDAQ
National Market was $49.56 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.

Issuer Purchases of Equity Securities

|Period              |  | Total Number
of Shares of
Common Stock
Purchased(1) |  | Average Price
Paid Per Share |       | Total Number of
Shares of Common
Stock Purchased as
Part of Publicly
Announced Plans or
Programs |   | Approximate
Dollar Value of
Common Stock
that May Yet Be
Purchased Under
the Plans or
Programs
|------------------- |  | --------------------------------------------------- |  | ---------------------------- | ----- | ------------------------------------------------------------------------------------------------ | - | ----------------------------------------------------------------------------------------------
|October 131, 2004  |  |                                                    |  |                              |      |                                                                                                  |  |                                                                                               
|November 130, 2004 |  |                                                    |  |                              |      |                                                                                                  |  |                                                                                               
|December 131, 2004 |  | 23,720                                              |  | $                            | 48.66 |                                                                                                  |  |                                                                                               
|                    |  |                                                     |  |                              |       |                                                                                                  |   |                                                                                               
|Total               |  | 23,720                                              |  | $                            | 48.66 |                                                                                                  |  |                                                                                               
|                    |  |                                                     |  |                              |       |                                                                                                  |   |                                                                                               

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Exchange of Convertible Notes

In December 2004, we completed an exchange offer (the "Exchange Offer") in which we offered to exchange (i) Zero Coupon Convertible Subordinated
Notes Due 2033, First Putable June 15, 2008 ("New 2008 Notes"), for any and all of our then outstanding Zero Coupon Convertible Subordinated Notes Due 2033, First Putable June 15, 2008
(the "Old 2008 Notes"), and (ii) Zero Coupon

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Convertible
Subordinated Notes Due 2033, First Putable June 15, 2010 (the "New 2010 Notes" and together with the New 2008 Notes, the "New Notes") for any and all of our then outstanding Zero
Coupon Convertible Subordinated Notes Due 2033, First Putable June 15, 2010 (the "Old 2010 Notes" and, together with the Old 2008 Notes, the "Old Notes"). The following table reflects the Old
Notes exchanged in the Exchange Offer.

|Period              |  | Total Principal
Amount of
Notes
Exchanged |             | Average Price Per
$1,000 Principal
Amount of the
Notes Exchanged |   | Total Principal
Amount of Notes
Purchased as Part of
Publicly Announced
Plans or Programs |     | Approximate
Dollar Value of
Notes that May Yet
Be Purchased
Under the Plans or
Programs
|------------------- |  | ----------------------------------------- | ----------- | ---------------------------------------------------------------- | - | ----------------------------------------------------------------------------------------- | --- | ---------------------------------------------------------------------------------------
|October 131, 2004  |  |                                           |            |                                                                  |   |                                                                                          |     |                                                                                       
|November 130, 2004 |  |                                           |            |                                                                  |   |                                                                                          |     |                                                                                       
|December 131, 2004 |  | $                                         | 749,585,000 | (1)                                                              | $ | 1,000                                                                                     | (2) |                                                                                       
|                    |  |                                           |             |                                                                  |   |                                                                                           |     |                                                                                        
|Total               |  | $                                         | 749,585,000 |                                                                  | $ | 1,000                                                                                     |     |                                                                                       
|                    |  |                                           |             |                                                                  |   |                                                                                           |     |                                                                                        

---

Securities Authorized for Issuance Under Equity Compensation Plans

The following table gives information about our common stock that may be issued upon the exercise of options, warrants and rights under all of our existing equity
compensation plans as of December 31,
2004, including the 1987 Stock Option Plan (which expired in 1997) (the "1987 Plan"), the 2004 Equity Compensation Plan (the "2004 Plan") and the 2000 Equity Compensation Plan for Employees and Key
Advisors (the "2000 Plan").

Equity Compensation Plan Information

|Plan Category                                             |  | (a)
Number of Securities
to be Issued Upon
Exercise of
Outstanding Options,
Warrants and
Rights(1) |     | (b)
Weighted Average
Exercise Price of
Outstanding
Options, Warrants
and Rights(1) |       | (c)
Number of Securities Remaining
Available for Future Issuance
(Excludes Securities Reflected in
Column(a))(2)
|--------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------- | --- | ---------------------------------------------------------------------------------- | ----- | ----------------------------------------------------------------------------------------------------------------
|Equity compensation plans approved by stockholders        |  | 6,098,048                                                                                          | (3) | $                                                                                  | 42.70 |                                                                                                                 
|Equity compensation plans not approved by stockholders(4) |  | 3,920,050                                                                                          |     | $                                                                                  | 56.95 |                                                                                                                 
|                                                          |  |                                                                                                    |     |                                                                                    |       |                                                                                                                 
|Total                                                     |  | 10,018,098                                                                                         |     | $                                                                                  | 48.27 |                                                                                                                 
|                                                          |  |                                                                                                    |     |                                                                                    |       |                                                                                                                 

---

27

---





ITEM 6.    SELECTED FINANCIAL DATA

On August 12, 2004 and December 28, 2001, we completed the acquisitions of the outstanding shares of capital stock of CIMA LABS INC. and
Group Lafon, respectively. These acquisitions have been accounted for as purchases and, accordingly, the estimated fair value of assets acquired and liabilities assumed have been recorded as of the
respective dates of the acquisitions.

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 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.

|                                                                           |  | Year Ended December 31, |          
|-------------------------------------------------------------------------- |  | ----------------------- | ---------
|
|
|Sales                                                                      |  | $                       | 980,375  
|Other revenues                                                             |  |                         | 35,050   
|                                                                           |  |                         |          
|Total revenues                                                             |  |                         | 1,015,425
|Acquired in-process research and development                               |  |                         | (185,700 
|Debt exchange expense                                                      |  |                         | (28,230  
|Impairment charge                                                          |  |                         | (30,071  
|Income tax (expense) benefit, net                                          |  |                         | (45,629  
|Income (loss) before cumulative effect of a change in accounting principle |  | $                       | (73,813  
|Cumulative effect of a change in accounting principle                      |  |                         |         
|                                                                           |  |                         |          
|Net income (loss)                                                          |  |                         | (73,813  
|Dividends on convertible exchangeable preferred stock                      |  |                         |         
|                                                                           |  |                         |          
|Net income (loss) applicable to common shares                              |  | $                       | (73,813  
|                                                                           |  |                         |          
|Basic income (loss) per common share*:                                     |  |                         |          
|Income (loss) before cumulative effect of a change in accounting principle |  | $                       | (1.31    
|Cumulative effect of a change in accounting principle                      |  |                         |         
|                                                                           |  |                         |          
|                                                                           |  | $                       | (1.31    
|                                                                           |  |                         |          
|Weighted average number of shares outstanding                              |  |                         | 56,489   
|                                                                           |  |                         |          
|                                                                           |  |                         |          

28

---



|Diluted income (loss) per common share*:                                   |  |   |        |   |   |        |  |   |        |   |   |        |   |   |        |  
|-------------------------------------------------------------------------- |  | - | ------ | - | - | ------ |  | - | ------ | - | - | ------ | - | - | ------ | -
|Income (loss) before cumulative effect of a change in accounting principle |  | $ | (1.31  | ) | $ | 1.42   |  | $ | 2.82   |   | $ | (1.27  | ) | $ | (2.51  | )
|Cumulative effect of a change in accounting principle                      |  |   |       |   |   |       |  |   | (.05   | ) |   |       |   |   | (.19   | )
|                                                                           |  |   |        |   |   |        |  |   |        |   |  
|                                                                           |  | $ | (1.31  | ) | $ | 1.42   |  | $ | 2.77   |   | $ | (1.27  | ) | $ | (2.70  | )
|                                                                           |  |   |        |   |   |        |  |   |        |   |  
|Weighted average number of shares outstanding  assuming dilution          |  |   | 56,489 |   |   | 64,076 |  |   | 66,856 |   |   | 48,292 |   |   | 40,893 |  
|                                                                           |  |   |        |   |   |        |  |   |        |   |  

---

|                                       |  | As of December 31, |          
|-------------------------------------- |  | ------------------ | ---------
|
|
|Cash, cash equivalents and investments |  | $                  | 791,676  
|Total assets                           |  |                    | 2,440,176
|Long-term debt                         |  |                    | 1,284,410
|Accumulated deficit                    |  |                    | (395,118 
|Stockholders' equity                   |  |                    | 830,044  

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   |  

29

---



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

Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to provide information to assist
you in better understanding and evaluating our financial condition and results of operations. We recommend that you read this MD&A in conjunction with our consolidated financial statements included in
Item 8 of 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. Through our wholly-owned subsidiary, CIMA LABS INC., we develop and manufacture orally disintegrating tablets using proprietary technologies. Our three largest products in
terms of product sales, PROVIGIL, ACTIQ and GABITRIL, comprised approximately 90% of our worldwide net sales for the year ended December 31, 2004. We market PROVIGIL, ACTIQ and GABITRIL in the
United States through our approximately 500-person sales force.

Our
corporate headquarters are in Frazer, Pennsylvania, and our research and development headquarters are in West Chester, Pennsylvania. In addition, we have offices in Utah, Minnesota,
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, Utah, for the
production of ACTIQ for worldwide distribution and sale, and Minnesota, for the production of orally disintegrating versions of drugs for our partners.

Our
future success is highly dependent on obtaining and maintaining patent protection for our products and technology. With respect to PROVIGIL, we have filed patent infringement
lawsuits against six generic companies based upon the ANDAs filed by these companies seeking FDA approval to market a generic version of modafinil. We anticipate that the first trial will begin no
earlier than late 2005. See "Certain Risks Related to Our Business." For ACTIQ, the patents covering the previous and current formulations of the product are set to expire as early as
May 2005 and September 2006, respectively. As a result of the License and Supply Agreement we entered into with
Barr Laboratories, Inc. in July 2004, we could face generic competition from Barr prior to September 2006 if we receive FDA approval of ORAVESCENT fentanyl before this date. See
"Acquisition of CIMA LABS INC." below. In December 2004, we announced that FDA had acknowledged receipt of an ANDA filed by Barr seeking approval for a generic form of ACTIQ. In
January 2005, we filed a patent infringement lawsuit against Barr to defend our patents until the license effective date. Neither the ANDA filing nor the lawsuit modify the existing license
grant to Barr, and we do not expect any change in the anticipated date of Barr's entry to market (absent resolution of the lawsuit). The loss of patent protection on any of our existing U.S. products,
whether by third-party challenge, invalidation, circumvention, license or patent expiration, would materially impact our results of operations.

As
part of our business strategy, in the future we expect to consider and, as appropriate, consummate acquisitions of other technologies, products and businesses. Over the past few
years, we also 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. During 2004, we made significant progress towards these goals. Some notable achievements include:



30

---





We
also have significant research programs focused on developing therapeutics to treat neurological and oncological disorders. In the neurology area, we have a program with H. Lundbeck
A/S to evaluate a molecule, CEP-1347, in 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 conducting Phase 2 clinical trials in patients suffering from AML. We also are conducting a Phase 1/2 program with another molecule,
CEP-7055, to evaluate safety and tolerability and to gather preliminary evidence of efficacy 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, nearly all 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, as of the filing date of this report, $521.8 million in aggregate principal amount outstanding matures in
December 2006.

The
rate of our future growth and our ability to generate sufficient cash flows from operations 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 and new indications for our existing products.

Acquisition of CIMA LABS INC.

On August 12, 2004, we completed our acquisition of CIMA LABS INC. Under the Agreement and Plan of Merger dated November 3, 2003, we acquired
each outstanding share of CIMA LABS common stock for $34.00 per share in cash. The total cash paid to CIMA LABS stockholders in the transaction was approximately $482.5 million, net of CIMA
LABS' existing cash on hand, or $409.4 million, net of its cash, cash equivalents and investments. As a result of the acquisition, we obtained the rights to CIMA LABS' ORAVESCENT fentanyl
product candidate, which is currently in Phase 3 clinical trials for the treatment of breakthrough cancer pain in opioid-tolerant patients. ORAVESCENT fentanyl utilizes an enhanced absorption
transmucosal drug delivery technology that we believe may facilitate the rapid onset of pain relief in such patients. We are targeting approval of this product by the FDA in late 2006.

31

---



CIMA
LABS also develops and manufactures orally disintegrating tablets using its proprietary technologies, OraSolv® and DuraSolv®, that allow an active drug
ingredient to be formulated into a new dosage form that quickly disintegrates in the mouth without chewing or the need for water. CIMA LABS enters into collaborative agreements with pharmaceutical
companies to develop products based on its oral drug delivery technologies. It currently manufactures for its partners, including AstraZeneca, N.V. Organon and Wyeth, five prescriptions and three
over-the-counter pharmaceutical brands incorporating either the OraSolv or DuraSolv technologies. Revenues from these arrangements consist of net sales of manufactured product
to partners, product development and licensing fees and royalties. For the period August 13, 2004 to December 31, 2004, revenues attributable to CIMA LABS totaled $28.4 million.
CIMA LABS has facilities in Eden Prairie and Brooklyn Park, Minnesota, which house its executive offices, manufacturing facility, research and product development center and warehouse space.

To
secure FTC clearance of the CIMA LABS acquisition, we entered into a license and supply agreement with Barr whereby we agreed to license to Barr our U.S. rights to any intellectual
property related to ACTIQ. The license to ACTIQ will become effective upon the earliest to occur of (i) final FDA approval of ORAVESCENT fentanyl, (ii) September 5, 2006, if we
have not received either (A) an approvable letter from FDA for the sugar free formulation of ACTIQ by July 1, 2005 (or final FDA approval within 180 days of such approvable
letter) or (B) a pediatric extension for ACTIQ or (iii) February 3, 2007, if we have received a pediatric extension for ACTIQ. As we currently expect to receive both a pediatric
extension for ACTIQ prior to September 2006 and FDA approval for the sugar-free formulation of ACTIQ within the timeframe agreed upon with the FTC, we anticipate that the Barr
license will be effective upon ORAVESCENT fentanyl approval. Under the agreement, Barr also may receive a license to the sugar-free formulation of ACTIQ under development; this license
would become effective upon ORAVESCENT fentanyl approval by the FDA or if the sugar-free approval timelines described above are not achieved. We have filed an sNDA with the FDA requesting
approval for the sugar-free formulation of ACTIQ, and we anticipate final FDA approval of this formulation by mid-2005.

Under
the license and supply agreement, we also agreed to transfer to Barr our technological know-how and intellectual property related to ACTIQ and to sell to Barr, for
period of up to three years, a generic form of ACTIQ for resale in the United States if Barr is unable to manufacture an FDA-approved generic version of ACTIQ by the date the license takes
effect. In addition, we have agreed to forbear from asserting any remaining patent rights in ACTIQ against other parties beginning on the earlier of August 3, 2007 or six months following the
effective date of Barr's license.

RESULTS OF OPERATIONS(Dollar amounts in thousands)

SalesIn the United States, we sell our products to pharmaceutical wholesalers, the largest three of
which accounted for 87% of our worldwide net sales for the year ended December 31, 2004. Decisions made by these wholesalers and their customers regarding the levels of inventory they hold (and
thus the amount of product they purchase from us) are outside of our control and can materially affect the level of our sales in any particular period and thus may not necessarily correlate to the
number of prescriptions written for our products as reported by IMS Health Incorporated. To the extent possible, 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. However, we do not have any agreements, understandings or business practices under which we extend incentives based on levels of inventory held by wholesalers. As of December 31,
2004, we received information from our three largest U.S. wholesaler customers about the levels of inventory they held for our three products. Based on this information, which we have not
independently verified, we believe

32

---



that
inventory held at these wholesalers is within a normal range for our business of approximately one month's supply. However, we currently do not have ongoing agreements for access to the actual
inventory levels of our products held by our wholesalers or their customers.

At
the beginning of 2004, we consolidated our two former U.S. sales forces into a single unit that now details 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 this combined force to approximately 500 persons. We believe this substantially larger sales
force, coupled with focused marketing efforts designed to educate physicians and communicate the benefits of our products, contributed to the increases in total sales for the year ended
December 31, 2004.

Year ended December 31, 2004 compared to year ended December 31, 2003

For the year endedDecember 31,% Change2004

2003

ChangeSales:PROVIGIL

$
439,667

$
290,465

$
149,202

51
%ACTIQ


344,997


237,467


107,530

45
%GABITRIL


94,164


63,699


30,465

48
%Other


101,547


93,619


7,928

8
%Total sales


980,375


685,250


295,125

43
%Total other revenues


35,050


29,557


5,493

19
%Total revenues

$
1,015,425

$
714,807

$
300,618

42
%


SalesIn addition to our larger sales force presence and targeted sales and marketing efforts designed to
educate physicians and communicated the benefits of our products, other factors which contributed to the increase in sales are summarized as follows:



33

---





Analysis of gross sales to net salesThe following table presents the adjustments deducted from gross sales to arrive at a net
sales figure:

For the year endedDecember 31,% Change2004

2003

ChangeGross sales:

$
1,080,408

$
747,060

$
333,348

45
%Adjustments to gross sales:Prompt payment discounts


18,443


12,202


6,241

51
%Returns


11,247


7,973


3,274

41
%Coupons


16,521


9,349


7,172

77
%Medicaid discounts


41,274


25,760


15,514

60
%Managed care and governmental agreements


12,548


6,526


6,022

92
%100,033


61,810


38,223

62
%Net sales

$
980,375

$
685,250

$
295,125

43
%Adjustments to gross sales as a percentage of gross sales


9.3
%

8.3
%


Increases
in the dollar amount of adjustments to gross sales from 2003 to 2004 primarily reflect increases in gross sales during the period and corresponding increases in
discounts, expected returns and coupon usage, and participation in managed care, Medicaid, and other governmental programs. The change in the adjustments to gross sales as a percentage of gross sales
is primarily driven by higher Medicaid discounts, and managed care and governmental agreement discounts and chargebacks resulting from the impact of price increases and increased participation.

Other RevenuesThe increase in other revenues of 19% from period to period is primarily due to the inclusion of product
development and licensing fees and royalties of $15.1 million attributable to CIMA LABS partially offset by a decrease in partner reimbursements on both our CEP-7055 program and our
CEP-1347 program and a reduction in earnings recognized under our collaboration agreement with Novartis Pharma AG. 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 endedDecember 31,% Change2004

2003*

ChangeCosts and expenses:Cost of sales

$
119,973

$
92,375

$
27,598

30
%Research and development


273,972


168,222


105,750

63
%Selling, general and administrative


339,477


254,088


85,389

34
%Depreciation and amortization


52,798


44,073


8,725

20
%Impairment charge


30,071





30,071


%Acquired in-progress research and development costs


185,700





185,700


%$
1,001,991

$
558,758

$
443,233

79
%


---

34

---



Cost of SalesThe cost of sales was approximately 12% of net sales in 2004 and 13% of net sales in 2003. The
decrease is primarily 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, partially offset
by higher costs related to other products sold in France and to CIMA LABS cost of sales for which there are no comparable data for 2003 and for which the margin is higher than other Cephalon products.

