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



FORM 10-K

(Mark One)ý

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2009oro

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from            to


Commission File Number 000-19119

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 Road
P.O. Box 4011Frazer, Pennsylvania

19355(Address of Principal Executive Offices)

(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 registeredCommon Stock, par value $0.01 per share

NASDAQ Global Select Market


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

None(Title of Class)



Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes ý    No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o    No ý

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such
files). Yes o    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. ý

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.:

Large accelerated filer ý

Accelerated filer o

Non-accelerated filer o (Do not check if a
smaller reporting company)

Smaller reporting company o


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

The aggregate market value of the voting stock held by non-affiliates of the registrant, as of June 30, 2009, was approximately
$2.6 billion. Such aggregate market value was computed by reference to the closing price of the Common Stock as reported on the NASDAQ Global Select Market on June 30, 2009. 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, 2009.

The
number of shares of the registrant's Common Stock outstanding as of February 8, 2010 was 74,930,978.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive proxy statement for its 2010 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



PageCautionary Note Regarding Forward-Looking Statements


iiPART IItem 1.

Business


1Item 1A.

Risk Factors


26Item 1B.

Unresolved Staff Comments


40Item 2.

Properties


40Item 3.

Legal Proceedings


41Item 4.

Submission of Matters to a Vote of Security Holders


42PART IIItem 5.

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities


45Item 6.

Selected Financial Data


48Item 7.

Management's Discussion and Analysis of Financial Condition and Results of
Operations


49Item 7A.

Quantitative and Qualitative Disclosures About Market Risk


85Item 8.

Financial Statements and Supplementary Data


86Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure


151Item 9A.

Controls and Procedures


151Item 9B.

Other Information


151PART IIIItem 10.

Directors, Executive Officers and Corporate Governance


153Item 11.

Executive Compensation


153Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters


153Item 13.

Certain Relationships and Related Transactions, and Director
Independence


153Item 14.

Principal Accountant Fees and Services


153PART IVItem 15.

Exhibits and Financial Statement Schedules


154SIGNATURES


166


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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 or incorporated herein by reference constitute our expectations or forecasts of future events as of the date this report was filed with the
Securities and Exchange Commission 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:



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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:



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 Part I, Item 1A of this Annual Report on Form 10-K. This discussion
is permitted by the Private Securities Litigation Reform Act of 1995.

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PART I

ITEM 1.    BUSINESS

Overview

Cephalon, Inc. is an international biopharmaceutical company dedicated to the discovery, development and commercialization of
innovative products in four core therapeutic areas: central nervous system ("CNS"), pain, oncology and inflammatory disease. In addition to conducting an active research and development program, we
market seven proprietary products in the United States and numerous products in various countries throughout Europe and the world. Consistent with our core therapeutic areas, we have aligned our
approximately 775-person U.S. field sales and sales management teams by area. We have a sales and marketing organization numbering approximately 335 persons that supports our presence in
nearly 50 countries in Europe, the Middle East and Africa and have a strong presence in the five key European pharmaceutical markets: France, Germany, Italy, Spain and the United Kingdom, and
affiliates in Benelux and Poland. For the year ended December 31, 2009, our total revenues and net income attributable to Cephalon, Inc. were $2.2 billion and
$342.6 million, respectively. Our revenues from U.S. and European operations are detailed in Note 19 to our Consolidated Financial Statements included in Part II, Item 8 of
this Annual Report on Form 10-K.

On
January 31, 2010, we entered into a Share Purchase Agreement with Mepha Holding AG pursuant to which we agreed to purchase all of the issued share capital of Mepha AG
("Mepha"), a privately-held, Swiss-based pharmaceutical company, for CHF 622.5 million (or approximately US$590 million) in cash, subject to certain closing
adjustments. The closing of the transaction is subject to customary closing conditions, including receipt of the applicable antitrust approvals. The transaction is expected to close in the second
quarter of 2010. Founded in 1949, Mepha markets branded and non-branded generics as well as specialty products in more than 50 countries. Mepha develops and manufactures its products in
Aesch/Basel, Switzerland with a focus on Swiss-quality standards. Mepha's research and development focuses on the development of improved and innovative generics providing additional benefits for
patients. Furthermore, Mepha is active in malaria research offering innovative life-saving therapies for adults and children. Mepha is the leading company on the Swiss generic market, with
more than 120 products in over 500 packaging forms. Mepha has operational subsidiaries in Portugal and the Baltics. Through partnerships, Mepha markets its products in other European countries, in the
Middle East, Africa, South and Central America as well as in Asia. Mepha employs approximately 1,000 people worldwide, 500 of them in Switzerland.

We
have recently completed certain transactions designed to build a portfolio of potential products targeted to treat inflammatory diseases. In 2009, we (i) acquired Arana
Therapeutics Limited, an Australian company, whose lead domain antibody compound, CEP-37247, is in Phase II development for patients with certain inflammatory diseases;
(ii) acquired an exclusive, worldwide license to the ImmuPharma investigational compound, LUPUZOR, which is in Phase IIb development for the treatment of systemic lupus
erythematosus; (iii) purchased an option to acquire privately-held Ception Therapeutics, Inc., whose lead humanized monoclonal antibody compound, reslizumab, is in
Phase II development for eosinophilic asthma; and (iv) purchased an option to acquire privately-held BioAssets Development Corporation, which has an intellectual property
estate around use of TNF inhibitors for sciatic pain in patients with intervertebral disk herniation, as well as other spinal disorders, which intellectual property we expect to utilize to develop
CEP-37247 as a possible treatment of sciatica. For more information regarding
these transactions, please see Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of OperationsRecent Acquisitions and Transactions."

Our
most significant products are our wakefulness products, PROVIGIL® (modafinil) Tablets [C-IV] and NUVIGIL® (armodafinil)
Tablets [C-IV], which comprised 51% of our total consolidated net sales for the year ended December 31, 2009, of which 94% was in the U.S. market. For the
year ended December 31, 2009, combined consolidated net sales of PROVIGIL and NUVIGIL increased

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11%
over the year ended December 31, 2008. In June 2007, we secured final U.S. Food and Drug Administration (the "FDA") approval of the NUVIGIL indication for the treatment of excessive
sleepiness associated with narcolepsy, obstructive sleep apnea/hypopnea syndrome ("OSA/HS") and shift work sleep disorder ("SWSD"). We launched NUVIGIL on June 1, 2009. In March 2009, we
announced positive results from a Phase II clinical trial of NUVIGIL as adjunctive therapy for treating major depressive disorder in adults with bipolar I disorder and our plan to advance to
Phase III trials for this indication. In April 2009, we announced positive results from a Phase III clinical trial of NUVIGIL as a treatment for excessive sleepiness associated with jet
lag disorder and filed a supplemental new drug application (an "sNDA") for this indication with the FDA in June 2009. We expect a response from the FDA by March 29, 2010. In May 2009, we
announced positive results from a Phase IV study of NUVIGIL in obstructive sleep apnea and co-morbid major depressive disorder requiring ongoing antidepressant therapy.

On
a combined basis, our two next most significant products are FENTORA® (fentanyl buccal tablet) [C-II] and ACTIQ® (oral
transmucosal fentanyl citrate) [C-II] (including our generic version of ACTIQ ("generic OTFC")). Together, these products comprise 17% of our total consolidated net
sales for the year ended December 31, 2009, of which 80% was in the U.S. market. In October 2006, we launched FENTORA in the United States. FENTORA is indicated for the management of
breakthrough pain in patients with cancer who are already receiving and are tolerant to opioid therapy for their underlying persistent cancer pain. In April 2008, we received marketing authorization
from the European Commission for EFFENTORA for the same indication as FENTORA and launched the product in certain European countries in January 2009. We have focused our clinical strategy
for FENTORA on studying the product in opioid-tolerant patients with breakthrough pain associated with chronic pain conditions, such as neuropathic pain and back pain. In November 2007, we submitted
an sNDA to the FDA seeking approval to market FENTORA for the management of breakthrough pain in opioid tolerant patients with chronic pain conditions. In early April 2009, we submitted a Risk
Evaluation and Mitigation Strategy (the "REMS Program") with respect to FENTORA. Subject to the timing and nature of further discussions with the FDA, we expect to receive a response from the FDA
regarding the FENTORA REMS Program by the middle of 2010. For more information regarding our FENTORA REMS Program, please see "PainFENTORA" below. With respect to ACTIQ, its sales have
been meaningfully eroded by the launch of FENTORA and by generic OTFC products sold since June 2006 by Barr Laboratories, Inc. and by us through our sales agent, Watson
Pharmaceuticals, Inc. We expect this erosion will continue. In September 2009, our obligation to supply Barr with generic OTFC ended pursuant to the terms of a license and supply agreement we
entered into with Barr in July 2004. In
October 2009, we understand that the FDA approved ANDAs by Barr and by Covidien to market and sell generic OTFC. We submitted our REMS Program for ACTIQ and generic OTFC in early April 2009. We expect
to receive a response from the FDA by the middle of 2010.

In
March 2008, the FDA granted an orphan drug approval for TREANDA® (bendamustine hydrochloride) for the treatment of patients with chronic lymphocytic leukemia
("CLL") and, in April 2008, the product was launched. In October 2008, we received FDA approval of TREANDA for treatment of patients with indolent B-cell
non-Hodgkin's lymphoma ("NHL") who have progressed during or within six months of treatment with rituximab or a rituximab-containing regimen. TREANDA comprised 10% of our
total consolidated net sales for the year ended December 31, 2009, all of which were in the U.S. market. While not a currently approved indication by the FDA, TREANDA was recently listed in the
2010 NCCN clinical practice guidelines as a front-line treatment for NHL. We believe the guidelines listing was the result of an independent Phase III clinical study conducted by
the German Study Group for Indolent Lymphomas ("StiL Group") in Giessen, Germany. The StiL Group's study results announced in December 2009 indicated better tolerability and more than a
20-month improvement in median progression free survival in patients treated with TREANDA in combination with rituximab versus cyclophosphamide, doxorubicin, vincristine, and prednisolone
(commonly known as CHOP) in combination with rituximab for the first-line treatment of patients with advanced

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follicular,
indolent, and mantle cell lymphomas, each of which is not currently an FDA-approved indication.

In
August 2007, we acquired exclusive North American rights to AMRIX® (cyclobenzaprine hydrochloride extended-release capsules) from E. Claiborne Robins Company, Inc.,
a privately-held company d/b/a ECR Pharmaceuticals ("ECR"). Two dosage strengths of AMRIX (15 mg and 30 mg) were approved in February 2007 by the FDA for short-term use as an
adjunct to rest and physical therapy for relief of muscle spasm associated with acute, painful musculoskeletal conditions. We made the product available in the United States in October 2007 and
commenced a full U.S. launch in November 2007. In June 2008, the U.S. Patent and Trademark Office (the "PTO") issued a pharmaceutical formulation patent for AMRIX, which expires in February 2025.

In
late 2005 and early 2006, we entered into PROVIGIL patent settlement agreements with certain generic pharmaceutical companies. As part of these separate settlements, we agreed to
grant to each of these parties a non-exclusive royalty-bearing license to market and sell a generic version of PROVIGIL in the United States, effective in April 2012, subject to applicable
regulatory considerations. Under the agreements, the licenses could become effective prior to April 2012 only if a generic version of PROVIGIL is sold in the United States prior to this date. We filed
each of the settlements with both the U.S. Federal Trade Commission (the "FTC") and the Antitrust Division of the U.S. Department of Justice (the "DOJ") as required by the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (the "Medicare Modernization Act"). The FTC conducted an investigation of each of the PROVIGIL settlements and, in February 2008, filed suit against us
challenging the validity of the settlements and related agreements. The complaint alleges a violation of Section 5(a) of the Federal Trade Commission Act and seeks to permanently enjoin us from
maintaining or enforcing these agreements and from engaging in similar conduct in the future. We believe the FTC complaint is without merit and we have filed a motion to dismiss the case. While we
intend to vigorously defend ourselves and the propriety of the settlement agreements, these efforts will be both expensive and time consuming and, ultimately, due to the nature of litigation, there
can be no assurance that these efforts will be successful. For more information regarding our PROVIGIL settlements and related litigation, please see Note 16 to our Consolidated Financial
Statements included in Part II, Item 8 of this Annual Report on Form 10-K, which is incorporated herein by reference.

In
September 2008, as part of our settlement with the U.S. government regarding their investigation of our promotional practices with respect to ACTIQ, GABITRIL and PROVIGIL, we entered
into a five-year Corporate Integrity Agreement (the "CIA") with the Office of Inspector General of the Department of Health and Human Services. The CIA provides criteria for establishing
and maintaining compliance with federal laws governing the marketing and promotion of our products. We are also subject to periodic reporting and certification requirements attesting that the
provisions of the CIA are being implemented and followed.

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 particular, as a biopharmaceutical company, our future success is highly dependent on obtaining and
maintaining patent protection or regulatory exclusivity for our products and technology. In that regard, we are currently engaged in lawsuits with respect to generic company challenges to the validity
and/or enforceability of our patents covering AMRIX, FENTORA and NUVIGIL. We intend to vigorously defend the validity, and prevent infringement, of our patents. The loss of patent protection or
regulatory exclusivity on any of our existing products, whether by third-party challenge, invalidation, circumvention, license or expiration, could materially impact our results of operations. For
more information regarding the legal proceedings described in this Overview and others, please see Note 16 to our Consolidated Financial Statements included in Part II, Item 8 of
this Annual Report on Form 10-K, which is incorporated herein by reference.

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We
have significant discovery research programs focused on developing therapeutics to treat cancers. Our technology principally focuses on an understanding of kinases and proteases and
the role they play in cellular integrity survival and proliferation. We have coupled this knowledge with a library of novel, small, orally-active synthetic molecules that inhibit the activities of
specific kinases. We also have reinforced our commitment to the treatment of inflammatory diseases through the use of biologics. Our entry into the biologics space combined with our efforts with our
small molecule products creates opportunities to address unmet medical needs. We also work with our collaborative partners to provide a more diverse therapeutic breadth and depth to our research
efforts.

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, and to
successfully develop or acquire and commercialize new product candidates.



We
are a Delaware corporation with our principal executive offices located at 41 Moores Road, P.O. Box 4011, Frazer, Pennsylvania 19355. Our telephone number is
(610) 344-0200 and our web site address ishttp://www.cephalon.com. Our research and development headquarters are in West Chester,
Pennsylvania and we also have offices in Wilmington, Delaware, Salt Lake City, Utah, suburban Minneapolis-St. Paul, Minnesota, France, the United Kingdom, Ireland, Denmark, Germany,
Italy, the Netherlands, Poland, Spain, Switzerland, Australia, Hong Kong and certain other countries. We have manufacturing facilities in France for the production of modafinil, which is used in the
production of PROVIGIL. We also have manufacturing facilities in Salt Lake City, Utah, for the production of FENTORA, EFFENTORA, ACTIQ and generic OTFC 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 Information 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.



CENTRAL NERVOUS SYSTEM DISORDERS

Our CNS disorders portfolio includes three FDA-approved and marketed products: NUVIGIL, for improving wakefulness in
patients with excessive sleepiness associated with narcolepsy, OSA/HS and SWSD; PROVIGIL, for the same labeled indications as NUVIGIL; and GABITRIL, for use as adjunctive therapy in the treatment of
partial seizures in epileptic patients.

Modafinil Products



An important focus of our modafinil strategy has been the development of our next-generation compound, NUVIGIL, a
single-isomer formulation of modafinil. In June 2007, we received final FDA approval to market NUVIGIL for the treatment of excessive sleepiness associated with narcolepsy, OSA/HS and SWSD. The
product is protected by a composition of matter patent that will expire on December 18, 2023 and covers a novel polymorphic form of armodafinil, the active pharmaceutical ingredient in NUVIGIL.
We launched NUVIGIL on June 1, 2009. In March 2009, we announced positive results from a Phase II clinical trial of NUVIGIL as adjunctive therapy for treating major depressive disorder
in adults with bipolar I disorder and our plan to advance to Phase III trials for this

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indication.
In April 2009, we announced positive results from a Phase III clinical trial of NUVIGIL as a treatment for excessive sleepiness associated with jet lag disorder and filed a
supplemental new drug application (an "sNDA") for this indication with the FDA in June 2009. We expect a response from the FDA by March 29, 2010. In May 2009, we announced positive results from
a Phase IV study of NUVIGIL in obstructive sleep apnea and comorbid major depressive disorder requiring ongoing antidepressant therapy.

We
also have ongoing clinical studies for NUVIGIL focused on adjunctive treatment to atypical anti-psychotics in schizophrenia patients, adjunctive treatment for
bi-polar
depression and excessive sleepiness associated with traumatic brain injury. In clinical studies, NUVIGIL was generally well-tolerated. The most common side effects were mainly mild to
moderate in severity and included nausea, headaches, dizziness, diarrhea, decreased appetite and upset stomach.



Modafinil, the active ingredient in PROVIGIL, is the first in a new class of wake-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. 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. In clinical studies, PROVIGIL was 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, we also have approval to market modafinil to treat excessive daytime sleepiness in patients with OSA/HS and/or SWSD.

Indicated Diseases/Disorders

Narcolepsy: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. 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.

Obstructive Sleep Apnea/Hypopnea Syndrome (OSA/HS):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 caused by the relaxation and collapse of the soft tissue in the back of the
throat during sleep. Continuous positive airway pressure ("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 and NUVIGIL may be an appropriate adjunctive treatment.

Shift Work Sleep Disorder (SWSD):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. SWSD particularly affects those who
frequently rotate shifts or work at night, which is contrary to the body's natural circadian rhythms.

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We own various U.S. and foreign patent rights that expire between 2014 and 2015 and cover pharmaceutical compositions and uses of
modafinil, including the commercial formulation of PROVIGIL. We also hold rights to other patents and patent applications directed to polymorphs, manufacturing processes, formulations, and uses of
modafinil and to next-generation modafinil products. We also own rights to PROVIGIL and other various trademarks for our pharmaceutical products containing the active drug substance
modafinil. Ultimately, these patents and patents related to our other products and product candidates might be found invalid if challenged by a third party, or a potential competitor could develop a
competing product that avoids infringement of these patents.

With
respect to NUVIGIL, we successfully obtained issuance of a U.S. patent in November 2006 claiming the Form I polymorph of armodafinil, the active drug substance in NUVIGIL.
This patent is currently set to expire in 2023. Foreign patent applications directed to the Form I polymorph of armodafinil and its use in treating sleep disorders are pending in Europe and
elsewhere. In addition, the particle size patent described above for PROVIGIL also covers NUVIGIL. We also received a three year period of marketing exclusivity (until early 2010). We also hold rights
to other patent applications directed to other polymorphic forms of armodafinil and to the manufacturing process related to armodafinil. We hold rights to the NUVIGIL trademark.

Regarding
our ongoing NUVIGIL patent lawsuits and PROVIGIL settlements and related lawsuits, please see Note 16 to our Consolidated Financial Statements included in
Part II, Item 8 of this Annual Report on Form 10-K, which is incorporated herein by reference. While we intend to vigorously defend the NUVIGIL intellectual property
rights and the propriety of the PROVIGIL settlements, these efforts will be both expensive and time consuming and, ultimately, due to the nature of litigation, there can be no assurance that these
efforts will be successful.



We have third party agreements with four companies to supply us with modafinil (which requirements include certain minimum purchase
requirements) and two companies to supply us with finished commercial supplies of PROVIGIL. With respect to NUVIGIL, we have three third parties who manufacture the active drug substance armodafinil
and one qualified manufacturer of finished supplies of NUVIGIL tablets. At our manufacturing facility in Mitry-Mory, France, we produce modafinil for use in the production of PROVIGIL. We
seek to maintain inventories of active drug substance and finished products to protect against supply disruptions. Any future change in manufacturers or manufacturing processes requires regulatory
approval.



With respect to PROVIGIL and 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, have been available for a number of years and are available in inexpensive generic forms. We also are aware of numerous
companies seeking to develop products to treat excessive sleepiness.

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. 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. We currently have worldwide product rights to GABITRIL, excluding
Canada and Latin America, and we market GABITRIL in the United

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States,
France, the United Kingdom and Germany, among other countries. We have one third-party manufacturer of the active drug substance in GABITRIL and finished commercial supplies of the product. We
seek to maintain inventories of finished products to protect against supply disruptions.

GABITRIL
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. The U.S.
composition-of-matter patents covering the currently approved product include: 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. We also hold rights to the GABITRIL trademark, which is used in connection with pharmaceuticals containing tiagabine as the active drug
substance.

PAIN

Our pain therapeutics portfolio currently includes four marketed products in the United States. We market AMRIX, a
once-a-day, extended-release version of cyclobenzaprine hydrochloride, the active ingredient in the brand FLEXERIL®. AMRIX is indicated for relief of muscle spasm
associated with acute, painful musculoskeletal conditions.

We
also market three products, FENTORA, ACTIQ, and generic OTFC, which focus on treating breakthrough cancer pain in opioid-tolerant patients. One of the most challenging components of
cancer pain is breakthrough pain. Breakthrough pain is a transitory flare of moderate to severe pain that "breaks through" the medication patients use to control their persistent pain. Breakthrough
cancer pain typically develops rapidly, can reach maximum intensity in three to five minutes and typically lasts for 30 to 60 minutes. Breakthrough pain may be related to a specific activity, or may
occur spontaneously and unpredictably. Cancer patients who suffer from breakthrough pain may suffer a number of episodes every day. Breakthrough pain can have a profound impact on an individual's
physical and psychological well-being and is often associated with a more severe and difficult to treat pain condition.

AMRIX

In August 2007, we acquired exclusive North American rights to AMRIX from E. Claiborne Robins Company, Inc., a
privately-held company d/b/a ECR Pharmaceuticals ("ECR"). Two dosage strengths of AMRIX (15 mg and 30 mg) were approved in February 2007 by the FDA for short-term use as an
adjunct to rest and physical therapy for relief of muscle spasm associated with acute, painful musculoskeletal conditions. With convenient, once-daily dosing, AMRIX provides relief from
muscle spasm comparable to that with cyclobenzaprine hydrochloride taken three times daily. We made the product available in the United States in October 2007 and commenced a full U.S. launch in
November 2007. AMRIX is intended for use up to two or three weeks. The most common side effects of AMRIX in Phase III clinical trials were dry mouth, dizziness, fatigue, constipation, nausea
and dyspepsia.

FENTORA

We received FDA approval of FENTORA in late September 2006 and launched the product in the United States in early October 2006. FENTORA
is indicated for the management of breakthrough pain in patients with cancer who are already receiving and are tolerant to opioid therapy for their underlying persistent cancer pain. FENTORA is the
first and only buccal tablet approved for this indication. In

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April
2008, we received marketing authorization from the European Commission for EFFENTORA for the same indication as FENTORA and launched the product in certain European countries in January 2009.

We
have focused our clinical strategy for FENTORA on studying the product in opioid-tolerant patients with breakthrough pain associated with chronic pain conditions, such as neuropathic
pain and back pain. In November 2007, we submitted an sNDA to the FDA seeking approval to market FENTORA for the management of breakthrough pain in opioid tolerant patients with chronic pain
conditions. In May 2008, an FDA Advisory Committee voted not to recommend approval of the FENTORA sNDA. In September 2008, we received a complete response letter, in which the FDA requested that we
implement and demonstrate the effectiveness of proposed enhancements to the current FENTORA risk management program. In December 2008, we also received a supplement request letter from the FDA
requesting that we submit a Risk Evaluation and Mitigation Strategy (the "REMS Program") with respect to FENTORA. We submitted our REMS Program to the FDA in early April 2009. To address the FDA's
requests in its September 2008 and December 2008 letters, we plan to implement SECURE Access, a first-of-its-kind initiative designed to minimize the
potential risk of overdose from an opioid through appropriate patient selection, as part of our REMS Program. In July 2009, we exchanged correspondence with the FDA regarding elements of our REMS
Programs for FENTORA and ACTIQ and have been engaged in ongoing discussions with the agency. Subject to the timing and nature of further discussions with the FDA, we expect to receive a response from
the FDA by the middle of 2010. We believe that, by working with the FDA, we can design and implement a REMS Program to meet the FDA's requests and possibly to provide a potential avenue for approval
of the sNDA. We anticipate initiating the REMS Program upon receipt of approval from the FDA.

In
clinical trials, FENTORA was generally well tolerated. Most adverse events occurring with FENTORA are typical opioid side effects. The most serious adverse events associated with all
opioids are respiratory depression (potentially leading to apnea or respiratory arrest), circulatory depression, hypotension, and shock. The most common (greater or equal to 10 percent) adverse
events observed in clinical trials of FENTORA in patients with cancer were nausea, vomiting, application site abnormalities, fatigue, anemia, dizziness, constipation, edema, asthenia, dehydration, and
headache. In clinical trials in patients with other chronic pain conditions, the most common (greater or equal to 10 percent) adverse events were nausea, vomiting, back pain, dizziness,
headache, and somnolence. Application site adverse events were reported in 12 percent of patients. Most side effects were mild to moderate in severity.

ACTIQ/Generic OTFC

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 12 countries, principally in Europe, from Elan Pharma International Limited.

ACTIQ
uses an 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 and into the bloodstream, with pain relief that 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. The FDA has notified us that we must implement a REMS

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Program
for ACTIQ and generic OTFC. We submitted our REMS Program for ACTIQ and generic OTFC in early April 2009. Subject to the timing and nature of further discussions with the FDA, we expect to
receive a response from the FDA by the middle of 2010.

To
secure FTC clearance of our acquisition of CIMA LABS, we agreed to license to Barr our U.S. rights to intellectual property necessary to manufacture and market a generic OTFC. The
rights we granted to Barr became effective in September 2006 and Barr entered the United States market with generic OTFC on September 27, 2006. On this same date, we also entered the market
with a generic OTFC, utilizing Watson as our sales agent in this effort. In September 2009, our obligation to supply Barr with generic OTFC ended pursuant to the terms of a license and supply
agreement we entered into with Barr in July 2004. In October 2009, we understand that the FDA approved ANDAs by Barr and by Covidien to market and sell generic OTFC. With respect to ACTIQ, its sales
have been meaningfully eroded by the launch of FENTORA and by generic OTFC products sold since June 2006 by Barr Laboratories, Inc. and by us through our sales agent, Watson
Pharmaceuticals, Inc. We expect this erosion will continue.



AMRIX:Upon FDA approval, AMRIX was granted a three-year period of marketing exclusivity that extends until February 2010. In June 2008,
the U.S. Patent and Trademark Office issued a pharmaceutical formulation patent for AMRIX, which expires in February 2025. An additional patent covering a method of relieving muscle spasm using AMRIX
was issued in June 2009 and expires in 2023. We have an exclusive North American license to these patents from Eurand. Other patent applications claiming further formulations and uses are pending. We
also hold rights to the AMRIX trademark.

FENTORA:We own patents and/or patent applications covering formulation, methods of treatment using certain formulations and
manufacturing processes
for FENTORA expiring between 2019 and 2024. We also hold rights to the FENTORA trademark.

ACTIQ:The U.S. patents covering the currently approved compressed powder pharmaceutical composition and the method for administering
fentanyl via
this composition expired in September 2006. As described above, we have licensed to Barr our U.S. rights to intellectual property necessary to manufacture and market a generic OTFC. Corresponding
patents covering the current formulation of ACTIQ in foreign countries generally expire between 2009 and 2010. Our patent protection with respect to the ACTIQ formulation we sold in the United States
prior to June 2003 expired in May 2005. We hold the rights to the ACTIQ trademark.

Regarding
our ongoing AMRIX and FENTORA patent lawsuits, please see Note 16 to our Consolidated Financial Statements included in Part II, Item 8 of this Annual
Report on Form 10-K, which is incorporated herein by reference. While we intend to vigorously defend the AMRIX and FENTORA intellectual property rights, these efforts will be both
expensive and time consuming and, ultimately, due to the nature of litigation, there can be no assurance that these efforts will be successful.



AMRIX:We have third party agreements with one company to supply us with AMRIX capsules and another company to package the AMRIX
capsules for
commercial sale. We seek to maintain inventories of finished products to protect against supply disruptions. Any future change in manufacturers or manufacturing processes requires regulatory approval.

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FENTORA /ACTIQ/Generic OTFC:At our facility in Salt Lake City, Utah, we manufacture FENTORA, ACTIQ and generic OTFC for our sale in the
United
States and international markets and EFFENTORA for our sale in certain countries in Europe.

Fentanyl,
the active ingredient in FENTORA, EFFENTORA, ACTIQ and generic OTFC, is a Schedule II controlled substance under the Controlled Substances Act. Our purchases of fentanyl
for use in the production of FENTORA, EFFENTORA, ACTIQ and generic OTFC are subject to quota that is approved by the U.S. Drug Enforcement Administration ("DEA"). 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. While we currently have available fentanyl quota to produce our fentanyl-based products, in the future we could face
shortages of quota that could negatively impact our ability to produce our fentanyl-based products.



AMRIX:Cyclobenzaprine hydrochloride, the active ingredient in AMRIX, is a widely prescribed muscle relaxant in the United States,
representing 43%
of the 48 million prescriptions for muscle relaxants written in 2008, according to IMS Health Incorporated. AMRIX competes with short-acting, non-extended release versions of
cyclobenzaprine hydrochloride, such as SKELAXIN®, FLEXERIL® and other inexpensive generic forms of muscle relaxants. AMRIX is a once-a-day,
extended-release version of cyclobenzaprine hydrochloride.

FENTORA/ACTIQ/Generic OTFC: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 a short-acting product, such
as FENTORA, ACTIQ or generic OTFC, that is used in conjunction with an around-the-clock formulation.

Long-acting
products, which have a slower onset and longer duration of action relative to FENTORA, ACTIQ and generic OTFC, are commonly prescribed to treat persistent pain.
Three long-acting opioid analgesics and their generic equivalents 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 FENTORA, ACTIQ or generic OTFC, such as morphine and
combination products (with acetaminophen and oxycodone or hydrocodone), as well as quick-acting opioids delivered via invasive 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 rapid delivery of opioids to treat breakthrough pain, including transmucosal, transdermal, nasal spray, and inhaled
delivery systems,
among others. If these technologies are successfully developed and approved over the next few years, they could represent significant competition for FENTORA, ACTIQ and generic OTFC.

The
existence of generic OTFC has and will likely continue to impact sales of ACTIQ and could negatively impact the growth of FENTORA. Since the launch of generic OTFC in September 2006,
ACTIQ sales have been meaningfully eroded. In addition, sales of our own generic OTFC could be significantly impacted by the entrance into the market of additional generic OTFC products, which

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could
occur at any time. For example, we expect Covidien to enter the U.S. market with its generic OTFC in the first quarter of 2010.

ONCOLOGY

Our U.S. oncology portfolio includes two marketed products to treat patients with hematologic cancers: TREANDA, a
bi-functional hybrid cytotoxic; and TRISENOX®, an intravenous arsenic-based targeted therapy currently marketed in the U.S., as well as in Europe. In Europe, we have two
commercialized oncology products in our portfolio: MYOCET® (liposomal doxorubicin), a cardio-protective chemotherapy agent used to treat metastatic breast cancer and TARGRETIN®
(bexarotene), a treatment for cutaneous T-cell lymphoma. In addition, we market and sell ABELCET® (amphotericin B lipid complex), an anti-fungal product used
by cancer patients.

TREANDA

We obtained U.S. and Canadian rights to TREANDA in June 2005. TREANDA is a novel hybrid cytotoxic alkylating agent that differs from
conventional compounds in its apparent multi-functional mechanism of action. In addition to killing cells by damaging their DNA and triggering apoptosiswhich is typical of alkylating
agentsresearchers demonstrated that TREANDA also causes the disruption of cell division. Bendamustine hydrochloride, the active ingredient in TREANDA, is currently marketed in Germany by
a third party for the treatment of NHL, CLL, multiple myeloma, metastatic breast cancer and other solid tumors.

In
March 2008, the FDA approved TREANDA for the treatment of patients with CLL. The FDA granted an orphan drug designation to TREANDA for this indication. CLL is a slowly progressing
blood and bone marrow disease with an estimated 15,000 new cases diagnosed every year in the United States, according to the National Cancer Institute (the "NCI").

In
October 2008, the FDA approved TREANDA for the treatment of patients with indolent B-cell NHL who have progressed during or within six months of treatment with rituximab
or a rituximab-containing regimen. NHL occurs when lymphatic cells divide too much and too fast. Growth control is lost, and the lymphatic cells may overcrowd, invade and destroy lymphoid tissues and
spread to other organs. There are two broad subtypes of NHLindolent, also referred to as slow growing or low-grade, and aggressive or high-grade. Indolent disease
may "transform" into a more aggressive condition. According to the NCI, an estimated 30,000 people in the United States were diagnosed in 2008 with indolent NHL, which is difficult to treat because
patients are prone to relapse after treatment.

Over
the past few years, we have incurred significant expenditures related to conducting clinical studies to develop new pharmaceutical products and to explore the utility of our
existing products in treating disorders beyond those currently approved in their respective labels. In 2010, we expect to continue to incur significant levels of research and development expenditures.
We also expect to continue or begin a number of significant clinical programs including: studies of TREANDA in combination with RITUXAN as a front-line treatment for NHL and a
Phase I/II clinical study for the treatment of multiple myeloma in combination with Velcade®. While not a currently approved indication by the FDA, TREANDA in combination with
RITUXAN was recently listed in the 2010 NCCN clinical practice guidelines as a front-line treatment for NHL. We believe the guidelines listing was the result of an independent
Phase III clinical study conducted by the German Study Group for Indolent Lymphomas ("StiL Group") in Giessen, Germany. The StiL Group's study results announced in December 2009 indicated
better tolerability and more than a 20-month improvement in median progression free survival in patients treated with TREANDA in combination with rituximab versus CHOP in combination with
rituximab for the first-line treatment of patients with advanced follicular, indolent, and mantle cell lymphomas, each of which is not currently an FDA-approved indication.

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We received a five year New Chemical Entity exclusivity which prevents the FDA from accepting an ANDA for this product for a period of
five years from the date of approval (four years if the ANDA contains a Paragraph IV certification). In August 2007, the FDA granted orphan drug status for TREANDA for the treatment of CLL. The
orphan drug designation provides a seven-year period of marketing exclusivity for the treatment of CLL with
TREANDA until March 2015. We are also prosecuting method of treatment, polymorph, manufacturing and formulation patent applications relating to bendamustine. We also hold rights to the TREANDA
trademark.



We have one third-party supplier of the active drug substance bendamustine hydrochloride and one third-party supplier of finished
supplies of TREANDA. In addition, we will seek to qualify additional manufacturers as may be necessary to meet commercial demands and to protect against supply disruptions. We also seek to maintain
inventories of active drug substance and finished products to protect against supply disruptions.



TREANDA competes with traditional methods of treating indolent NHL, including treatments involving chemotherapy with a combination of
drugs such as cyclophosphamide, vincristine and prednisolone and with drugs currently marketed (such as BEXXAR® (131-I tositumomab) by GlaxoSmithKline) or being developed to
treat indolent NHL refractory to rituximab. With respect to CLL, TREANDA competes with Leukeran® (chlorambucil) by GlaxoSmithKline, Campath® (alemtuzumab) by Bayer Healthcare
Pharmaceuticals and, although not currently approved for the treatment of CLL but used for the treatment of CLL, the combination therapy of fludarabine, cyclophospharmide and rituximab.

TRISENOX

In July 2005, we acquired substantially all of the assets related to the TRISENOX injection business from Cell
Therapeutics, Inc. TRISENOX was approved for marketing in the United States and Europe in 2000 and 2002, respectively, for the treatment of patients with relapsed or refractory acute
promyelocytic leukemia ("APL"), a life threatening hematologic cancer. APL is one of eight subtypes of acute myeloid or myelogenous leukemia ("AML"). According to the
American Cancer Society, approximately 13,000 patients are diagnosed with AML in the United States every year, 10 to 15% of whom will have the APL subtype. Research indicates that approximately 10 to
30% of patients with APL will not respond to, or will relapse from, first-line therapy.

TRISENOX
is a highly purified salt of arsenic, a natural element. TRISENOX appears to have multiple targets and mechanisms of antileukemic activity; it degrades a protein that causes
abnormal levels of immature white blood cells while simultaneously forcing immature cancer cells to self-destruct through a process called programmed cell death or apoptosis. Apoptosis is
a normal part of a cell's life cycle. Because cancer is often associated with a malfunction of the normal process of apoptosis, drugs that can induce apoptosis offer the hope of affecting cancer cells
more selectively without the typical toxic side effects of conventional treatments. Direct induction of apoptosis represents a relatively new method of killing tumor cells that is different than the
majority of conventional cancer drugs. As a result, in addition to its use as a single-agent therapy, TRISENOX may work well when administered in combination with other cancer therapies to produce
more durable response rates.

In
January 2007, the National Cancer Institute (the "NCI") and one of its Cooperative Clinical Trial Groups announced positive results from a clinical trial using TRISENOX in newly
diagnosed patients with APL. According to the NCI, the results of the trial showed that adult patients with

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previously
untreated APL who had standard chemotherapy to induce remission of their disease, and who then received TRISENOX to maintain remission, had significantly better event-free
survival and better overall survival than those who received only standard chemotherapy.



We have a license to patents and patent applications covering methods of treating APL with the active ingredient arsenic trioxide that
expire in 2018. We also hold rights to the TRISENOX trademark.



We have one third-party manufacturer that produces the active drug substance arsenic trioxide for us and one third-party manufacturer
that provides finished commercial supplies of TRISENOX to us in the United States and Europe. We seek to maintain inventories of active drug substance and finished products to protect against supply
disruptions.



The pharmaceutical market for the treatment of patients with relapsed or refractory APL is served by a number of available
therapeutics, such as VESANOID® by Roche Laboratories Inc. in combination with chemotherapy.

INFLAMMATORY DISEASE

LUPUZOR

In November 2008, we entered into an option agreement (the "ImmuPharma Option Agreement") with ImmuPharma plc providing us with
an option to obtain an exclusive, worldwide license to the investigational medication LUPUZOR for the treatment of systemic lupus erythematosus ("Lupus"). In January 2009, we exercised
the option and entered into a Development and Commercialization Agreement (the "ImmuPharma License Agreement") with ImmuPharma based on a review of interim results of a Phase IIb study for
LUPUZOR. Under the terms of the ImmuPharma Option Agreement, we paid ImmuPharma a $15.0 million upfront option payment upon execution and paid a one-time $30.0 million
license fee in February 2009. Under the ImmuPharma License Agreement, ImmuPharma may receive (i) up to approximately $500 million in milestone payments (including the option and license
fees) upon the achievement of regulatory and sales milestones and (ii) royalties on the net sales of LUPUZOR. We will assume all expenses for the additional Phase II and Phase III
clinical studies, regulatory filings and, assuming regulatory approval, subsequent commercialization of the product.

Lupus
is an autoimmune disease causing various effects throughout different parts of the body. Its severity can range from very mild to extremely serious depending on which body organs
are afflicted. The Lupus Foundation of America estimates that 1.5 million Americans have a form of Lupus. Approximately 90 percent of those diagnosed with the disease are women. Lupus is
two to three times more prevalent among people of color, including African-Americans, Hispanics/Latinos, Asians, and Native Americans. LUPUZOR has shown that it modulates, through a unique mechanism,
a specific subset of CD4 T cells which may play a critical role in the physiopathology of Lupus. Patents for LUPUZOR have been approved in Europe, Japan and Australia, and have been applied for in the
United States.

In
November 2009, ImmuPharma issued a press release announcing the final results for its Phase IIb clinical study for LUPUZOR for the treatment of Lupus. In its press release,
ImmuPharma stated that in an intention to treat ("ITT") analysis, LUPUZOR administered at 200 mcg once a month for 3 months plus standard of care achieved a clinically significant improvement
(p = 0.048) in patient response rate compared to placebo plus standard of care as measured by a combined score,

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which
is defined by: (1) a reduction from baseline of at least 4 points on the 2K-SLEDAI disease activity scale (which reduction indicates a clinically important reduction in Lupus disease
activity); (2) no worsening of disease as measured by the Physician's Global Assessment (worsening defined as an increase of 0.30 points or more from baseline); and (3) no new BILAG A
organ domain score (which indicates a severe flare of Lupus disease activity) and no more than one new BILAG B organ domain score (which indicates a moderate flare of Lupus disease activity).
ImmuPharma also stated that the greatest improvement was seen in patients with moderate to severe Lupus. In this subgroup, which was 90% of the ITT population, LUPUZOR administered at 200 mcg once a
month achieved a statistically significant improvement in patient response rate compared to placebo (p=0.016). Consistent with previous studies, LUPUZOR was generally well tolerated, with no
significant drug related adverse events reported.

We
expect to commence a large Phase IIb study for LUPUZOR in the second quarter of 2010.

CEP-37247

CEP-37247 is a new generation tumor necrosis factor (TNF) alpha blocker in development to treat patients with sciatica.
CEP-37247 is based on a new type of therapeutic protein called a domain antibody. CEP-37247 is the first product incorporating domain antibodies (dAb) to be used in human
trials. Domain antibodies exhibit the binding properties to a target characteristic of a full-sized antibody, but are considerably smaller. This smaller size has several possible
advantages including improved manufacturing yield, lower immunogenicity and improved tissue penetration. We acquired CEP-37247 as part of our acquisition of Arana in August 2009.

Effective
November 2009, we signed an agreement with BioAssets Development Corporation ("BDC") that sets forth our option to acquire BDC. Under the terms of the option agreement, we paid
BDC an upfront payment of $30.0 million. If we exercise the option, we have agreed to pay a total of $12.5 million plus the value of BDC's net working capital less the amount of any
outstanding debt. BDC stockholders could also receive additional future payments related to regulatory and sales milestones. BDC is currently conducting a Phase II placebo-controlled proof of
concept study with the tumor necrosis factor (TNF) inhibitor, etanercept, epidurally administered to a minimum of 40 patients with sciatica. Sciatica is a neuropathic inflammatory pain condition that
occurs when the sciatic nerve is
compressed, injured or irritated. BDC has secured an intellectual property estate around use of TNF inhibitors for sciatic pain in patients with intervertebral disk herniation, as well as other spinal
disorders. We may exercise our option at any time from the closing date of the option agreement until the date that is 60 days after receipt of one-month patient response data from
BDC's Phase II study. Data are anticipated to be available in the second half of 2010.

If
we acquire BDC, we expect to utilize the BDC intellectual property and expertise to evaluate CEP-37247 for the treatment of sciatica. Most often the result of a herniated
spinal disc or spinal stenosis, sciatica is a set of symptoms typically defined by a sharp or burning pain radiating down the leg. Sciatica is the major form of radiculopathy, which occurs when a
nerve root that connects to the sciatic nerve is compressed, injured or irritated. TNF is thought to be a major mediator of pain in radiculopathy.

In
September 2009, a Phase II study for the treatment of psoriasis was completed, with repeat doses of CEP-37247 being generally well-tolerated and
exhibiting an efficacy safety profile consistent with anti-TNF activity. We are also examining CEP-37247 as a possible treatment for rheumatoid arthritis.

CINQUIL

CINQUIL (reslizumab) is an investigational humanized monoclonal antibody (mAb) against interleukin-5 (IL-5).
IL-5 has been shown to play a crucial role in the maturation, growth and

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chemotaxis
(movement) of eosinophils, inflammatory white blood cells implicated in a number of allergic diseases. We hold an option to acquire Ception Therapeutics, Inc. ("Ception"), the
developer of CINQUIL. For more information regarding the Ception option, please see Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of
OperationsRecent Acquisitions and Transactions", which is incorporated herein by reference.

A
Phase II study of CINQUIL in eosinophilic asthma is ongoing, with top-line results expected in the first quarter of 2010. The parties have agreed to extend
Cephalon's option exercise period until a specified period of time after delivery of the top-line results for the Phase II eosinophilic asthma study. Eosinophilic airway
inflammation is a common feature in patients with asthma and is generally responsive to inhaled corticosteroids treatment. Certain patients with severe asthma suffer persistent eosinophilic airway
inflammation that is resistant to inhaled corticosteroids treatment. These patients suffer from airway remodeling, impaired lung function, more
frequent asthma exacerbations and near-fatal asthma attacks and require additional anti-inflammatory therapies to address persistent symptoms and associated poor prognosis.

In
November 2009, we, together with Ception, announced results from a Phase IIb/III clinical trial for CINQUIL as a treatment for pediatric eosinophilic esophagitis ("EE"). The
study was designed to evaluate improvement in the co-primary endpoints of changes in esophageal eosinophil levels and clinical symptoms. The four-month, double-blind,
placebo-controlled clinical trial evaluated the efficacy and safety of CINQUIL in 226 pediatric patients between five and 18 years of age with poorly controlled EE. Study participants were
randomized to receive one of three dose levels of CINQUIL (1 mg/kg, 2 mg/kg, and 3 mg/kg) or placebo. The reduction of esophageal eosinophils was marked in all active groups, with statistically
significant reductions of peak esophageal eosinophils (p<0.0001) at all dose levels compared to placebo. All active groups also experienced improvement in the physician global assessment of
their symptoms. However, the placebo cohort also demonstrated improvement in their physician global assessment; therefore, there were no statistically significant differences between the active groups
and the placebo group for this endpoint.

INTERNATIONAL OPERATIONS

Commercial Products

We market and sell directly or through partnerships 30 different branded products in over 50 countries in Europe, the Middle East and
Africa and have a strong presence in the five key European pharmaceutical markets: France, Germany, Italy, Spain and the United Kingdom, and affiliates in Benelux and Poland. For the year ended
December 31, 2009, aggregate net sales outside the United States accounted for 18% of our total consolidated net sales. In 2009, our largest products in terms of net product sales outside the
United States are shown in the table below. Together, these products

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accounted
for 81% of our total European segment net sales and 14% of our total consolidated net sales for the year ended December 31, 2009.

Product

Indication

Key Market(s)ABELCET (amphotericin B lipid complex)(1)

Anti-fungal

France, Germany, U.K, .Italy, Spain, Central Eastern European countries, Benelux and PolandACTIQ (oral transmucosal fentanyl citrate)

Breakthrough cancer pain

France, Germany, U.K., Italy, SpainMYOCET (liposomal doxorubicin)

Metastatic breast cancer

France, Germany, U.K., Italy, Spain, Central Eastern European Countries, Benelux and Poland.NAXY® and MONONAXY® (clarithromycin)(2)

Antibiotic

FrancePROVIGIL (modafinil)(3)

Excessive sleepiness associated with narcolepsy and certain other conditions

France, Germany, U.K., Italy, SpainSPASFON® (phloroglucinol)

Biliary/urinary tract spasm and irritable bowel syndrome

France, certain African countries including Morocco, Algeria, TunisiaTARGRETIN (bexarotene)(4)

Cutaneous T-cell lymphoma

France, Germany, U.K.


(1)ABELCET
is licensed from Bristol Myers Squibb.(2)NAXY
and MONONAXY are licensed from Abbott France.(3)Marketed
under the name MODIODAL® (modafinil) in France and under the name VIGIL® (modafinil) in Germany.(4)TARGRETIN
is licensed from Ligand Pharmaceuticals.


We
are expanding our reach beyond Europe to Asia, where we have established an office in Hong Kong. We are seeking approval from the Chinese authorities to develop and register our
products and are exploring a number of other opportunities in China and expect this market to be a key part of our Asian growth strategy moving forward. In 2007, our licensees, Alfresa Pharma and
Mitsubishi Tanabe Pharma, launched modafinil in Japan (under the trade name MODIODAL) for the treatment of excessive daytime sleepiness associated with narcolepsy. Nippon Shinyaku launched TRISENOX in
Japan in 2004. We have formed relationships with other Japanese companies that are conducting clinical trials with, and pursuing regulatory approval of, a number of our products in Japan. Our partner
SymBio recently received marketing approval for TREANDA in Hong Kong, and we will be responsible for the marketing of the product in Hong Kong.

In
April 2008, we received marketing authorization from the European Commission for EFFENTORA for the same indication as FENTORA and launched the product in certain European countries in
January 2009. We anticipate launching EFFENTORA in additional European countries in 2010.

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In December 2009, we entered into an agreement with UCB Pharma France under which we acquired all assets related to the development, manufacturing, marketing and
sale of VOGALENE® (metopimazine) and VOGALIB® (metopimazine) in France and French overseas territories for $53.3 million. These products are approved for use in the
symptomatic treatment of nausea and vomiting. The injectible solution is approved for the prevention of nausea and vomiting in patients under chemotherapy.