Research and Development ExpensesResearch and development expenses increased $105.8 million, or 63%, in 2004 as
compared to 2003. Of this increase, $71.1 million is due to clinical research costs including expenditures associated with increased headcount necessary to support higher levels of clinical
activities and expenditures associated with (1) additional clinical studies initiated in 2004 to explore the utility of GABITRIL beyond its current indication, (2) costs incurred with
Phase 3 clinical programs for ATTENACE which began in late 2003, and (3) costs incurred with our Phase 3 studies of NUVIGIL which began in the fourth quarter of 2003. The increase in 2004 also
was impacted by higher costs incurred during 2004 associated with supplying materials for our clinical trials in process, developing new or improved production processes for our currently marketed
products and products in development, and by the inclusion of CIMA LABS.

Selling, General and Administrative ExpensesSelling, general and administrative expenses increased $85.4 million, or
34%, in 2004 as compared to 2003. The increase is predominantly the result of the expansion of our European and U.S. field sales forces, additional product promotional expenses and an increased number
of educational programs. In addition, a portion of the increase is due to higher administrative expenses associated with an increase in headcount, costs associated with complying with the requirements
of the Sarbanes-Oxley Act, and higher accruals for bonus expenses resulting from a shift away from a stock option-based incentive compensation plan to a cash-based incentive compensation
plan. These increases were partially offset by the recognition of a gain of $4.2 million in 2004 as a result of retiree medical benefit changes for current employees at Cephalon France.

Depreciation and Amortization ExpensesDepreciation and amortization expenses increased by $8.7 million, or 20%, in
2004 as compared to 2003. Depreciation expense increased period over period primarily as a result of increased capital investments in software, building and laboratory improvements at our West Chester
location, increased spending on manufacturing equipment at our Salt Lake City location and the acquisition of property, plant and equipment associated with the CIMA LABS acquisition. Amortization
expense increased due to the amortization of technology, trademark and marketing rights acquired from CIMA LABS.

Impairment chargeDuring 2004, we recorded an impairment charge of $30.1 million for the write-off of our
investment in MDS Proteomics Inc.

Acquired in-process research and developmentIn connection with our acquisition of CIMA LABS, we allocated
approximately $185.7 million of the purchase price to in-process research and development projects. At the acquisition date, CIMA LABS' ongoing research and development initiatives
were focused on the development and commencement of Phase 3 clinical trials of ORAVESCENT fentanyl, and several other minor ongoing research and development projects. These costs were charged to
expense in the third quarter of 2004 since, at the date of acquisition, the development of these projects

35

---



had
not yet reached technological feasibility, and the research and development in progress had no alternative future uses.

For the year endedDecember 31,% Change2004

2003

ChangeOther income and expense:Interest income

$
16,486

$
11,298


5,188

46
%Interest expense


(22,186
)

(28,905
)

6,719

(23
%)Debt exchange expense


(28,230
)




(28,230
)

%Charge on early extinguishment of debt


(2,313
)

(9,816
)

7,503

(76
%)Other income (expense), net


(5,375
)

1,688


(7,063
)
(418
%)$
(41,618
)
$
(25,735
)
$
(15,883
)
62
%


Other Income and ExpenseThe aggregate of other income and expense increased $15.9 million, or 62%, in
the year ended December 31, 2004 from the year ended December 31, 2003. The increase was attributable to the following factors:



For the year endedDecember 31,% Change2004

2003

ChangeIncome tax expense

$
45,629

$
46,456

$
(827
)
(2
%)


36

---



Income TaxesDuring 2004, we recognized $45.6 million of income tax expense on a loss before income taxes of
$28.2 million, generating an overall effective tax rate of 162%. This compared to 2003 tax expense of $46.5 million on income before income taxes of $130.3 million, yielding an
effective tax rate of 36%. The change in effective tax rates between 2004 and 2003 is primarily due to the $185.7 million acquired in-process research and development charge that
was not tax deductible and, therefore, no tax benefit was recorded for this item. In addition, we recorded a decrease in the valuation allowance account of $7.1 million and recognized a
research and development tax credit of $11.9 million, both of which were partially offset by alternative minimum tax expense.

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

For the year endedDecember 31,% Change2003

2002

ChangeSales:PROVIGIL

$
290,465

$
207,204

$
83,261

40
%ACTIQ


237,467


126,725


110,742

87
%GABITRIL


63,699


48,760


14,939

31
%Other


93,619


83,254


10,365

12
%Total sales


685,250


465,943


219,307

47
%Total other revenues


29,557


40,954


(11,397
)
(28
%)Total revenues

$
714,807

$
506,897

$
207,910

41
%


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



37

---





Analysis of gross sales to net salesThe following table presents the adjustments deducted from gross sales to arrive at a net
sales figure:

For the year endedDecember 31,% Change2003

2002

ChangeGross sales:

$
747,060

$
498,637

$
248,423

50
%Adjustments to gross sales:Prompt payment discounts


12,202


7,842


4,360

56
%Returns


7,973


3,249


4,724

145
%Coupons


9,349


4,481


4,868

109
%Medicaid discounts


25,760


13,201


12,559

95
%Managed care and governmental agreements


6,526


3,921


2,605

66
%61,810


32,694


29,116

89
%Net sales

$
685,250

$
465,943

$
219,307

47
%Adjustments to gross sales as a percentage of gross sales


8.3
%

6.6
%


Increases
in the dollar amount of adjustments to gross sales from 2002 to 2003 primarily reflect increases in gross sales during the period and corresponding increases in
discounts, expected returns and coupon usage, and participation in managed care, Medicaid, and other governmental programs. The change in the adjustments to gross sales as a percentage of gross sales
is primarily driven by higher Medicaid discounts, and managed care and governmental agreement discounts and chargebacks resulting from the impact of price increases and increased participation.

Other Revenues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

38

---



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 endedDecember 31,% Change2003 *

2002 *

ChangeCosts and expenses:Cost of sales

$
92,375

$
74,237

$
18,138

24
%Research and development


168,222


122,920


45,302

37
%Selling, general and administrative


254,088


178,138


75,950

43
%Depreciation and amortization


44,073


35,457


8,616

24
%$
558,758

$
410,752

$
148,006

36
%


---

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 $45.3 million, or 37%, 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 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 $76.0 million, or
43%, 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,

39

---



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

24
%Charge 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The aggregate of other income and expense decreased $8.0 million, or 24%, in 2003 from 2002
due to:



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
%


40

---



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.

LIQUIDITY AND CAPITAL RESOURCES

Cash, cash equivalents and investments at December 31, 2004 were $791.7 million, representing 32% of total assets, down from $1.2 billion, or
49% of total assets, at December 31, 2003. In August 2004, we completed our acquisition of CIMA LABS and paid $482.5 million in cash, net of CIMA LABS' existing cash on hand, (or
$409.4 million, net of CIMA LABS' cash, cash equivalents and investments) to CIMA LABS stockholders to complete the transaction.

Working
capital, which is calculated as current assets less current liabilities, was $963.7 million at December 31, 2004 compared to $1.2 billion at
December 31, 2003.

Net Cash Provided by Operating Activities

Net cash provided by operating activities was $178.6 million for the year ended December 31, 2004 as compared to $200.2 million for 2003. The
decrease in 2004 is primarily a result of increases in current assets, particularly trade receivables, partially offset by increases in current liabilities. Our loss of $73.8 million in 2004
includes non-cash expenditures of $185.7 million of acquired in-process research and development expense, $30.1 million of impairment expense and
$28.2 million of debt exchange expense.

Net Cash Used for Investing Activities

Net cash used for investing activities was $685.2 million for the year ended December 31, 2004 as compared to $17.6 million for 2003. The
change is primarily due to our acquisition of CIMA LABS in August 2004 for $482.5 million, net of cash acquired (or $409.4 million, net of cash, cash equivalents and investments
acquired) and the increase of purchases of available-for-sale investments in order to benefit from rising interest rates on longer term investments. In addition, in the fourth
quarter of 2004, we purchased the French marketing rights to NAXY and MONO-NAXY from Sanofi-Synthelabo France for $44.3 million. Net cash used for investing activities in 2003
included the purchase of non-marketable securities totaling $33.0 million, which included $30.0 million for the purchase of securities of MDS Proteomics Inc. (MDSP), a
privately-held Canadian company. The carrying value of the investment in MDSP was written off as an impairment charge in the second quarter of 2004.

41

---



Net Cash Provided by (Used for) Financing Activities

Net cash used for financing activities was $41.0 million for the year ended December 31, 2004, as compared to net cash provided by financing
activities of $437.9 million in 2003. The change is primarily the result of net proceeds of $727.1 million received in 2003 from the sale of zero coupon convertible subordinated notes.
Concurrent with the private placement of the notes, we purchased a convertible note hedge for $258.6 million and sold warrants for $178.3 million.

During
both comparable periods, convertible subordinated notes were repurchased or redeemed (amounts in thousands):

3.875% convertible subordinated notes

March 2004

Repurchase

$
10,0003.875% convertible subordinated notes

August 2004

Repurchase


33,000$
43,0005.25% convertible subordinated notes

March 2003

Repurchase

$
2,0005.25% convertible subordinated notes

April 2003

Repurchase


7,0005.25% convertible subordinated notes

July 2003

Redemption


174,0003.875% convertible subordinated notes

July 2003

Repurchase


12,000$
195,000


The
volume of exercises of common stock options increased in 2004 as compared to 2003. The extent and timing of option exercises are primarily dependent upon the market price of our
common stock and general financial market conditions, as well as the exercise prices and expiration dates of the options.

Commitments and Contingencies

Legal Proceedings

For
a complete description of legal proceedings, see Part I, Item 3, "Legal Proceedings."

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 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.

42

---



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 and 2004. This
consolidation did not have a material impact on our financial statements.

Other Commitments and Contingencies

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

|                                   |  | Payments due by period
|---------------------------------- |  | ----------------------
|
|Debt obligations                   |  | $                     
|Convertible notes                  |  |                       
|Capital lease obligations          |  |                       
|Interest payments on debt          |  |                       
|Operating leases                   |  |                       
|                                   |  |                       
|Total contractual cash obligations |  | $                     
|                                   |  |                       

The
convertible notes in the table include $374.7 million and $374.9 million of zero coupon convertible notes that are due in "4  5 years"
and "More than 5 years," respectively. This classification is based on the date that such notes are first putable to us by holders. These notes also contain restrictions on a holder's ability
to convert such notes into a mixture of cash and stock. If these restrictions on conversion are satisfied, we would classify the then-aggregate outstanding principal balance of such notes
as a current liability on our balance sheet. As of December 31, 2004, these restrictions have not been met.

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 primarily in
the area of research and development agreements. Payments 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. As of December 31, 2004, the
potential milestone and other contingency payments due under current contractual agreements are approximately $196 million.

Outlook

Overview

Cash, cash equivalents and investments at December 31, 2004 were $791.7 million. In August 2004, we completed our acquisition of CIMA LABS
and paid $482.5 million in cash, net of CIMA LABS' existing cash on hand, (or $409.4 million, net of its cash, cash equivalents and investments) to CIMA LABS stockholders to complete the
transaction. We expect to use our remaining cash, cash equivalents and investments for working capital and general corporate purposes, including the acquisition of

43

---



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. At this time, we cannot accurately predict the effect of certain developments on the rate of sales growth in 2006 and beyond, such as the degree of market
acceptance and exclusivity of our products, the impact of competition, the effectiveness of our sales and marketing efforts and the outcome of our current efforts to develop new products and
formulations of our existing products and 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 generate profits and positive cash flows from operations in the near term.

Based
on our current level of operations and projected sales of our products combined with other revenues and interest income, we also 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.

Products

Analysis of prescription data for our products in the United States indicates that physicians elected to prescribe PROVIGIL, GABITRIL and ACTIQ to treat a number
of indications outside of their labeled indications. Our strategy for PROVIGIL and GABITRIL has been to broaden the ranges of clinical uses that are approved by the FDA and European regulatory
agencies to include many of the 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. We believe that new indications for PROVIGIL, coupled with a larger sales force, had 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. See "Commitments and ContingenciesLegal Proceedings" above. If we complete clinical studies of
PROVIGIL in pediatric patients that are agreeable to the FDA, the FDA could grant us a six-month extension of our current exclusivity and of the particle-size patent. Future
growth of modafinil-based product sales in 2006 and beyond also will depend on our ability to achieve FDA approval of NUVIGIL and ATTENACE.

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 previous
formulation of ACTIQ, which expires in May 2005. See "Commitments and ContingenciesLegal Proceedings" above. If we complete clinical studies in pediatric patients that are
agreeable to the FDA, the FDA could grant us six months of exclusivity beyond the September 2006 compressed powder patent expiration. However, even with this additional exclusivity, Barr's
license to the ACTIQ patents could become effective as early as the launch of ORAVESCENT fentanyl (expected in late 2006), and in no event later than February 3, 2007. The entry of Barr with a
generic form of ACTIQ beginning in late 2006 or early 2007 likely will significantly and negatively impact future ACTIQ sales and could potentially have a negative impact on sales of ORAVESCENT
fentanyl, if approved.

Clinical Studies

In 2004, we incurred significant expenditures related to conducting clinical studies to develop new pharmaceutical products and exploring the utility of our
existing products in treating disorders beyond

44

---



those
currently approved in their respective labels. In 2005 and beyond, we expect to increase the level of our research and development activities, including clinical trials, for our other product
candidates, and for improved formulations for our existing products. With respect to GABITRIL, we have initiated a Phase 3 clinical program evaluating GABITRIL for the treatment of GAD. With respect
to new product candidates, we are continuing Phase 3 clinical trials of ORAVESCENT fentanyl for the treatment of breakthrough cancer pain and our Phase 2/3 studies of CEP-1347 for the
treatment of Parkinson's disease. We also are continuing clinical development of CEP-701 and CEP-7055 for treatment of certain malignancies. 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.

Manufacturing, Selling and Marketing Efforts

We also expect to continue to incur significant expenditures associated with manufacturing, selling and marketing our products. In 2004, we purchased
approximately 20 acres of land adjacent to our current facilities in Salt Lake City for approximately $2 million and began a nearly $70 million capital expansion that will be
substantially completed by late 2006 and that will increase our ACTIQ capacity and provide us with flexibility to manufacture other products.

Indebtedness

We have significant indebtedness outstanding, consisting principally of indebtedness on convertible subordinated notes. The following table summarizes the
principal terms of our most significant convertible subordinated notes outstanding as of December 31, 2004:

|Security                                                                 |  | Aggregate
Principal
Balance
Outstanding
(in millions) |       | Conversion
Price |   | Other 
|------------------------------------------------------------------------ |  | ----------------------------------------------------- | ----- | ---------------- | - | ------
|2.5% Convertible Subordinated Notes due December 2006                    |  | $                                                     | 521.8 |                  | $ | 81.00 
|Zero Coupon Convertible Notes due June 2033, first putable
June 15, 2008 |  | $                                                     | 374.7 |                  | $ | 59.50*
|Zero Coupon Convertible Notes due June 2033, first putable
June 15, 2010 |  | $                                                     | 374.9 |                  | $ | 56.50*

---

45

---



The
annual interest payments on our convertible notes outstanding as of December 31, 2004 are $13.0 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 debt, 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 2.5% convertible notes in the
aggregate notional amount of $200.0 million. Although we exchanged $78.3 million of these notes in July 2004 for 1,518,169 shares of our common stock, the interest rate swap
remains at $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,
2005, the interest rate is 2.85%. 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.

Acquisition Strategy

As part of our business strategy, we plan to consider and, as appropriate, make acquisitions of other businesses, products, product rights or technologies. Our
cash reserves and other liquid assets may be inadequate to consummate these acquisitions and it may be necessary for us to raise substantial additional funds in the future 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.

Other

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



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

46

---



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, 2004 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 87% of our worldwide net sales for the year ended December 31, 2004. Decisions made by these wholesalers and their customers regarding the levels of inventory they hold (and thus
the amount of product they purchase from us) are outside of our control and can materially affect the level of our sales in any particular period. To the extent possible, 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. However, we do not have any agreements, understandings or business practices under which we extend incentives based on levels of inventory held
by wholesalers. As of December 31, 2004, we received information from our three largest U.S. wholesaler customers about the levels of inventory they held for our three products. Based on this
information, which we have not independently verified, we believe that inventory held at these wholesalers is within a normal range for our business of approximately one month's supply. However, we
currently do not have ongoing agreements for access to the actual inventory levels of our products held by our wholesalers or their customers. Sales recorded for the year ended December 31,
2004 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.

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.

Gross to Net Sales AdjustmentsWe record product sales net of the following significant categories of gross to net sales
adjustments: prompt payment discounts, returns, coupons, Medicaid discounts and

47

---



managed
care and governmental contracts. Calculating each of these items involves significant estimates and judgments and requires us to use information from external sources.

1)Prompt payment discountsWe offer our U.S. wholesaler customers a 2% prompt-pay cash discount as
an incentive to remit payment within the first thirty days after the date of the invoice. Prompt-pay discount calculations are based on the gross amount of each invoice. We account for
these discounts by reducing sales by the 2% discount amount when product is sold, and apply earned cash discounts at the time of payment. Since we began selling our products commercially in 1999, our
customers routinely take advantage of this discount. Based on common industry practices and our customers' overall payment performance, we accrue for cash discounts on all U.S. sales recorded during
the period. We adjust the accrual to reflect actual experience as necessary and, as a result, the actual amount recognized in any period may be slightly different from our accrual amount.

2)ReturnsCustomers can return short-dated or expired product that meets the guidelines set forth in our return
goods policy. Product shelf life from the date of manufacture for PROVIGIL is 3 years, GABITRIL is 2 to 3 years, depending on product strength, and ACTIQ is 3 years. Returns are
accepted from wholesalers and retail pharmacies. Wholesaler customers can return short dated product with six months or less shelf life remaining and expired product within twelve months following the
expiration date. Retail pharmacy are not permitted to return short-dated product but can return full or partial quantities of expired product only within twelve months following the expiration date.
We base our estimates of product returns for each of our products on the percentage of returns that we have experienced historically. Notwithstanding this, we may adjust our estimate of product
returns if we are aware of other factors that we believe could meaningfully impact our expected return percentages. These factors could include, among others, our estimates of inventory levels of our
products in the distribution channel, known sales trends and existing or anticipated competitive market forces such as product entrants and/or pricing changes.