Manufacturing Operations

At our manufacturing facility in Mitry-Mory, France, we produce the active pharmaceutical ingredient for
SPASFON®. Our other manufacturing facility in Nevers, France is producing SPASFON for France and certain other countries. We manufacture certain other products at these facilities in
France for sale in Europe and also perform warehousing, packaging and distribution activities for certain products sold in France and other export territories from these facilities. NAXY, MONONAXY,
MYOCET, ABELCET, TARGRETIN and GABITRIL are among our European products that are manufactured for us by third party manufacturers. For these and most of our other European products, we depend on
single sources for the manufacture of both the active drug substances contained in our products and for finished commercial supplies.

European Competitive and Regulatory Environment

In Europe, we face competition from generic versions of a number of the branded products we market. In addition, 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.

In
addition, the manufacture and sale of our products in Europe are subject to extensive regulation by European governmental authorities. Government efforts to control healthcare costs
may result in further growth of generic competition to our proprietary products or a decrease in the selling prices of any of our proprietary products due to associated decreases in the amount the
government health care authority will reimburse for any of those products. For example, we are aware of governmental efforts in France to limit or eliminate reimbursement for some of our products,
particularly FONZYLANE, which will have a limited impact on revenues due to its limited sales.

RESEARCH AND DEVELOPMENT

In addition to ongoing clinical programs supporting our marketed products and internally generated compounds and biologics at various
stages of clinical investigation, our discovery research and development efforts focus primarily on three therapeutic areas: oncology, inflammatory disease and pain. Our research strategy is guided by
four core principles: 1) balancing risk; 2) utilizing multiple technologies within a therapeutics focus; 3) establishing strategic alliances to complement internal expertise; and
4) innovative research and development that focuses on unmet medical needs.

In
August 2009, we completed our acquisition of Arana, which allows us to increase our research and development efforts, particularly with biologics, expand our discovery research
technology platform, diversify our therapeutic interests and broaden our pipeline opportunities. In October 2009, we began to restructure our discovery research organization to focus on our pipeline
opportunities, primarily in oncology, inflammatory disease and pain, with an emphasis on our biologic opportunities, wind down our internal discovery research efforts in CNS and reduce our overall
cost structure.

For
the years ended December 31, 2009, 2008 and 2007, our research and development costs were $395.4 million, $362.2 million, and $369.1 million,
respectively. Additionally, for 2009 and 2008, we

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incurred
charges associated with acquired in-process research and development of $46.1 million and $42.0 million, respectively.

Oncology

Our current oncology research program includes two main therapeutic targets: solid tumors, which are associated with a broad range of
cancers, and hematological cancers, including AML, multiple myeloma and myeloproliferative disorders ("MPD").

In
normal tissues, cellular proliferation is balanced by cellular death. Generally, both processes are controlled in part by a class of molecules (known as growth factors) that bind to
cell surface receptors (many of which are kinases). Kinases, on the cell surface or intracellular, control the lifecycle of a cell by regulating when it should replicate, cease replication, perform
its functions in a healthy state, or undergo programmed cell death. In cancer, the normal mechanisms of cell death are blocked or the survival mechanisms are overactive, allowing cells to escape/avoid
programmed death and leaving cell proliferation unchecked.

Many
current cancer therapies are designed to arrest and kill rapidly dividing cells non-selectively. Thus, traditional chemotherapy and radiation therapy kill all rapidly
dividing cells, including both normal and cancerous cells, and the benefits of these therapies are often limited by their toxicity to normal cells. We are focusing our research on identifying the
mechanisms blocking cell-death programs, enhancing tumor cell survival and/or understanding DNA damage and repair. We believe this foundation will enable us to develop selective therapies
with improved clinical benefit and better side effect profiles than current cancer treatments.

Solid Tumors

Solid tumors account for roughly 80 to 90% of all cancers. Cancers of the lung, breast, colon, and prostateeach of which
involves the formation and spread of tumorsare among the most prevalent and deadly forms of cancer. Angiogenesis, the natural process used by the human body to produce blood vessels,
occurs as a pathological process in
the development of solid tumors such as breast and lung cancers. All living organisms, including tumors, need blood vessels to supply nutrients to survive and grow. Recently approved therapeutics in
this area have targeted a receptor family/primary ligand responsible for survival of individual capillary cells and formation of the tumor blood vessel: a protein receptor kinase called VEGF or the
ligand VEGF itself.

Our
researchers have not only discovered proprietary, potent orally active inhibitors of the VEGF kinase but have also demonstrated the importance of the Tie-2 receptor
kinase as a critical partner with VEGF in the process of angiogenesis. The Tie-2 receptor kinase works in concert with VEGF receptor systems to form new blood vessels. Using pre clinical
models we have shown that inhibiting both kinases results in much greater tumor regression than would observed with inhibition of VEGFR alone.

From
this research, we have synthesized a number of proprietary, orally active molecules that are potent, dual inhibitors of VEGF and Tie-2 kinases. These molecules have been
shown to potently inhibit the formation of blood vessels and thereby slow growth and/or induce regressions of a variety of tumors in pre-clinical models. A potential drug candidate,
CEP-11981, has been identified incorporating both of these important mechanisms, and we are currently testing this molecule in Phase I clinical trials.

As
noted above, many current cancer therapies are designed to arrest and kill rapidly dividing cells non-selectively via damage to DNA. Thus, traditional chemotherapy and
radiation therapy kill all rapidly dividing cells, including both normal and cancerous cells, and the benefits of these therapies are often limited by their toxicity to normal cells. In addition, DNA
repair mechanisms in tumor cells are

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up-regulated,
further limiting the ability of these treatments to be completely successful. PARP is an integral DNA repair enzyme that corrects single and double strand DNA breaks in
normal cells, cancer cells and after chemo- or radiation therapy. Using pre-clinical models, we have shown that inhibiting this key repair mechanism sensitizes the tumor to the
anti-tumor killing effects of chemo- and radiation therapy and thereby overcomes tumor resistance. CEP-9722 was chosen from a library of proprietary potent, orally active PARP
inhibitors. We filed an Investigational Medicinal Product Dossier, the European equivalent of an IND, for CEP-9722 in the fourth quarter of 2008 and began our Phase I study in 2009.

As
part of the Arana acquisition, we acquired rights to the biologics CEP-37250 and CEP-37251. CEP-37250 is being investigated as a potential
treatment for colorectal cancer as part of a collaboration with Kyowa Hakko Kirin ("Kyowa"). Targeting a tumor selective carbohydrate, CEP-37250 is active against wild type and
K-Ras mutations. This biologic has demonstrated in vitro and in vivo efficacy and potent cell-killing activity.

CEP-37251
is a RANKL inhibitor being investigated as a potential treatment of bone metasases. A potent inhibitor of bone erosion in in vivo models, CEP-37251 is a
variant of osteoprotegerin developed using Arana's proprietary EvoGene technology. We plan to initiate clinical trials for CEP-37251 in 2010.

Hematological Cancers

Hematologic (blood) cancers such as leukemia, lymphoma, multiple myeloma and MPD arise due to errors in the genetic information of an
immature blood cell. As a consequence of these errors, cell development is arrested so that it does not mature further, but is instead replicated over and over again, resulting in a proliferation of
abnormal blood cells that eventually crowd out and destroy normal blood cells.

We
are actively pursuing the development of novel inhibitors of the proteosome, a multifunctional protease integral to normal cellular functioning. Based on clinical and
pre-clinical studies, we believe that proteosome inhibitors may have utility in the treatment of hematological cancers, particularly multiple myeloma. We have identified proprietary
proteosome inhibitors that in preclinical models of cancer display greater efficacy and tolerability than currently available therapies. These proteosome inhibitors also may be useful in the treatment
of solid tumors. CEP-18770, a potent, proprietary proteosome inhibitor, is currently in Phase II clinical investigation.

Inflammatory Disease

As described above, we plan to begin evaluation of CEP-37247 as a treatment for sciatica in 2010. If we acquire BDC, we
expect to utilize BDC's intellectual property and expertise as part of that evaluation. CEP-37247 is also in a Phase II study for the treatment of RA. In March 2009, the
Phase II study for the treatment of psoriasis was completed, with repeat doses of CEP-37247 being well-tolerated and exhibiting a safety profile consistent with
anti-TNF activity.

We
acquired CEP-37248 as part of the Arana acquisition. CEP-37248 is a humanized antibody targeting cytokines IL 12/23. By blocking IL 12/23, we believe
CEP-37248 can reduce inflammation associated with certain autoimmune diseases. We plan to file an IND for this biologic product in 2011.

Pain

We have primarily focused our current research and development efforts in the therapeutic area of Pain on the development of tamper
deterrent opioids utilizing our OraGuard technology. OraGuard provides resistance against various tampering methods, including chewing, aqueous extraction for IV dosing and alcohol extraction.
Phase I data for CEP-33236, our tamper deterrent formulation of hydromorphone, shows resistance to alcohol dose-dumping and dose-dumping when crushed.

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CEP-33237,
our tamper-deterrent formulation of hydrocodone, is expected to begin a Phase I study in 2010.

We
are also continuing our evaluation of CEP-33222, our IV formulation of celecoxib that we licensed from Acusphere. To date, our Phase I study indicates no
significant safety concerns.

CNS Disorders

While we are winding down our CNS discovery research, we continue to develop CEP-26401, a histamine H3 receptor
antagonist/inverse agonist. CEP-26401 is one of the first GPCR-directed compound entering into IND-enabling development activities with the therapeutic
potential for treatment of the cognitive disorders associated with the negative symptoms of schizophrenia and/or symptomatic improvement in the cognitive dysfunction in Alzheimer's disease. We filed
an IND and began a Phase I study for CEP-26401 in 2009.

Drug Delivery Research and Development

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 or our ORAVESCENT drug
delivery technology.
Revenues from these arrangements consist of net sales of manufactured products to partners, product development and licensing fees and royalties, and totaled 2.6% of our total consolidated revenue for
the year ended December 31, 2009. We currently collaborate with many partners, including AstraZeneca, Organon, Schering-Plough and Wyeth. We 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. During 2008, we began the transition of our manufacturing activities primarily performed at our Eden Prairie facility to our recently expanded manufacturing
facility in Salt Lake City, Utah. As part of that transition we also consolidated at our Brooklyn Park facility certain drug delivery research and development activities formerly performed in Salt
Lake City. The transition of manufacturing activities and the closure of the Eden Prairie facility are expected to be completed in 2011.

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 ("OTM") technologies.

ODT
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, may improve dosing accuracy relative to liquid formulations and often is preferred by patients to conventional tablets and other formulations. Our two
primary ODT technologies are ORASOLV and DURASOLV. Our ORASOLV technology incorporates 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 U.S. patent for our ORASOLV technology
expires in 2010.

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 U.S. patents for our DURASOLV technology expire in 2018. In

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the
third quarter of 2007, the U.S. Patent and Trademark Office ("PTO") notified us that, in response to re-examination petitions filed by a third party, the Examiner rejected the claims
in the two U.S. patents for our DURASOLV ODT technology. We disagree with the Examiner's position, and we filed notices of appeal to the Board of Patent Appeals of the PTO's decisions in the
fourth quarter of 2007 regarding one patent and in the second quarter of 2008 regarding the second patent. In September 2009, the Board affirmed the Examiner's position with respect to one of the
DURASOLV patents. We have the right to appeal this rejection and, as of the filing date of this report, we are awaiting a hearing and a determination with respect to our appeal regarding the other
patent. These
efforts will be both expensive and time consuming and, ultimately, due to the nature of patent appeals, there can be no assurance that these efforts will be successful. The invalidity of the DURASOLV
patents could reduce our ability to enter into new contracts with regard to our drug delivery business.

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 recently expanded to provide additional capacity for both in-house and third party manufacturing. We currently
manufacture and sell several drugs in France using our LYOC technology, including SPASFON LYOC®, PARALYOC®, PROXALYOC® and LOPERAMIDE LYOC®.

OTM
technologies are designed to increase the absorption of active drug ingredients across the mucosal membranes lining the oral cavity, gastrointestinal tract and colon. 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"). The U.S. patents for our ORAVESCENT technology begin to 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.

CUSTOMERS

Our principal customers are wholesale drug distributors. These customers comprise a significant part of the distribution network for
all pharmaceutical products in the United States. Three large wholesale drug distributors, Cardinal Health, Inc., McKesson Corporation and AmerisourceBergen Corporation, control a significant
share of this network. These three wholesale customers, in the aggregate, accounted for 75% of our total consolidated gross sales for the year ended December 31, 2009.

COMPETITION

We face intense competition and rapid technological change in the pharmaceutical marketplace. Large and small companies, academic
institutions, governmental agencies, and other public and private research organizations conduct research, seek patent protection and establish collaborative arrangements for product development in
competition with us. Products developed by any of these entities may compete directly with those we develop or sell. In addition, many of the companies and institutions that compete against us have
substantially greater capital resources, research and development staffs and facilities than we have, and substantially greater experience in conducting clinical trials, obtaining regulatory approvals
and manufacturing and marketing pharmaceutical products. These entities represent significant competition for us. Our products also face potential competition from companies seeking to develop and
sell generic formulations of our products at a substantial price discount to the current price of our products. In addition, competitors who are developing products 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

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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 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.

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

Promising
data from preclinical and clinical trials are submitted to the FDA in an NDA (or a Biologic License Application ("BLA") for biologics) for marketing approval and to foreign
regulatory authorities under applicable requirements. Preparing an NDA, BLA 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

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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 IV 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 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. 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

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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 petition for an
extension of the term of a patent for a period of time following the initial FDA approval of an NDA. 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 a New Chemical Entity ("NCE"). During this period of
exclusivity, an ANDA or a 505(b)(2) application cannot be submitted to the FDA 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, and armodafinil, the active ingredient in NUVIGIL, have been scheduled under the
Controlled Substances Act as a
Schedule IV substance. Schedule IV substances are subject to special handling procedures relating to the storage, shipment, inventory control and disposal of the product. Fentanyl, the
active ingredient in FENTORA, ACTIQ and generic OTFC, 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, PROVIGIL, FENTORA, NUVIGIL, ACTIQ and generic OTFC are subject to state controlled substance
regulation, and may be placed in more restrictive schedules than those determined by the DEA and FDA. However, to date, modafinil, armodafinil and fentanyl have not been placed in a more restrictive
schedule by any state.

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

Outside
the United States and as described in "International OperationsEuropean Competitive and Regulatory Environment" above, we are subject to many analogous laws and
regulations in countries where we operate. These laws and regulations govern, among other things, the authorization and conduct of clinical trials, the marketing authorization process for medicinal
products, manufacturing and import activities, and post-authorization activities including pharmacovigilance, drug

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safety,
effectiveness and pricing. Our ability to market new products outside the United States is dependent upon receiving marketing approval from applicable regulatory authorities. While the
specific process for approval may differ in certain respects from the FDA process, we are generally subject to the same risks described above. With respect to product pricing, regulatory approval is
typically required. Additionally, certain countries have regularly imposed new or additional cost containment measures for pharmaceuticals, such as restrictions on physician prescription levels and
patient reimbursements, emphasis on greater use of generic drugs and/or enacted across-the-board price cuts.

LEGAL MATTERS

For a summary of legal matters, see Note 16 of the Consolidated Financial Statements included in Part II, Item 8
of this Annual Report on Form 10-K, which is incorporated herein by reference.

EMPLOYEES

As of December 31, 2009, we had a total of 3,026 full-time employees, of which 2,107 were employed in the United
States, 851 were located at our facilities in Europe and 68 were located at our facilities in Australia and Asia. We believe that we have been successful in attracting skilled and experienced
personnel; however, competition for such personnel is intense.

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ITEM 1A.    RISK FACTORS

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 revenue is derived from five products, and our future success will depend on the aggregate growth of NUVIGIL and PROVIGIL, the continued
acceptance of FENTORA, and the growth of AMRIX and TREANDA.

For the year ended December 31, 2009, approximately 51%, 10%, 7% and 5% of our total consolidated net sales were derived from
sales of PROVIGIL and NUVIGIL (collectively), TREANDA, FENTORA and AMRIX, respectively. With respect to PROVIGIL, we cannot be certain that it will continue to be accepted in its market. With respect
to our newly launched product, NUVIGIL, we cannot be sure that our sales and marketing efforts will be successful or that it will be accepted in the market. It is possible that CNS net sales could
decrease in the future as a result of the decline in PROVIGIL marketing efforts associated with the launch of NUVIGIL. NUVIGIL is currently selling at a price below that of PROVIGIL. As a result, it
is possible that CNS net sales could decline if we are unable to achieve sufficient prescription growth for PROVIGIL and NUVIGIL in the aggregate. With respect to AMRIX and TREANDA, we cannot be
certain that they will continue to be accepted in their markets or that we will be able to achieve projected levels of sales growth.

To
counter the impact from existing and potential generic competition for ACTIQ, we need FENTORA to continue to be accepted in the market. We expect to initiate a REMS Program for
FENTORA to mitigate serious risks associated with the use of FENTORA. We submitted our REMS Program to the FDA in early April 2009. Subject to the timing and nature of further discussions with the
FDA, we expect to receive a response from the FDA by the middle of 2010. It is possible that the REMS Program could have a negative impact on sales of FENTORA.

For
consolidated net sales to grow over the next several years, we will need our three newest products, NUVIGIL, AMRIX and TREANDA, to achieve projected levels of growth. Specifically,
the following factors, among others, could affect the level of market acceptance of these products, as well as PROVIGIL and FENTORA:



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Any
adverse developments with respect to the sale or use of these products 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 expanded indications of our existing products, which would
significantly hamper future sales and earnings growth.

Our long-term prospects, particularly with respect to the growth of our future sales and earnings, depend to a large extent
on our ability to obtain FDA approvals of new product candidates (including product candidates for which we have an option-to-acquire) or of expanded indications of our
existing products such as FENTORA and NUVIGIL.

In
May 2008, an FDA Advisory Committee voted not to recommend approval of the FENTORA sNDA. In September 2008, we received a complete response letter, in which the FDA requested that we
implement and demonstrate the effectiveness of proposed enhancements to the current FENTORA risk management program. In December 2008, we also received a supplement request letter from the FDA
requesting that we submit a Risk Evaluation and Mitigation Strategy (the "REMS Program") with respect to FENTORA. We submitted our REMS Program to the FDA in early April 2009. To address the FDA's
requests in its September 2008 and December 2008 letters, we plan to implement SECURE Access, a first-of-its-kind initiative designed to minimize the
potential risk of overdose from an opioid through appropriate patient selection, as part of our REMS Program. In July 2009, we exchanged correspondence with the FDA regarding elements of our REMS
Program for FENTORA and have been engaged in ongoing discussions with the agency. Subject to the timing and nature of further discussions with the FDA, we expect to receive a response from the FDA by
the middle of 2010. We believe that, by working with the FDA, we can design and implement a REMS Program to meet the FDA's requests and possibly to provide a potential avenue for approval of the sNDA.
While we plan to initiate the REMS Program upon receipt of approval from the FDA, we may be unsuccessful, ultimately, in designing and implementing a REMS Program acceptable to the FDA.

In
March 2009, we announced positive results from a Phase II clinical trial of NUVIGIL as adjunctive therapy for treating major depressive disorder in adults with bipolar I
disorder and our plan to advance to Phase III trials for this indication. In April 2009, we announced positive results from a Phase III clinical trial of NUVIGIL as a treatment for
excessive sleepiness associated with jet lag disorder and filed an sNDA for this indication with the FDA in June 2009. We expect a response from the FDA by March 29, 2010. In May 2009, we
announced positive results from a Phase IV study of NUVIGIL in obstructive sleep apnea and comorbid major depressive disorder requiring ongoing antidepressant therapy.

There
can be no assurance that our applications to market for these new indications or for product candidates will be submitted or reviewed in a timely manner or that the FDA will
approve the new indications or product candidates on the basis of the data contained in the applications. Even if approval is granted to market a new indication or a product candidate, there can be no
assurance that we will be able to successfully commercialize the product in the marketplace or achieve a profitable level of sales.

We may not be able to maintain adequate protection for our intellectual property or market exclusivity for our key 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

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companies
can be highly uncertain and involve complex legal, scientific and factual questions. 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 the 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.

Competition
from generic manufacturers is a particularly significant risk to our business. Upon the expiration of, or successful challenge to, our patents covering a product, generic
competitors may introduce a generic version of that product at a lower price. Some generic manufacturers have also demonstrated a willingness to launch generic versions of branded products before the
final resolution of related patent litigation (known as an "at-risk launch"). A launch of a generic version of one of our products could have a material adverse effect on our business and
we could suffer a significant loss of sales and market share in a short period of time.

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.

We
are currently engaged in lawsuits with respect to generic company challenges to the validity and/or enforceability of our patents covering AMRIX, FENTORA and NUVIGIL. While we intend
to
vigorously defend the validity, and prevent infringement, of our patents, these efforts will be both expensive and time consuming and, ultimately, due to the nature of litigation, there can be no
assurance that these efforts will be successful. The loss of patent protection or regulatory exclusivity on any of our existing products, whether by third-party challenge, invalidation, circumvention,
license or expiration, could materially impact our results of operations. For more information regarding the legal proceedings described in this Overview and others, please see Note 16 to our
Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K, which is incorporated herein by reference.

In
late 2005 and early 2006, we entered into PROVIGIL patent settlement agreements with certain generic pharmaceutical companies. As part of these separate settlements, we agreed to
grant to each of these parties a non-exclusive royalty-bearing license to market and sell a generic version of PROVIGIL in the United States, effective in April 2012, subject to applicable
regulatory considerations. Under the agreements, the licenses could become effective prior to April 2012 only if a generic version of PROVIGIL is sold in the United States prior to this date. Various
factors could lead to the sale of a generic version of PROVIGIL in the United States at any time prior to April 2012, including if (i) we lose patent protection for PROVIGIL due to an adverse
judicial decision in a patent infringement lawsuit; (ii) all parties with first-to file ANDAs relinquish their right to the 180-day period of marketing exclusivity,
which could allow a subsequent ANDA filer, if approved by the FDA, to launch a generic version of PROVIGIL in the United States at-risk; (iii) we breach or the applicable
counterparty breaches a PROVIGIL settlement agreement; or (iv) the FTC prevails in its lawsuit against us in the U.S. District Court for the Eastern District of Pennsylvania described below. We
filed each of the settlements with both the U.S. Federal Trade Commission (the "FTC") and the Antitrust Division of

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the
U.S. Department of Justice (the "DOJ") as required by the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the "Medicare Modernization Act"). The FTC conducted an
investigation of each of the PROVIGIL settlements and, in February 2008, filed suit against us challenging the validity of the settlements and related agreements. The complaint alleges a violation of
Section 5(a) of the Federal Trade Commission Act and seeks to permanently enjoin us from maintaining or enforcing these agreements and from engaging in similar conduct in the future. We believe
the FTC complaint is without merit and we have filed a motion to dismiss the case. While we intend to vigorously defend ourselves and the propriety of the settlement agreements, these efforts will be
both expensive and time consuming and, ultimately, due to the nature of litigation, there can be no assurance that these efforts will be successful. For more information regarding our PROVIGIL
settlements and related litigation, please see Note 16 to our Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K,
which is incorporated herein by reference.

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:



Over
the past few years, a significant number of pharmaceutical and biotechnology companies have been the target of inquiries and investigations by various federal and state regulatory,
investigative, prosecutorial and administrative entities, including the DOJ and various U.S. Attorney's Offices, the Office of Inspector General of the Department of Health and Human Services, the
FDA, the FTC and various state Attorneys General offices. These investigations have alleged violations of various federal and state laws and regulations, including claims asserting antitrust
violations, violations of the Food, Drug and Cosmetic Act, the False Claims Act, the Prescription Drug Marketing Act,
anti-kickback laws, and other alleged violations in connection with off-label promotion of products, pricing and Medicare and/or Medicaid reimbursement.

Because
of the broad scope and complexity of these laws and regulations, the high degree of prosecutorial resources and attention being devoted to the sales practices of pharmaceutical
companies by law enforcement authorities, and the risk of potential exclusion from federal government reimbursement programs, numerous companies have determined that it is highly advisable that they
enter into settlement agreements in these matters, particularly those brought by federal authorities. Companies that have chosen to settle these alleged violations have typically paid multi-million
dollar fines to the government and agreed to abide by corporate integrity agreements.

In
September 2008, as part of our settlement with the U.S. government regarding their investigation of our promotional practices with respect to ACTIQ, GABITRIL and PROVIGIL, we entered
into a five-year Corporate Integrity Agreement (the "CIA") with the Office of Inspector

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General
of the Department of Health and Human Services. The CIA provides criteria for establishing and maintaining compliance with federal laws governing the marketing and promotion of our products.
We are also subject to periodic reporting and certification requirements attesting that the provisions of the CIA are being implemented and followed. For more information regarding our settlement with
the U.S. government and the CIA, please see Note 16 to our Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K,
which is incorporated herein by reference.