In
2004, we recorded a provision for returns at a weighted average rate of 1.0% of gross sales, which is consistent with our actual historical return percentages. The other factors
described above did not have a significant impact in 2004 on our estimate of product returns. Actual returns could exceed historical experience and our estimates of expected future returns activity
because of several factors, including, among other things, wholesaler and retailer stocking patterns and/or competition. If the returns provision percentage were to increase by 0.5% of 2004 gross
sales, then an additional provision of $5.4 million would result.

As
described above, we estimate wholesaler inventory as of December 31, 2004 to equal approximately one month's supply. Based on fourth quarter sales, we believe a reasonable
estimate of our maximum exposure for potential product returns as of December 31, 2004 is approximately $43.0 million for PROVIGIL, $28.0 million for ACTIQ and $7.0 million
for GABITRIL.

3)CouponsWe offer patients the opportunity to obtain free samples of our products through a program whereby
physicians provide coupons to qualified patients for redemption at retail pharmacies. We reimburse retail pharmacies for the cost of these products through a third party administrator. We recognize
the estimated cost of this reimbursement as a reduction of gross sales when product is sold. In addition, we maintain an accrual for unused coupons based on inventory in the distribution channel and
historical coupon usage rates and adjust this accrual whenever changes in such coupon usage rates occur.

In
2004, we recorded a provision for coupons at a weighted average rate of 1.5% of gross sales. Actual coupon usage could exceed historical experience and our estimates of expected
future coupon activity. If the coupons provision percentage were to increase by 0.5% of 2004 gross sales, then an additional provision of $5.4 million would result.

48

---



4)Medicaid discountsWe record accruals for rebates to be provided through governmental rebate programs, such as
the Medicaid Drug Rebate Program, as a reduction of sales when product is sold. These reductions are based on historical rebate amounts and trends of sales eligible for these governmental programs for
a period, as well as any expected changes to the trends of our total product sales. In addition, we estimate the expected unit rebate amounts to be used and adjust our rebate accruals based on the
expected changes in rebate pricing. Rebate amounts are generally invoiced and paid quarterly in arrears, so that our accrual consists of an estimate of the amount expected to be incurred for the
current quarter's activity, plus an accrual for prior quarters' unpaid rebates and an accrual for inventory in the distribution channel.

In
2004, we recorded a provision for Medicaid discounts at a weighted average rate of 3.8% of gross sales. Actual Medicaid discounts could exceed historical experience and our estimates
of expected future Medicaid patient activity or unit rebate amounts. If the Medicaid discounts provision percentage were to increase by 0.5% of 2004 gross sales, then an additional provision of
$5.4 million would result.

5)Managed care and governmental agreementsWe have entered into agreements with certain managed care customers
whereby we provide agreed-upon discounts to such entities based on sales volume. We record accruals for these discounts as a reduction of sales when product is sold based on the discount
rates and expected levels of sales volume of these managed care customers during a period. We estimate eligible sales based on historical amounts and trends of sales by these entities and on any
expected changes to the trends of our product sales. Discounts are generally invoiced and paid quarterly in arrears, so that our accrual consists of an estimate of the amount expected to be incurred
for the current quarter's activity, plus an accrual for prior quarters' unpaid rebates and an accrual for inventory in the distribution channel.

We
have entered into agreements with certain governmental customers (other than Medicaid) whereby we provide legislatively mandated discounts and rebates to such entities. We record
accruals for these discounts and rebates as a reduction of sales when product is sold based on the discount amounts and expected levels of performance of these governmental customers during a period.
We estimate eligible sales based on historical sales amounts and trends of sales by these entities and on any expected changes to the trends of our product sales. Generally, discounts are granted to
governmental customers by our wholesalers at time of purchase. In other cases, rebates are paid directly to governmental customers based on reported levels of patient usage. Wholesalers charge these
discounts and rebates back to us generally within one to three months. We record accruals for our estimate of unprocessed chargebacks related to sales made during the period based on an estimate of
the amount expected to be incurred for the current quarter's sales, plus an accrual based on the amount of inventory in the distribution channel.

In
2004, we recorded a provision for managed care and governmental contracts at a weighted average rate of 1.2% of gross sales. Actual chargebacks and rebates could exceed historical
experience and our estimates of expected future participation in these programs. If the chargebacks and rebates provision percentage were to increase by 0.5% of 2004 gross sales, then an additional
provision of $5.4 million would result.

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The
following table summarizes activity in each of the above categories for the years ended December 31, 2003 and 2004 (in thousands):

|                             |  | Prompt
Payment
Discounts |         | *Returns |   | Coupons |   | Medicaid
Discounts |         | Managed
Care and
Governmental
Agreements |   | Total   |  
|---------------------------- |  | ------------------------ | ------- | -------- | - | ------- | - | ------------------ | ------- | ---------------------------------------- | - | ------- | -
|Balance at January 1, 2003   |  | $                        | (1,010  | )        | $ | (2,879  | ) | $                  | (688    | )                                        | $ | (4,950  | )
|Provision:                   |  |                          |         |          |   |         |   |                    |         |                                          |   |         |  
|Current period               |  |                          | (12,202 | )        |   | (7,115  | ) |                    | (8,933  | )                                        |   | (25,699 | )
|Prior periods                |  |                          |        |          |   | (858    | ) |                    | (416    | )                                        |   | (61     | )
|                             |  |                          |         |          |   |         |   |                    |         |                                          |   |         |  
|Total                        |  |                          | (12,202 | )        |   | (7,973  | ) |                    | (9,349  | )                                        |   | (25,760 | )
|Actual:                      |  |                          |         |          |   |         |   |                    |         |                                          |   |         |  
|Current period               |  |                          | 11,076  |          |   |        |   |                    | 7,446   |                                          |   | 16,261  |  
|Prior periods                |  |                          | 1,028   |          |   | 3,731   |   |                    | 416     |                                          |   | 4,411   |  
|                             |  |                          |         |          |   |         |   |                    |         |                                          |   |         |  
|Total                        |  |                          | 12,104  |          |   | 3,731   |   |                    | 7,862   |                                          |   | 20,672  |  
|                             |  |                          |         |          |   |         |   |                    |         |                                          |   |         |  
|Balance at December 31, 2003 |  |                          | (1,108  | )        |   | (7,121  | ) |                    | (2,175  | )                                        |   | (10,038 | )
|                             |  |                          |         |          |   |         |   |                    |         |                                          |   |         |  
|Provision:                   |  |                          |         |          |   |         |   |                    |         |                                          |   |         |  
|Current period               |  |                          | (18,443 | )        |   | (12,822 | ) |                    | (16,521 | )                                        |   | (41,027 | )
|Prior periods                |  |                          |        |          |   | 1,575   |   |                    |        |                                          |   | (247    | )
|                             |  |                          |         |          |   |         |   |                    |         |                                          |   |         |  
|Total                        |  |                          | (18,443 | )        |   | (11,247 | ) |                    | (16,521 | )                                        |   | (41,274 | )
|Actual:                      |  |                          |         |          |   |         |   |                    |         |                                          |   |         |  
|Current period               |  |                          | 15,497  |          |   |        |   |                    | 13,538  |                                          |   | 25,321  |  
|Prior periods                |  |                          | 1,155   |          |   | 6,641   |   |                    | 993     |                                          |   | 7,916   |  
|                             |  |                          |         |          |   |         |   |                    |         |                                          |   |         |  
|Total                        |  |                          | 16,652  |          |   | 6,641   |   |                    | 14,531  |                                          |   | 33,237  |  
|                             |  |                          |         |          |   |         |   |                    |         |                                          |   |         |  
|Balance at December 31, 2004 |  | $                        | (2,899  | )        | $ | (11,727 | ) | $                  | (4,165  | )                                        | $ | (18,075 | )
|                             |  |                          |         |          |   |         |   |                    |         |                                          |   |         |  

---

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 inventories. 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.

We
capitalize inventory costs associated with marketed products and certain products prior to regulatory approval and product launch, based on management's judgment of probable future
commercial use and net realizable value. We could be required to expense previously capitalized costs related to pre-approval or pre-launch inventory upon a change in such
judgment, due to a denial or delay of approval by regulatory bodies, a delay in commercialization, or other potential factors. At December 31, 2004, we had $21.9 million of capitalized
inventory costs.

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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 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.

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, 2004. We have only one reporting unit, a biopharmaceutical 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, 2004 was
used as the fair value of

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the
reporting unit. Since the fair value of the reporting unit exceeded its carrying value at July 1, 2004, no adjustment to our goodwill for impairment was necessary. We updated our test of
impairment of goodwill as of September 30, 2004 in conjunction with our acquisition of CIMA LABS, and again concluded that no adjustment to our goodwill for impairment was necessary.

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.

Our
evaluation process led us to conclude that we should record impairment charges in 2003 and 2004. 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. In January 2003, we purchased from MDS Proteomics Inc. (MDSP), a privately-held
Canadian company and a subsidiary of MDS Inc., a $30.0 million convertible note due 2010 and entered into a five-year research agreement focused on accelerating the clinical
development of our pipeline of small chemical compounds. In 2004, MDSP determined to change its business model to focus upon the provision of services to the pharmaceutical and biotechnology
industries, which it believes can lead to nearer term revenue and profitability. On July 29, 2004, MDSP completed its reorganization under Canada's Companies Creditors' Arrangement Act and
changed its name to Protana Inc. As part of the reorganization, we agreed to terminate our research agreement with Protana and cancel the $30.0 million convertible note we held in return
for shares of Class A Preferred Stock and Common
Stock of Protana. In light of the restructuring of Protana and the uncertain business prospects for the company, we determined that the carrying value of our investment was fully impaired and we
recorded an impairment charge of $30.1 million, which also included transaction costs, in our second quarter of 2004 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.

At
the end of 2004, we retained a valuation allowance of $49.9 million against a total deferred tax asset balance of $260.6 million. We believe that this reserve is
appropriate given the significant risks which face the company related to the potential introduction of generic competition for PROVIGIL and ACTIQ before the end of 2006, and the uncertainties
surrounding the development, FDA approval and successful commercialization of NUVIGIL, ATTENACE and ORAVESCENT fentanyl. We will

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continue
to reassess our ability to realize the future tax benefits of our deferred tax assets and adjust our valuation allowance, if necessary. Without approval and successful commercialization of
these new products, it is not likely that we will be able to utilize the deferred tax assets that currently have a valuation allowance against them.

RECENT ACCOUNTING PRONOUNCEMENTS

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 have adopted the additional disclosure requirements of this statement effective December 31, 2004.

In
March 2004, the FASB's Emerging Issues Task Force (EITF) reached consensus on Issue 03-6. This Issue is intended to clarify what is a participating security for
purposes of applying SFAS No. 128, "Earnings Per Share." The Issue also provides further guidance on how to apply the two-class method of computing earnings per share (EPS) once it
is determined that a security is participating, including how to allocate undistributed earnings to such a security. We adopted this Issue in the second quarter of 2004 and determined that our 3.875%
convertible subordinated notes were participating securities as defined by this Issue. Although none of the 3.875% convertible notes are outstanding at December 31, 2004, net income (loss) used
for basic and diluted income (loss) per share is allocated to the common shares using a ratio of weighted average common shares outstanding and weighted average participating securities, using the
if-converted method. Our previously reported earnings per share have been restated as required by EITF Issue 03-6. The effect on our basic EPS for the years ended
December 31, 2003 and 2002 was a decrease of $0.02 and $0.03 per share, respectively. The effect on our diluted EPS for the years ended December 31, 2003 and 2002 was a decrease of $0.02
per share in each of the years. There was no effect on our basic and diluted EPS for any periods prior to December 31, 2002.

In
September 2004, the EITF reached consensus on Issue 04-8, "Accounting Issues Related to Certain Features of Contingently Convertible Debt and the Effects on Diluted
Earnings per Share." This Issue requires the inclusion of convertible shares for contingently convertible debt in the calculation of diluted EPS regardless of whether the contingency has been met, if
the effect is dilutive. The Issue is effective for periods ending after December 15, 2004 and requires the restatement of previously reported EPS. In December 2004, we exchanged
$749.6 million of our Zero Coupon Convertible Notes for notes with substantially the same terms and conditions. However, the contingent conversion feature is no longer considered when
calculating diluted earnings per share under EITF 04-8. The remaining $0.4 million of unexchanged Zero Coupon Convertible Notes have not been included in the calculation of diluted
EPS for the year ended December 31, 2004 as the effect is anti-dilutive. For the year ended December 31, 2003, the inclusion of the unexchanged Zero Coupon Convertible Notes using the
if-converted method had no effect on diluted EPS.

In
November 2004, the FASB issued SFAS No. 151, "Inventory Costs", which requires abnormal amounts of idle capacity and spoilage costs to be excluded from the cost of
inventory and expensed when incurred. This Statement is effective for fiscal years beginning after June 15, 2005. We believe the adoption of this statement will not impact our current financial
statements.

In
December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment," a revision of SFAS No. 123 "Accounting for Stock-Based Compensation," that addresses
the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are
based on the fair value of the enterprise's equity

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instruments
or that may be settled by the issuance of such equity instruments. This Statement requires that an entity measure the cost of equity based service awards based on the
grant-date fair value of the award and recognize the cost of such awards over the period during which the employee is required to provide service in exchange for the award (the vesting
period). The Statement requires that an entity measure the cost of liability based service awards based on current fair value that is remeasured subsequently at each reporting date through the
settlement date. This Statement is effective as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. We will adopt this new standard effective
July 2005, which will require us to recognize share-based compensation expense in our statement of operations. We have not yet quantified the impact this statement will have on our future
results but we expect that it will be material.

In
December 2004, the FASB issued Staff Position No. FAS 109-1, "Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax
Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004" ("FSP No. 109-1"), and Staff Position No. FAS 109-2, "Accounting
and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004" ("FSP No. 109-2"). These staff positions provide accounting
guidance on how companies should account for the effects of the American Jobs Creation Act of 2004 ("AJCA") that was signed into law on October 22, 2004. FSP No. 109-1 states
that the tax relief (special tax deduction for domestic manufacturing) from this legislation should be accounted for as a "special deduction" instead of a tax rate reduction. FSP
No. 109-2 gives a company additional time to evaluate the effects of the legislation on any plan for reinvestment or repatriation of foreign earnings for purposes of applying FASB
Statement No. 109. We are currently assessing both provisions to determine the impact they could have on our future income tax expense. We expect to complete this evaluation within a reasonable
amount of time after additional guidance from the United States Treasury is published.

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, 2004, approximately 90% 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:



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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 obtain regulatory approval for new products or for new formulations or indications for our existing products, which would significantly
hamper future sales and earnings growth.

Our prospects, particularly with respect to the growth of our future sales and earnings, depend substantially on our ability to obtain FDA approval for our four
near-term product candidates: NUVIGIL, ATTENACE, ORAVESCENT fentanyl and GABITRIL for GAD. Recently, we filed an sNDA with the FDA seeking approval for the use of ATTENACE for ADHD in
children and expect to file in March 2005 an NDA seeking approval for NUVIGIL. We do not know whether we will succeed in obtaining regulatory approval to market these products or what level of
market acceptance these products may achieve, particularly if we ultimately face competition in the form of a generic version of PROVIGIL. We also have not yet completed Phase 3 studies of GABITRIL
for use in treating GAD. If the results of some of these additional studies are negative or adverse, this could undermine physician and patient comfort with the current product, limit its commercial
success, and diminish its acceptance. Even if the results of these studies are positive, the impact on sales of GABITRIL may be minimal unless we are able to obtain regulatory 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. Finally, we are continuing Phase 3 clinical studies of ORAVESCENT fentanyl for treatment of breakthrough cancer pain. As with our GABITRIL studies, we do not know whether these
studies will demonstrate safety and efficacy, or if they do, whether we will succeed in receiving regulatory approval to market this product. Even if we obtain regulatory approval for ORAVESCENT
fentanyl, the availability of a generic version of ACTIQ at that time could significantly and negatively impact sales of ORAVESCENT fentanyl.

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.

PROVIGIL

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 and cover
pharmaceutical compositions and uses of

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modafinil,
specifically, 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 six ANDAs for pharmaceutical products
containing modafinil. Each of these ANDAs contain 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. We have filed patent infringement lawsuits in U.S. District Court in New Jersey against Teva Pharmaceuticals USA, Inc., Mylan
Pharmaceuticals Inc., Ranbaxy Pharmaceuticals Inc., Barr Laboratories, Inc. and Sandoz Inc. based upon the ANDAs filed by each of these companies with the FDA. The lawsuit
claims infringement of our U.S. Patent No. RE37,516. Each of the defendants has asserted defenses and/or counterclaims for non-infringement and/or patent invalidity, and defendants Teva,
Ranbaxy and Mylan have moved to amend their answers and counterclaims to state inequitable conduct as a defense to our claims (we have opposed the motions and a decision is pending). These lawsuits
are currently in the discovery phase; we expect a trial to begin no earlier than late 2005. We also recently filed suit against Carlsbad with respect to the ANDA they have filed with the FDA and
discovery in this action has not yet commenced. 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.

Barr,
Mylan and Ranbaxy have each announced the receipt of tentative FDA approval for their respective generic versions of PROVIGIL. Under the provisions of the Hatch-Waxman Act, we are
entitled to a 30-month stay of final FDA approval of these generic versions of PROVIGIL. This stay precludes these companies from selling a modafinil-based product until the earlier to
occur of the conclusion of the lawsuit or June 2006. However, if the court finds our particle-size patent is invalid or not infringed, these companies 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, Sandoz and Carlsbad have been, or will be, tentatively approved by the FDA.

If
we complete clinical studies of PROVIGIL in pediatric patients that are 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.

ACTIQ

With respect to ACTIQ, we hold an exclusive license to a U.S. patents covering the currently approved compressed powder pharmaceutical composition and methods for
administering fentanyl via this composition that are set to expire in September 2006. 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. If we complete an additional clinical study in pediatric patients that is agreeable to the FDA,
the FDA could grant us six months of exclusivity beyond the September 2006 compressed powder patent expiration. However, even with this additional exclusivity, Barr's license to the ACTIQ
patents under the license and supply agreement could become effective as early as the launch of ORAVESCENT fentanyl (expected in late 2006), and in no event later than February 3, 2007. In
December 2004, we announced that FDA had acknowledged receipt of an ANDA filed by Barr seeking approval for a generic form of ACTIQ. In January 2005, we filed a patent infringement
lawsuit against Barr to defend our patents until the license effective date. Neither the ANDA filing nor the lawsuit modify the existing license grant to Barr, and we do not expect any change in the
anticipated date of Barr's entry to market (absent resolution of the lawsuit). The entry of Barr with a generic form of ACTIQ likely will significantly and negatively impact future ACTIQ sales.

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GABITRIL

With respect to GABITRIL, there are four 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; a patent claiming the
pharmaceutical formulation; and a patent claiming anhydrous crystalline tiagabine hydrochloride and processes for its preparation. These patents currently are set to expire in 2011, 2012, 2016 and
2017, respectively. Supplemental Protection Certificates based upon corresponding foreign patents covering this product are set to expire in 2011. 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.

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.

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:



In
September 2004, we announced that we had received subpoenas from the U.S. Attorney's Office in Philadelphia with respect to PROVIGIL, ACTIQ and GABITRIL. This investigation is
ongoing and appears to be focused on our sales and promotional practices. We are cooperating with the investigation and are providing documents to the government. In addition, we have engaged in
ongoing discussions with the Attorney General in Pennsylvania regarding recent media reports of instances of abuse and diversion of ACTIQ. We have had similar discussions with the Office of the
Connecticut Attorney General; in September 2004, we received a voluntary request for information from the Office of the Connecticut Attorney General asking us to provide information generally
relating to our sales and promotional practices for our U.S. products. We have agreed to comply with this voluntary request. These matters may involve the bringing of criminal charges and fines,
and/or civil penalties. We cannot predict or determine the outcome of these matters or reasonably estimate the amount or range of amounts of any fines or penalties that might result from an adverse
outcome. However, an adverse

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outcome
could have a material adverse effect on our financial position, liquidity and results of operations.

It
is both costly and time-consuming for us to comply with these inquiries and 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, each of which requires
us to comply with extensive government regulations. 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 and the heightened level of media
attention given to this issue, 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 a 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
rely on third parties for the timely supply of specified raw materials, equipment, contract manufacturing, formulation or packaging services, product distribution services, customer
service activities and product returns processing. Although we actively manage these third party relationships to ensure continuity and quality, some events beyond our control could result in the
complete or partial failure of these goods and services. Any such failure could have a material adverse effect on our financial condition and result of operations.

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.

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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:



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.

As our products are used commercially, unintended side effects, adverse reactions or incidents of misuse may occur that could result in additional regulatory controls, adverse
publicity 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 identify undesirable or unintended side effects that have not been evident in our clinical trials or the
relatively limited commercial use to date. For example, in February 2005, working with the FDA, we updated our prescribing information for GABITRIL to include a bolded warning describing the
risk of new onset seizures in non-induced patients without epilepsy. 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, particularly with respect to products such as ACTIQ and PROVIGIL, which contain controlled substances. These events,
among others, could result in adverse publicity that harms the commercial prospects of our products or lead to 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. In particular, 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.

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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 changing rapidly. Forecasting is further complicated by the
difficulties in estimating both existing inventory levels for our products at pharmaceutical wholesalers and retail pharmacies and the timing of their purchases to replenish these stocks. As a result,
it is likely that our product sales will fluctuate significantly, which may not meet with 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:



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 significantly in recent years, and the availability of coverage has decreased.
Nevertheless, we maintain product liability insurance in amounts we believe to be commercially reasonable. However, 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.

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

As of December 31, 2004, we had $1,289.5 million of indebtedness outstanding, including $1,271.8 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 convertible notes outstanding as of the filing date of this report,
$521.8 million mature 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, or limit our 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

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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 customer base is highly concentrated.

Our principal customers are wholesale drug distributors. These customers comprise a significant part of the distribution network for all pharmaceutical products
sold in the United States. Three large wholesale distributors, Cardinal Health, Inc., McKesson Corporation and AmerisourceBergen Corporation, control a significant share of this network. These
three wholesaler customers, in the aggregate, accounted for 87% of our worldwide net sales for the year ended December 31, 2004. Fluctuations in the buying patterns of these customers, which
may result from seasonality, wholesaler buying decision or other factors outside of our control, could significantly affect the level of our net sales on a period to period basis. Because of this, the
amounts purchased by these customers during any quarterly or annual period may not correlate to the level of underlying demand evidenced by the number of prescriptions written for such products, as
reported by IMS Health Incorporated. Furthermore, the loss or bankruptcy of any of these customers could materially and adversely affect our results of operations and financial condition.

Our internal controls over financial reporting may not be considered effective, which could result in possible regulatory sanctions and a decline in our stock price.

Section 404 of the Sarbanes-Oxley Act of 2002 requires us to furnish annually a report on our internal controls over financial reporting, beginning with
this Annual Report on Form 10-K. The internal control report must contain an assessment by our management of the effectiveness of our internal control over financial reporting
(including the disclosure of any material weakness) and a statement that our independent auditors have attested to and reported on management's evaluation of such internal controls. The Sarbanes-Oxley
Act requires, among other things, that we maintain effective disclosure controls and procedures and internal controls over financial reporting. In order for management to evaluate our internal
controls, we must regularly review and document our internal control processes and procedures and test such controls. Ultimately, we or our independent auditors could conclude that our internal
control over financial reporting may not be effective if, among others things:



Due
to the number of controls to be examined, the complexity of the project, and the subjectivity involved in determining the effectiveness of controls, we cannot be certain that, in the
future, all of our controls will continue to be considered effective by management or, if considered effective by our management, that our auditors will agree with such assessment.

If,
in the future, we are unable to assert that our internal control over financial reporting is effective, or if our auditors are unable to attest that our management's report is fairly
stated or they are unable to express an opinion on our management's evaluation, we could be subject to regulatory sanctions or lose investor confidence in the accuracy and completeness of our
financial reports, either of which could have an adverse effect on the market price for our securities.

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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, particularly FONZYLANE, 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 are increasingly utilizing their significant purchasing power to challenge the prices charged
for pharmaceutical products and seek to limit reimbursement levels offered to consumers for such products. Moreover, many governments and private insurance plans have instituted reimbursement schemes
that favor the substitution of generic pharmaceuticals for more expensive brand-name pharmaceuticals. In the U.S. in particular, generic substitution statutes have been enacted in
virtually all states and permit or require the dispensing pharmacist to substitute a less expensive generic drug instead of an original branded drug. 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. In
addition, our two largest products, PROVIGIL and ACTIQ, could face competition from companies seeking to market generic forms of these products if our patent infringement lawsuits against these
companies are unsuccessful.

The
conditions that our products treat, and some of the other disorders for which we are conducting additional studies, are currently treated with many drugs, several of which have been
available for a number of years or are available in inexpensive generic forms. With respect to PROVIGIL, and, if approved, NUVIGIL, 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. If we are successful in obtaining FDA approval of modafinil for the treatment of ADHD in children and adolescents, we will face competition
from stimulants such as RITALIN® by Novartis, STRATERRA® by Eli Lilly, and CONCERTA® by McNeil Consumer, as well as from amphetamines such as DEXEDRINE®
by GlaxoSmithKline and ADDERALL® by Shire. 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 as
well as Purdue's PALLADONE® which was approved in September 2004. In addition, we 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, that will compete against ACTIQ and, if approved, ORAVESCENT fentanyl. 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

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several
years while others have recently entered the partial seizure marketplace. In addition, several treatments for partial seizures are available in inexpensive generic forms. If we are successful
in our efforts to expand the label of GABITRIL to include anxiety disorders, we will face significant competition from well-established Selective Serotonin Reuptake Inhibitor (SSRI)
products such as Paxil®, Effexor XR® and Lexapro®. For all of our products, 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.

As part of our efforts to acquire businesses or to enter into other significant transactions, we conduct 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 an acquired business 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 acquisitions we may consummate in the future, whether as a result of unidentified risks, integration difficulties, regulatory setbacks or other events, our business, results of
operations and financial condition could be adversely affected.

In
our acquisition of CIMA LABS, we secured rights to the product development candidate, ORAVESCENT fentanyl, as well as CIMA LABS' existing drug delivery business. We estimated a value
for ORAVESCENT fentanyl by making certain assumptions about, among other things, the likelihood and timing of ORAVESCENT fentanyl approval and the potential market for the product. This estimated
value of ORAVESCENT fentanyl comprised a significant portion of the total consideration we paid to CIMA LABS stockholders. Ultimately, our assumptions may prove to be incorrect, which could cause us
to fail to realize the anticipated benefits of the CIMA LABS transaction.

In
addition, we have experienced, and will likely continue to experience, significant charges to earnings related to our efforts to consummate acquisitions. For transactions that
ultimately are not consummated, these charges may include fees and expenses for investment bankers, attorneys, accountants and other advisers in connection with our efforts. Even if our efforts are
successful, we may incur as part of a transaction substantial charges for closure costs associated with the elimination of duplicate operations and facilities and acquired in-process
research and development charges. In either case, the incurrence of these charges could adversely affect our results of operations for particular quarterly or annual periods.

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The failure to successfully integrate CIMA LABS could negatively impact our results of operations.

The
integration of CIMA LABS following our August 2004 acquisition involves a number of risks and presents financial, managerial and operational challenges, including:



In
light of these challenges, we may not be able to successfully manage the operations and personnel of CIMA LABS. Customer dissatisfaction, manufacturing, supply or distribution
problems associated with the products that utilize CIMA LABS' technology and intense competition in the filed of drug delivery technology could cause its pharmaceutical business to underperform
relative to our expectations, which could have a material adverse effect on our business. We also could experience financial or other setbacks if CIMA LABS' business has problems or liabilities of
which we were not aware or that are substantially greater than we anticipated based on our evaluation of the business prior to the acquisition. Currently, a significant majority of CIMA LABS' revenues
are derived from only three customers. The loss of any one of these customers, or a decline in the market acceptance of the products we develop and manufacture for them, could significantly impact
revenues from the CIMA LABS business.

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.

In
the pharmaceutical business, the research and development process can take up to 12 years, or even longer, from discovery to commercial product launch. During each stage of
this process, there is a substantial risk of failure. 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.

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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 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 December 31, 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 or our customers, changes in government
regulations impacting the biotechnology or pharmaceutical industries or the movement of capital into

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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, 2004, approximately 14% of our revenues were 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 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 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

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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 could adversely affect 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.

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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, 2004, 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
$14.3 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.

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ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF MANAGEMENT

Management's Report on Financial Statements

Our management is responsible for the preparation, integrity and fair presentation of information in our consolidated financial statements, including estimates
and judgments. The consolidated financial statements presented in this report have been prepared in accordance with accounting principles generally accepted in the United States of America. Our
management believes the consolidated financial statements and other financial information included in this report fairly present, in all material respects, our financial condition, results of
operations and cash flows as of and for the periods presented in this report. The consolidated financial statements have been audited by PricewaterhouseCoopers LLP, an independent registered public
accounting firm, as stated in their report, which is included herein.

Management's Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting
is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles
generally accepted in the United States of America.

Our
internal control over financial reporting includes those policies and procedures that:



Because
of its inherent limitations, internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements. Also, projections of any
evaluation of the effectiveness of such controls in future periods are subject to the risk that the controls may become inadequate because of changes in conditions or that the degree of compliance
with the policies and procedures may deteriorate.

Our
management conducted an assessment of the effectiveness of internal control over financial reporting based on the framework in Internal ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, our management concluded that, as of December 31, 2004, our internal controls over
financial reporting were effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
accounting principles generally accepted in the United States of America. As permitted by SEC rules and regulations, our management has excluded CIMA LABS INC. from its assessment of internal
control over financial reporting as of December 31, 2004 because it was acquired in 2004. Total assets and total revenues of CIMA LABS INC., our wholly-owned subsidiary, represented 16%
and 3%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2004. Refer to Note 2 of our consolidated financial statements for
more information about the CIMA LABS INC. acquisition.

Our
management's assessment of the effectiveness of our internal control over financial reporting has been audited by PricewaterhouseCoopers LLP, an independent registered public
accounting firm, as stated in their report which is included herein.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To
the Board of Directors and Shareholders of Cephalon, Inc.:

We
have completed an integrated audit of Cephalon, Inc.'s 2004 consolidated financial statements and of its internal control over financial reporting as of December 31,
2004 and audits of its 2003 and 2002 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our
audits, are presented below.

Consolidated financial statements and financial statement schedules

In our opinion, the consolidated financial statements listed in the accompanying index appearing under Item 15(a)(1) on page 113, present fairly, in all
material respects, the financial position of Cephalon, Inc. and its subsidiaries at December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2004 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 accompanying index appearing under Item 15(a)(2) on page 113 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 the financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit of financial statements 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.

Internal control over financial reporting

Also, in our opinion, management's assessment, included in "Management's Report on Internal Control Over Financial Reporting" appearing under Item 8, that the
Company maintained effective internal control over financial reporting as of December 31, 2004 based on criteria established in Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in
all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal ControlIntegrated Framework issued by
the COSO. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express opinions on management's assessment and on the effectiveness of the Company's internal control over financial reporting based on our audit. We conducted our
audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial
reporting includes obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of
internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

70

---



A
company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the
risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

As
described in "Management's Report on Internal Control Over Financial Reporting", management has excluded CIMA LABS INC. from its assessment of internal control over financial
reporting as of December 31, 2004 because it was acquired by the Company in a purchase business combination during 2004. We have also excluded CIMA LABS INC. from our audit of internal
control over financial reporting. CIMA LABS INC. is a wholly-owned subsidiary whose total assets and total revenues represent 16% and 3%, respectively, of the related consolidated financial
statement amounts as of and for the year ended December 31, 2004.

PricewaterhouseCoopers
LLP

Philadelphia,
PA

March 15,
2005

71

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CEPHALON, INC. AND SUBSIDIARIES    CONSOLIDATED BALANCE SHEETS

|                                        |                                                                                                                                                        | December 31, 2004          |           | December 31, 2003 |          
|--------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------ | -------------------------- | --------- | ----------------- | ---------
|
|ASSETS                                  |                                                                                                                                                        |                            |           |                   |          
|CURRENT ASSETS:                         |                                                                                                                                                        |                            |           |                   |          
|                                        | Cash and cash equivalents                                                                                                                              |                            | $         | 574,244           |          
|                                        | Investments                                                                                                                                            |                            |           | 217,432           |          
|                                        | Receivables, net                                                                                                                                       |                            |           | 203,594           |          
|                                        | Inventory, net                                                                                                                                         |                            |           | 86,629            |          
|                                        | Deferred tax asset                                                                                                                                     |                            |           | 65,302            |          
|                                        | Other current assets                                                                                                                                   |                            |           | 32,819            |          
|                                        |                                                                                                                                                        |                            |           |                   |          
|                                        |                                                                                                                                                        | Total current assets       |           |                   | 1,180,020
|PROPERTY AND EQUIPMENT, net             |                                                                                                                                                        |                            | 244,834   |                   |          
|GOODWILL                                |                                                                                                                                                        |                            | 372,534   |                   |          
|INTANGIBLE ASSETS, net                  |                                                                                                                                                        |                            | 449,402   |                   |          
|DEBT ISSUANCE COSTS, net                |                                                                                                                                                        |                            | 25,401    |                   |          
|DEFERRED TAX ASSET, net                 |                                                                                                                                                        |                            | 145,436   |                   |          
|OTHER ASSETS                            |                                                                                                                                                        |                            | 22,549    |                   |          
|                                        |                                                                                                                                                        |                            |           |                   |          
|                                        |                                                                                                                                                        | $                          | 2,440,176 |                   | $        
|                                        |                                                                                                                                                        |                            |           |                   |          
|LIABILITIES AND STOCKHOLDERS' EQUITY    |                                                                                                                                                        |                            |           |                   |          
|CURRENT LIABILITIES:                    |                                                                                                                                                        |                            |           |                   |          
|                                        | Current portion of long-term debt                                                                                                                      |                            | $         | 5,114             |          
|                                        | Accounts payable                                                                                                                                       |                            |           | 52,488            |          
|                                        | Accrued expenses                                                                                                                                       |                            |           | 157,841           |          
|                                        | Current portion of deferred revenues                                                                                                                   |                            |           | 868               |          
|                                        |                                                                                                                                                        |                            |           |                   |          
|                                        |                                                                                                                                                        | Total current liabilities  |           |                   | 216,311  
|LONG-TERM DEBT                          |                                                                                                                                                        |                            | 1,284,410 |                   |          
|DEFERRED REVENUES                       |                                                                                                                                                        |                            | 1,769     |                   |          
|DEFERRED TAX LIABILITIES                |                                                                                                                                                        |                            | 94,100    |                   |          
|OTHER LIABILITIES                       |                                                                                                                                                        |                            | 13,542    |                   |          
|                                        |                                                                                                                                                        |                            |           |                   |          
|                                        |                                                                                                                                                        | Total liabilities          |           |                   | 1,610,132
|                                        |                                                                                                                                                        |                            |           |                   |          
|COMMITMENTS AND CONTINGENCIES (Note 14) |                                                                                                                                                        |                            |          |                   |          
|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, 57,973,050 and 55,842,510 shares issued, and 57,640,266 and 55,533,682 shares outstanding |                            |           | 580               |          
|                                        | Additional paid-in capital                                                                                                                             |                            |           | 1,172,499         |          
|                                        | Treasury stock, 332,784 and 308,828 shares outstanding, at cost                                                                                        |                            |           | (14,860           | )        
|                                        | Accumulated deficit                                                                                                                                    |                            |           | (395,118          | )        
|                                        | Accumulated other comprehensive income                                                                                                                 |                            |           | 66,943            |          
|                                        |                                                                                                                                                        |                            |           |                   |          
|                                        |                                                                                                                                                        | Total stockholders' equity |           |                   | 830,044  
|                                        |                                                                                                                                                        |                            |           |                   |          
|                                        |                                                                                                                                                        | $                          | 2,440,176 |                   | $        
|                                        |                                                                                                                                                        |                            |           |                   |          