Although
we have resolved the previously outstanding federal and state government investigations into our sales and promotional practices, there can be no assurance that there will not
be regulatory or other actions brought by governmental entities who are not party to the settlement agreements we have entered. We may also become subject to claims by private parties with respect to
the alleged conduct which was the subject of our settlements with the federal and state governmental entities. In addition, while we intend to comply fully with the terms of the settlement agreements,
the settlement agreements provide for sanctions and penalties for violations of specific provisions therein. We cannot predict when or if any such actions may occur or reasonably estimate the amount
of any fines, penalties, or other payments or the possible effect of any non-monetary restrictions that might result from either settlement of, or an adverse outcome from, any such
actions. Further, while we have initiated, and will initiate, compliance programs to prevent conduct similar to the alleged conduct subject to these agreements, we cannot provide complete assurance
that conduct similar to the alleged conduct will not occur in the future, subjecting us to future claims and actions. Failure to comply with the terms of the CIA could result in, among other things,
substantial civil penalties and/or our exclusion from government health care programs, which could materially reduce our sales and adversely affect our financial condition and results of operations.

It
is both costly and time-consuming for us to comply with these inquiries and with the extensive regulations to which we are subject. 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, 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, NUVIGIL, FENTORA, EFFENTORA, ACTIQ and generic OTFC contain active ingredients that are controlled substances, we are subject to regulation by the U.S.
Drug Enforcement Agency ("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 analogous
foreign authorities withdrew the approval of, or placed additional significant restrictions on the marketing of any of our products, our ability to promote our products and product sales 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

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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.

We
also must comply with all applicable regulatory requirements of the DEA and analogous foreign authorities for certain of our products that contain controlled substances. The DEA also
has authority to grant or deny requests for quota of controlled substances such as the fentanyl that is the active ingredient in FENTORA and EFFENTORA or the fentanyl citrate that is the active
ingredient in ACTIQ and generic OTFC.

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.

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.

For
certain of our products in the United States and abroad, we depend upon single sources for the manufacture of both the active drug substances contained in our products and for
finished commercial supplies. The process of changing or adding a manufacturer or changing a formulation requires prior FDA and/or analogous foreign 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,
changes to product labeling, 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 commercial use as of the filing date of this report. For example, in September 2007, we issued a letter to healthcare professionals to clarify the appropriate patient
selection, design and administration for FENTORA, following reports of serious adverse events in connection with the use of the product. Likewise, in February 2005, working with the FDA, we updated
our prescribing information for GABITRIL to include a bolded warning describing

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the
risk of new onset seizures in patients without epilepsy. As described above, we are also in process of developing REMS Programs for certain of our products to mitigate serious risks associated
with the use of certain of our products. 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 FENTORA, EFFENTORA, ACTIQ, generic OTFC, NUVIGIL and PROVIGIL, which contain controlled substances.

In
April 2009, we received approval from the FDA for our sNDA to update the prescribing information for TREANDA. We finalized and implemented the updated prescribing information for
TREANDA in May 2009. We identified two postmarketing cases of Stevens Johnson Syndrome ("SJS")/toxic epidermal necrolysis ("TEN") in patients treated concomitantly with TREANDA and allopurinol; one of
these cases was fatal. Allopurinol is known to cause SJS/TEN. In the non-fatal case, the patient also received other drugs that can cause SJS. TREANDA's prescribing information has been
updated to include these serious skin reactions. These updates communicate safety warnings when TREANDA is used in combination with allopurinol. Although the relationship between TREANDA and SJS/TEN
cannot be determined, there may be an increased risk of severe skin toxicity when TREANDA and allopurinol are administered concomitantly. This update is similar to the labeling that currently exists
with certain other agents used to treat indolent non-Hodgkin's lymphoma and/or chronic lymphocytic leukemia, such as RITUXAN® (rituximab), REVLIMID® (lenalidomide)
and cyclophosphamide, all of which also reference SJS/TEN in their current respective prescribing information.

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, FENTORA and ACTIQ have been approved under regulations concerning
drugs with certain safety profiles, under which the FDA has established special restrictions to ensure safe use. Any violation of these special restrictions could lead to the imposition of further
restrictions or withdrawal of the product from the market.

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

The administration of drugs to humans, whether in clinical trials or commercially, can result in product liability claims whether or
not the drugs are actually at fault for causing an injury. Furthermore, our products may cause, or may appear to have caused, adverse side effects (including death) or potentially dangerous drug
interactions that we may not learn about or understand fully until the drug has been administered to patients for some time. As our products are used more widely and in patients with varying medical
conditions, the likelihood of an adverse drug reaction, unintended side effect or incidence of misuse may increase. Product liability claims can be expensive to defend and may result in large
judgments or settlements against us, which could have a negative effect on our financial performance. The cost of product liability insurance has increased in recent years, and the availability of
coverage has decreased. Nevertheless, we maintain product liability insurance and significant self-insurance retentions held by our wholly-owned Bermuda-based insurance captive in amounts
we believe to be commercially reasonable but which would be unlikely to cover the potential liability associated with a significant unforeseen safety issue. Product liability coverage maintained by
our captive is reserved for, based on Cephalon's historical claims as well as historical claims within the industry. Reserves held by the captive are fully funded. Any claims could easily exceed our
current 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.

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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 the level of market acceptance of our products is changing rapidly. As a result, it is reasonably likely that our product sales will fluctuate to an
extent that may not meet with market expectations and that 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 may be unable to repay our substantial indebtedness and other obligations.

All of our convertible notes outstanding contain restricted conversion prices. As of December 31, 2009, our 2.0% Notes are
convertible because the closing price of our common stock on that date was higher than the restricted conversion prices of these notes and our 2010 Zero Coupon Notes are convertible based on maturity
date. As a result, our 2.0% Notes and our 2010 Zero Coupon Notes have been classified as current liabilities on our consolidated balance sheet as of December 31, 2009. Under the terms of the
indentures governing the notes, we are obligated to repay in cash the aggregate principal balance of any such notes presented for conversion. As of the filing date of this report, we do not have
available cash, cash equivalents and investments sufficient to repay all of the convertible notes, if presented. In addition, other than the restrictive covenants contained in our credit agreement,
there are no restrictions on our use of this cash and the cash available to repay indebtedness may decline over time. If we do not have sufficient funds available to repay the principal balance of
notes presented for conversion, 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.

The restrictive covenants contained in our credit agreement may limit our activities.

With respect to our $200 million, three-year revolving credit facility, the credit agreement contains restrictive
covenants which affect, and in many respects could limit or prohibit, among other things, our ability to:



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Failure
to comply with the restrictive covenants in our credit agreement could preclude our ability to borrow or accelerate the repayment of any debt outstanding under the credit
agreement. Additionally, as a result of these restrictive covenants, we may be at a disadvantage compared to our competitors that have greater operating and financing flexibility than we do.

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.

To maximize our growth opportunities, we have entered into a number of collaboration agreements with third parties. In certain
countries outside the United States, we have entered into agreements with a number of partners with respect to the development, manufacturing and marketing of our products. 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 ultimately might not be successful in
establishing any such new or additional relationships.

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. For example, President Obama has made healthcare reform a
top priority for his administration, and certain members of Congress have introduced legislation to restrict or significantly limit branded pharmaceutical companies' ability to enter into patent
litigation settlement agreements with generic companies. Congress is also considering legislation to provide for FDA

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approval
of generic versions of branded biologic products. 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 United States 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 are focusing 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 may negatively impact our product sales and profitability.

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

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

The
conditions that our products treat, and some of the other disorders for which we are conducting additional studies, are currently treated with 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 NUVIGIL, there are several other products used for the treatment of excessive sleepiness or
narcolepsy in the United States, including methylphenidate products, and in our other territories, many of which have been available for a number of years and are available in inexpensive generic
forms. With respect to AMRIX, we face significant competition from SKELAXIN®, FLEXERIL® and other inexpensive generic forms of muscle relaxants. With respect to FENTORA, we
face competition from numerous short-and long-acting opioid products, including three productsJohnson & Johnson's DURAGESIC® and Purdue
Pharmaceutical's OXYCONTIN® and MS-CONTIN®that dominate the market. In addition, we are aware of numerous other companies developing other technologies
for rapidly delivering opioids to treat breakthrough pain that will compete against FENTORA in the market for breakthrough cancer pain in opioid-tolerant patients. ONSOLIS® is approved for
this indication. It also is possible that the existence of generic OTFC could negatively impact the growth of FENTORA. With respect to ACTIQ, generic competition from Barr has meaningfully eroded
branded ACTIQ sales and impacted sales of our own generic OTFC through Watson. Our generic sales also could be significantly impacted by the entrance into the market of additional generic OTFC
products, which could occur at any time. In October 2009, we understand that the FDA approved ANDAs by Barr and Covidien to market and sell generic OTFC. With respect to TREANDA, we face competition
from LEUKERAN®, CAMPATH® and the combination therapy of fludarabine, cyclophosphamide and rituximab. With respect to TRISENOX, the pharmaceutical market for the treatment of
patients with relapsed or refractory APL is served by a number of available therapeutics, such as VESANOID® by Roche in combination with chemotherapy.

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

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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. If we fail to realize the expected benefits from acquisitions we have consummated or 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 connection with an acquisition, we must estimate the value of the transaction by making certain assumptions about, among other things, likelihood of regulatory approval for unapproved
products and the market potential for marketed products and/or product candidates. Ultimately, our assumptions may prove to be incorrect, which could cause us to fail to realize the anticipated
benefits of a transaction. As part of our efforts to hedge risks associated with the uncertainty of acquisitions generally and pharmaceutical development specifically, we have structured certain
transactions as options-to-acquire. Pursuant to this structure, we typically make an upfront payment to secure the option, set forth the appropriate "trigger" for the option in
an option agreement and, should we exercise the option, make a subsequent payment to finalize the product or company acquisition. Our option transactions with Ception and BDC are examples of this
option structure. While we believe that this structure helps us to manage risk appropriately, it is possible that we will not "trigger" an
option-to-acquire, and therefore receive nothing of tangible value in return for our upfront payment to secure the option-to-acquire.

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.

We may be unable to successfully consolidate and integrate the operations of businesses we acquire, which may adversely affect our stock price, operating results and
financial condition.

We must consolidate and integrate the operations of acquired businesses 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. The diversion of our
management's attention and any delays or difficulties encountered in connection with these recent acquisitions, and any future acquisitions we may consummate, could result

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in
the disruption of our ongoing business or inconsistencies in standards, controls, procedures and policies that could negatively affect our ability to maintain relationships with customers,
suppliers, employees and others with whom we have business dealings.

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 the development of new indications for our existing products 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 generally takes 12 years or 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.

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.

The price of our common stock has been and may continue to be highly volatile, which may make it difficult for stockholders 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, 2009 through February 8, 2010 our common stock traded at a high price of $81.35 and a low price of $52.55. Negative announcements, including, among
others:



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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 or out of our industry, also are likely to affect the price of our common stock, regardless of our
operating performance.

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 and to 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:



We
have implemented a number of information technology systems, including SAP®, to assist us to meet our internal controls for financial reporting. While we believe our
systems are effective for that purpose, we cannot be certain that they will continue to be effective in the future or adaptable for future needs. Due to the number of controls to be examined, the
complexity of our processes, the subjectivity involved in determining the effectiveness of controls, and, more generally, the laws and regulations to which we are subject as a global company, 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 express an opinion on the effectiveness of
our internal control over financial reporting, 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.

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, 2009, 18.2% 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.

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Our customer base is highly concentrated.

Our principal customers are wholesale drug distributors. These customers comprise a significant part of the distribution network for
pharmaceutical products in the United States. Three large wholesale distributors, Cardinal Health, Inc., McKesson Corporation and AmerisourceBergen Corporation, control a significant share of
this network. These three wholesaler customers, in the aggregate, accounted for 75% of our total consolidated gross sales for the year ended December 31, 2009. Fluctuations in the buying
patterns of these customers, which may result from seasonality, wholesaler buying decisions 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.

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 those matters specifically described in Note 16 of the Consolidated Financial Statements included in Part II,
Item 8 of this Annual Report on Form 10-K, as well as numerous other litigation matters. While we currently do not believe that the settlement or adverse adjudication of
these other litigation matters 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 is unknown but could be material.

Unfavorable general economic conditions could adversely affect our business.

Our business, financial condition and results of operations may be affected by various general economic factors and conditions. Periods
of economic slowdown or recession in any of the countries in which we operate could lead to a decline in the use of our products and therefore could have an adverse effect on our business. In
addition, if we are unable to access the capital markets due to general economic conditions, we may not have the cash available or be able to obtain funding to permit us to meet our business
requirements and objectives, thus adversely affecting our business and the market price for our securities.

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.

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

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

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

ITEM 1B.    UNRESOLVED STAFF COMMENTS

None.

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 215,000 square feet of office, administrative, research and warehouse space that is near our Frazer and West Chester facilities. In Salt Lake City, Utah, we own approximately 200,000
square feet of manufacturing, warehousing and laboratory space and lease approximately 123,000 square feet for administrative, research and pilot plant functions. At our 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. In 2008, we began the transition of
manufacturing activities primarily performed at the Eden Prairie, Minnesota facility to our recently expanded manufacturing facility in Salt Lake City, Utah. As part of that transition we also

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consolidated
at our Brooklyn Park facility certain drug delivery research and development activities formerly performed in Salt Lake City. The transition of manufacturing activities and the closure of
the Eden Prairie facility are expected to be completed in 2011.

In
France, we own administrative facilities, a development facility, two manufacturing facilities, a packaging facility and various warehouses totaling approximately 355,000 square feet.
We lease office space for our satellite offices in a number of countries worldwide. On September 18, 2008, our subsidiary Cephalon France SAS informed the French Works Councils of its intention
to search for a potential acquiror of the manufacturing facility at Mitry-Mory, France. We are considering the proposed divestiture due to a reduction of manufacturing activities at the
Mitry-Mory manufacturing site. The proposed divestiture is subject to completion of a formal consultation process with the French Works Councils and employee representatives.

In
Australia, we lease two administrative and development facilities totaling approximately 40,000 square feet.

We
believe that our current facilities are adequate for our present purposes.

ITEM 3.    LEGAL PROCEEDINGS

The information set forth in Note 16 of the Consolidated Financial Statements included in Part II, Item 8 of this
Annual Report on Form 10-K is incorporated herein by reference.

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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 2009.

Executive Officers of the Registrant

The names, ages and positions held by our executive officers as of the filing date of this Annual Report on
Form 10-K are as follows:

Name

Age

PositionFrank Baldino, Jr., Ph.D.


56

Chairman and Chief Executive OfficerAlain Aragues


58

Executive Vice President and President of Cephalon EuropeValli F. Baldassano


49

Executive Vice President and Chief Compliance OfficerJ. Kevin Buchi


54

Chief Operating OfficerPeter E. Grebow, Ph.D.


63

Executive Vice President, Worldwide Technical OperationsWilco Groenhuysen


52

Executive Vice President and Chief Financial OfficerGerald J. Pappert


46

Executive Vice President, General Counsel and SecretaryLesley Russell, MB.Ch.B., MRCP


49

Executive Vice President and Chief Medical OfficerCarl A. Savini


60

Executive Vice President and Chief Administrative OfficerJeffry L. Vaught, Ph.D.


59

Executive Vice President and Chief Scientific Officer


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,
founder of the Company, has served as Chief Executive Officer and director since the Company's inception. He was appointed Chairman of the Board of Directors in 1999.
He currently serves as a director of Acusphere, Inc., a drug delivery company, NicOx S.A., a company engaged in the research, development and commercialization of nitric oxide
therapeutics, and Viropharma, Inc., a developer of proprietary antiviral pharmaceuticals for treatment of viral diseases. Dr. Baldino also holds several adjunct academic appointments and
is a trustee of Temple University.

Mr. Aragues
was appointed as Executive Vice President and President of Cephalon Europe in January 2010. Mr. Aragues joined Cephalon in 2002 to lead the company's expansion
in France following its 2001 acquisition of Group Lafon and was appointed President of Cephalon Europe in February 2005. Prior to joining Cephalon, Mr. Aragues held various senior positions in
the pharmaceutical industry at DuPont Pharmaceuticals in Europe and in the United States as well as at Bristol-Myers Squibb Pharma France. In February 2008, Mr. Aragues was awarded the highest
French Distinction as Chevalier de la Légion d'Honneur by the French Minister of Health, Mrs. Roselyne Bachelot. Mr. Aragues graduated from Institut des Sciences
Politiques of Toulouse in France with a Master in Economy, Finance and Business Administration.

Ms. Baldassano
joined Cephalon in October 2007 as Executive Vice President and Chief Compliance Officer. From April to September 2007, Ms. Baldassano served as Partner with
Fox Rothschild LLP in Philadelphia where she was a member of the litigation department and the founding member of the White Collar Compliance and Defense Practice Group. Between January 2004
and March 2007, Ms. Baldassano served as Vice President Global Compliance for Schering-Plough. Between 1999 and 2003, Ms. Baldassano service as Senior Director, Global Compliance and
Associate General Counsel for Pharmacia. Between 1990 and 1998, Ms. Baldassano was with the U.S. Attorney's Office in the Eastern District of Pennsylvania. Ms. Baldassano graduated from
Georgetown University and received her J.D. from Syracuse University.

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Mr. Buchi
joined Cephalon in March 1991 and, since January 2010, he has served as Chief Operating Officer. From February 2006 through January 2010, Mr. Buchi was Executive
Vice President and Chief Financial Officer. From April 1996 through January 2006, he served as Senior Vice President and Chief Financial Officer, and he held several financial positions with the
Company prior to 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 Graduate School of Management, Northwestern University in 1982 and is a certified public accountant. Mr. Buchi serves as a member of the board of directors of Celator
Pharmaceuticals, Inc., a privately-held pharmaceutical company.

Dr. Grebow
joined Cephalon in January 1991 and, since February 2005, he has served as Executive Vice President, Worldwide Technical Operations. Dr. Grebow also has served
as Senior Vice President, Worldwide Technical Operations, Senior Vice President, Business Development, and Vice President, Drug Development. 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 serves as a member of the board of
directors of Optimer Pharmaceuticals, Inc., a publicly-traded biotechnology company. Dr. Grebow received a Ph.D. in chemistry from the University of California, Santa Barbara.

Mr. Groenhuysen
joined Cephalon in August 2007 as Senior Vice President of Finance. Since January 2010, he has held the position of Executive Vice President & CFO with
responsibility for Worldwide Finance, Commercial Operations and Risk Management. Prior to joining Cephalon he spent 20 years with Philips Electronics in various assignments in Europe, Asia and
the United States, the latest of which started in 2002 when he was promoted to Senior Vice President and Chief Financial Officer of Philips Electronics North America Corporation.

Mr. Pappert
joined Cephalon in May 2008 as Executive Vice President and General Counsel. In October 2008, Mr. Pappert assumed the responsibilities of the Company Secretary.
Prior to coming to Cephalon, Mr. Pappert was a partner with Ballard Spahr Andrews & Ingersoll LLP in Philadelphia, PA, where he was a member of the Litigation Department. From
2003 to 2005, Mr. Pappert was the Commonwealth of Pennsylvania Attorney General. From 1997 to 2003, he held the position of First Deputy Attorney General of Pennsylvania. Mr. Pappert is
a graduate of Villanova University and earned his Juris Doctorate from the University of Notre Dame Law School.

Dr. Russell
joined Cephalon in January 2000 and, since August 2008, she has served as Executive Vice President and Chief Medical Officer. From November 2006 to August 2008,
Dr. Russell served as Executive Vice President, Worldwide Medical and Regulatory Operations. From January 2000 to August 2006, Dr. Russell was Senior Vice President of Worldwide Clinical
Research with the Company. Dr. Russell came to Cephalon in January 2000 from US Bioscience Inc./Medimmune Oncology, where she was Vice President Clinical Research, responsible for
directing and implementing the clinical programs in oncology and HIV research. Prior to joining US Bioscience, Dr. Russell was Director of Clinical Research at USB Pharma Ltd, the
European subsidiary of US Bioscience. Before her work at USB Pharma, Dr. Russell was a Clinical Research Physician at Eli Lilly UK, responsible for the oncology clinical trial program in the
UK. Dr. Russell was Medical Director at Amgen UK from May 1992 to May 1995. Before joining the pharmaceutical industry, Dr. Russell was trained in Hematology/Oncology at Royal Infirmary
of Edinburgh, and Royal Hospital for Sick Children Edinburgh UK and was a Research Fellow at University of Edinburgh Faculty of Medicine. Dr. Russell serves as a member of the board of
directors of AMAG Pharmaceuticals, Inc., a biopharmaceutical company. Dr. Russell received MB.Ch.B. from University of Edinburgh, Scotland, Faculty of Medicine and is a member of the
Royal College of Physicians, UK.

Mr. Savini
joined Cephalon in June 1993 and, since February 2006, he has served as Executive Vice President and Chief Administrative Officer. Mr. Savini has served in
various capacities with the

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Company,
including Senior Vice President, Administration and Senior Vice President, Human Resources. 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 August 2008, he has served as Executive Vice President and Chief Scientific Officer responsible for directing Cephalon's
research operations. 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 Global Select Market under the symbol "CEPH." The following table sets forth the range of high
and low sales prices for the common stock as reported on the NASDAQ Global Select Market for the periods indicated below.

High

Low2009First Quarter

$
81.35

$
60.42Second Quarter


70.09


54.63Third Quarter


69.30


52.55Fourth Quarter


63.16


53.052008First Quarter

$
74.31

$
56.20Second Quarter


71.53


59.91Third Quarter


80.39


66.47Fourth Quarter


79.00


59.45


As
of February 8, 2010, there were 412 holders of record of our common stock. On February 8, 2010, the last reported sale price of our common stock as reported on the
NASDAQ Global Select Market was $65.00 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(2)

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
ProgramsOctober 1 - 31, 2009




$






November 1 - 30, 2009











December 1 - 31, 2009


115,068


58.16





Total


115,068

$
58.16








(1)This
column reflects the following transactions during the fourth quarter of 2009: (i) 20,198 shares repurchased from employees and (ii) the
surrender to Cephalon of 94,870 shares of common stock to satisfy tax withholding obligations in connection with the vesting of restricted stock units issued to employees.(2)Price
paid per share is a weighted average based on the closing price of our common stock on the various vesting dates.


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 stock options, warrants and rights
under all of our existing equity compensation plans as of

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December 31,
2009, including 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


7,147,445
(3)
$
63.38


686,982Equity compensation plans not approved by stockholders(4)


1,286,467

$
62.49


3,725Total


8,433,912

$
63.25


690,707


(1)The
foregoing does not include stock options assumed under the Anesta Corp. 1993 Stock Option Plan (the "Anesta Plan") as a result of our acquisition of
Anesta Corp. in 2000. As of December 31, 2009, there were 483 shares of common stock subject to outstanding stock options under the Anesta Plan, with a weighted average exercise price of these
stock options of $31.37 per share. No additional shares are reserved for issuance under the Anesta Plan.(2)The
2004 Plan permits our Board of Directors or the Stock Option and Compensation Committee of our Board to award stock options to participants. Up to
189,200 of the shares remaining available for issuance under equity compensation plans approved by stockholders may be issued as restricted stock units. Restricted stock unit awards are not permitted
to be made under the terms of the 2000 Plan.(3)Includes
awards covering 895,250 shares of unvested restricted stock units that are outstanding under the 2004 Plan.(4)Issued
under the 2000 Plan, which does not require the approval of, and has not been approved by, Cephalon stockholders.


2000 Equity Compensation Plan for Employees and Key Advisors

On December 13, 2000, our Board of Directors adopted the 2000 Plan. The 2000 Plan has been amended several times since its
adoption, with the most recent amendment to the 2000 Plan on July 25, 2002. The 2000 Plan provides that stock options may be granted to our employees who are not officers or directors of
Cephalon and consultants and advisors who perform services for Cephalon. At the time of its initial approval, the 2000 Plan was not submitted to, nor was it required to be submitted to, our
stockholders for approval. Amendments to the 2000 Plan, including amendments increasing the number of shares of common stock reserved for issuance under the 2000 Plan, also did not require approval of
our stockholders. In light of changes to the NASDAQ shareholder approval requirements for stock option plans, our Board of Directors has decided that it will not further increase the number of shares
authorized for issuance under the 2000 Plan, but will continue to use any shares authorized for issuance under the 2000 Plan for future grants until the 2000 Plan expires according to its terms in
2010.