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

72

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CEPHALON, INC. AND SUBSIDIARIES    CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                                           |                                                                                             | Year Ended December 31, |          
|-------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------- | ----------------------- | ---------
|
|
|REVENUES:                                                                  |                                                                                             |                         |          
|                                                                           | Sales                                                                                       |                         | $        
|                                                                           | Other revenues                                                                              |                         |          
|                                                                           |                                                                                             |                         |          
|                                                                           |                                                                                             |                         | 1,015,425
|                                                                           |                                                                                             |                         |          
|COSTS AND EXPENSES:                                                        |                                                                                             |                         |          
|                                                                           | Cost of sales                                                                               |                         |          
|                                                                           | Research and development                                                                    |                         |          
|                                                                           | Selling, general and administrative                                                         |                         |          
|                                                                           | Depreciation and amortization                                                               |                         |          
|                                                                           | Impairment charge                                                                           |                         |          
|                                                                           | Acquired in-process research and development                                                |                         |          
|                                                                           |                                                                                             |                         |          
|                                                                           |                                                                                             |                         | 1,001,991
|                                                                           |                                                                                             |                         |          
|INCOME FROM OPERATIONS                                                     |                                                                                             |                         | 13,434   
|                                                                           |                                                                                             |                         |          
|OTHER INCOME AND EXPENSE                                                   |                                                                                             |                         |          
|                                                                           | Interest income                                                                             |                         |          
|                                                                           | Interest expense                                                                            |                         |          
|                                                                           | Debt exchange expense                                                                       |                         |          
|                                                                           | Charge on early extinguishment of debt                                                      |                         |          
|                                                                           | Other income (expense), net                                                                 |                         |          
|                                                                           |                                                                                             |                         |          
|                                                                           |                                                                                             |                         | (41,618  
|                                                                           |                                                                                             |                         |          
|INCOME (LOSS) BEFORE INCOME TAXES                                          |                                                                                             |                         | (28,184  
|INCOME TAX (EXPENSE) BENEFIT, NET                                          |                                                                                             |                         | (45,629  
|                                                                           |                                                                                             |                         |          
|INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE |                                                                                             |                         | (73,813  
|CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE                      |                                                                                             |                         |         
|                                                                           |                                                                                             |                         |          
|NET INCOME (LOSS)                                                          |                                                                                             | $                       | (73,813  
|                                                                           |                                                                                             |                         |          
|*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                                       |                         |          
|                                                                           |                                                                                             |                         |          
|                                                                           |                                                                                             | $                       | (1.31    
|                                                                           |                                                                                             |                         |          
|WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING                       |                                                                                             |                         | 56,489   
|                                                                           |                                                                                             |                         |          
|*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                                       |                         |          
|                                                                           |                                                                                             |                         |          
|                                                                           |                                                                                             | $                       | (1.31    
|                                                                           |                                                                                             |                         |          
|*WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING-ASSUMING DILUTION    |                                                                                             |                         | 56,489   
|                                                                           |                                                                                             |                         |          

---

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

73

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

|                           |                                                                              |  |   |         |   | Common Stock |          |            |           | Treasury Stock |     |    |   | Accumulated
Comprehensive
Other
Income
|-------------------------- | ---------------------------------------------------------------------------- |  | - | ------- | - | ------------ | -------- | ---------- | --------- | -------------- | --- | -- | - | --------------------------------------
|
|
|
|BALANCE, JANUARY 1, 2002   |                                                                              |  |   |         | $ | 398,731      |          | 54,909,533 |           | $              | 549 |    | $ | 982,123                               
|                           | 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   |                |     | 4  |   |                                       
|                           | Tax benefit from the exercise of stock options                               |  |   |         |   |              | 40,998   |            |           |                |     |    |   |                                       
|                           | Restricted stock award plan                                                  |  |   |         |   |              | 2,828    |            | 129,900   |                |     | 1  |   |                                       
|                           | 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 |    |   | 1,034,137                             
|                           | 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   |                |     | 3  |   |                                       
|                           | Tax benefit from the exercise of stock options                               |  |   |         |   |              | 944      |            |           |                |     |    |   |                                       
|                           | Restricted stock award plan                                                  |  |   |         |   |              | 1,394    |            | 99,025    |                |     | 1  |   |                                       
|                           | Employer contributions to employee benefit plan                              |  |   |         |   |              | 829      |            | 18,588    |                |     |   |   |                                       
|                           | Treasury stock acquired                                                      |  |   |         |   |              | (1,703   | )          |           |                |     |    |   |                                       
|                           |                                                                              |  |   |         |   |              |          |            |           |                |     |    |   |                                       
|BALANCE, DECEMBER 31, 2003 |                                                                              |  |   |         |   | 770,370      |          | 55,842,510 |           |                | 558 |    |   | 1,052,059                             
|                           |                                                                              |  |   |         |   |              |          |            |           |                |     |    |   |                                       
|                           | Net Loss                                                                     |  | $ | (73,813 | ) |              | (73,813  | )          |           |                |     |    |   |                                       
|                           |                                                                              |  |   |         |   |              |          |            |           |                |     |    |   |                                       
|                           | Foreign currency translation gain                                            |  |   | 16,071  |   |              |          |            |           |                |     |    |   |                                       
|                           | Unrealized investment losses                                                 |  |   | (1,878  | ) |              |          |            |           |                |     |    |   |                                       
|                           |                                                                              |  |   |         |   |              |          |            |           |                |     |    |   |                                       
|                           | Other comprehensive gain                                                     |  |   | 14,193  |   |              | 14,193   |            |           |                |     |    |   |                                       
|                           | Comprehensive loss                                                           |  | $ | (59,620 | ) |              |          |            |           |                |     |    |   |                                       
|                           |                                                                              |  |   |         |   |              |          |            |           |                |     |    |   |                                       
|                           | Issuance of common stock upon conversion of convertible notes                |  |   |         |   |              | 105,122  |            | 1,518,169 |                |     | 15 |   |                                       
|                           | Tax effect upon conversion of convertible notes                              |  |   |         |   |              | (10,100  | )          |           |                |     |    |   |                                       
|                           | Stock options exercised                                                      |  |   |         |   |              | 12,051   |            | 535,446   |                |     | 6  |   |                                       
|                           | Tax benefit from the exercise of stock options                               |  |   |         |   |              | 8,017    |            |           |                |     |    |   |                                       
|                           | Restricted stock award plan                                                  |  |   |         |   |              | 5,372    |            | 76,925    |                |     | 1  |   |                                       
|                           | Treasury stock acquired                                                      |  |   |         |   |              | (1,168   | )          |           |                |     |    |   |                                       
|                           |                                                                              |  |   |         |   |              |          |            |           |                |     |    |   |                                       
|BALANCE, DECEMBER 31, 2004 |                                                                              |  |   |         | $ | 830,044      |          | 57,973,050 |           | $              | 580 |    | $ | 1,172,499                             
|                           |                                                                              |  |   |         |   |              |          |            |           |                |     |    |   |                                       

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

74

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CEPHALON, INC. AND SUBSIDIARIES    CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                             |                                                                                          | Year Ended December 31,                                                                               |                                                         
|------------------------------------------------------------ | ---------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------- | --------------------------------------------------------
|
|
|CASH FLOWS FROM OPERATING ACTIVITIES:                        |                                                                                          |                                                                                                       |                                                         
|                                                             | Net (loss) income                                                                        |                                                                                                       | $                                                       
|                                                             | Adjustments to reconcile net (loss) income to net cash provided by operating activities: |                                                                                                       |                                                         
|                                                             |                                                                                          | Deferred income tax expense (benefit)                                                                 |                                                         
|                                                             |                                                                                          | Tax benefit from exercise of stock options                                                            |                                                         
|                                                             |                                                                                          | Debt exchange expense                                                                                 |                                                         
|                                                             |                                                                                          | Tax effect on conversion of convertible notes                                                         |                                                         
|                                                             |                                                                                          | Depreciation and amortization                                                                         |                                                         
|                                                             |                                                                                          | Amortization of debt issuance costs                                                                   |                                                         
|                                                             |                                                                                          | Cumulative effect of changing inventory costing method from FIFO to LIFO                              |                                                         
|                                                             |                                                                                          | Stock-based compensation expense                                                                      |                                                         
|                                                             |                                                                                          | Non-cash charge on early extinguishment of debt                                                       |                                                         
|                                                             |                                                                                          | Pension curtailment                                                                                   |                                                         
|                                                             |                                                                                          | Loss on disposals of property and equipment                                                           |                                                         
|                                                             |                                                                                          | Impairment charge                                                                                     |                                                         
|                                                             |                                                                                          | Acquired in-process research and development                                                          |                                                         
|                                                             |                                                                                          | 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                                       
|                                                             |                                                                                          |                                                                                                       |                                                         
|                                                             |                                                                                          |                                                                                                       |                                                         
|                                                             |                                                                                          |                                                                                                       |                                                         
|CASH FLOWS FROM INVESTING ACTIVITIES:                        |                                                                                          |                                                                                                       |                                                         
|                                                             | Purchases of property and equipment                                                      |                                                                                                       |                                                         
|                                                             | Investments in non-marketable securities                                                 |                                                                                                       |                                                         
|                                                             | Acquisition of CIMA, net of cash acquired                                                |                                                                                                       |                                                         
|                                                             | Acquisition of intangible assets                                                         |                                                                                                       |                                                         
|                                                             | Purchases of investments                                                                 |                                                                                                       |                                                         
|                                                             | Sales of investments                                                                     |                                                                                                       |                                                         
|                                                             |                                                                                          |                                                                                                       |                                                         
|                                                             |                                                                                          |                                                                                                       |                                                         
|                                                             |                                                                                          |                                                                                                       |                                                         
|CASH FLOWS FROM FINANCING ACTIVITIES:                        |                                                                                          |                                                                                                       |                                                         
|                                                             | Proceeds from exercises of common stock options                                          |                                                                                                       |                                                         
|                                                             | Acquisition of treasury stock                                                            |                                                                                                       |                                                         
|                                                             | 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                                                            |                                                                                                       |                                                         
|                                                             |                                                                                          |                                                                                                       |                                                         
|                                                             |                                                                                          |                                                                                                       |                                                         
|                                                             |                                                                                          |                                                                                                       |                                                         
|EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS |                                                                                          |                                                                                                       | 6,177                                                   
|                                                             |                                                                                          |                                                                                                       |                                                         
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS         |                                                                                          |                                                                                                       | (541,455                                                
|CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                 |                                                                                          |                                                                                                       | 1,115,699                                               
|                                                             |                                                                                          |                                                                                                       |                                                         
|CASH AND CASH EQUIVALENTS, END OF YEAR                       |                                                                                          | $                                                                                                     | 574,244                                                 
|                                                             |                                                                                          |                                                                                                       |                                                         
|Supplemental disclosures of cash flow information:           |                                                                                          |                                                                                                       |                                                         
|                                                             | Cash payments for interest                                                               |                                                                                                       | $                                                       
|                                                             | Cash payments for 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.

75

---





CEPHALON, INC. AND SUBSIDIARIES        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        (Amounts in thousands, except per share data)  (Unaudited)

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 innovative products to treat sleep and
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. Through our wholly-owned subsidiary, CIMA LABS INC., we develop and manufacture orally disintegrating tablets using proprietary technologies that allow an active drug
ingredient to be formulated into a new dosage form that quickly disintegrates in the mouth without chewing or the need for water.

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. On August 12, 2004 and December 28, 2001, we completed the acquisitions of the outstanding shares of capital stock of CIMA LABS and Group Lafon,
respectively. Both of these acquisitions have been accounted for as purchases and, accordingly, the estimated fair value of assets acquired and liabilities assumed have been recorded as of the
respective dates of the acquisitions.

Foreign Currency

For foreign operating entities with currencies other than the U.S. Dollar, the local currency is the functional currency. 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.

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

76

---



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 U.S. Customers and Concentration of Credit Risk

Our three largest products in terms of product sales, PROVIGIL® (modafinil) Tablets [C-IV],
ACTIQ®(oral transmucosal fentanyl citrate) [C-II] and GABITRIL® (tiagabine hydrochloride), comprised approximately 90% of our worldwide net
sales. Approximately 95% of PROVIGIL, ACTIQ and GABITRIL sales for the year ended December 31, 2004 are in the U.S. market. In the United States, 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.

% of total trade
accounts receivable

% of worldwide
net product salesFor the period ended
December 31,

For the year ended
December 31,2004

2003

2002

2004

2003

2002Major U.S. customers:AmerisourceBergen Corporation

14
%
19
%
24
%
20
%
22
%
22
%Cardinal Health, Inc.

31

23

30

36

33

30McKesson Corporation

35

28

22

31

27

25Total

80
%
70
%
76
%
87
%
82
%
77
%


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.

We
capitalize inventory costs associated with marketed products and certain products prior to regulatory approval and product launch, based on management's judgment of probable future
commercial use and net realizable value. We could be required to expense previously capitalized costs related to pre-approval or pre-launch inventory upon a change in such
judgment, due to a denial or delay of approval by regulatory bodies, a delay in commercialization, or other potential factors. At December 31, 2004, we had $21.9 million of capitalized
inventory costs.

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

77

---



useful
life of the assets. Expenditures for maintenance and repairs are charged to expense as incurred, while major renewals and betterments are capitalized.

We
capitalize interest in connection with the construction of plant and equipment, if material.

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 $511.3 million as compared to a carrying value of $521.8 million, and the market value of our zero coupon
convertible notes was $752.8 million as compared to a carrying value of $750.0 million, at December 31, 2004, based on quoted market values. None of our other debt instruments
that were outstanding as of December 31, 2004 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,"
goodwill is not amortized; rather, goodwill is subject to a periodic assessment for impairment by applying a fair-value-based test. We have recorded goodwill related to our acquisitions of
Group Lafon and CIMA LABS. We performed our annual test of impairment of goodwill as of July 1, 2004. We have only one reporting unit, a biopharmaceutical 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, 2004 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, 2004, no
adjustment to our goodwill for impairment was necessary. We updated our test of impairment of goodwill as of September 30, 2004 in conjunction with our acquisition of CIMA LABS, and again
concluded that 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 a quarterly 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
2004, we determined that the carrying value of our investment in MDS Proteomics Inc. was fully impaired and we recorded an impairment charge of $30.1 million, which
included transaction costs, in our second quarter of 2004 results of operations. See Note 9. 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.

78

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Revenue Recognition

In the United States, we sell our products to pharmaceutical wholesalers, the largest three of which account for 87% of our worldwide net sales for the year ended
December 31, 2004. Decisions made by these wholesalers and their customers regarding the levels of inventory they hold (and thus the amount of product they purchase) can materially affect the
level of our sales in any particular 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. However, we do not have any agreements, understandings or business
practices under which we extend incentives based on levels of inventory held by wholesalers. As of December 31, 2004, we received information from our three largest U.S. wholesaler customers
about the levels of inventory they held for our three products. Based on this information, which we have not independently verified, we believe that inventory held at these wholesalers is within a
normal range for our business of approximately one month's supply. However, we currently do not have ongoing agreements for access to the actual inventory levels of our products held by our
wholesalers or their customers. Sales recorded for the year ended December 31, 2004 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 $27.9 million, $46.1 million, $44.0 million for the years ended December 31, 2004, 2003, and
2002, respectively.

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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, 2004, we have recorded $2.6 million of deferred revenues of which $0.9 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 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 $66.9 million and $50.9 million as of December 31, 2004 and 2003, respectively. The balance in accumulated other comprehensive income due to
unrealized investment gains was negligible as of December 31, 2004 and $1.9 million as of December 31, 2003.

Stock-based Compensation

We account for stock option plans and restricted stock award plans using the intrinsic value method prescribed in Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees." Compensation cost for stock options, 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. Restricted stock awards are recorded as compensation cost over the requisite vesting periods based on the market value on the date of grant. We have
opted to disclose only the provisions of Statement of Financial Accounting Standards (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

80

---



fair
value of granted stock options as prescribed by SFAS 123 and SFAS 148, the pro forma income (loss) and income (loss) per share amounts would have been as follows:

Year ended December 31,2004

2003

2002Net income (loss), as reported

$
(73,813
)
$
83,858

$
171,528Add: Stock-based compensation expense included in net income, net of related tax effects


3,187


896


1,753Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects


(40,035
)

(34,799
)

(36,413
)Pro forma net income (loss)

$
(110,661
)
$
49,955

$
136,868Earnings (loss) per share:*Basic income (loss) per share, as reported

$
(1.31
)
$
1.49

$
3.08*Basic income (loss) per share, pro forma

$
(1.96
)
$
0.89

$
2.46*Diluted income (loss) per share, as reported

$
(1.31
)
$
1.42

$
2.77*Diluted income (loss) per share, pro forma

$
(1.96
)
$
0.87

$
2.25


---

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. In our result of operations for the year ended
December 31, 2003 and 2002, $2.1 million and $5.4 million, respectively, of expenditures were reclassed from the Research and development category into the Selling, general and
administrative category to conform to the current year presentation.

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Recent Accounting Pronouncements

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 have adopted the additional disclosure requirements of this statement effective December 31, 2004.

In
March 2004, the FASB's Emerging Issues Task Force (EITF) reached consensus on Issue 03-6. This Issue is intended to clarify what is a participating security for
purposes of applying SFAS No. 128, "Earnings Per Share." The Issue also provides further guidance on how to apply the two-class method of computing earnings per share (EPS) once it
is determined that a security is participating, including how to allocate undistributed earnings to such a security. We adopted this Issue in the second quarter of 2004 and determined that our 3.875%
convertible subordinated notes were participating securities as defined by this Issue. Although none of the 3.875% convertible notes are outstanding at December 31, 2004, net income (loss) used
for basic and diluted income (loss) per share is allocated to the common shares using a ratio of weighted average common shares outstanding and weighted average participating securities, using the
if-converted method. Our previously reported earnings per share have been restated as required by EITF Issue 03-6. The effect on our basic EPS for the years ended
December 31, 2003 and 2002 was a decrease of $0.02 and $0.03 per share, respectively. The effect on our diluted EPS for the years ended December 31, 2003 and 2002 was a decrease of $0.02
per share in each of the years. There was no effect on our basic and diluted EPS for any periods prior to December 31, 2002.

In
September 2004, the EITF reached consensus on Issue 04-8, "Accounting Issues Related to Certain Features of Contingently Convertible Debt and the Effects on Diluted
Earnings per Share." This Issue requires the inclusion of convertible shares for contingently convertible debt in the calculation of diluted EPS regardless of whether the contingency has been met, if
the effect is dilutive. The Issue is effective for periods ending after December 15, 2004 and requires the restatement of previously reported EPS. In December 2004, we exchanged
$749.6 million of our Zero Coupon Convertible Notes for notes with substantially the same terms and conditions. However, the contingent conversion feature is no longer considered when
calculating diluted earnings per share under EITF 04-8. The remaining $0.4 million of unexchanged Zero Coupon Convertible Notes have not been included in the calculation of diluted
EPS for the year ended December 31, 2004 as the effect is anti-dilutive. For the year ended December 31, 2003, the inclusion of the unexchanged Zero Coupon Convertible Notes
using the if-converted method had no effect on diluted EPS.

In
November 2004, the FASB issued SFAS No. 151, "Inventory Costs," which requires abnormal amounts of idle capacity and spoilage costs to be excluded from the cost of
inventory and expensed when incurred. This Statement is effective for fiscal years beginning after June 15, 2005. We believe the adoption of this statement will not impact our current financial
statements.

In
December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment," a revision of SFAS No. 123 "Accounting for Stock-Based Compensation," that addresses the
accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity

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instruments
of the enterprise or (b) liabilities that are based on the fair value of the enterprise's equity instruments or that may be settled by the issuance of such equity instruments. This
Statement requires that an entity measure the cost of equity based service awards based on the grant-date fair value of the award and recognize the cost of such awards over the period
during which the employee is required to provide service in exchange for the award (the vesting period). The Statement requires that an entity measure the cost of liability-based service awards based
on current fair value that is remeasured subsequently at each reporting date through the settlement date. This Statement is effective as of the beginning of the first interim or annual reporting
period that begins after June 15, 2005. We will adopt this new standard effective July 2005, which will require us to recognize share-based compensation expense in our statement of
operations. We have not yet quantified the impact this statement will have on our future results but we expect that it will be material.

In
December 2004, the FASB issued Staff Position No. FAS 109-1, "Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction
on Qualified Production Activities Provided by the American Jobs Creation Act of 2004" ("FSP No. 109-1"), and Staff Position No. FAS 109-2, "Accounting and
Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004" ("FSP No. 109-2"). These staff positions provide accounting
guidance on how companies should account for the effects of the American Jobs Creation Act of 2004 ("AJCA") that was signed into law on October 22, 2004. FSP No. 109-1 states
that the tax relief (special tax deduction for domestic manufacturing) from this legislation should be accounted for as a "special deduction" instead of a tax rate reduction. FSP
No. 109-2 gives a company additional time to evaluate the effects of the legislation on any plan for reinvestment or repatriation of foreign earnings for purposes of applying FASB
Statement No. 109. We are currently assessing both provisions to determine the impact they could have on our future income tax expense. We expect to complete this evaluation within a reasonable
amount of time after additional guidance from the United States Treasury is published.

2.    ACQUISITION OF CIMA LABS INC.

On August 12, 2004, we completed our acquisition of CIMA LABS INC. Under the Agreement and Plan of Merger dated November 3, 2003, we acquired
each outstanding share of CIMA LABS common stock for $34.00 per share in cash. The total cash paid to CIMA LABS stockholders in the transaction was approximately $482.5 million, net of CIMA
LABS' existing cash on hand, or $409.4 million, net of its cash, cash equivalents and investments. As a result of the acquisition, we obtained the rights to CIMA LABS' ORAVESCENT
fentanyl® product candidate, which is currently in Phase 3 clinical trials for the treatment of breakthrough cancer pain in opioid-tolerant patients. ORAVESCENT fentanyl utilizes an
enhanced absorption transmucosal drug delivery technology that we believe may facilitate the rapid onset of pain relief in such patients. We are targeting approval of this product by the FDA in late
2006.

The
total purchase price of $514.1 million consists of $500.1 million for all outstanding shares of CIMA LABS at $34.00 per share and $14.0 million in direct
transaction costs. The acquisition was funded from Cephalon's existing cash and short-term investments. In connection with the acquisition, CIMA LABS used $18.8 million of their own
funds to purchase all outstanding employee stock options, whether or not vested or exercisable, for an amount equal to $34.00 less the exercise price for such option.

83

---



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

At August 12, 2004Cash and cash equivalents

$
31,604Available-for-sale investments


73,169Receivables


8,821Inventory


6,224Deferred tax asset, net


17,985Other current assets


555Property, plant and equipment


82,474Intangible assets


113,100Acquired in-process research and development


185,700Goodwill


71,843Total assets acquired


591,475Current liabilities


(32,783
)Deferred tax liability


(44,567
)Total liabilities assumed


(77,350
)Net assets acquired

$
514,125


Of
the $113.1 million of acquired intangible assets, $70.0 million was assigned to the DuraSolv® technology with an estimated useful life of 14 years,
$32.7 million was assigned to the OraSolv® technology with a weighted average estimated useful life of approximately 6 years, and $10.4 million was assigned to the
developed ORAVESCENT technology with an estimated useful life of 15 years. The $71.8 million of goodwill was assigned to our single biopharmaceutical segment. In accordance with
SFAS 142, goodwill is not amortized, but will be subject to a periodic assessment for impairment by applying a fair-value-based test. None of this goodwill is expected to be
deductible for income tax purposes.

We
believe our purchase price allocation will be finalized during the first quarter of 2005. We allocated $185.7 million of the purchase price to in-process research
and development projects. In-process research and development (IPR&D) represents the valuation of acquired, to-be-completed research projects. At the acquisition
date, CIMA LABS' ongoing research and development initiatives were primarily involved with the development and commencement of Phase 3 clinical trials of ORAVESCENT fentanyl for the treatment of
breakthrough cancer pain in opioid-tolerant patients, and several other minor ongoing research and development projects. At the acquisition date, CIMA LABS had spent approximately $5.6 million
on the ORAVESCENT in-process research and development project. During the remainder of 2004, we spent an additional $2.5 million on the project, and we expect to spend an additional
$8.0 million through 2005. We expect to complete our ORAVESCENT fentanyl Phase 3 clinical trials and submit an NDA for approval of this product in late 2005. The estimated revenues for the
in-process projects are expected to be recognized from 2006 through 2019.

84

---



The
value assigned to purchased in-process technology was determined 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 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 of 28 percent were considered appropriate for the in-process research and
development. These discount rates were commensurate with the projects' stage 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. No assurance can be given, 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. 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 in the amount of $185.7 million were charged to expense in the third quarter of 2004.

The
results of operations for CIMA LABS have been included in our consolidated statements since the acquisition date of August 12, 2004.

The
following unaudited pro forma information shows the results of our operations for the year ended December 31, 2004 and 2003 as though the acquisition had occurred as of the
beginning of the periods presented:

For the year ended
December 31,2004

2003Total revenues

$
1,050,390

$
790,883Net income (loss)

$
(94,640
)
$
71,442Basic and diluted net income (loss) per common share:Basic income (loss) per common share

$
(1.68
)
$
1.27Diluted income (loss) per common share

$
(1.68
)
$
1.23


The
pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the actual results of operations had the acquisition taken place as of the
beginning of the periods presented, or the results that may occur in the future. Furthermore, the pro forma results do not give effect to all cost savings or incremental costs that may occur as a
result of the integration and consolidation of the acquisition.

85

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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.

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 of which none are outstanding as of December 31, 2004.

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


86

---



4.    CASH, CASH EQUIVALENTS AND INVESTMENTS

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

2004

2003Cash and cash equivalents:Demand deposits

$
80,910

$
194,480Repurchase agreements


196,215


388,816Commercial paper


244,496


407,403Asset-backed securities


34,973


125,000Bonds


17,650


574,244


1,115,699Short-term investments (at market value):U.S. government agency obligations


107,803


Asset-backed securities


37,023


16,537Bonds


61,738


22,927Non-U.S. corporate obligations


4,063


Commercial paper


6,805


217,432


39,464$
791,676

$
1,155,163


The
contractual maturities of our investments in cash, cash equivalents, and investments at December 31, 2004 are as follows:

Less than one year

$
586,929Greater than one year but less than two years


131,828Greater than two years


72,919$
791,676


5.    RECEIVABLES

At December 31, receivables consisted of the following:

2004

2003Trade receivables

$
187,375

$
75,851Receivables from collaborations


14,099


11,281Other receivables


17,562


7,990219,036


95,122Less reserve for sales discounts, returns and allowances


(15,442
)

(8,774
)$
203,594

$
86,348


Trade
receivables are recorded at the invoiced amount and do not bear interest. Our allowance for doubtful accounts is our best estimate of probable credit losses in our existing
accounts receivable.

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---



We determine
the allowance based on a percentage of trade receivables past due, specific customer issues, and a reserve related to our specific historical write-off experience and
general industry experience. We review and adjust our allowance for doubtful accounts quarterly. Receivable balances or specific customer issues are written off against the allowance when we feel that
it is probable that the receivable amount will not be recovered. Our balances of receivables over 90 days and historical write-off experience have been immaterial. We do not have
any off-balance sheet credit exposure related to our customers.

6.    INVENTORY

At December 31, inventory consisted of the following:

2004

2003Raw material

$
31,511

$
23,647Work-in-process


4,286


10,295Finished goods


50,832


27,307$
86,629

$
61,249


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
excess of LIFO inventory value over current or replacement cost was $0.3 million at December 31, 2004 and the excess of current or replacement cost over LIFO inventory
value was $0.8 million at December 31, 2003.

The
majority of our foreign inventories are valued using the first-in, first-out (FIFO) method. Inventories valued using the FIFO method were $31.8 million
and $5.3 million at December 31, 2004 and 2003, respectively.

7.    PROPERTY AND EQUIPMENT

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

Estimated
Useful Lives

2004

2003Land and improvements



$
10,632

$
5,681Buildings and improvements

10-40 years


128,546


74,921Laboratory, machinery and other equipment

3-15 years


120,375


68,510Construction in progress




62,638


31,510322,191


180,622Less accumulated depreciation and amortization




(77,357
)

(54,180
)$
244,834

$
126,442


88

---



Depreciation
and amortization expense related to property and equipment was $15.0 million, $11.0 million, and $7.8 million for the years ended December 31,
2004, 2003 and 2002, respectively.

8.    OTHER INTANGIBLE ASSETS, NET

Other intangible assets consisted of the following:

|                                                |  |             |  | December 31, 2004 |         | December 31, 2003
|----------------------------------------------- |  | ----------- |  | ----------------- | ------- | -----------------
|
|Developed technology acquired from
Group Lafon  |  | 10-15 years |  | $                 | 132,000 |                  
|Trademarks/tradenames acquired from
Group Lafon |  | 15 years    |  |                   | 16,000  |                  
|GABITRIL product rights                         |  | 9-15 years  |  |                   | 119,352 |                  
|Novartis CNS product rights                     |  | 10 years    |  |                   | 41,641  |                  
|ACTIQ marketing rights                          |  | 10 years    |  |                   | 75,465  |                  
|Modafinil marketing rights                      |  | 10 years    |  |                   | 10,288  |                  
|DuraSolv® technology                            |  | 14 years    |  |                   | 70,000  |                  
|OraSolv® technology                             |  | 6 years     |  |                   | 32,700  |                  
|ORAVESCENT® technology                          |  | 15 years    |  |                   | 10,400  |                  
|NAXY® and MONO-NAXY® product rights             |  | 5 years     |  |                   | 44,343  |                  
|Other product rights                            |  | 5-14 years  |  |                   | 16,356  |                  
|                                                |  |             |  |                   |         |                  
|                                                |  |             |  | $                 | 568,545 |                  
|                                                |  |             |  |                   |         |                  

In December 2004, Cephalon France purchased Sanofi-Synthelabo France's rights to promote, distribute and sell NAXY and
MONO-NAXY in France and French overseas territories. The purchase price for these product rights was approximately $44.3 million. Abbott France holds the underlying rights to the
product. Abbott France manufactures clarithromycin and also promotes, distributes and sells clarithromycin under the trademark ZECLAR® in the French market.

Other
intangible assets are amortized over their estimated useful economic life using the straight line method. Amortization expense was $37.8 million, $33.1 million, and
$27.7 million for the years ended December 31, 2004, 2003 and 2002, respectively. Estimated amortization expense of intangible assets for each of the next five years is approximately
$48.0 million.

9.    INVESTMENT IN MDS PROTEOMICS INC.

In January 2003, we purchased from MDS Proteomics Inc. (MDSP), a privately-held Canadian company and a subsidiary of MDS Inc., a
$30.0 million convertible note due 2010 and entered into a five-year research agreement focused on accelerating the clinical development of our pipeline of small chemical compounds.
In 2004, MDSP decided to change its business model to focus upon the provision of services to the pharmaceutical and biotechnology industries, which it believes can lead to nearer term revenue and
profitability.

On
July 29, 2004, MDSP completed its reorganization under Canada's Companies Creditors' Arrangement Act and changed its name to Protana Inc. As part of the reorganization,
we agreed to

89

---



terminate
our research agreement with Protana and cancelled the $30.0 million convertible note we held in return for shares of Class A Preferred Stock and Common Stock of Protana. In
light of the restructuring of Protana and the uncertain business prospects for the company, we determined that the carrying value of our investment was fully impaired and we recorded an impairment
charge of $30.1 million, which included transaction costs, in our second quarter of 2004 results of operations.

10.    ACCRUED EXPENSES

At December 31, accrued expenses consisted of the following:

2004

2003Accrued compensation and benefits

$
27,692

$
12,579Accrued income taxes


15,263


22,918Accrued professional and consulting fees


6,103


2,347Accrued clinical trial fees


16,494


6,041Accrued research and development


9,881


7,462Accrued license fees and royalties


4,401


3,696Accrued sales and marketing costs


18,065


8,771Accrued contractual sales allowances


26,649


13,905Accrued co-promotional fee


8,793


Other accrued expenses


24,500


21,319$
157,841

$
99,038


11.    LONG-TERM DEBT

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

|                                                                              |  | 2004 |           | 2003 |  
|----------------------------------------------------------------------------- |  | ---- | --------- | ---- | -
|2.5% convertible subordinated notes due December 2006                         |  | $    | 521,750   |      | $
|Change in fair value of hedged portion of 2.5% convertible subordinated notes |  |      | (1,772    | )    |  
|3.875% convertible subordinated notes due March 2007                          |  |      |          |      |  
|Zero Coupon convertible subordinated notes first putable June 2008 (Old)      |  |      | 303       |      |  
|Zero Coupon convertible subordinated notes first putable June 2010 (Old)      |  |      | 102       |      |  
|Zero Coupon convertible subordinated notes first putable June 2008 (New)      |  |      | 374,697   |      |  
|Zero Coupon convertible subordinated notes first putable June 2010 (New)      |  |      | 374,898   |      |  
|Due to Abbott Laboratories                                                    |  |      | 531       |      |  
|Mortgage and building improvement loans                                       |  |      | 9,721     |      |  
|Capital lease obligations                                                     |  |      | 3,270     |      |  
|Other                                                                         |  |      | 6,024     |      |  
|                                                                              |  |      |           |      |  
|Total debt                                                                    |  |      | 1,289,524 |      |  
|Less current portion                                                          |  |      | (5,114    | )    |  
|                                                                              |  |      |           |      |  
|Total long-term debt                                                          |  | $    | 1,284,410 |      | $
|                                                                              |  |      |           |      |  

90

---



Aggregate maturities of long-term debt are as follows:

2005

$
5,1142006


523,5492007


2,5022008


378,0432009


2,2822010 and thereafter


378,034$
1,289,524


2.5% Convertible Subordinated Notes

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
July 2004, a holder of our 2.5% convertible subordinated notes approached us, and we agreed, to exchange $78.3 million of these outstanding notes for 1,518,169 shares of
our common stock. We recognized debt exchange expense of $28.2 million in the third quarter of 2004 relating to these early exchanges in accordance with SFAS No. 84, "Induced Conversion
of Convertible Debt." We also recognized the tax effect of this exchange of $10.1 million as a reduction of additional
paid-in capital in our statement of stockholders' equity and as a tax benefit in our statement of operations for the year ended December 31, 2004.

Interest Rate Swap

In January 2003, we entered into an interest rate swap agreement with a financial institution relating to our 2.5% convertible notes in the aggregate
notional amount of $200.0 million. Although we exchanged $78.3 million of these notes in July 2004, the interest rate swap remains at $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, 2005, the interest rate is 2.85%. 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. 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 sheets.

91

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Charge on Early Extinguishment of Debt

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


For
the year ended December 31, 2004, we recognized $2.3 million 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 debt3.875% convertible subordinated notes repurchased in March 2004

$
10,000

$
950

$
11

$
9613.875% convertible subordinated notes repurchased in August 2004


33,000


1,320


32


1,352$
43,000

$
2,270

$
43

$
2,313


Zero Coupon Convertible Subordinated Notes

In June 2003, we issued and sold in a private placement $750.0 million of Zero Coupon Convertible Notes. The interest rate on the notes is zero and
the notes do not accrete interest. The notes were issued in two tranches: $375.0 million of Zero Coupon Convertible Subordinated Notes Due 2033, First Putable June 15, 2008 (the "Old
2008 Notes") and $375.0 million of Zero Coupon Convertible Subordinated Notes Due 2033, First Putable June 15, 2010 (the "Old 2010 Notes" and, together with the Old 2008 Notes, the "Old
Notes").

In
November 2004, we commenced an offer to exchange our Zero Coupon Convertible Subordinated Notes Due 2033, First Putable June 15, 2008 (the "New 2008 Notes"), and our
Zero Coupon Convertible Subordinated Notes Due 2033, First Putable June 15, 2010 (the "New 2010 Notes" and, together with the New 2008 Notes, the "New Notes"), for any and all of our
outstanding Old 2008 Notes and Old 2010 Notes. Our offer to exchange expired on December 15, 2004 and thereafter we issued $374.7 million principal amount at maturity of New 2008 Notes
in exchange for a like principal amount at maturity of our outstanding Old 2008 Notes and $374.9 million principal amount at maturity of New 2010 Notes in exchange for a like principal amount
at maturity of our outstanding Old 2010 Notes. Following this transaction, there remains outstanding $0.3 million and $0.1 million of the Old 2008 and Old 2010 Notes, respectively, as of
December 31, 2004.

92

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The
New Notes were issued solely to our existing security holders pursuant to our offer to exchange, which was made in reliance upon the exemption from the registration requirement of
the Securities Act afforded by Section 3(a)(9) thereof. We did not pay or give, directly or indirectly, any commission or other remuneration for solicitation of the exchange of the Old Notes
for the New Notes.

The
New Notes contain the following terms:



The
New 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 a combination of cash and shares of our common stock, as described below. A holder may convert the New Notes only if one or more of the following conditions are satisfied:



93

---





Upon
the satisfaction of any one of these conditions, we would classify the then-aggregate outstanding principal balance of New Notes as a current liability on our balance
sheet.

Each
$1,000 principal amount of New Notes is convertible into cash and shares of our common stock, if any, based on an amount (the "Daily Conversion Value"), calculated for each of the
ten trading days immediately following the conversion date (the "Conversion Period"). The Daily Conversion Value for each trading day during the Conversion Period for each $1,000 aggregate principal
amount of New Notes is equal to one-tenth of the product of the then applicable conversion rate multiplied by the volume weighted average price of our common stock on that day.

For
each $1,000 aggregate principal amount of New Notes surrendered for conversion, we will deliver the aggregate of the following for each trading day during the Conversion Period:



If
the New Notes are converted in connection with a Fundamental Change that occurs prior to June 15, 2008, we may also be obligated to pay an additional premium with respect to
the New Notes so converted.

The
aggregate commissions and other debt issuance costs incurred with respect to the issuance of the Old 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. Other debt issuance costs incurred with respect to the issuance of the New Notes have been expensed as
incurred.

The
New Notes are subordinate to our existing and future senior indebtedness. The outstanding principal balance of the 2008 and 2010 New 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.