The
purpose of the 2000 Plan is to promote our success by linking the personal interests of our non-executive employees and consultants and advisors to those of our
stockholders and by providing participants with an incentive for outstanding performance. The 2000 Plan currently authorizes the

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granting
of "non-qualified stock options" ("NQSOs") only. The 2000 Plan is administered and interpreted by the Stock Option and Compensation Committee of the Board of Directors subject to
ratification by the Board of Directors. The Stock Option and Compensation Committee determines the individuals who will receive a NQSO grant under the 2000 Plan, the number of shares of common stock
subject to the NQSO, the period during which the NQSO becomes exercisable, the term of the NQSO (but not to exceed 10 years from the date of grant) and the other terms and conditions of the
NQSO consistent with the terms of the 2000 Plan. All of the NQSOs that are currently outstanding under the 2000 Plan become exercisable ratably over a four-year period beginning on the
date of grant and expire ten years from the date of grant. The exercise price of a NQSO granted under the 2000 Plan will be determined by the Stock Option and Compensation Committee, but may not be
less than the fair market value of the underlying stock on the date of grant. A grantee may exercise a NQSO granted under the 2000 Plan by delivering notice of exercise to the Stock Option and
Compensation Committee and paying the exercise price (i) in cash, (ii) with approval of the Stock Option and Compensation Committee, by delivering shares of common stock already owned by
the grantee and having a fair market value on the date of exercise equal to the exercise price, or through attestation to ownership of such shares, or (iii) through such other method as the
Stock Option and Compensation Committee may approve. In the event of a "Corporate Transaction," (e.g., a merger in which 50% or more of the common stock is transferred to a third party), all
outstanding stock options will automatically accelerate and become immediately exercisable, subject to certain limitations.

The
Board of Directors has the authority to amend or terminate the 2000 Plan at any time without stockholder approval. The 2000 Plan will terminate on December 12, 2010, unless it
is terminated earlier or extended by the Board of Directors. No amendment or termination of the 2000 Plan may adversely affect any stock option previously granted under the 2000 Plan without the
written consent of the participant, unless required by applicable law.

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ITEM 6.    SELECTED FINANCIAL DATA(In thousands, except per share data)

The
following five year summary table includes the acquisitions of AMRIX in August 2007, Zeneus Holdings Limited in December 2005, substantially all the assets
related to TRISENOX from CTI and CTI Technologies in July 2005, the outstanding capital stock of Salmedix Inc. in June 2005, 50.4% of the outstanding shares of Arana Therapeutics Limited in May
2009 and the remaining outstanding shares as of August 2009. The selected financial data also includes the results of Ception Therapeutics as of January 2009, Acusphere Inc. from November 2008
until June 2009 and BioAssets Development Corporation, Inc. as of November 2009 as a result of transactions that were determined to create variable interest entities in which Cephalon has determined
it is the primary beneficiary. See Note 2 to our Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for additional
information on these transactions.

Five-year summary of selected financial data:

Year Ended December 31,Statement of operations data

2009

As Adjusted
2008*

As Adjusted
2007*

As Adjusted
2006*

As Adjusted
2005*Net sales

$
2,151,548

$
1,943,464

$
1,727,299

$
1,720,172

$
1,156,518Other revenues


40,760


31,090


45,339


43,897


55,374Total revenues


2,192,308


1,974,554


1,772,638


1,764,069


1,211,892Settlement reserve





7,450


425,000





Impairment charges


182,080


99,719





12,417


20,820Acquired in-process research and development


46,118


41,955





5,000


366,815Debt exchange expense











41,106


Restructuring charge


13,825


8,415








Loss on sale of equipment





17,178


1,022





Income tax expense (benefit)


78,680


(37,819
)

103,153


76,524


(77,279
)Net income (loss)


210,727


171,889


(226,429
)

115,642


(187,227
)Net loss attributable to noncontrolling interest


131,900


21,073








Net income (loss).attributable to Cephalon, Inc.

$
342,627

$
192,962

$
(226,429
)
$
115,642

$
(187,227
)Basic income (loss) per common share attributable to Cephalon, Inc.

$
4.74

$
2.84

$
(3.40
)
$
1.91

$
(3.23
)Weighted average number of common shares outstanding


72,342


68,018


66,597


60,507


58,051Diluted income (loss) per common share attributable to Cephalon, Inc.

$
4.41

$
2.54

$
(3.40
)
$
1.66

$
(3.23
)Weighted average number of common shares outstanding-assuming dilution


77,733


76,097


66,597


69,672


58,051




December 31,Balance sheet data

2009

As Adjusted
2008*

As Adjusted
2007*

As Adjusted
2006*

As Adjusted
2005*Cash, cash equivalents and investments

$
1,647,635

$
524,459

$
826,265

$
521,724

$
484,090Total assets


4,658,095


3,082,942


3,395,759


2,937,339


2,638,907Current portion of long-term debt


818,925


781,618


944,659


701,074


590,038Long-term debt (excluding current portion)


363,696


3,692


3,788


206,895


617,944Redeemable equity


207,307


248,403


292,509


322,239


343,122Accumulated deficit


(178,659
)

(521,286
)

(714,248
)

(480,651
)

(596,293
)Total equity


2,478,073


1,416,680


1,191,557


1,203,947


577,025


*As
adjusted in accordance with the transition provisions of accounting for convertible debt instruments that may be settled in cash upon conversion (including
partial cash settlement) and accounting for noncontrolling interests in consolidated financial statements. See Note 1 of the Consolidated Financial Statements included in Part II,
Item 8 of this Annual Report on Form 10-K for additional information.


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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 encourage you to read this MD&A in conjunction with our consolidated financial statements
included in Part II, Item 8 of this Annual Report on Form 10-K and the "Risk Factors" contained in Part I, Item 1A of this Annual Report on
Form 10-K.

EXECUTIVE SUMMARY

Cephalon, Inc. is an international biopharmaceutical company dedicated to the discovery, development and commercialization of
innovative products in four core therapeutic areas: central nervous system ("CNS"), pain, oncology and inflammatory disease. In addition to conducting an active research and development program, we
market seven proprietary products in the United States and numerous products in various countries throughout Europe and the world. Consistent with our core therapeutic areas, we have aligned our
approximately 775-person U.S. field sales and sales management teams by area. We have a sales and marketing organization numbering approximately 335 persons that supports our presence in
nearly 50 countries in Europe, the Middle East and Africa and have a strong presence in the five key European pharmaceutical markets: France, Germany, Italy, Spain and the United Kingdom, and
affiliates in Benelux and Poland. For the year ended December 31, 2009, our total revenues and net income attributable to Cephalon, Inc. were $2.2 billion and
$342.6 million, respectively. Our revenues from U.S. and European operations are detailed in Note 19 to our Consolidated Financial Statements included in Part II, Item 8 of
this Annual Report on Form 10-K.

On
January 31, 2010, we entered into a Share Purchase Agreement with Mepha Holding AG pursuant to which we agreed to purchase all of the issued share capital of Mepha AG
("Mepha"), a privately-held, Swiss-based pharmaceutical company, for CHF 622.5 million (or approximately US$590 million) in cash, subject to certain closing
adjustments. The closing of the transaction is subject to customary closing conditions, including receipt of the applicable antitrust approvals. The transaction is expected to close in the second
quarter of 2010. Founded in 1949, Mepha markets branded and non-branded generics as well as specialty products in more than 50 countries. Mepha develops and manufactures its products in
Aesch/Basel, Switzerland with a focus on Swiss-quality standards. Mepha's research and development focuses on the development of improved and innovative generics providing additional benefits for
patients. Furthermore, Mepha is active in malaria research offering innovative life-saving therapies for adults and children. Mepha is the leading company on the Swiss generic market, with
more than 120 products in over 500 packaging forms. Mepha has operational subsidiaries in Portugal and the Baltics. Through partnerships, Mepha markets its products in other European countries, in the
Middle East, Africa, South and Central America as well as in Asia. Mepha employs approximately 1,000 people worldwide, 500 of them in Switzerland.

We
have recently completed certain transactions designed to build a portfolio of potential products targeted to treat inflammatory diseases. In 2009, we (i) acquired Arana
Therapeutics Limited, an Australian company, whose lead domain antibody compound, CEP-37247, is in Phase II development for patients with certain inflammatory diseases;
(ii) acquired an exclusive, worldwide license to the ImmuPharma investigational compound, LUPUZOR, which is in Phase IIb development for the treatment of systemic lupus
erythematosus; (iii) purchased an option to acquire privately-held Ception Therapeutics, Inc., whose lead humanized monoclonal antibody compound, reslizumab, is in
Phase II development for eosinophilic asthma; and (iv) purchased an option to acquire privately-held BioAssets Development Corporation, which has an intellectual property
estate around use of TNF inhibitors for sciatic pain in patients with intervertebral disk herniation, as well as other spinal disorders, which intellectual property we expect to utilize to develop
CEP-37247 as a possible treatment of sciatica.

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Our
most significant products are our wakefulness products, PROVIGIL® (modafinil) Tablets [C-IV] and NUVIGIL® (armodafinil)
Tablets [C-IV], which comprised 51% of our total consolidated net sales for the year ended December 31, 2009, of which 94% was in the U.S. market. For the
year ended December 31, 2009, combined consolidated net sales of PROVIGIL and NUVIGIL increased 11% over the year ended December 31, 2008. In June 2007, we secured final U.S. Food and
Drug Administration (the "FDA") approval of the NUVIGIL indication for the treatment of excessive sleepiness associated with narcolepsy, obstructive sleep apnea/hypopnea syndrome ("OSA/HS") and shift
work sleep disorder ("SWSD"). We launched NUVIGIL on June 1, 2009. In March 2009, we announced positive results from a Phase II clinical trial of NUVIGIL as adjunctive therapy for
treating major depressive disorder in adults with bipolar I disorder and our plan to advance to Phase III trials for this indication. In April 2009, we announced positive results from a
Phase III clinical trial of NUVIGIL as a treatment for excessive sleepiness associated with jet lag disorder and filed a supplemental new drug application (an "sNDA") for this indication with
the FDA in June 2009. We expect a response from the FDA by March 29, 2010. In May 2009, we announced positive results from a Phase IV study of NUVIGIL in obstructive sleep apnea and
co-morbid major depressive disorder requiring ongoing antidepressant therapy.

On
a combined basis, our two next most significant products are FENTORA® (fentanyl buccal tablet) [C-II] and ACTIQ® (oral
transmucosal fentanyl citrate) [C-II] (including our generic version of ACTIQ ("generic OTFC")). Together, these products comprise 17% of our total consolidated net
sales for the year ended December 31, 2009, of which 80% was in the U.S. market. In October 2006, we launched FENTORA in the United States. FENTORA is indicated for the management of
breakthrough pain in patients with cancer who are already receiving and are tolerant to opioid therapy for their underlying persistent cancer pain. In April 2008, we received marketing authorization
from the European Commission for EFFENTORA for the same indication as FENTORA and launched the product in certain European countries in January 2009. We have focused our clinical strategy
for FENTORA on studying the product in opioid-tolerant patients with breakthrough pain associated with chronic pain conditions, such as neuropathic pain and back pain. In November 2007, we submitted
an sNDA to the FDA seeking approval to market FENTORA for the management of breakthrough pain in opioid tolerant patients with chronic pain conditions. In early April 2009, we submitted a Risk
Evaluation and Mitigation Strategy (the "REMS Program") with respect to FENTORA. Subject to the timing and nature of further discussions with the FDA, we expect to receive a response from the FDA
regarding the FENTORA REMS Program by the middle of 2010. With respect to ACTIQ, its sales have been meaningfully eroded by the launch of FENTORA and by generic OTFC products sold since June 2006 by
Barr Laboratories, Inc. and by us through our sales agent, Watson Pharmaceuticals, Inc. We expect this erosion will continue. In September 2009, our obligation to supply Barr with
generic OTFC ended pursuant to the terms of a license and supply agreement we entered into with Barr in July 2004. In October 2009, we understand that the FDA approved ANDAs by Barr and by Covidien to
market and sell generic OTFC. We submitted our REMS Program for ACTIQ and generic OTFC in early April 2009. We expect to receive a response from the FDA by the middle of 2010.

In
March 2008, the FDA granted an orphan drug approval for TREANDA® (bendamustine hydrochloride) for the treatment of patients with chronic lymphocytic leukemia
("CLL") and, in April 2008, the product was launched. In October 2008, we received FDA approval of TREANDA for treatment of patients with indolent B-cell
non-Hodgkin's lymphoma ("NHL") who have progressed during or within six months of treatment with rituximab or a rituximab-containing regimen. TREANDA comprised 10% of our
total consolidated net sales for the year ended December 31, 2009, all of which were in the U.S. market. While not a currently approved indication by the FDA, TREANDA was recently listed in the
2010 NCCN clinical practice guidelines as a front-line treatment for NHL. We believe the guidelines listing was the result of an independent Phase III clinical study conducted by
the German Study Group for Indolent Lymphomas ("StiL Group") in Giessen, Germany. The StiL Group's study results announced in December 2009 indicated better tolerability and more than a
20-month

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improvement
in median progression free survival in patients treated with TREANDA in combination with rituximab versus cyclophosphamide, doxorubicin, vincristine, and prednisolone (commonly known as
CHOP) in combination with rituximab for the first-line treatment of patients with advanced follicular, indolent, and mantle cell lymphomas, each of which is not currently an
FDA-approved indication.

In
August 2007, we acquired exclusive North American rights to AMRIX® (cyclobenzaprine hydrochloride extended-release capsules) from E. Claiborne Robins Company, Inc.,
a privately-held company d/b/a ECR Pharmaceuticals ("ECR"). Two dosage strengths of AMRIX (15 mg and 30 mg) were approved in February 2007 by the FDA for short-term use as an
adjunct to rest and physical therapy for relief of muscle spasm associated with acute, painful musculoskeletal conditions. We made the product available in the United States in October 2007 and
commenced a full U.S. launch in November 2007. In June 2008, the U.S. Patent and Trademark Office (the "PTO") issued a pharmaceutical formulation patent for AMRIX, which expires in February 2025.

In
August 2008, we established a $200 million, three-year revolving credit facility (the "Credit Agreement") with JP Morgan Chase Bank, N.A. and certain other lenders.
The credit facility is available for letters of credit, working capital and general corporate purposes and is guaranteed by certain of our domestic subsidiaries. The Credit Agreement contains
customary covenants, including but not limited to covenants related to total debt to Consolidated EBITDA (as defined in the Credit Agreement), senior debt to Consolidated EBITDA, interest expense
coverage and limitations on capital expenditures, asset sales, mergers and acquisitions, indebtedness, liens, and transactions with affiliates. As of the filing date of this Annual Report on
Form 10-K, we have not drawn any amounts under the credit facility.

As
a biopharmaceutical company, our future success is highly dependent on obtaining and maintaining patent protection or regulatory exclusivity for our products and technology. We intend
to vigorously defend the validity, and prevent infringement, of our patents. The loss of patent protection or regulatory exclusivity on any of our existing products, whether by third-party challenge,
invalidation,
circumvention, license or expiration, could materially impact our results of operations. In late 2005 and early 2006, we entered into PROVIGIL patent settlement agreements with certain generic
pharmaceutical companies. As part of these separate settlements, we agreed to grant to each of these parties a non-exclusive royalty-bearing license to market and sell a generic version of
PROVIGIL in the United States, effective in April 2012, subject to applicable regulatory considerations. Under the agreements, the licenses could become effective prior to April 2012 only if a generic
version of PROVIGIL is sold in the United States prior to this date. We filed each of the settlements with both the U.S. Federal Trade Commission (the "FTC") and the Antitrust Division of the U.S.
Department of Justice (the "DOJ") as required by the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the "Medicare Modernization Act"). The FTC conducted an investigation of
each of the PROVIGIL settlements and, in February 2008, filed suit against us challenging the validity of the settlements and related agreements. The complaint alleges a violation of
Section 5(a) of the Federal Trade Commission Act and seeks to permanently enjoin us from maintaining or enforcing these agreements and from engaging in similar conduct in the future. We believe
the FTC complaint is without merit and we have filed a motion to dismiss the case. While we intend to vigorously defend ourselves and the propriety of the settlement agreements, these efforts will be
both expensive and time consuming and, ultimately, due to the nature of litigation, there can be no assurance that these efforts will be successful.

We
also received rights to certain modafinil-related intellectual property developed by each party and in exchange for these rights, we agreed to make payments to Barr, Mylan, Ranbaxy
and Teva collectively totaling up to $136.0 million, consisting of upfront payments, milestones and royalties on net sales of our modafinil products. In order to maintain an adequate supply of
the active drug substance modafinil, we entered into agreements with three modafinil suppliers whereby we have

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agreed
to purchase minimum amounts of modafinil through 2012, with remaining aggregate purchase commitments totaling $15.9 million as of December 31, 2009. Based on our current
assessment, we have recorded a reserve of $9.0 million for purchase commitments for modafinil raw materials not expected to be utilized. For more information, see Note 8 to our
Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K, which is incorporated herein by reference.

In
September 2008, as part of our settlement with the U.S. government regarding their investigation of our promotional practices with respect to ACTIQ, GABITRIL and PROVIGIL, we entered
into a five-year Corporate Integrity Agreement (the "CIA") with the Office of Inspector General of the Department of Health and Human Services. The CIA provides criteria for establishing
and maintaining compliance with federal laws governing the marketing and promotion of our products. We are also subject to periodic reporting and certification requirements attesting that the
provisions of the CIA are being implemented and followed.

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 particular, as a biopharmaceutical company, our future success is highly dependent on obtaining and
maintaining
patent protection or regulatory exclusivity for our products and technology. In that regard, we are currently engaged in lawsuits with respect to generic company challenges to the validity and/or
enforceability of our patents covering AMRIX, FENTORA and NUVIGIL. We intend to vigorously defend the validity, and prevent infringement, of our patents. The loss of patent protection or regulatory
exclusivity on any of our existing products, whether by third-party challenge, invalidation, circumvention, license or expiration, could materially impact our results of operations. For more
information regarding the legal proceedings described in this Overview and others, please see Note 16 to our Consolidated Financial Statements included in Part II, Item 8 of this
Annual Report on Form 10-K, which is incorporated herein by reference.

We
have significant levels of indebtedness outstanding, nearly all of which consists of convertible notes. Under the terms of the indentures governing nearly all of our notes, we are
obligated to repay in cash the aggregate principal balance of any such notes presented for conversion. For a more complete description of these notes, see Note 13 to our Consolidated Financial
Statements included in Part II, Item 8 of this Annual Report on Form 10-K. We do not have available cash, cash equivalents and investments sufficient to repay all of
the convertible notes, if presented. In addition, there are no restrictions on our use of this cash, and the cash available to repay indebtedness may decline over time.

As
of December 31, 2009 the fair value of both the 2.0% convertible senior subordinated notes due June 1, 2015 (the "2.0% Notes") and Zero Coupon Convertible Notes due June
2033, first putable June 15, 2010 (the "Zero Coupon Notes") is greater than the value of the shares into which such notes are convertible. We believe that the share price of our common stock
would have to significantly increase over the market price as of the filing date of this report before the fair value of the convertible notes would be less than the value of the common stock shares
underlying the notes. As such, we believe it is highly unlikely that holders of the 2.0% Notes or Zero Coupon Notes will present significant amounts of such notes for conversion under the current
terms. In the unlikely event that a significant conversion did occur, we believe that we have the ability to raise sufficient cash to repay the principal amounts due through a combination of utilizing
our existing cash on hand, accessing our credit facility, raising money in the capital markets or selling our note hedge instruments for cash. 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.

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RECENT ACQUISITIONS AND TRANSACTIONS

For additional information related to each of the following acquisitions and transactions, see Note 2 to
the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.



On May 27, 2009, we issued an aggregate of 5,000,000 shares of common stock, par value $0.01 per share, at a price of $60.00 per
share, resulting in net cash proceeds of $288.0 million. Concurrently with the equity offering, we also issued $500.0 million aggregate principal amount of 2.5% convertible senior
subordinated notes due on May 1, 2014. See Note 13 to our Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on
Form 10-K.



In December 2009, we entered into an agreement with UCB Pharma France under which we acquired all assets related to the development,
manufacturing, marketing and sale of VOGALENE® (metopimazine) and VOGALIB® (metopimazine) in France and French Overseas territories for $53.3 million. These products are
approved for use in the symptomatic treatment of nausea and vomiting. The injectible solution is approved for the prevention of nausea and vomiting in patients under chemotherapy.



Effective November 2009, we signed an agreement with BioAssets Development Corporation ("BDC") that sets forth our option to acquire
BDC. Under the terms of the option agreement, we paid BDC an upfront payment of $30.0 million. If we exercise the option, we have agreed to pay a total of $12.5 million plus the value of
BDC's net working capital less the amount of any outstanding debt. BDC stockholders could also receive additional future payments related to regulatory and sales milestones. BDC is currently
conducting a Phase II placebo-controlled proof of
concept study with the tumor necrosis factor (TNF) inhibitor, etanercept, epidurally administered to a minimum of 40 patients with sciatica. Sciatica is a neuropathic inflammatory pain condition that
occurs when the sciatic nerve is compressed, injured or irritated. BDC has secured an intellectual property estate around use of TNF inhibitors for sciatic pain in patients with intervertebral disk
herniation, as well as other spinal disorders. We may exercise our option at any time from the closing date of the option agreement until the date that is 60 days after receipt of
one-month patient response data from BDC's Phase II study. Data are anticipated to be available in the second half of 2010.

We
have determined that, because of our rights under the BDC option agreement, effective on November 18, 2009, BDC is a variable interest entity for which we are the primary
beneficiary. As a result, as of November 18, 2009 we have included the financial condition and results of operations of BDC in our consolidated financial statements. However, we do not have an
equity interest in BDC and, therefore, we have allocated the BDC losses to noncontrolling interest in the consolidated statement of operations. If the BDC option expires unexercised, we will
deconsolidate BDC and recognize a loss of $30.0 million, equal to our investment in BDC. BDC did not have an impact on our revenues or earnings attributable to our Cephalon shareholders for the
period ended December 31, 2009 or on a pro forma basis for the periods ended December 31, 2009 and 2008. BDC is included in our U. S. operating segment.



On February 27, 2009, we announced that we acquired (through our wholly owned subsidiary Cephalon International
Holdings, Inc. ("Cephalon International")), approximately 19.8% of the total issued share capital (the "Equity Stake") of Arana Therapeutics Limited, an Australian company listed

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on
the Australian Securities Exchange ("Arana"), for $41.4 million and that we intended to initiate a takeover offer for Arana (through Cephalon International). On March 9, 2009, through
Cephalon International, we filed a Bidder's Statement with the Australian Securities and Investments Commission in connection with our takeover offer for Arana. The offer terms consisted of the
following:



The
takeover offer closed on June 29, 2009. Cephalon International's relevant interest in Arana as of that date was 93.1%. Cephalon International exercised a compulsory
acquisition to acquire the remaining 6.9% interest in Arana's ordinary shares, which was completed on August 8, 2009. The total funds used to acquire Arana shares was $223.2 million, net
of gains on foreign exchange contracts.

Arana
is a biopharmaceutical company focused on developing next generation antibody and protein based drugs that will improve the lives of patients with inflammatory diseases and cancer.
The company's lead compound, CEPH 37247, is a new generation tumor necrosis factor (TNF) alpha blocker. Arana has a patent portfolio related to anti-TNF alpha antibodies and receives
licensing income in connection with certain patents. We acquired Arana in order to expand our technology base. Arana is included in our U.S. operating segment.

Our
initial investment in Arana was recorded as an available for sale investment. On May 27, 2009, we acquired additional shares for $89.8 million which increased our Arana
holdings to 50.4% of the outstanding shares. As a result, effective on that date we have included Arana in our consolidated financial statements. The 90% Premium payment is considered contingent
consideration and was initially recognized at its estimated fair value of $1.0 million for the shares purchased on May 27, 2009. Upon satisfying the 90% criteria on June 12, 2009,
the excess of the actual payments over the recorded liability for the 90% premium of $2.8 million was recorded as a charge to other income (expense), net. The fair value of the noncontrolling
interest in Arana as of May 27, 2009 was $104.7 million based on the closing stock price for Arana's shares on that date.

The
fair value of our Arana holdings of approximately 19.8% immediately prior to the acquisition on May 27, 2009 was $48.0 million. This investment was remeasured to fair
value on the acquisition date with the increase of $6.6 million over the original cost recognized in other income (expense), net. This gain is the result of an increase in the value of the
Australian dollar relative to the U.S. dollar, net of changes in the Arana share price. For the year ended December 31, 2009, we have included $14.0 million of revenues and
$14.6 million of net losses attributable to Cephalon, Inc. for Arana in our consolidated results.