Concurrent with the private placement of the Old 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. In connection
with our exchange of Old Notes for New Notes, we amended the Convertible Note Hedge to reflect the mandatory net share settlement feature

94

---



of
the New Notes. Taken together, the Convertible Note Hedge and warrants have the effect of increasing the effective conversion price of the New 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 the original agreements. At our option, the warrants may be settled in either net cash or net shares; the
Convertible Note Hedge must be settled using net shares. Under the Convertible Note Hedge, CSFBI will deliver to us the aggregate number of shares we are required to deliver to a holder of New Notes
that presents such New Notes for conversion, provided, however, that if the market price per share of our common stock is above $72.08, we will be required to deliver either shares of our common stock
or cash to CSFBI representing the value of the warrants in excess of the strike price of the warrants. 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 recorded the Convertible Note Hedge and warrants in additional paid in capital as of June 30, 2003, and do 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, 2004,
$0.5 million is outstanding and payable by May 31, 2005.

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
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. At its meeting
held June 8, 2004, the PIDA board approved the extension of the construction deadline until December 31, 2005, subject to the requirement that, effective July 1, 2004, we must
commence payment of interest only on the original loan. If the PIDA Board determines not to grant an extension to the December 31, 2005

95

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deadline,
we will be required to resume payment of principal on the original loan in addition to the payment of interest.

12.    EARNINGS PER SHARE (EPS)

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, restricted stock awards and the New Zero Coupon Convertible Notes is measured using the treasury stock method.
The dilutive effect of all other 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.

We
adopted the guidance from the EITF's Issue 03-6 in the second quarter of 2004. Under the guidance, we must apply the two-class method of computing EPS and
allocate undistributed earnings to participating securities. We determined that our 3.875% convertible subordinated notes were participating securities as these notes contained a provision that stated
that if we distributed cash to all or substantially all of our common stock holders, whether by dividend or otherwise, the holders were entitled to such distribution as if they had converted their
notes into shares. Although as of December 31, 2004, none of the 3.875% convertible notes are outstanding, net income (loss) used for basic and diluted income (loss) per share is allocated to
the common shares using a ratio of weighted average common shares and weighted average participating securities for the period outstanding, using the if-converted method. Our previously
reported earnings per share have been restated as required by EITF Issue 03-6. For 2002, basic and diluted income per common share have been restated with a decrease of $0.03 and $0.02 per
share, respectively; for 2003, both basic and diluted income per common share have been restated with a decrease of $0.02 per share.

In
September 2004, the EITF reached consensus on Issue 04-8, "Accounting Issues Related to Certain Features of Contingently Convertible Debt and the Effects on Diluted
Earnings per Share." This Issue requires the inclusion of convertible shares for contingently convertible debt in the calculation of diluted EPS regardless of whether the contingency has been met, if
the effect is dilutive. The Issue is effective for periods ending after December 15, 2004 and requires the restatement of previously reported EPS. In December 2004, we exchanged
$749.6 million of the Old Notes for the New Notes with substantially the same terms and conditions. However, the contingent conversion feature is no longer considered when calculating diluted
earnings per share under EITF 04-8. The remaining $0.4 million Old Notes have not been included in the calculation of diluted EPS for the year ended December 31, 2004 as the
effect is anti-dilutive. For the year ended December 31, 2003, the inclusion of the Old Notes using the if-converted method had no effect on diluted EPS.

96

---



The following is a reconciliation of net income (loss) and weighted average common shares outstanding for purposes of calculating basic and diluted income (loss) per common share:

|                                                                                            |                                         | Year ended December 31, |        
|------------------------------------------------------------------------------------------- | --------------------------------------- | ----------------------- | -------
|
|
|Basic income (loss) per common share computation:                                           |                                         |                         |        
|                                                                                            | Numerator:                              |                         |        
|Income (loss) before cumulative effect of a change in accounting principle per common share |                                         | $                       | (73,813
|Cumulative effect of a change in accounting principle per common share                      |                                         |                         |       
|                                                                                            |                                         |                         |        
|Net income (loss) used for basic income (loss) per common share                             |                                         | $                       | (73,813
|Net income used for basic income per participating security                                 |                                         |                         |       
|                                                                                            |                                         |                         |        
|                                                                                            | Total net income (loss)                 |                         | $      
|                                                                                            |                                         |                         |        
|                                                                                            | Denominator:                            |                         |        
|Weighted average shares used for basic income (loss) per common share                       |                                         |                         | 56,489 
|Weighted average shares of participating securities                                         |                                         |                         | 316    
|                                                                                            | Basic income (loss) per common share:   |                         |        
|Income (loss) per common share before cumulative effect of a change in accounting principle |                                         | $                       | (1.31  
|Cumulative effect of a change in accounting principle per common share                      |                                         |                         |       
|                                                                                            |                                         |                         |        
|                                                                                            |                                         | $                       | (1.31  
|                                                                                            |                                         |                         |        
|Diluted income (loss) per common share computation:                                         |                                         |                         |        
|                                                                                            | Numerator:                              |                         |        
|Income (loss) before cumulative effect of a change in accounting principle per common share |                                         | $                       | (73,813
|Cumulative effect of a change in accounting per common share                                |                                         |                         |       
|                                                                                            |                                         |                         |        
|Net income (loss) used for basic income (loss) per common share                             |                                         |                         | (73,813
|Interest on convertible notes (net of tax) per common share                                 |                                         |                         |       
|                                                                                            |                                         |                         |        
|Net income (loss) used for diluted income (loss) per common share                           |                                         | $                       | (73,813
|                                                                                            |                                         |                         |        
|                                                                                            | Denominator:                            |                         |        
|Weighted average shares used for basic income (loss) per common share                       |                                         |                         | 56,489 
|Effect of dilutive securities:                                                              |                                         |                         |        
|Convertible subordinated notes                                                              |                                         |                         |       
|Employee stock options and restricted stock awards                                          |                                         |                         |       
|                                                                                            |                                         |                         |        
|Weighted average shares used for diluted income (loss) per common share                     |                                         |                         | 56,489 
|                                                                                            |                                         |                         |        
|                                                                                            | Diluted income (loss) per common share: |                         |        
|Income (loss) per common share before cumulative effect of a change in accounting principle |                                         | $                       | (1.31  
|Cumulative effect of a change in accounting principle                                       |                                         |                         |       
|                                                                                            |                                         |                         |        
|                                                                                            |                                         | $                       | (1.31  
|                                                                                            |                                         |                         |        

97

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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 31,2004

2003

2002Weighted average shares excluded:Employee stock options

4,041

5,793

2,331Convertible subordinated notes including Old Notes

7,284

9,148

11,325

14,941

2,331


The
New Zero Coupon Convertible Notes are considered to be Instrument C's as defined by EITF 90-19; therefore, the New Notes are included in the dilutive earnings per share
calculation using the treasury stock method. Under the treasury stock method, we must calculate the number of shares issuable under the terms of the New Notes based on the average market price of the
stock during the period, and include that number of shares in the total diluted shares figure for the period. For example, using the treasury stock method, if the average price of our stock during the
period ended December 31, 2004 had been $65.00, $80.00 or $90.00, the shares from the New Notes to be included in diluted EPS would have been 1.4 million, 3.6 million and
4.6 million shares, respectively. The total number of shares that could potentially be included under the New Notes is 12.9 million. Since the average share price of our stock during the
year ended December 31, 2004 did not exceed the conversion prices of $56.50 and $59.50, there was no impact of these New Notes on diluted shares or diluted EPS during that period.

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. SFAS 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. SFAS 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, 2004 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, 2004 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.

13.    PENSIONS AND OTHER POSTRETIREMENT BENEFITS

At our French subsidiaries, we have a defined benefit pension plan for current employees and a postretirement benefit plan for employees who retired prior to
2003. These plans are noncontributory and are not funded; benefit payments are funded from operations.

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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 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 Benefits2004

2003

2004

2003Change in benefit obligation:Benefit obligation at beginning of year

$
6,627

$
5,559

$
6,000

$
4,713Service cost


486


376


33


376Interest cost


351


290


89


257Actuarial gain


(277
)




(41
)

(6
)Amortization of prior improvements











(259
)Recognized (gain) loss due to plan curtailment








(4,214
)

Benefits paid


(359
)

(695
)

(113
)

(65
)Foreign currency translation


593


1,097


85


984Benefit obligation at end of year

$
7,421

$
6,627

$
1,839

$
6,000


Pension Benefits

Other Benefits2004

2003

2004

2003Components of net periodic benefit cost:Service cost

$
486

$
376

$
33

$
376Interest cost


351


290


89


257Amortization of prior improvements











(259
)Recognized (gain) loss due to plan curtailment








(4,214
)

Recognized actuarial (gain) loss


(277
)




(41
)

(6
)Net periodic benefit cost

$
560

$
666

$
(4,133
)
$
368


In
the first quarter of 2004, we cancelled postretirement health care benefits at Cephalon France for employees not yet retired. This resulted in a gain of $4.2 million, which has
been recognized as an offset to net periodic benefits costs for the year ended December 31, 2004.

The
following table presents the significant assumptions used:

Pension Benefits

Other Benefits2004

2003

2004

2003Discount rate

4.5
%
5.0
%
4.5
%
5.0
%Rate of compensation increase

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







4.0
%


99

---



Contributions
made by Cephalon France for postretirement health care benefits have been frozen at 2004 levels for all future periods. Participants are required to pay for any changes to
the cost of this plan. Therefore, the disclosure of the effects of a 1% change in the assumed health care cost trend is not applicable as it would not impact our costs.

The
accumulated benefit obligation for the defined benefit pension plan was $5.2 million and $4.7 million at December 31, 2004 and 2003, respectively.

The
following benefits payments, which reflect expected future service, as appropriate, are expected to be paid as follows:

Pension
Benefits

Other
Benefits2005

$
108

$
1082006


179


1122007


126


1202008


228


1192009


239


130Years 2010-2014


3,809


639


14.    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 $12.4 million, $6.9 million, and $4.3 million in 2004, 2003, and 2002, respectively. Estimated lease expense for each of the next five years is as
follows:

2005

$
11,0512006


10,3832007


8,0842008


7,0212009


2,9002010 and thereafter


12,001$
51,440


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.

100

---



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.

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 these standards, CCP has been consolidated in our financial statements at December 31, 2003 and 2004. This
consolidation did not have a material impact on our financial statements.

Legal Proceedings

We have filed patent infringement lawsuits in U.S. District Court in New Jersey against Teva Pharmaceuticals USA, Inc., Mylan Pharmaceuticals Inc.,
Ranbaxy Pharmaceuticals Inc., Barr Laboratories, Inc. and Sandoz Inc. based upon the ANDAs filed by each of these companies with the FDA seeking approval to market a generic form
of modafinil. The lawsuits claim infringement of our U.S. Patent No. RE37,516 which covers the pharmaceutical compositions and methods of treatment with the form of modafinil contained in PROVIGIL.
Each of the defendants has asserted defenses and/or counterclaims for non-infringement and patent invalidity, and defendants Teva, Ranbaxy and Mylan have moved to amend their answers and
counterclaims to state inequitable conduct as a defense to our claims (we have opposed these motions and a decision is pending). These lawsuits are currently in the discovery phase; we expect a trial
to begin no earlier than late 2005. We also recently received notice that Carlsbad Technology, Inc. filed an ANDA seeking to market a generic form of modafinil and we have filed suit against
them. Discovery in this action has not yet commenced. While we intend

101

---



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.

In
January 2005, we filed a patent infringement lawsuit in U.S. District Court in Delaware against Barr Laboratories, Inc., based on the ANDA filed by Barr seeking approval
for generic form of ACTIQ.
Neither the ANDA filing nor the lawsuit modifies the existing license grant to Barr, and we do not expect any change in the anticipated date of Barr's entry to the market (absent resolution of the
lawsuit). At the same time we continue to comply in good faith with the FTC Decision and Order requiring us to provide Actiq manufacturing process and other information to Barr to assist its efforts
to manufacture a licensed generic version of Actiq when Barr's license becomes effective. While we intend to vigorously defend the validity of the ACTIQ patents and prevent infringement by Barr until
the license effective date, these efforts will be both expensive and time consuming and, ultimately, may not be successful.

In
September 2004, we announced that we had received subpoenas from the U.S. Attorney's Office in Philadelphia with respect to PROVIGIL, ACTIQ and GABITRIL. This investigation is
ongoing and appears to be focused on our sales and promotional practices. We are cooperating with the investigation and are providing documents to the Government. In addition, we have engaged in
ongoing discussions with the Attorney General in Pennsylvania regarding recent media reports of instances of abuse and diversion of ACTIQ. We have had similar discussions with the Office of the
Connecticut Attorney General; in September 2004, we received a voluntary request for information from the Office of the Connecticut Attorney General asking us to provide information generally
relating to our sales and promotional practices for our U.S. products. We have agreed to comply with this voluntary request. These matters may involve the bringing of criminal charges and fines,
and/or civil penalties. We cannot predict or determine the outcome of these matters or reasonably estimate the amount or range of amounts of any fines or penalties that might result from an adverse
outcome. However, an adverse outcome could have a material adverse effect on our financial position, liquidity and results of operations.

We
are a party to certain other litigation in the ordinary course of our business, including, among others, 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.

Other Commitments

We have committed to make potential future "milestone" payments to third parties as part of our in-licensing and development programs primarily in the
area of research and development agreements. Payments 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. As of December 31, 2004, the
potential milestone and other contingency payments due under current contractual agreements are approximately $196 million.

102

---



15.    STOCKHOLDERS' EQUITY

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 Stock Option
and Compensation Committee of our Board of Directors. We may grant non-qualified stock options under the Cephalon, Inc. 2004 Equity Compensation Plan "2004 Plan" (formerly, the
Cephalon, Inc. 1995 Equity Compensation Plan) and the Cephalon, Inc. 2000 Equity Compensation Plan "2000 Plan," and also may grant incentive stock options and restricted stock awards
under the 2004 Plan. During 2004, our 2004 Plan was amended to increase the number of shares authorized for issuance from 8.4 million shares to 9.7 million shares and to extend the term
of the plan for an additional ten years so that the 2004 Plan will terminate on February 4, 2014. Options and restricted stock awards generally become exercisable or vest ratably over four
years from the grant date, and options must be exercised within ten years of the grant date. At December 31, 2004, the shares available for future stock option grants and restricted stock
grants were 950,335 and 310,609, respectively.

Stock Options

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

2004

2003

2002Shares

Weighted
Average
Exercise
Price

Shares

Weighted
Average
Exercise
Price

Shares

Weighted
Average
Exercise
PriceOutstanding, January 1,

9,881,100

$
49.04

7,576,941

$
48.52

5,607,595

$
45.36Granted

768,950


49.43

2,882,400


47.75

2,497,200


51.88Exercised

(535,446
)

22.51

(299,056
)

16.01

(347,686
)

17.43Cancelled

(450,520
)

53.29

(279,185
)

56.54

(180,168
)

50.98Outstanding, December 31,

9,664,084

$
50.34

9,881,100

$
49.04

7,576,941

$
48.52Exercisable at end of year

5,485,360

$
49.56

4,071,207

$
43.68

2,829,136

$
35.16Weighted average fair value of options granted during the year



$
31.81



$
29.55



$
23.79


103

---



The fair value of the options granted during 2004, 2003 and 2002 were estimated on the date of grant using the Black-Scholes option-pricing model
based on the following assumptions:

2004

2003

2002Risk free interest rate

3.91
%
3.53
%
3.30
%Expected life

6.5 years

6 years

6 yearsExpected volatility

65
%
69
%
43
%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

467,493

3.5

$
9.47

467,493

$
9.47$15.00-$29.99

473,551

4.2


25.02

473,551


25.02$30.00-$50.99

3,492,690

8.7


47.31

881,165


45.66$51.00-$59.99

3,440,625

7.2


52.00

2,327,950


52.07$60.00-$71.96

1,789,725

6.9


70.45

1,335,201


70.519,664,084

7.3

$
50.34

5,485,360

$
49.56


During
2004, 2003, and 2002, we received net proceeds of $12.1 million, $4.5 million, and $5.9 million, respectively, from the exercise of stock options. During
2002, 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.

Restricted Stock

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

2004

2003

2002Outstanding, January 1,


223,175


133,275


268,875Granted


309,400


195,000


Vested


(76,925
)

(99,775
)

(129,900
)Canceled





(5,325
)

(5,700
)Outstanding, December 31,


455,650


223,175


133,275Compensation expense recognized

$
5,372

$
1,394

$
2,828


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

104

---



maximums.
For the periods 2002 through June 30, 2003, our contribution was 100% of the first 6% of employee salaries at a ratio of 50% cash and 50% Cephalon stock. Effective July 1,
2003, our matching contribution is made solely in cash on 100% on the first 6% of employee salaries. We contributed $6.3 million, $4.1 million, and $3.6 million, in either cash or
a combination of cash and common stock to the plan for the years 2004, 2003, and 2002, respectively.

Pro forma Aggregate Conversions or Exercises

At December 31, 2004, 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 29,045,000 shares, or 50%.

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

16.    INCOME TAXES

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

2004

2003

2002United States

$
(28,213
)
$
134,194

$
70,562Foreign


29


(3,880
)

(8,129
)Total

$
(28,184
)
$
130,314

$
62,433


105

---



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

2004

2003

2002Current taxes:United States

$
4,074

$
2,170

$
19,997Foreign


4,675


7,379


13,041State


3,883


3,526


1,06712,632


13,075


34,105Deferred taxes:United States


48,021


36,887


9,224Foreign


(6,681
)

(3,913
)

2,138State


(1,259
)




3,18240,081


32,974


14,544Change in valuation allowance


(7,084
)

407


(161,278
)32,997


33,381


(146,734
)Total

$
45,629

$
46,456

$
(112,629
)


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

2004

2003

2002U.S. Federal statutory rateexpense (benefit)

(35.0
)%
35.0
%
35.0
%In-process research and development

230.6



Meals and entertainment

5.8

0.6

0.9Executive compensation

3.8

1.3

1.4Other deductible expenses

(6.1
)
(0.5
)
Revision of prior years' estimates

6.4

0.5

State income taxes, net of U.S. federal tax benefit

6.1

1.8

1.7Tax rate differential on foreign income

1.8

(4.5
)
13.6Change in valuation allowance

(25.1
)
0.3

(230.7
)Research and development

(42.2
)


(5.8
)Alternative minimum tax

13.5



Other

2.3

1.2

3.5Consolidated effective tax rate

161.9
%
35.7
%
(180.4
)%


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 or increase the deferred tax asset until we begin paying U.S. federal tax. Tax benefits of $8.0 million and $0.9 million associated with the exercise of employee stock options
were recorded to additional paid-in capital in 2004 and 2003, respectively.