In January 2009, we entered into an option agreement (the "Ception Option Agreement") with Ception Therapeutics, Inc.
("Ception"). Under the terms of the Ception Option Agreement, we have the irrevocable option (the "Ception Option") to purchase all of the outstanding capital stock on a fully diluted basis of Ception
at any time on or prior to the expiration of the Ception Option Period (as defined below). As consideration for the Ception Option, we paid $50.0 million to Ception and paid Ception
stockholders an aggregate of $50.0 million. We also agreed to provide up to $25.0 million of financing to Ception during the Ception Option Period. As of December 31, 2009, we
have advanced $11.0 million to Ception under the financing agreement. Through the date of this filing, in 2010 we

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advanced
an additional $14.0 million to Ception under the financing agreement. We are not obligated to provide any additional financing to Ception. Based on an agreement we entered into with
Ception in January 2010 to amend the Ception Option Agreement, we, in our sole discretion, may exercise the Ception Option by providing written notice to Ception at any time during the period (the
"Ception Option Period") from January 13, 2009 to and including the date that is (a) 15 business days after the later of (i) the receipt by Cephalon of the final study report for
Ception's Phase IIb/III clinical trial for CINQUIL as a treatment for pediatric eosinophilic esophagitis (the "EE Study") or (ii) the receipt by Cephalon of the top-line data
from Ception's Phase II study for CINQUIL as a treatment for eosonophilic asthma (the "EA Study") or (b) such earlier date on which Cephalon terminates the Ception Option Agreement
pursuant to its terms. We received the EE Study final report in January 2010 and anticipate receiving the EA Study top-line data in the first quarter of 2010. If we exercise the Ception
Option, we have agreed to pay a total of $250.0 million less any third party debt payable by Ception in exchange for all the outstanding capital stock of Ception on a fully-diluted basis.
Ception stockholders also could receive (i) additional payments related to clinical and regulatory milestones and (ii) royalties related to net sales of products developed from Ception's
program to discover small molecule, orally-active, anti-TNF (tumor necrosis factor) receptor agents.

In
November 2009, we, together with Ception, announced top-line results from a Phase IIb/III clinical trial for CINQUIL as a treatment for pediatric eosinophilic
esophagitis ("EoE"), which is further discussed in Part I, Item 1 "OverviewInflammatory DiseasesCINQUIL" of this Annual Report on
Form 10-K. Based on these results, we reduced our estimate of future cash flows from an EoE indication for CINQUIL and recognized an impairment charge to reduce the associated
intangible asset carrying value to its revised estimated fair value. See Note 11 to our Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on
Form 10-K for additional information.

We
have determined that, because of our rights under the Ception Option Agreement, effective on January 13, 2009, Ception is a variable interest entity for which we are the
primary beneficiary. As a result, as of January 13, 2009 we have included the financial condition and results of operations of
Ception in our consolidated financial statements. However, we do not have an equity interest in Ception and, therefore, we have allocated the Ception losses to noncontrolling interest in the
consolidated statement of operations. If the Ception Option expires unexercised, we will deconsolidate Ception and recognize a loss of $100.0 million, equal to our investment in Ception. We
will also need to assess Ception's ability to repay loan amounts advanced under the financing agreement.



In November 2008, we entered into a license and convertible note transaction with Acusphere, Inc. ("Acusphere"). In connection
with the transaction, we received an exclusive worldwide license from Acusphere to all of its intellectual property relating to the development and marketing of celecoxib for all current and future
indications. Under the license, we paid Acusphere an upfront fee of $5.0 million and agreed to make a $15.0 million milestone payment, as well as royalties on net sales. In addition, we
purchased a $15.0 million senior secured three-year convertible note (the "Acusphere Note") from Acusphere, secured by substantially all the assets of Acusphere. Separately, in
March 2008, we purchased license rights for Acusphere's Hydrophobic Drug Delivery Systems (HDDS) technology for use in oncology therapeutics for $10.0 million.

On
June 24, 2009, we exchanged the Acusphere Note and $1.0 million for (i) the elimination of the $15.0 million milestone payment and any future royalty
payments associated with the celecoxib license agreement and (ii) the Acusphere patent rights relating to the HDDS technology.

We
had previously determined that based on the rights afforded to us under the Acusphere Note, effective on November 3, 2008 Acusphere was a variable interest entity for which we
were the primary beneficiary and began including Acusphere in our consolidated financial statements. Effective with the

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termination
of the Acusphere Note, we are no longer considered the primary beneficiary and deconsolidated Acusphere, resulting in a $9.4 million charge to acquired in-process
research and development as a result of the elimination of the royalty and milestone payments associated with the celecoxib license agreement.

Effective
January 1, 2009 through the deconsolidation of Acusphere on June 24, 2009, we attributed Acusphere's losses to the noncontrolling interest, which increased net
income attributable to Cephalon, Inc. by $10.6 million during the twelve months ended December 31, 2009.



In November 2008, we entered into an option agreement (the "ImmuPharma Option Agreement") with ImmuPharma plc ("ImmuPharma")
providing us with an option to obtain an exclusive, worldwide license to the investigational medication LUPUZOR for the treatment of systemic lupus erythematosus ("Lupus"). In January
2009, we exercised the option and entered into a Development and Commercialization Agreement (the "ImmuPharma License Agreement") with ImmuPharma based on a review of interim results of a
Phase IIb study for LUPUZOR (the "Phase IIb Study"). In November 2009, ImmuPharma issued a press release announcing the final results for its Phase IIb clinical study for LUPUZOR
for the treatment of Lupus, which is further discussed in Part I, Item 1 "OverviewInflammatory DiseasesLUPUZOR" of this Annual Report on
Form 10-K. Under the terms of the ImmuPharma Option Agreement, we paid ImmuPharma a $15.0 million upfront option payment upon execution and a one-time
$30.0 million license fee in February 2009. Under the ImmuPharma License Agreement, ImmuPharma may receive (i) up to approximately $500 million in milestone payments (including
the option and license fees) upon the achievement of regulatory and sales milestones and (ii) royalties on the net sales of LUPUZOR. We will assume all expenses for the additional
Phase II and Phase III clinical studies, regulatory filings and, assuming regulatory approval, subsequent commercialization of the product. We expect to commence a large Phase IIb
study in the second quarter of 2010.

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RESULTS OF OPERATIONS(In thousands)

Year ended December 31, 2009 compared to year ended December 31, 2008:

Year Ended December 31,% Increase
(Decrease)2009

2008United
States

Europe

Total

United
States

Europe

Total

United
States

Europe

TotalNet Sales:PROVIGIL

$
961,070

$
63,618

$
1,024,688

$
924,986

$
63,432

$
988,418


4
%


%

4
%NUVIGIL


73,391





73,391

















GABITRIL


51,100


5,386


56,486


52,441


8,256


60,697


(3
)

(35
)

(7
)CNS


1,085,561


69,004


1,154,565


977,427


71,688


1,049,115


11


(4
)

10ACTIQ


75,418


71,527


146,945


105,351


71,170


176,521


(28
)

1


(17
)Generic OTFC


83,032





83,032


95,760





95,760


(13
)




(13
)FENTORA


136,563


4,114


140,677


155,246





155,246


(12
)




(9
)AMRIX


114,435





114,435


73,641





73,641


55





55Pain


409,448


75,641


485,089


429,998


71,170


501,168


(5
)

6


(3
)TREANDA


222,112





222,112


75,132





75,132


196





196Other Oncology


18,281


95,470


113,751


18,566


91,919


110,485


(2
)

4


3Oncology


240,393


95,470


335,863


93,698


91,919


185,617


157


4


81Other


32,981


143,050


176,031


49,667


157,897


207,564


(34
)

(9
)

(15
)Total Net Sales


1,768,383


383,165


2,151,548


1,550,790


392,674


1,943,464


14


(2
)

11Other Revenues


39,846


914


40,760


29,546


1,544


31,090


35


(41
)

31Total Revenues

$
1,808,229

$
384,079

$
2,192,308

$
1,580,336

$
394,218

$
1,974,554


14
%

(3
)%

11
%


Net salesIn the United States, we sell our proprietary products to pharmaceutical wholesalers, the largest three of which accounted for 75% and 71%
of our total consolidated gross sales for the years ended December 31, 2009 and 2008, respectively. Decisions made by these wholesalers regarding the levels of inventory they hold (and thus the
amount of product they purchase from us) 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.

We
have distribution service agreements with our major wholesaler customers. These agreements obligate the wholesalers to provide us with periodic retail demand information and current
inventory levels for our products held at their warehouse locations; additionally, the wholesalers have agreed to manage the variability of their purchases and inventory levels within specified limits
based on product demand. Various factors can impact the decisions made by wholesalers and retailers regarding the levels of inventory they hold, including, among other factors, their assessment of
anticipated demand for products, timing of sales made by them, their review of historical product usage trends, and their purchasing patterns.

As
of December 31, 2009, we received information from substantially all of our U.S. wholesaler customers about the levels of inventory they held for our U.S. branded products.
Based on this information, which we have not independently verified, we believe that total inventory held at these wholesalers is approximately two to three weeks supply of our U.S. branded products
at our current sales levels. As of our most recent retail inventory survey in June 2009, our generic OTFC inventory held at wholesalers and retailers is approximately three months. We do not expect
that potential future fluctuations in inventory levels of generic OTFC held by retailers will have a significant impact on our financial position and results of operations.

57

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Table of Contents

For
the twelve months ended December 31, 2009, in addition to the factors addressed below, net sales were also impacted by changes in the product sales allowances deducted from
gross sales as described further below and by changes in the relative levels of the number of units of inventory held at wholesalers and retailers. Declines in foreign exchange rates versus the U.S.
dollar caused an 8% decrease in European net sales. The other key factors that contributed to the increase in net sales, period to period, are summarized by product as indicated below.



Other revenuesThe increase of 31% from period to period is primarily due to revenues and license royalties earned by Arana, offset by a decrease in
revenues from our collaborators including royalties, milestone payments and fees.

58

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Table of Contents

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

Year Ended December 31,2009

2008

Change

% ChangeGross sales

$
2,469,314

$
2,226,804

$
242,510


11
%Product sales allowances:Prompt payment discounts


42,814


36,855


5,959


16Wholesaler discounts


21,011


13,897


7,114


51Returns


63,680


49,159


14,521


30Coupons


31,779


21,068


10,711


51Medicaid discounts


42,628


40,923


1,705


4Managed care and governmental contracts


115,854


121,438


(5,584
)

(5
)317,766


283,340


34,426Net sales

$
2,151,548

$
1,943,464

$
208,084


11
%Product sales allowances as a percentage of gross sales


12.9
%

12.7
%


Prompt
payment discounts increased for the twelve months ended December 31, 2009 as compared to the twelve months ended December 31, 2008 due to the increase in sales, the
timing of discounts granted and level of discounts taken; prompt payment discounts are generally granted at 2% of gross sales. Wholesaler discounts increased period over period because fewer discounts
were required for early 2008 as a result of price increases. Returns increased as a result of increased returns rates related to PROVIGIL and estimated returns of NUVIGIL as a result of the launch of
NUVIGIL. Coupons increased as a result of the effect of NUVIGIL coupon programs, partially offset by the termination of the PROVIGIL coupon program in the third quarter of 2009.

Medicaid
discounts increased slightly for the twelve months ended December 31, 2009 as compared to the twelve months ended December 31, 2008 due to price increases,
partially offset by the lower Medicaid utilization of our CNS and Pain products. Managed care and governmental contracts decreased for the twelve months ended December 31, 2009 as compared to
the twelve months ended December 31, 2008 due to decreases in rebates for certain managed care and governmental programs, particularly with respect to sales of our Pain products. In the future,
we expect product sales allowances as a percentage of gross sales to trend upward due to the impact of potential future price increases on
Medicaid discounts and potential increases related to Medicaid, Medicare Part D, managed care and governmental contracts sales.

Year Ended December 31,2009

2008

Change

% ChangeCosts and expenses:Cost of sales

$
398,837

$
412,234

$
(13,397
)

(3
)%Research and development


395,431


362,208


33,223


9Selling, general and administrative


822,052


840,873


(18,821
)

(2
)Settlement reserve





7,450


(7,450
)

(100
)Restructuring charge


13,825


8,415


5,410


64Impairment charge


182,080


99,719


82,361


83Acquired in-process research and development


46,118


41,955


4,163


10Loss on sale of equipment





17,178


(17,178
)

(100
)$
1,858,343

$
1,790,032

$
68,311


4
%


59

---



Table of Contents

Cost of salesThe cost of sales was 18.5% of net sales for the year ended December 31, 2009 and 21.2% of net sales for the year ended
December 31, 2008. Cost of sales decreased by 3%, due to the recognition of $3.5 million in net gains during 2009 in connection with a reduction of our excess modafinil purchase
commitment reserve, as compared to an additional expense of $26.0 million recorded in 2008 to increase our reserve for excess modafinil purchase commitments, based on revised agreements with
our modafinil suppliers and our analysis of estimated future requirements. In 2009, royalties paid to Teva decreased by $10.6 million compared to 2008, as we fully satisfied royalty contractual
commitments during July 2009. For the year ended December 31, 2009 and 2008, we recognized $97.5 million and $100.7 million of amortization expense included in cost of sales,
respectively. Amortization expense decreased by $5.6 million due to the increase in estimated useful life for AMRIX from 5 to 18 years and by $6.7 million due to the elimination
of amortization for VIVITROL, partially offset by increases in amortization for TREANDA and Arana. We recorded accelerated depreciation charges of $19.0 million and $12.4 million in 2009
and 2008, respectively.

Research and development expensesResearch and development expenses increased $33.2 million, or 9%, for the year ended December 31, 2009
as compared to the year ended December 31, 2008. In 2009, we recognized an increase in R&D charges related to our variable interest entities ("VIEs") of $32.7 million. Also, in 2009 we
recognized R&D charges for Arana of $18.0 million for which there was no equivalent amount in the prior year. This was offset by a decrease of $6.8 million in clinical activity expenses
in the U.S. related primarily to NUVIGIL and a decrease of $7.5 million for French research and development credits. For the year ended December 31, 2009 and 2008, we recognized
$27.3 million and $24.3 million, respectively, of depreciation expense included in research and development expenses.

Selling, general and administrative expensesSelling, general and administrative expenses decreased $18.8 million, or 2%, for the year ended
December 31, 2009 as compared to the year ended December 31, 2008. In 2008, we recognized $28.2 million of sunset payments due to Takeda Pharmaceuticals North America, Inc.
("TPNA"), and $12.2 million of expenses related to the termination of our collaboration with Alkermes. In 2009, we recognized promotional expenses associated with the launch of NUVIGIL, which
were offset by reduced selling expenses related to PROVIGIL. In 2009, we reduced promotional expenses resulting from the termination of the TPNA contract. This was offset by increased promotional
expenses associated with AMRIX, and an increase of $8.8 million related to our VIE's. Also in 2009, we recognized $4.1 million related to Arana for which there was no equivalent amount
in the prior year. For the year ended December 31, 2009 and 2008, we recognized $25.6 million and $20.7 million, respectively, of depreciation expense included in selling general
and administrative expenses.

Settlement reserveFor the year ended December 31, 2008, we recognized $7.4 million for the charges relating to the settlement of
investigations by the states of Connecticut and Massachusetts, and for our estimate of attorneys' fees for the Relators as part of the U.S. Attorney's Office settlement.

Restructuring chargesFor the years ended December 31, 2009 and 2008, we recorded $13.8 million and $8.4 million, respectively,
related to our restructuring plan to consolidate certain manufacturing and research and development activities primarily within our U.S. locations. These charges mainly consist of severance payments
and accruals for employees who have or are expected to be terminated as a result of these restructuring plans.

60

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Table of Contents

Impairment chargesFor the year ended December 31, 2009, we recorded a $182.1 million impairment charge consisting of the reduction of
our estimate of future cash flows from an EoE indication for CINQUIL of $175.0 million to reduce the associated intangible asset carrying value to its revised estimated fair value in November
2009, and a $7.1 million impairment charge to write-down our investment in SymBio Pharmaceuticals Limited ("SymBio") to fair value. For the year ended December 31, 2008, we
recorded a $99.7 million impairment charge consisting of the write-off of the net book value of the VIVITROL intangible assets of $90.4 million as a result of the termination
of our collaboration with Alkermes, and a $9.3 million impairment charge for the write-down to fair value of Acusphere's long-lived assets.

Acquired in-process research and developmentFor the year ended December 31, 2009, we incurred expense
of:



For
the year ended December 31, 2008, we recorded acquired in-process research and development expense of:



Loss on sale of equipmentFor the year ended December 31, 2008, we recorded a $17.2 million loss on sale of equipment related to the
termination of our collaboration with Alkermes.

Year Ended
December 31,2009

As adjusted
2008*

Change

% ChangeOther income (expense):Interest income

$
5,263

$
16,901

$
(11,638
)

(69
)%Interest expense


(90,336
)

(75,233
)

(15,103
)

20Other income (expense), net


40,515


7,880


32,635


414$
(44,558
)
$
(50,452
)
$
5,894


(12
)%


*As
adjusted in accordance with the transition provisions of accounting for convertible debt instruments that may be settled in cash upon conversion (including
partial cash settlement).


61

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Table of Contents




Other income (expense)Other income (expense) increased $5.9 million for the year ended December 31, 2009 as compared to the year ended
December 31, 2008. The decrease was attributable to the following factors:



Year Ended
December 31,2009

As Adjusted
2008*

Change

% ChangeIncome tax expense (benefit)

$
78,680

$
(37,819
)
$
116,499


308
%


*As
adjusted in accordance with the transition provisions of accounting for convertible debt instruments that may be settled in cash upon conversion (including
partial cash settlement).


Income TaxesFor the year ended December 31, 2009 we recognized $78.7 million of
income tax expense on income before income taxes of $289.4 million, resulting in an overall effective tax rate of 27.2 percent. We have recognized tax benefit of $74.2 million
associated with the impairment charge of the Ception product rights intangible asset. During 2009 we recognized an additional tax benefit of $13.8 million over the benefits recorded at
December 31, 2008, due to our closing agreement with the IRS in which both parties agreed that the nondeductible punitive portion of the Settlement Agreement is $152.3 million. For the
year ended December 31, 2009, a $7.5 million benefit for French research and development credit is recognized in R&D expense. For the year ended December 31, 2008, we recognized
$37.8 million of income tax benefit on income before income taxes of $134.1 million, resulting in an overall effective tax rate of (28.2) percent. This includes a tax benefit of
$82.3 million related to the settlement with the U.S. Attorney's Office, for which the related expense was recorded in 2007 and a net release of $11.1 million reserves related to the
settlement of our 2003-2005 IRS audit.

Year ended
December 31,2009

2008

Change

% ChangeNet loss attributable to noncontrolling interest

$
131,900

$
21,073

$
110,827


526
%


Net loss attributable to noncontrolling interestFor the year ended December 31, 2009, we recorded a net loss attributable to noncontrolling
interest of $131.9 million, related to our investments in Ception, Acusphere and Arana, as compared to $21.1 million in 2008. In 2009, this value includes the $100.8 million net
impact consisting of the $175.0 million Ception product rights impairment charge,

62

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Table of Contents

offset
by an associated $74.2 million deferred tax benefit. Arana became a wholly owned subsidiary on August 8, 2009.

Year ended December 31, 2008 compared to year ended December 31, 2007:

Year Ended December 31,% Increase
(Decrease)2008

2007United
States

Europe

Total

United
States

Europe

Total

United
States

Europe

TotalNet Sales:PROVIGIL

$
924,986

$
63,432

$
988,418

$
801,639

$
50,408

$
852,047


15
%

26
%

16
%GABITRIL


52,441


8,256


60,697


50,642


6,668


57,310


4


24


6CNS


977,427


71,688


1,049,115


852,281


57,076


909,357


15


26


15ACTIQ


105,351


71,170


176,521


181,039


59,033


240,072


(42
)

21


(26
)Generic OTFC


95,760





95,760


129,033





129,033


(26
)




(26
)FENTORA


155,246





155,246


135,136





135,136


15





15AMRIX


73,641





73,641


8,401





8,401


777





777Pain


429,998


71,170


501,168


453,609


59,033


512,642


(5
)

21


(2
)TREANDA


75,132





75,132

















Other Oncology


18,566


91,919


110,485


16,561


76,316


92,877


12


20


19Oncology


93,698


91,919


185,617


16,561


76,316


92,877


466


20


100Other


49,667


157,897


207,564


52,702


159,721


212,423


(6
)

(1
)

(2
)Total Net Sales


1,550,790


392,674


1,943,464


1,375,153


352,146


1,727,299


13


12


13Other Revenues


29,546


1,544


31,090


40,149


5,190


45,339


(26
)

(70
)

(31
)Total Revenues

$
1,580,336

$
394,218

$
1,974,554

$
1,415,302

$
357,336

$
1,772,638


12
%

10
%

11
%


Net SalesIn the United States, we sell our proprietary products to pharmaceutical wholesalers, the largest three of which accounted for 71% and 66%
of our total consolidated gross sales for the years ended December 31, 2008 and 2007, respectively. Decisions made by these wholesalers regarding the levels of inventory they hold (and thus the
amount of product they purchase from us) 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.

We
have distribution service agreements with our major wholesaler customers. These agreements obligate the wholesalers to provide us with periodic retail demand information and current
inventory levels for our products held at their warehouse locations; additionally, the wholesalers have agreed to manage the variability of their purchases and inventory levels within specified limits
based on product demand.

As
of December 31, 2008, we received information from substantially all of our U.S. wholesaler customers about the levels of inventory they held for our U.S. branded products.
Based on this
information, which we have not independently verified, we believe that total inventory held at these wholesalers is approximately two to three weeks supply of our U.S. branded products at our current
sales levels. At December 31, 2008, we believe that inventory held at wholesalers and retailers of our generic OTFC product, launched in October 2006, is approximately five months supply at our
current sales levels.

For
the year ended December 31, 2008, net sales were impacted by changes in the product sales allowances deducted from gross sales as described further below and by changes in the
relative levels of the number of units of inventory held at wholesalers and retailers. For the year ended December 31,

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Table of Contents

2008,
total net sales increased over the prior year. The other key factors that contributed to the changes in sales are summarized by product as follows:



Other revenuesThe decrease of 31% from period to period is primarily due to lower revenues from our collaborators including royalties, milestone
payments and fees.

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

Year Ended December 31,2008

2007

Change

% ChangeGross sales

$
2,226,804

$
1,941,097

$
285,707


15
%Product sales allowances:Prompt payment discounts


36,855


31,814


5,041


16Wholesaler discounts


13,897


22,172


(8,275
)

(37
)Returns


49,159


14,116


35,043


248Coupons


21,068


25,419


(4,351
)

(17
)Medicaid discounts


40,923


37,528


3,395


9Managed care and governmental contracts


121,438


82,749


38,689


47283,340


213,798


69,542Net sales

$
1,943,464

$
1,727,299

$
216,165


13
%Product sales allowances as a percentage of gross sales


12.7
%

11.0
%


64

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Table of Contents

Prompt payment discounts, generally granted at 2% of sales, increased for the year ended December 31, 2008 as compared to the year ended
December 31, 2007 due to a corresponding increase in U.S. sales that are eligible for the discount. Wholesaler discounts decreased $8.3 million period over period because cumulative
price increases in 2008 produced wholesaler credits that partially offset the wholesaler discounts that would have otherwise been recorded for 2008.

Returns
increased $35.0 million for the year ended December 31, 2008 as compared to the year ended December 31, 2007 as a result of higher ACTIQ returns in the
second half of 2008 and higher FENTORA returns in the fourth quarter of 2008. Between March and July of 2006, we increased ACTIQ manufacturing levels to ensure sufficient supply as we switched
manufacturing to FENTORA in anticipation of its launch and prepared for the transition of ACTIQ production to a new facility that opened in August 2006. The expiration of this product in the second
half of 2008 has resulted in both an increased amount of returns and a higher level of returns experience for this period. In the fourth quarter of 2008, we experienced our first returns for FENTORA,
which was launched in October 2006. As a result, we have increased our returns percentages as it relates to current ACTIQ and FENTORA sales to more closely match this recent experience. In 2007,
returns were impacted by a decrease in historical returns experience for our CNS products and by our analysis of retail pipeline data. Coupons decreased $4.4 million for the year ended
December 31, 2008 as compared to the year ended December 31, 2007 as a result of the decrease in coupons redemption activity for FENTORA.

Medicaid
discounts increased for the year ended December 31, 2008 as compared to the year ended December 31, 2007 due to price increases, offset by the lower Medicaid
utilization of our CNS and Pain
products. Managed care and governmental contracts increased for the year ended December 31, 2008 as compared to the year ended December 31, 2007 due to new managed care contracts related
to PROVIGIL as well as additional utilization and rebates for certain managed care and governmental programs, particularly with respect to sales of PROVIGIL and our generic OTFC product. In addition,
we recognized a reserve of $15.8 million as of December 31, 2008 for amounts payable to the U.S. Department of Defense ("DoD") under the new Tricare program effective January 28,
2008. In the future, we expect product sales allowances as a percentage of gross sales to slightly decrease due to a stabilization of our returns experience for our Pain products and change in our
sales mix to products with lower utilizations in certain managed care and governmental programs.

Year Ended December 31,2008

2007

Change

% ChangeCosts and expenses:Cost of sales

$
412,234

$
345,691

$
66,543


19
%Research and development


362,208


369,115


(6,907
)

(2
)Selling, general and administrative


840,873


735,799


105,074


14Settlement reserve


7,450


425,000


(417,550
)

(98
)Restructuring charge


8,415





8,415


Impairment charge


99,719





99,719


Acquired in-process research and development


41,955





41,955


Loss on sale of equipment


17,178


1,022


16,156


1,581$
1,790,032

$
1,876,627

$
(86,595
)

(5
)%


Cost of salesCost of sales was 21.2% of net sales for the year ended December 31, 2008 and 20.0% of net sales for the year ended
December 31, 2007. For the years ended December 31, 2008 and 2007, we recognized $100.7 million and $90.5 million, respectively, of amortization expense included in cost of
sales. The remainder of this fluctuation is primarily due to the following factors: the recording of a reserve for excess modafinil purchase commitments of $26.0 million in the third quarter of
2008 based on our analysis of estimated future requirements; the favorable mix of product margins for

65

---



Table of Contents

certain
of our product sales for the year ended December 31, 2008 as compared to the year ended December 31, 2007 due to price increases on several of our U.S. products; and a charge of
$3.5 million in the first quarter of 2007 for the termination of a materials supply agreement. In addition, we recorded accelerated depreciation charges within cost of sales for the year ended
December 31, 2008 of $7.0 million related to restructuring at our CIMA facility and $5.4 million related to the proposed divestiture of our Mitry-Mory manufacturing
site.

Research and development expensesResearch and development expenses decreased $6.9 million, or 2%, for the year ended December 31, 2008
as compared to the year ended December 31, 2007. For the years ended December 31, 2008 and 2007, we recognized $6.0 million and $43.5 million, respectively, in
up-front and milestone payments primarily related to rights acquired to certain development stage products. The decrease in up-front and milestone payments from 2007 to 2008
was partially offset by increased clinical activity during 2008 primarily related to NUVIGIL. For the years ended December 31, 2008 and 2007, we recognized $24.3 million and
$20.6 million of depreciation expense included in research and development expenses, respectively.

Selling, general and administrative expensesSelling, general and administrative expenses increased $105.1 million, or 14%, for the year ended
December 31, 2008 as compared to the year ended December 31, 2007 primarily due to increased sales and marketing spending on TREANDA and AMRIX, expenses incurred under our agreements
with Takeda and the elimination of reimbursements to Alkermes related to the termination of our VIVITROL promotion agreement as well as $28.2 million of expenses in the second half of 2008
related to the termination of our co-promotion agreement with Takeda, and $12.2 million of expenses in the fourth quarter of 2008 related to the termination of our collaboration
with Alkermes. These increases were offset by reduced spending on FENTORA marketing expenses and a reduction in continuing medical education grants for our existing products. For the years ended
December 31, 2008 and 2007, we recognized $20.7 million and $12.7 million, respectively, of depreciation expense included in selling, general and administrative expenses.

Settlement reserveFor the year ended December 31, 2008, we recognized $7.4 million for the charges relating to the settlement of
investigations by the states of Connecticut and Massachusetts, including $0.6 million for attorneys' fees for the Relators, as part of the U.S. Attorney's Office settlement. For the year ended
December 31, 2007, we recorded a settlement reserve of $425.0 million related to the terms of the agreement in principle reached with the U.S. Attorney's Office. See Note 16 of
the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

Restructuring chargesFor the year ended December 31, 2008, we recorded $8.4 million related to our restructuring plan to consolidate
certain manufacturing and research and development activities within our U.S. locations. These charges primarily consist of severance payments and accruals for employees who have or are expected to be
terminated as a result of this restructuring plan.

Impairment chargeFor the year ended December 31, 2008 we recorded a $99.7 million
impairment charge consisting of the write-off of the net book value of the VIVITROL intangible assets of $90.4 million as a result of the termination of our collaboration with
Alkermes and a $9.3 million impairment charge for the write-down to fair value of Acusphere's long-lived assets.

Acquired in-process research and development expenseFor the year ended December 31, 2008, we recorded acquired
in-process research and development expense of $27.0 million for Acusphere and $15.0 million related to LUPUZOR, a compound in phase IIb testing for the treatment of
systemic lupus erythematosus, not yet approved by the FDA.

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Table of Contents

Loss on sale of equipmentFor the year ended, December 31, 2008, we recorded a $17.2 million loss on sale of equipment related to the
termination of our collaboration with Alkermes.

Year Ended December 31,As adjusted
2008*

As adjusted
2007*

Change

% ChangeOther income (expense):Interest income

$
16,901

$
32,816

$
(15,915
)

(48
)%Interest expense


(75,233
)

(70,866
)

(4,367
)

6Gain on extinguishment of debt





5,319


(5,319
)

Gain on sale of investment





5,791


(5,791
)

Other income (expense), net


7,880


7,653


227


3$
(50,452
)
$
(19,287
)
$
(31,165
)

(162
)%


*As
adjusted in accordance with the transition provisions of accounting for convertible debt instruments that may be settled in cash upon conversion (including
partial cash settlement).


Other income (expense)Other income (expense) decreased $31.2 million, or 162%, for the year ended December 31, 2008 as compared to the
year ended December 31, 2007. The decrease was attributable to the following factors:



Year Ended December 31,As adjusted
2008*

As Adjusted
2007*

Change

% ChangeIncome tax expense (benefit)

$
(37,819
)
$
103,153

$
(140,972
)

(137
)%


*As
adjusted in accordance with the transition provisions of accounting for convertible debt instruments that may be settled in cash upon conversion (including
partial cash settlement).


Income tax expense (benefit)For the year ended December 31, 2008, we recognized $37.8 million of income tax benefit on income before
income taxes of $134.1 million, resulting in an overall effective tax rate of (28.2) percent. This includes a tax benefit of $82.3 million related to the settlement with the U.S.
Attorney's Office, for which the related expense was recorded in 2007 and a net release of $11.1 million reserves related to the settlement of the company's 2003-2005 IRS audit.
This compared to income tax expense for the year ended December 31, 2007 of $103.2 million on a loss before income taxes of $123.3 million. During 2007, Cephalon did not recognize
a tax benefit for the U.S. Attorney's Office settlement reserve of $425.0 million due to the uncertainty associated with the tax treatment of any potential settlement. See Note 17 to our
Consolidated Financial Statements included in Part II,

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Table of Contents

Item 8
of this Annual Report on Form 10-K for a reconciliation of the United States Federal statutory rate to our effective tax rate.

LIQUIDITY AND CAPITAL RESOURCES(In thousands, except per share data)

As of December 31,2009

As adjusted
2008*

As adjusted
2007*Financial assets:Cash and cash equivalents and investments

$
1,647,635

$
524,459

$
818,669Investments








7,596Total financial assets (current)

$
1,647,635

$
524,459

$
826,265Debt and redeemable equity:Current portion of long-term debtconvertible notes

$
1,019,968

$
1,019,888

$
1,233,370Current portion of long-term debt discountconvertible notes


(207,307
)

(248,403
)

(292,510
)Current portion of long-term debtother debt


6,264


10,133


3,799Long-term debtconvertible notes


500,000





Long-term debt discountconvertible notes


(137,907
)




Long-term debtother debt


1,603


3,692


3,788Redeemable equity


207,307


248,403


292,510Total debt and redeemable equity

$
1,389,928

$
1,033,713

$
1,240,957Select measures of liquidity and capital resources:Working capital surplus (deficit)

$
1,227,993

$
156,410

$
(285,708
)Cash/cash equivalents/investments as a percent of total assets


35
%

17
%

24
%




Year Ended December 31,2009

2008

2007Change in cash and cash equivalentsNet cash provided by (used for) operating activities

$
681,351

$
(1,877
)
$
384,856Net cash used for investing activities


(258,089
)

(108,138
)

(172,946
)Net cash provided by (used for) financing activities


681,413


(172,894
)

96,935Effect of exchange rate changes on cash and cash equivalents


18,501


(11,301
)

13,312Net increase (decrease) in cash and cash equivalents

$
1,123,176

$
(294,210
)
$
322,157


*As
adjusted in accordance with the transition provisions of accounting for convertible debt instruments that may be settled in cash upon conversion (including
partial cash settlement).


Our
working capital surplus (deficit) is calculated as current assets less current liabilities. The fluctuation in the working capital surplus (deficit) between the three periods was
primarily driven by our equity and 2.5% Notes issuances in 2009, the acquisition of Arana in 2009, the redemption of our 2008 Zero Coupon Notes in 2008, the change in accrued expenses year over year
as a result of the agreement-in-principle reached in 2007 with the U.S. Attorney's Office for $425.0 million, which was paid in 2008, and the convertible nature of our
notes over all periods. Our convertible notes contain conversion terms that will impact whether these notes are classified as current or long-term liabilities and consequently affect our
working capital position.

On
August 15, 2008, we established a $200 million, three-year revolving credit facility (the "Credit Agreement") with JP Morgan Chase Bank, N.A. and certain
other lenders. The credit facility is

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available
for letters of credit, working capital and general corporate purposes and is guaranteed by certain of our domestic subsidiaries. The Credit Agreement contains customary covenants, including
but not limited to covenants related to total debt to Consolidated EBITDA (as defined in the Credit Agreement), senior debt to Consolidated EBITDA, interest expense coverage and limitations on capital
expenditures, asset sales, mergers and acquisitions, indebtedness, liens, and transactions with affiliates. As of the date of filing of this Annual Report on Form 10-K, we have not
drawn any amounts under the credit facility.

Net Cash Provided by (Used for) Operating Activities

For all periods presented, cash provided by operating activities is driven by income from sales of our products offset by the timing of
receipts and payments in the ordinary course of business.

Net
cash provided by operating activities was $681.4 million in 2009 as compared to net cash used for operating activities of $1.9 million in 2008. The increase in 2009 is
primarily attributable to the payment of $425.0 million in 2008 in association with the settlement agreement with the U.S. Attorney's Office reflected in the change in accrued expenses and a
federal tax refund of $67.3 million received in 2009 for previously paid 2008 estimated federal taxes reflected in receivables. Other liabilities decreased in 2009 due to the reduction in the
modafinil purchase commitments reserve and payments of liabilities for the sunset payments due to TPNA originally both recorded as liabilities in 2008.

Material
non-cash items impacting 2009 cash flows from operating activities include:



Net
cash used for operating activities was $1.9 million in 2008 as compared to net cash provided by operating activities of $384.9 million in 2007. The
$386.7 million decrease in 2008 is primarily attributable to the payment of $425.0 million in association with the settlement agreement with the U.S. Attorney's Office. Receivables
increased in 2008 due to the initial recording of a federal tax refund as a receivable as well as an increase in trade receivables most notably as a result of the launch of TREANDA in April 2008.

Material
non-cash items impacting 2008 cash flows from operating activities include:



Net Cash Used for Investing Activities

Cash used for investing activities primarily relates to acquisitions of business, technologies, products and product rights and funds
used for capital expenditures in property and equipment. These uses of cash are offset by sales, maturities or purchases of investments associated with our portfolio of
available-for-sale investments.

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Net
cash used for investing activities was $258.1 million in 2009 as compared to $108.1 million in 2008. The increase in cash used between periods is primarily attributable
to:



Net
cash used for investing activities was $108.1 million in 2008 as compared to $172.9 million in 2007. The change between periods is primarily attributable
to:



Net Cash Provided by (Used for) Financing Activities

Cash provided by financing activities during 2009 primarily relates to proceeds received from the issuance of common stock and
convertible debt. On May 27, 2009, we issued an aggregate of 5,000,000 shares of common stock, resulting in net cash proceeds of $288.0 million. Also on May 27, 2009, we

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issued
$500.0 million aggregate principal amount of 2.5% convertible senior subordinated notes due May 1, 2014 (the "2.5% Notes"). Concurrent with the offering of the 2.5% Notes in May
2009, we purchased a convertible note hedge from Deutsche Bank AG ("DB") at a cost of $121.0 million and sold to DB warrants to purchase an aggregate of 7,246,377 shares of our common stock and
received
net proceeds from the sale of these warrants of $37.6 million. For more information, see Note 13 to our Consolidated Financial Statements in Part II, Item 8 of this Annual
Report on Form 10-K.

Net
cash used for financing activities was $172.9 million in 2008 as compared to net cash provided by financing activities of $96.9 million in 2007. The change is primarily
attributable to the payment in 2008 of $213.1 million upon conversion or redemption of our 2008 Zero Coupon Convertible Notes.

All
periods presented also reflect proceeds received from the exercise of stock options which will vary from period to period primarily due to fluctuations in the market value of our
stock relative to the exercise price of such options.

Commitments and Contingencies



For a description of legal proceedings, see Note 16 of the Consolidated Financial Statements included in Part II,
Item 8 of this Annual Report on Form 10-K.



The following table summarizes our obligations to make future payments under current contracts:

Payments due by periodContractual obligations

Total

2010

2011 and 2012

2013 and 2014

2015 and
thereafterDebt obligations

$
1,039

$
868

$
171

$


$
Convertible notes*


1,519,968


1,019,968





500,000


Purchase obligations


28,523


24,379


4,048


48


48Capital lease obligations


3,065


1,634


1,431





Interest payments on debt


145,576


29,025


57,843


50,508


8,200Operating leases


102,006


21,715


35,299


22,663


22,329Pension obligations


9,117


255


787


1,322


6,753Total contractual obligations

$
1,809,294

$
1,097,844

$
99,579

$
574,541

$
37,330


*This
value excludes the equity component of our convertible notes attributable to debt discount. The debt discount values associated with the convertible
notes at December 31, 2010 total $345,214.


As
of December 31, 2009, our 2.0% Notes are convertible because the closing price of our common stock on that date was higher than the restricted conversion prices of these notes
and our 2010 Zero Coupon Notes are convertible based on maturity date. As a result, our 2.0% Notes and our 2010 Zero Coupon Notes have been classified as current liabilities on our consolidated
balance sheet as of December 31, 2009 and are therefore included under the 2010 column in the table above. For a discussion of our obligations under our convertible notes, see
"OutlookIndebtedness" below.

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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, 2009, the potential milestone, option exercise payments and other contingency payments due under current contractual agreements are $1.8 billion.

The
table above excludes (i) our non-current liability for net unrecognized tax benefits, which totaled $71.2 million as of December 31, 2009, since we
cannot predict with reasonable reliability the timing of cash settlements to the respective taxing authorities and (ii) contractual obligations of our variable interest entities for
intellectual property rights, equipment financing, construction financing and lease obligations as our variable interest entities creditors have no recourse to the general credit of Cephalon.

Outlook

We expect to use our cash, cash equivalents, credit facility and investments for working capital and general corporate purposes, the
acquisition of businesses, products, product rights, technologies, property, plant and equipment, the payment of contractual obligations, including scheduled interest payments on our convertible notes
and regulatory or sales milestones that may become due, and/or the purchase, redemption or retirement of our convertible notes. We expect that net sales of our currently marketed products should allow
us to continue to generate positive operating cash flow in 2010. At this time, however, we cannot accurately predict the effect of certain developments on our anticipated rate of sales growth in 2010
and beyond, such as the degree of market acceptance, patent protection 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, receive approval for and successfully launch our product candidates and new indications for existing products.

Based
on our current level of operations, projected sales of our existing products, proceeds from our May 2009 financings, and estimated sales from our product candidates, if approved,
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.
We do not expect any material changes in our capital expenditure spending during 2010. 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, particularly if
such indebtedness is presented for conversion by holders (see "Indebtedness" below), or for our future operational needs, and we cannot be certain that funding will be available on terms
acceptable to us, or at all.

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 such acquisitions and it may be necessary for us to issue stock or raise substantial additional funds to complete future 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 or closure costs.

Marketed Products and Product Candidates

Sales growth of our wakefulness products depends, in part, on the continued effectiveness of the various settlement agreements we
entered into in late 2005 and early 2006, as well as our maintenance of protection in the United States and abroad of the modafinil particle-size patent through its

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expiration
beginning in 2014 and our NUVIGIL polymorph patent through its expiration beginning in 2023. See Note 16 of the Consolidated Financial Statements included in Part II,
Item 8 of this Annual Report on Form 10-K. During 2009, we experienced a 12% decline in prescriptions of PROVIGIL. Growth of our wakefulness product sales in the future may
depend in part on our ability to build upon the June 2009 launch of NUVIGIL in the U.S. and on the strength of the patents covering the product, particularly in light of the ANDAs filed by Actavis,
Mylan, Sandoz, Teva and Watson.

Our
future growth depends in large part on our ability to achieve continued sales growth with AMRIX and TREANDA, which we launched in October 2007 and April 2008, respectively. Growth of
AMRIX sales will depend in part on the strength of the patent covering the product, particularly in light of the ANDAs filed by Barr, Mylan, Impax and Anchen.

Our
future growth also depends, in part, on our ability to successfully market FENTORA within its current indication and to secure FDA approval of a new broader label indication for the
product outside of breakthrough cancer pain. In November 2007, we submitted an sNDA to the FDA seeking approval to market FENTORA for the management of breakthrough pain in opioid tolerant patients
with chronic pain conditions. In early April 2009, we submitted a Risk Evaluation and Mitigation Strategy (the "REMS Program") with respect to FENTORA. Subject to the timing and nature of further
discussions with the FDA, we expect to receive a response from the FDA regarding the FENTORA REMS Program by the middle of 2010. For more information regarding our FENTORA REMS Program, please see
Part I, Item 1 "PainFENTORA" of this Annual Report on Form 10-K.

Clinical Studies

Over the past few years, we have incurred significant expenditures related to conducting clinical studies to develop new pharmaceutical
products and to explore the utility of our existing products in treating disorders beyond those currently approved in their respective labels. In
2010, we expect to continue to incur significant levels of research and development expenditures. We also expect to continue or begin a number of significant clinical programs including: clinical
studies evaluating LUPUZOR for the treatment of systemic lupus erythematosus; clinical programs at Arana with respect to certain oncology and inflammatory disorders; and clinical programs with NUVIGIL
focused on adjunctive treatment to atypical anti-psychotics in schizophrenia patients, adjunctive treatment for bi-polar depression and excessive sleepiness associated with
traumatic brain injury.

Manufacturing, Selling and Marketing Efforts

In 2010, we expect to continue to incur significant expenditures associated with manufacturing, selling and marketing our products. We
expect to continue in 2010 a capital expenditure project related to the transfer of manufacturing activities from our facility in Eden Prairie, Minnesota to our facility in Salt Lake City, Utah; we
expect this phased transfer to be completed in 2011.

Over
the past few years, we have been developing a manufacturing process for the active pharmaceutical ingredient in NUVIGIL that is more cost effective than our prior process of
separating modafinil into armodafinil. As a result of our plan to manufacture armodafinil in the future using this new process coupled with the launch of NUVIGIL on June 1, 2009, we assessed
the potential impact of these items on certain of our existing agreements to purchase modafinil. Under these contracts, we have agreed to purchase minimum amounts of modafinil through 2012, with
aggregate future purchase commitments totaling $15.9 million as of December 31, 2009. Based on our current assessment, we have recorded a reserve of $9.0 million for purchase
commitments for modafinil raw materials not expected to be utilized. We have also initiated a search for a potential acquiror of our manufacturing facility in Mitry-Mory, France where we
produce modafinil. As of December 31, 2009, we had $19.4 million of property and equipment related to the Mitry-Mory facility included on our balance

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sheet.
The resolution of these assessments could have a negative impact on our results of operations in future periods.

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, 2009:

Security

Outstanding

Conversion
Price

Redemption Rights and Obligations(in millions)2.5% Convertible Senior Subordinated Notes due May 2014 (the "2.5% Notes")

$
500.0

$
69.00
*
Generally not redeemable by the holder prior to November 2013.2.0% Convertible Senior Subordinated Notes due June 2015 (the "2.0% Notes")

$
820.0

$
46.70
**
Generally not redeemable by the holder prior to December 2014.Zero Coupon Convertible Notes due June 2033, first putable June 15, 2010 (the "2010 Zero Coupon Notes")

$
199.5

$
56.50
**
Redeemable on June 15, 2010 at option of either holder or us at a redemption price of 100.25% of the
principal amount redeemed.


*Stated
conversion price as per the terms of the notes; subject to adjustment (equivalent to a conversion rate of approximately 14.4928 shares per $1,000
principal amount of Notes.) However, each convertible note contains certain terms restricting a holder's ability to convert the notes, including that a holder may only convert if any of the following
conditions is satisfied: (1) during any calendar quarter commencing after September 30, 2009, the closing sale price of our common stock for at least 20 trading days in the period of 30
consecutive trading days ending on the last trading day of the calendar quarter immediately preceding the calendar quarter in which the conversion occurs, is more than 130% of the conversion price per
share ($89.70 based on the initial conversion price) of the notes in effect on that last trading day; (2) during the 10 consecutive trading-day period that follows any five
consecutive trading-day period in which the trading price for the notes for each such trading day was less than 98% of the closing sale price of our common stock on such date multiplied by
the then current conversion rate; or (3) if we make certain significant distributions to holders of our common stock, we enter into specified corporate transactions or our common stock is not
listed on a U.S. national securities exchange.**Stated
conversion prices as per the terms of the notes. However, each convertible note contains certain terms restricting a holder's ability to convert the
notes, including that a holder may only convert if the closing price of our stock on the day prior to conversion is higher than $56.04 or $67.80 with respect to the 2.0% Notes or the 2010 Zero Coupon
Notes, respectively. For a more complete description of these notes, including the associated convertible note hedge, see Note 13 to our Consolidated Financial Statements included in
Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2008.


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As
of December 31, 2009, our stock price was $62.42, and therefore the 2.0% Notes and 2010 Zero Coupon Notes were convertible as of December 31, 2009. Under the terms of
the indentures governing the notes, we are obligated to repay in cash the aggregate principal balance of any such notes presented for conversion. If the notes were converted, we may not have available
cash, cash equivalents and investment sufficient to repay all of the convertible notes. In addition, other than the restrictive covenants contained in our Credit Agreement, there are no restrictions
on our use of this cash and the cash available to repay indebtedness may decline over time. If we do not have sufficient funds available to repay any principal balance of notes presented for
conversion, 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.

As
of December 31, 2009, our 2.0% Notes and our 2010 Zero Coupon Notes have been classified as current liabilities on our consolidated balance sheet. See Note 13 to our
Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for summary of our convertible debt, note hedge and call warrant. As
of February 8, 2010, the fair value of both the 2.0% Notes and the 2010 Zero Coupon Notes is greater than the value of the shares into which such notes are convertible. We believe that the
share price of our common stock would have to significantly increase over the market price as of the filing date of this report before the fair value of the convertible notes would be less than the
value of the common stock shares underlying the notes and, as such, we believe it is highly unlikely that holders of the 2.0% Notes or the 2010 Zero Coupon Notes will present significant amounts of
such notes for conversion under the current terms. In the unlikely event that a significant conversion did occur, we believe that we have the ability to raise sufficient cash to repay the principal
amounts due through a combination of utilizing our existing cash on hand, accessing our credit facility, raising money in the capital markets or selling our note hedge instruments for cash.

The
annual interest payments on our 2.0% Notes are $16.4 million, payable semi-annually on June 1 and December 1. The annual interest payments on our
2.5% Notes are $12.5 million, payable semi-annually on May 1 and November 1. 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 or retire all or a portion of the outstanding convertible notes.