106

---



Net
unremitted deficit of foreign subsidiaries at December 31, 2004 and December 31, 2003 amounted to approximately $46.7 million and $38.5 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 our
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:

2004

2003

2002Deferred tax asset:Net operating loss carryforwards

$
54,597

$
93,884

$
120,610Original issue discount


74,546


84,315


Capitalized research and development expenditures


31,711


42,563


52,479Unrealized profit in inventory


25,950


8,714


2,783Research and development tax credits


37,110


21,358


17,354Acquired product rights and intangible assets


8,173


8,495


11,921Reserves and accrued expenses


8,285


3,915


2,297Alternative minimum tax credit carryforwards


5,524


1,693


Deferred revenue


943


757


1,028Accounts receivable discounts and allowance


13,794


5,238


3,775Other, net





4,221


2,593Total deferred tax assets


260,633


275,153


214,840Valuation allowance


(49,895
)

(48,675
)

(44,768
)Net deferred tax assets

$
210,738

$
226,478

$
170,072Deferred tax liabilities:Acquired intangible assets from Group Lafon acquisition

$
46,094

$
44,916

$
52,666Acquired intangible assets from CIMA LABS acquisition


40,895





Deferred compensation


2,283





Fixed assets


4,032





Other


796


749


173Total deferred tax liabilities

$
94,100

$
45,665

$
52,839


107

---



At December 31, 2004, we had gross operating loss carryforwards for U.S. federal income tax purposes of approximately $109.0 million and apportioned state gross operating
losses of approximately $408.9 million that expire in varying years starting in 2005. We also have international gross operating losses of approximately $33.9 million of which
$14.6 million can be carried back while $19.3 million will be carried forward 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 and net operating loss carryforwards acquired in business
combinations. Federal research tax credits of $33.1 million are available to offset future tax liabilities and expire starting in 2005. The amount of U.S. federal net operating loss
carryforwards that 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 $49.9 million at December 31, 2004 relates to certain tax credits,
international and state operating loss carryforwards and other temporary differences that we believe are not likely to be recovered.

17.    SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)

2004 Quarter EndedDecember 31,

September 30,

June 30,

March 31,*RestatedStatement of Operations Data:Net sales

$
281,400

$
253,594

$
234,990

$
210,391Gross profit


251,026


219,812


205,150


184,414Net income (loss) applicable to common shares

$
78,105

$
(165,246
)
$
(8,383
)
$
21,711Basic (loss) income per common share **

$
1.35

$
(2.94
)
$
(0.15
)
$
0.38Weighted average number of shares outstanding **


57,754


56,178


56,110


55,905Diluted income per common share **

$
1.23

$
(2.94
)
$
(0.15
)
$
0.36Weighted average number of shares outstanding-assuming dilution **


64,889


56,178


56,110


65,006


108

---



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 **

$
0.55

$
0.40

$
0.32

$
0.22Weighted average number of shares outstanding **


55,706


55,573


55,504


55,452Diluted income per common share **

$
0.51

$
0.37

$
0.30

$
0.21Weighted average number of shares outstanding-assuming dilution **


64,162


64,559


64,436


57,090


---

18.    SEGMENT AND SUBSIDIARY INFORMATION

Although we have significant sales, manufacturing, and research operations conducted by several subsidiaries located throughout the United States and Europe,
including our latest acquisition of CIMA LABS, Cephalon management makes operating decisions and assesses performance based on a single biopharmaceutical segment. CIMA LABS' operations consist of
contract manufacturing and research and development of pharmaceutical products which we have included in our single operational segment for reporting purposes.

109

---



As
required by SFAS 131, "Disclosure about Segments of an Enterprise and Related Information," revenue and long-lived asset information summarized by geographic region
is provided below:

Revenues
for the year ended December 31:

2004

2003United
States

Europe

Total

United
States

Europe

TotalPROVIGIL sales

$
406,238

$
33,429

$
439,667

$
264,324

$
26,141

$
290,465ACTIQ sales


337,072


7,925


344,997


234,111


3,356


237,467GABITRIL sales


87,349


6,815


94,164


57,774


5,925


63,699Other sales


13,270


88,277


101,547





93,619


93,619Other revenue


28,749


6,301


35,050


20,118


9,439


29,557Total

$
872,678

$
142,747

$
1,015,425

$
576,327

$
138,480

$
714,807


Long-lived assets:

At December 31,2004

2003United States

$
677,097

$
474,112Europe


583,059


537,614Total

$
1,260,156

$
1,011,726


110

---





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, 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) Management's Annual Report on Internal Control over Financial Reporting

Management's Report on Internal Control over Financial Reporting is included in Part II, Item 8 of this Annual Report on Form 10-K and
incorporated into this Item 9A by reference.

(c) Attestation Report of the Registered Public Accounting Firm

Management's assessment of the effectiveness of internal control over financial reporting as of December 31, 2004 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report included in Part II, Item 8 of this Annual Report on Form 10-K and
incorporated into this Item 9A by reference.

(d) 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.

ITEM 9B.    OTHER INFORMATION

Not applicable.

111

---



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 2005 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 2005 annual meeting of stockholders.

Code of Ethics

The information concerning our Code of Ethics is incorporated by reference to the information contained under the caption "Governance of the
CompanyDoes the Company have a 'Code of Ethics'?" in our definitive proxy statement related to the 2005 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 2005 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 2005 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 2005 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 2005 annual meeting of
stockholders.

112

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PART IV

ITEM 15.    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(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
|------------------------------------------------
|                                                
|                                                
|                                                
|                                                
|                                                
|                                                
|                                                
|2.    FINANCIAL STATEMENT SCHEDULES             
|                                                

Schedules,
other than those listed above, are omitted because they are not applicable or are not required, or because the required information is included in the consolidated financial
statements or notes thereto.

(b) 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.                                                            
|            |  |                                                                                                                                                                                                                        

113

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|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.                                                                                                                                                                                                          
|4.5    |  | 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.                                                                                                                                                                                                                                                                                          
|4.6(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 period 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.
|4.7(a) |  | Indenture dated as of December 20, 2004 between the Registrant and U.S. Bank National Association, filed as Exhibit 4.l to the Company's Current Report on Form 8-K dated December 21, 2004.                                                                                                                                                                                                                                                                    
|4.7(b) |  | Registration Rights Agreement, dated as of December 20, 2004, between Cephalon, Inc. and U.S Bank National Association, filed as Exhibit 4.2 to the Company's Current Report on Form 8-K dated
December 21, 2004.                                                                                                                                                                                                                                               
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

114

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|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. 1995 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.                               
|10.3(c) |  | Cephalon, Inc. Amendment to 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.
|10.3(e) |  | Amendment No. 2004-1 to the Cephalon, Inc. 1995 Equity Compensation Plan, effective as of May 13, 2004, filed as Exhibit 99.1 to the Company's Registration Statement on Form S-8 (Registration
No. 333-118611) filed on August 27, 2004.                          
|10.3(f) |  | Cephalon, Inc. 2000 Equity Compensation PlanForm of Employee Non-Qualified Stock Option, filed as Exhibit 10.3(a) to the Company's Quarterly Report on Form 10-Q for the period ended September 30,
2004.                                                         
|10.3(g) |  | Cephalon, Inc. 2004 Equity Compensation PlanEmployee Restricted Stock Grant Term Sheet, filed as Exhibit 99.1 to the Company's Current Report on Form 8-K dated December 16, 2004.                                                                                
|10.3(h) |  | Cephalon, Inc. 2004 Equity Compensation PlanForm of Non-Employee Director Non-Qualified Stock Option, filed as Exhibit 10.3(c) to the Company's Quarterly Report on Form 10-Q for the period ended
September 30, 2004.                                            
|         |  |                                                                                                                                                                                                                                                                    

115

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|10.3(i) |  | Cephalon, Inc. 2004 Equity Compensation PlanForm of Employee Non-Qualified Stock Option, filed as Exhibit 10.3(d) to the Company's Quarterly Report on Form 10-Q for the period ended September 30,
2004.                                                                                                                                          
|-------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.3(j) |  | Cephalon, Inc. 2004 Equity Compensation PlanForm of Employee Incentive Stock Option, filed as Exhibit 10.3(e) to the Company's Quarterly Report on Form 10-Q for the period ended September 30,
2004.                                                                                                                                              
|*10.4   |  | Summary of Agreement for Payment of Services between Cephalon, Inc. and its Board of Directors, as approved May 13, 2004.                                                                                                                                                                                                                           
|10.5(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.                                                           
|10.5(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.                                                                                                      
|10.5(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)                                                                                                    
|10.6(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.
|10.6(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.                                                                        
|10.6(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.                                                                 
|10.6(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.                                                                                                   
|10.6(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.                                                                                                          
|10.6(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.                                                                           
|10.7     |  | 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)                                                                                  
|         |  |                                                                                                                                                                                                                                                                                                                                                     

116

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|10.8(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)                            
|-------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.8(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(c) |  | First Amendment to Toll Manufacturing and Packaging Agreement by and between Abbott Laboratories and Cephalon, Inc. dated October 1, 2004. (2)                                                                                                       
|10.9(a)  |  | 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(b)  |  | Clarification Letter dated July 1, 1999 between Cephalon, Inc. and H. Lundbeck A/S, filed as Exhibit 10.1(a) to the Company's Quarterly Report on Form 10-Q for the period ended June 30,
2004.                                                      
|10.9(c)  |  | Amendment No. 1 to the Joint Research, Development and License Agreement between Cephalon, Inc. and H. Lundbeck A/S, dated October 1999, filed as Exhibit 10.1(b) to the Company's Quarterly Report on
Form 10-Q for the period ended June 30, 2004. 
|10.9(d)  |  | Clarification letter dated March 16, 2000 between Cephalon, Inc. and H. Lundbeck A/S, filed as Exhibit 10.1(c) to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2004.                                                    
|10.9(e)  |  | Marketing and License Agreement between Cephalon, Inc., Kyowa Hakko Kogyo Co., Ltd., and H. Lundbeck A/S, dated April 10, 2000, filed as Exhibit 10.4(d) to the Company's Quarterly Report on Form 10-Q for the
period ended June 30, 2004. (1)      
|10.9(f)  |  | Amendment No. 2 to the Joint Research, Development and License Agreement between Cephalon, Inc. and H. Lundbeck A/S, dated June 13, 2001, filed as Exhibit 10.8(e) to the Company's Quarterly Report on
Form 10-Q for the period ended June 30, 2004.
|10.9(g)  |  | Amendment No. 3 to the Joint Research, Development and License Agreement between Cephalon, Inc. and H. Lundbeck A/S, dated June 10, 2002, filed as Exhibit 10.8(f) to the Company's Quarterly Report on
Form 10-Q for the period ended June 30, 2004.
|10.10(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)    
|10.10(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)                                            
|10.10(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)                                      
|10.10(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)                                       
|10.11(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) 
|         |  |                                                                                                                                                                                                                                                      

117

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|10.11(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.
|-------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.11(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)                                                                                                                                                                
|10.11(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)                                                                                                                     
|10.12(a) |  | 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.                                                                                                                                                                      
|10.12(b) |  | Amendment No. 1 to Wiley Post Plaza Lease between Anesta Corp. and Asset Management Services dated October 26, 1996, filed as Exhibit 10.11(b) to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2003.                                                                                                                                                                     
|10.12(c) |  | Amendment No. 2 to Wiley Post Plaza Lease between Anesta Corp. and Asset Management Services dated January 7, 1997, filed as Exhibit 10.11(c) to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2003.                                                                                                                                                                      
|10.12(d) |  | Amendment No. 3 to Wiley Post Plaza Lease between Anesta Corp. and Asset Management Services dated September 30, 1998, filed as Exhibit 10.11(d) to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2003.                                                                                                                                                                   
|10.12(e) |  | Amendment No. 4 to Wiley Post Plaza Lease between Anesta Corp. and Asset Management Services dated February 29, 2000, filed as Exhibit 10.11(e) to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2003.                                                                                                                                                                    
|10.12(f) |  | Amendment No. 5 to Wiley Post Plaza Lease between Anesta Corp. and Asset Management Services dated July 20, 2001, filed as Exhibit 10.11(f) to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2003.                                                                                                                                                                        
|10.12(g) |  | Amendment No. 6 to Wiley Post Plaza Lease between Anesta Corp. and Asset Management Services dated July 20, 2001, filed as Exhibit 10.11(g) to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2003.                                                                                                                                                                        
|10.12(h) |  | Amendment No. 7 to Wiley Post Plaza Lease between Anesta Corp. and Asset Management Services dated July 20, 2001, filed as Exhibit 10.11(h) to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2003.                                                                                                                                                                        
|10.12(i) |  | Amendment No. 8 to Wiley Post Plaza Lease between Anesta Corp. and Asset Management Services dated October 14, 2002, filed as Exhibit 10.11(i) to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2003.                                                                                                                                                                     
|10.12(j) |  | Amendment No. 9 to Wiley Post Plaza Lease between Anesta Corp. and Asset Management Services dated May 15, 2003, filed as Exhibit 10.11(j) to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2003. (1)                                                                                                                                                                     
|10.12(k) |  | Amendment No.10 to Wiley Post Plaza Lease between Anesta Corp. and Wiley Post Plaza, L.C. dated June 24, 2004, filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the period ended
June 30, 2004. (1)                                                                                                                                                                                 
|         |  |                                                                                                                                                                                                                                                                                                                                                                                                             

118

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|10.13(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)                                                                                                  
|-------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.13(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)                                                                              
|10.13(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)                                                                               
|10.13(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)                                                                                                                        
|10.13(e) |  | Amendment No. 4 to Toll Manufacturing and Packaging Agreement, dated April 28, 2003 between Cephalon, Inc. and DSM Pharmaceuticals, Inc. (1)                                                                                                                                                                                                                                           
|10.13(f) |  | Amendment No. 5 to Toll Manufacturing and Packaging Agreement, dated August 15, 2003 between Cephalon, Inc. and DSM Pharmaceuticals, Inc. (1)                                                                                                                                                                                                                                          
|10.14(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.                                                                                  
|10.14(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.
|10.14(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.                                                                                                                                                    
|10.15    |  | Manufacturing Services Agreement dated January 1, 2003 between Patheon, Inc. and Cephalon, Inc., filed as Exhibit 10.15 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
 2003 (1)                                                                                                                                                                   
|10.16(a) |  | License and Supply Agreement dated July 7, 2004 between Barr Laboratories, Inc. and Cephalon, Inc., filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the period ended
September 30, 2004 (1)                                                                                                                                                                   
|10.16(b) |  | Amendment No. 1 to the License and Supply Agreement between Barr Laboratories, Inc. and Cephalon, Inc. dated July 9, 2004, filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the
period ended September 30, 2004.                                                                                                                                               
|10.17    |  | Decision and Order of the Federal Trade Commission in the matter of Cephalon, Inc. and CIMA LABS INC. dated August 9, 2004, filed as Exhibit 10.1(c) to the Company's Quarterly Report on Form 10-Q for the
period ended September 30, 2004.                                                                                                                                           
|         |  |                                                                                                                                                                                                                                                                                                                                                                                        

119

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|10.18(a)  |  | Five Year Warrant, dated June 6, 2003, between the Company and Credit Suisse First Boston International filed as Exhibit 99.d(3) to the Company's Schedule TO-I dated November 16, 2004.                       
|--------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.18(b)  |  | Seven Year Warrant, dated June 6, 2003, between the Company and Credit Suisse First Boston International filed as Exhibit 99.d(4) to the Company's Schedule TO-I dated November 16, 2004.                      
|10.18(c)  |  | Five Year Convertible Note Hedge, dated December 3, 2004, between the Company and Credit Suisse First Boston International, filed as Exhibit 99.d(5) to the Company's Schedule TO-I/A dated December 14,
2004. 
|10.18(d)  |  | Seven Year Convertible Note Hedge, dated December 3, 2004, between the Company and Credit Suisse First Boston International, filed as Exhibit 99.d(6) to the Company's Schedule TO-I/A dated December 14,
2004.
|*10.19    |  | Sale and Purchase Agreement dated as of December 8, 2004 by and between Sanofi-Synthelabo France and Cephalon France. (2)                                                                                      
|*10.20(a) |  | Office Lease between The Multi-Employer Property Trust and Cephalon, Inc. dated January 14, 2004. (2)                                                                                                          
|*10.20(b) |  | Consent to Sublease between The Multi-Employer Property Trust, Systems & Computer Technology Corporation and Cephalon, Inc. dated April 2, 2004. (2)                                                           
|*12.1     |  | Statement Regarding Computation of Ratios                                                                                                                                                                      
|*21       |  | List of Subsidiaries                                                                                                                                                                                           
|*23.1     |  | Consent of PricewaterhouseCoopers 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.                                                                                        

---

PROVIGIL,
ACTIQ, GABITRIL, ATTENACE, NUVIGIL, ORAVESCENT, SPASFON, FONZYLANE, PROXALYOC, PARALYOC, LOPERAMIDE LYOC and MYOTROPHIN are trademarks or registered trademarks of Cephalon, Inc. or
its subsidiaries. All other brands and names used herein are trademarks of their respective owners.

120

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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) |  | Other
Additions
(Deductions)(2) |        | Balance
at End of
the Year
|---------------------------------------------------- | ---- | -------------------------------- | - | ------------------------- |  | ------------------------------- | ------ | --------------------------
|Reserve for sales discounts, returns and allowances: |      |                                  |   |                           |  |                                 |        |                           
|                                                     | 2004 |                                  | $ | 8,774                     |  | $                               | 29,958 |                           
|                                                     | 2003 |                                  | $ | 5,101                     |  | $                               | 19,417 |                           
|                                                     | 2002 |                                  | $ | 2,331                     |  | $                               | 12,243 |                           
|Reserve for inventories:                             |      |                                  |   |                           |  |                                 |        |                           
|                                                     | 2004 |                                  | $ | 3,233                     |  | $                               | (1,758 | )                         
|                                                     | 2003 |                                  | $ | 3,797                     |  | $                               | 615    |                           
|                                                     | 2002 |                                  | $ | 1,188                     |  | $                               | 2,609  |                           

---

121

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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 15, 2005

| |  | 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 15, 2005
|/s/J. KEVIN BUCHIJ. Kevin Buchi                |  | Sr. Vice President and Chief Financial Officer (Principal financial and accounting officer) |  | March 15, 2005
|/s/WILLIAM P. EGANWilliam P. Egan              |  | Director                                                                                    |  | March 15, 2005
|/s/ROBERT J. FEENEYRobert J. Feeney, Ph.D.     |  | Director                                                                                    |  | March 15, 2005
|/s/MARTYN D. GREENACREMartyn D. Greenacre      |  | Director                                                                                    |  | March 15, 2005
|/s/CHARLES A. SANDERSCharles A. Sanders, M.D.  |  | Director                                                                                    |  | March 15, 2005
|/s/GAIL R. WILENSKYGail R. Wilensky, Ph.D.     |  | Director                                                                                    |  | March 15, 2005
|/s/DENNIS L. WINGERDennis L. Winger            |  | Director                                                                                    |  | March 15, 2005
|/s/HORST WITZELHorst Witzel, Dr.-Ing.          |  | Director                                                                                    |  | March 15, 2005

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