Our
2.0% Notes, 2.5% Notes and 2010 Zero Coupon Notes each 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 these notes based on the average market price of our common stock during the period, and include that number in the total diluted
shares figure for the period. At the time we sold our 2.0% Notes, 2.5% and 2010 Zero Coupon Notes we entered into convertible note hedge and warrant agreements that together are intended to have the
economic effect of reducing the net number of shares that will be issued upon conversion of the notes by increasing the effective conversion price for these notes, from our perspective, to $67.92,
$100.00
and $72.08, respectively. However, from an accounting principles generally accepted in the United States of America ("U.S. GAAP") perspective, since the impact of the convertible note hedge
agreements is always anti-dilutive we exclude from the calculation of fully diluted shares the number of shares of our common stock that we would receive from the counterparties to these
agreements upon settlement.

Under
the treasury stock method, changes in the share price of our common stock can have a significant impact on the number of shares that we must include in the fully diluted earnings
per share calculation. The following table provides examples of how changes in our stock price will require the inclusion of additional shares in the denominator of the fully diluted earnings per
share calculation ("Total Treasury Stock Method Incremental Shares"). The table also reflects the impact on the number

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of
shares we could expect to issue upon concurrent settlement of the convertible notes, the warrant and the convertible note hedge ("Incremental Shares Issued by Cephalon upon Conversion"):

Share Price

Convertible
Notes Shares

Warrant
Shares

Total Treasury
Stock Method
Incremental
Shares(1)

Shares Due to
Cephalon under
Note Hedge

Incremental
Shares Issued by
Cephalon upon
Conversion(2)$55.00


2,650





2,650


(2,650
)

$65.00


5,406





5,406


(5,406
)

$75.00


8,077


1,796


9,873


(8,077
)

1,796$85.00


10,460


4,065


14,525


(10,460
)

4,065$95.00


12,341


5,857


18,198


(12,341
)

5,857$105.00


13,864


7,653


21,517


(13,864
)

7,653


(1)Represents
the number of incremental shares that must be included in the calculation of fully diluted shares under U.S. GAAP.(2)Represents
the number of incremental shares to be issued by us upon conversion of the convertible notes, assuming concurrent settlement of the convertible
note hedges and warrants.


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 such acquisitions and it may be necessary for us to issue stock or raise substantial additional funds
to complete future 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.

Other

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



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CRITICAL ACCOUNTING POLICIES AND ESTIMATES(In thousands)

Management's
Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which we have prepared
in accordance with U.S. GAAP. In preparing these financial statements, we must 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. We develop and periodically change these
estimates and assumptions 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 our Consolidated Financial Statements for the year ended December 31, 2009 included in Part II,
Item 8 of this Annual Report on Form 10-K. The Securities and Exchange Commission 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 proprietary products to pharmaceutical wholesalers, the largest three of which account for 75%
of our total consolidated gross sales for the year ended December 31, 2009. Decisions made by these wholesalers regarding the levels of inventory they hold (and thus the amount of product they
purchase from us) may have materially affected the level of our sales in any particular period and thus our sales may not correlate to the number of prescriptions written for our products as reported
by IMS Health.

We
have distribution service agreements with our major wholesaler customers. These agreements obligate the wholesalers to provide us with periodic retail demand information and current
inventory levels for our products held at their warehouse locations; additionally, the wholesalers have agreed to manage the variability of their purchases and inventory levels within specified limits
based on product demand.

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. destination.
Transfer of ownership and risk of loss for the product pass to the customer at the point that the product is received by 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.

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.

We
recognize revenue on new product launches when sales returns can be reasonably estimated and all other revenue recognition requirements have been met. When determining if returns can
be estimated, we consider actual returns of similar products as well as sales returns with similar customers. In cases in which a new product is not an extension of an existing line of product or
where we have no history of experience with products in a similar therapeutic category such that we can not estimate expected returns of the new product, we defer recognition of revenue until the
right of return no longer exists or until we have developed sufficient historical experience to estimate sales returns. In developing estimates for sales returns, we consider inventory levels in the
distribution channel, shelf life of the product and expected demand based on market data and prescriptions.

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As of December 31, 2009, we received information from substantially all of our U.S. wholesaler customers about the levels of inventory they held for our
U.S. branded products. Based on this information, which we have not independently verified, we believe that total inventory held at these wholesalers is approximately two to three weeks supply of our
U.S. branded products at our current sales levels. As of our most recent retail inventory survey in June 2009, our generic OTFC inventory held at wholesalers and retailers is approximately three
months. We do not expect that potential future fluctuations in inventory levels of generic OTFC held by retailers will have a significant impact on our financial position and results of operations.

Sales
of our generic OTFC product could be subject to retroactive price reductions for units that remain in the pipeline if the price of generic OTFC is reduced, including as a result of
another generic entrant into the market, and as a result any estimated impact of such adjustments is recorded at the time revenue is recognized. This estimate of both the potential timing of a generic
entrant and the amount of the price reduction is highly subjective. In October 2009, we understand that the FDA approved ANDAs by Barr and by Covidien to market and sell generic OTFC. As a result, we
have accrued a $1.2 million shelf stock adjustment as of December 31, 2009.

Product sales allowancesWe record product sales net of the following significant categories of product sales allowances: prompt payment discounts,
wholesaler discounts, returns, coupons, Medicaid discounts and managed care and governmental contracts. Calculating each of these
items involves significant estimates and judgments and requires us to use information from external sources. In certain of the product sales allowance categories, we have calculated the impact of
changes in our estimates, which we believe represent reasonably likely changes to these estimates based on historical data adjusted for certain unusual items such as changes in government contract
rules.

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-five 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 have routinely taken 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)Wholesaler discountsWe have distribution service agreements with a number of our wholesaler
customers that provide our wholesalers with the opportunity to earn up to 2% in additional discounts in exchange for the performance of certain services. We have therefore recorded a provision equal
to 2% of U.S. gross sales for the twelve months ended December 31, 2009, less inventory appreciation adjustments for 2009 price increases. In addition, at our discretion, we may provide
additional discounts to wholesalers such as the additional discount offered to wholesalers on initial stocking orders. Actual discounts provided could therefore exceed historical experience and our
estimates of expected discounts. If these discounts were to increase by 1.0% of 2009 gross sales from our proprietary products marketed in the U.S., then an additional provision of
$19.1 million would result.

3)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 NUVIGIL is three years, PROVIGIL is three to four years, depending on packaging, AMRIX is four years, GABITRIL is two to
three years, depending on packaging, and ACTIQ and FENTORA are each two 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 pharmacies 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

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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.

For
the year ended December 31, 2009, we recorded a provision for returns at a weighted average rate of 2.6% of gross sales, which is an increase over our actual historical return
percentages. Returns percentages increased for PROVIGIL in anticipation of the launch of NUVIGIL. NUVIGIL returns percentages have been estimated based on historical PROVIGIL experience. Between March
and July of 2006, we increased ACTIQ manufacturing levels to ensure sufficient supply as we switched manufacturing to FENTORA in anticipation of its launch and prepared for the transition of ACTIQ
production to a new facility that opened in August 2006. The expiration of ACTIQ in the second half of 2008 and the expiration of initial launch quantities of FENTORA in late 2008 and early 2009 have
resulted in both an increased amount of returns and a higher level of returns experience for 2008 and 2009. In the future, 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 2009 gross sales from our proprietary products marketed in the U.S., then an additional provision of $9.6 million would result.

Based
on fourth quarter net sales, we believe a reasonable estimate of our maximum exposure for potential returns related to product in our total supply pipeline as of
December 31, 2009 is $282.5 million.

4)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.

For
the year ended December 31, 2009, we recorded a provision for coupons at a weighted average rate of 1.3% 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 2009 gross sales from our proprietary products marketed in the U.S., then an
additional provision of $9.6 million would result.

5)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.

For
the year ended December 31, 2009, we recorded a provision for Medicaid discounts at a weighted average rate of 1.7% 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

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Medicaid
discounts provision percentage were to increase by 0.5% of 2009 gross sales from our proprietary products marketed in the U.S., then an additional provision of $9.6 million would
result.

6)Managed care and governmental contractsWe have entered into agreements with certain managed care
customers whereby we provide agreed-upon discounts to such entities based on market share. We record accruals for these discounts as a reduction of sales when product is sold based on the
discount rates and expected levels of market share 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.

For
the year ended December 31, 2009, we recorded a provision for managed care and governmental contracts at a weighted average rate of 4.7% 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 2009
gross sales from our proprietary products marketed in the U.S., then an additional provision of $9.6 million would result.

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The
following table summarizes activity in each of the above categories for the years ended December 31, 2008 and 2009:

Prompt
Payment
Discounts

Wholesaler
Discounts

Returns*

Coupons

Medicaid
Discounts

Managed
Care &
Governmental
Contracts

TotalBalance at December 31, 2007

$
(3,082
)
$
(6,449
)
$
(25,335
)
$
(7,253
)
$
(19,883
)
$
(24,264
)
$
(86,266
)Provision:Current period


(36,855
)

(13,899
)

(21,427
)

(21,176
)

(40,774
)

(122,517
)

(256,648
)Prior periods





2


(27,732
)

108


(149
)

1,079


(26,692
)Total


(36,855
)

(13,897
)

(49,159
)

(21,068
)

(40,923
)

(121,438
)

(283,340
)Actual:Current period


32,418


5,911





15,079


19,233


73,874


146,515Prior periods


3,082


6,447


38,071


7,144


19,543


23,187


97,474Total


35,500


12,358


38,071


22,223


38,776


97,061


243,989Balance at December 31, 2008

$
(4,437
)
$
(7,988
)
$
(36,423
)
$
(6,098
)
$
(22,030
)
$
(48,641
)
$
(125,617
)Provision:Current period


(42,814
)

(21,137
)

(37,226
)

(32,367
)

(42,741
)

(114,740
)

(291,025
)Prior periods





126


(26,454
)

588


113


(1,114
)

(26,741
)Total


(42,814
)

(21,011
)

(63,680
)

(31,779
)

(42,628
)

(115,854
)

(317,766
)Actual:Current period


38,325


21,080





18,096


21,784


73,131


172,416Prior periods


4,437


7,862


34,069


5,509


21,320


34,902


108,099Total


42,762


28,942


34,069


23,605


43,104


108,033


280,515Balance at December 31, 2009


(4,489
)

(57
)

(66,034
)

(14,272
)

(21,554
)

(56,462
)

(162,868
)


*Given
our return goods policy, we assume that all returns in a current year relate to prior period sales.


InventoriesEffective October 1, 2008, we changed our method of accounting for inventories previously valued using the last-in,
first-out (LIFO) method to the first-in, first-out (FIFO) method and adjusted our results for all of the periods presented. As a result of this change, all
inventories are now valued using the FIFO method. Our inventories include the cost of raw materials, labor, overhead and shipping and handling costs.

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 for forecasted product demand 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
expense pre-approval inventory unless we believe it is probable that the inventory will be saleable. We have capitalized 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. With respect to capitalization of
unapproved product

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candidates,
we seek to produce inventory in preparation for the launch of the product and in amounts sufficient to support forecasted initial market demand. Typically, capitalization of this inventory
does not begin until the product candidate is considered to have a high probability of regulatory approval. This may occur when either the product candidate is in Phase III clinical trials or
when it is a new formulation or dosage strength of a presently approved product for which we believe there is a high probability of receiving FDA approval. If we are aware of any specific risks or
contingencies that are likely to impact the expected regulatory approval process or if there are any specific issues identified during the research process relating to safety, efficacy, manufacturing,
marketing or labeling of the product candidate, we would not capitalize the related inventory.

When
manufacturing and capitalizing inventory costs of product candidates and at each subsequent balance sheet date, we consider both the expiration dates of the inventory and
anticipated future sales once approved. Since expiration dates are impacted by the stage of completion, we seek to avoid product expiration issues by managing the levels of inventory at each stage to
optimize the shelf life of the inventory relative to anticipated market demand following launch.

Once
we have determined to capitalize inventory for a product candidate that is not yet approved, we will monitor, on a quarterly basis, the status of this candidate within the
regulatory approval process. We could be required to expense previously capitalized costs related to pre-approval inventory upon a change in our judgment of future commercial use and net
realizable value, due to a denial or delay of approval by regulatory bodies, a delay in the timeline for commercialization or other potential factors.

On
a quarterly basis, we evaluate all inventory, including inventory capitalized for which regulatory approval has not yet been obtained, to determine if any lower of cost or market
adjustment is required. As it relates to pre-approval inventory, we consider several factors including expected timing of FDA approval, projected sales volume and estimated selling price.
Projected sales volume is based on several factors including market research, sales of similar products and competition in the market. Estimated sales price is based on the price of existing products
sold for the same indications and expected market demand.

In
June 2007, we secured final FDA approval of NUVIGIL. Prior to the commercial launch of NUVIGIL, we included net NUVIGIL inventory balances in other assets. We launched NUVIGIL
commercially on June 1, 2009 and reclassified our NUVIGIL inventory balances to current inventory at that time.

We
have committed to make future minimum payments to third parties for certain raw material inventories. Over the past few years, we have been developing a manufacturing process for the
active pharmaceutical ingredient in NUVIGIL that is more cost effective than our prior process of separating modafinil into armodafinil. As a result of our plan to manufacture armodafinil in the
future using this new process coupled with the launch of NUVIGIL on June 1, 2009, we assessed the potential impact of these items on certain of our existing agreements to purchase modafinil.
Under these contracts, we have agreed to purchase minimum amounts of modafinil through 2012, with aggregate future purchase commitments totaling $15.9 million as of December 31, 2009.
During the third quarter of 2008, we recorded a reserve of $26.0 million for purchase commitments for modafinil raw materials not expected to be utilized as a charge to cost of sales. We
reassessed our future modafinil needs during the second quarter of 2009, in association with the accelerated launch of NUVIGIL, and increased the reserve by $3.0 million, to
$29.0 million. During the third quarter of 2009, we entered into an agreement with one of our modafinil suppliers, paying $13.5 million in exchange for a $23.0 million reduction
in our existing purchase commitments with this supplier, which resulted in a $9.5 million gain recorded in cost of sales. In the fourth quarter of 2009, we reassessed our future modafinil needs
as well as our commitments and increased the reserve by $3.0 million. As of December 31, 2009, our remaining reserve balance for

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excess
purchase commitments is $9.0 million. See Note 8 to our Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on
Form 10-K for additional information.

Valuation of Property and Equipment, Acquired Intangible Assets and Goodwill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.

We
review intangible assets subject to amortization quarterly to determine if any adverse conditions exist or a change in circumstances has occurred that would indicate impairment or a
change in the remaining useful life. If an impairment indicator exists, we test the intangible asset for recoverability. Goodwill and indefinite-lived intangible assets are reviewed for impairment by
applying a fair-value based test on an annual basis or more frequently if circumstances indicate a potential impairment. If it is determined that an impairment has occurred, an impairment
loss is recognized for the amount by which the carrying amount of the asset exceeds its estimated fair value To do this, in the case of goodwill, we estimate the fair value of each of our reporting
units and compare it to the book value of their net assets. In the case of intangibles and other long lived assets, we compare the estimated cash flows of the related asset group and compare it to the
book value of
the asset group. Calculating fair value as well as future cash flows requires that we make a number of critical legal, economic, market and business assumptions that reflect our best estimates as of
the testing date. We believe the methods we use to determine these underlying assumptions and estimates are reasonable and reflective of common practice. Notwithstanding this, our assumptions and
estimates may differ significantly from actual results, or circumstances could change that would cause us to conclude that an impairment now exists or that we previously understated the extent of
impairment.

We
have acquired intangible assets that consist of developed product technology and core technologies associated with intellectual property and rights thereon, as well as goodwill. When
significant identifiable intangible assets are acquired, we determine the fair values of these assets as of the acquisition date using valuation techniques such as discounted cash flow models. These
models require the use of significant estimates and judgments made by management and, for significant items, we typically consider, in part, the reports of third party valuation specialists.
Assumptions used in valuing the intangibles include determining the timing and expected costs to complete the in-process projects, projecting regulatory approvals, estimating future net
cash flows from product sales resulting from completed products and in-process projects, and developing appropriate discount rates and probability rates by project.

Income taxesWe account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The deferred assets and
liabilities included within the consolidated results from the activities of variable interest entities are not realizable benefits and or liabilities to Cephalon. See Note 2 to our Consolidated
Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for additional information.

We
provide 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, as it has for the current year ended
December 31, 2009.

At
December 31, 2009, we have a valuation allowance of $132.7 million, against a gross deferred tax asset balance of $626.9 million. This valuation allowance is
provided against deferred tax assets which include state and foreign net operating losses, and state tax credits where we have concluded at

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this
time that it is not more likely than not that these deferred tax assets will be realized. We will continue to review and analyze the likelihood of realizing tax benefits related to deferred tax
assets as there is more certainty surrounding our future levels of profitability related to specific company operations and the related taxing jurisdictions. See Note 17 of our Consolidated
Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

The
recognition and measurement of certain tax benefits includes estimates and judgments by management and inherently includes subjectivity. Changes in estimates may create volatility in
our effective tax rate in future periods due to settlements with various tax authorities (either favorable or unfavorable), the expiration of the statute of limitations on some tax positions and
obtaining new information about particular tax positions that may cause management to change its estimates.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2009, the FASB issued revised accounting guidance for transfers of financial assets, which removes the concept of a qualifying
special-purpose entity and establishes specific conditions for reporting a transfer of a portion of a financial asset as a sale. The new guidance is effective for annual reporting periods beginning
after November 15, 2009. We are currently evaluating the impact of adoption on our consolidated financial statements.

In
June 2009, the FASB issued revised accounting guidance for consolidation of variable interest entities ("VIE"), which replaces the previous quantitative based risk and rewards
calculation for determining the primary beneficiary of a VIE with an approach focused on identifying which enterprise has the power to direct the activities of a VIE that most significantly impact the
entity's economic performance and (1) the obligation to absorb losses or (2) the right to receive benefits. The new guidance also requires ongoing reassessments of whether an enterprise
is the primary beneficiary of a variable interest entity. It is effective for annual reporting periods beginning after November 15, 2009. We are currently evaluating the impact of adopting the
new guidance but it could change our assessment of which entities are included in our consolidated financial statements.

In
October 2009, the FASB issued revised accounting guidance for multiple-deliverable arrangements. The amendment requires that arrangement considerations be allocated at the inception
of the arrangement to all deliverables using the relative selling price method and provides for expanded disclosures related to such arrangements. It is effective for revenue arrangements entered into
or
materially modified in fiscal years beginning on or after June 15, 2010. We are currently evaluating the impact of adoption on our consolidated financial statements.

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ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to foreign currency exchange risk related to our operations in European and Australian subsidiaries that have
transactions, assets, and liabilities denominated in foreign currencies that are translated into U.S. dollars for consolidated financial reporting purposes, as well as transactions, assets and
liabilities of our domestic operations that are denominated in foreign currencies. Currently, we do not have any foreign exchange contracts that hedge these foreign currency exchange risks. For the
years ended December 31, 2009 and 2008, an average 10% weakening of the U.S. dollar relative to the currencies in which our non-U.S. subsidiaries operate would have resulted in an
increase of $39.8 million and $37.7 million, respectively, 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 foreign subsidiaries.

Our
exposure to market risk for a change in interest rates is not significant as all of our investments are cash and cash equivalents.

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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 Annual Report on Form 10-K 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 Annual Report on
Form 10-K fairly present, in all material respects, our financial condition, results of operations and cash flows as of and for the periods presented in this Annual Report on
Form 10-K. 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, 2009, our internal control over
financial reporting was 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.

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 Stockholders of Cephalon, Inc.:

In
our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of
Cephalon, Inc. and its subsidiaries at December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended
December 31, 2009 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index
appearing under Item 15(a)(2), presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in
our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements
and financial statement schedule, for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial reporting, included in "Management's Report on Internal Control Over Financial Reporting" appearing under
Item 8. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company's internal control over financial reporting based on our
integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all
material respects. Our audits of the financial statements included 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. Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control
based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our
opinions.

As
discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for non-controlling interests, convertible debt
instruments, and business combinations in 2009.

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.

/s/
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 12, 2010

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CEPHALON, INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF OPERATIONS        (In thousands, except per share data)

Year Ended December 31,2009

As adjusted
2008*

As adjusted
2007*REVENUES:Net sales

$
2,151,548

$
1,943,464

$
1,727,299Other revenues


40,760


31,090


45,3392,192,308


1,974,554


1,772,638COSTS AND EXPENSES:Cost of sales


398,837


412,234


345,691Research and development


395,431


362,208


369,115Selling, general and administrative


822,052


840,873


735,799Settlement reserve





7,450


425,000Impairment charges


182,080


99,719


Restructuring charges


13,825


8,415


Acquired in-process research and development


46,118


41,955


Loss on sale of equipment





17,178


1,0221,858,343


1,790,032


1,876,627INCOME (LOSS) FROM OPERATIONS


333,965


184,522


(103,989
)OTHER INCOME (EXPENSE):Interest income


5,263


16,901


32,816Interest expense


(90,336
)

(75,233
)

(70,866
)Gain on extinguishment of debt








5,319Gain on sale of investment








5,791Other income (expense), net


40,515


7,880


7,653(44,558
)

(50,452
)

(19,287
)INCOME (LOSS) BEFORE INCOME TAXES


289,407


134,070


(123,276
)INCOME TAX EXPENSE (BENEFIT)


78,680


(37,819
)

103,153NET INCOME (LOSS)


210,727


171,889


(226,429
)NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTEREST


131,900


21,073


NET INCOME (LOSS) ATTRIBUTABLE TO CEPHALON, INC.

$
342,627

$
192,962

$
(226,429
)BASIC INCOME (LOSS) PER COMMON SHARE ATTRIBUTABLE TO CEPHALON, INC.

$
4.74

$
2.84

$
(3.40
)DILUTED INCOME (LOSS) PER COMMON SHARE ATTRIBUTABLE TO CEPHALON, INC.

$
4.41

$
2.54

$
(3.40
)WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING


72,342


68,018


66,597WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDINGASSUMING DILUTION


77,733


76,097


66,597


*As
adjusted in accordance with the transition provisions of accounting for convertible debt instruments that may be settled in cash upon conversion (including
partial cash settlement) and accounting for noncontrolling interests in consolidated financial statements.


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

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CEPHALON, INC. AND SUBSIDIARIES        CONSOLIDATED BALANCE SHEETS        (In thousands, except share data)

December 31,
2009

As adjusted
December 31,
2008*ASSETSCURRENT ASSETS:Cash and cash equivalents

$
1,647,635

$
524,459Receivables, net


376,076


409,580Inventory, net


240,576


117,297Deferred tax assets, net


243,246


224,066Other current assets


58,423


54,120Total current assets


2,565,956


1,329,522INVESTMENTS


12,427


8,081PROPERTY AND EQUIPMENT, net


451,879


467,449GOODWILL


590,284


445,332INTANGIBLE ASSETS, net


981,857


607,332DEFERRED TAX ASSETS, net


237


46,074DEBT ISSUANCE COSTS


18,862


11,838OTHER ASSETS


36,593


167,314$
4,658,095

$
3,082,942LIABILITIES AND EQUITYCURRENT LIABILITIES:Current portion of long-term debt, net

$
818,925

$
781,618Accounts payable


88,829


87,079Accrued expenses


430,209


304,415Total current liabilities


1,337,963


1,173,112LONG-TERM DEBT


363,696


3,692DEFERRED TAX LIABILITIES, net


159,328


77,932OTHER LIABILITIES


111,728


163,123Total liabilities


1,972,715


1,417,859COMMITMENTS AND CONTINGENCIES





REDEEMABLE EQUITY


207,307


248,403EQUITY:Cephalon stockholders' equity:Preferred stock, $0.01 par value, 5,000,000 shares authorized, 2,500,000 shares issued, and none outstanding





Common stock, $0.01 par value, 400,000,000 and 200,000,000 shares authorized, 78,002,764 and 71,707,041 shares issued, and 74,916,920 and 68,736,642 shares
outstanding


780


717Additional paid-in capital


2,534,070


2,095,324Treasury stock, at cost, 3,085,844 and 2,970,399 shares


(208,427
)

(201,705
)Accumulated deficit


(178,659
)

(521,286
)Accumulated other comprehensive income


114,194


43,630Total Cephalon stockholders' equity


2,261,958


1,416,680Noncontrolling interest


216,115


Total equity


2,478,073


1,416,680$
4,658,095

$
3,082,942


*As
adjusted in accordance with the transition provisions of accounting for convertible debt instruments that may be settled in cash upon conversion (including
partial cash settlement) and accounting for noncontrolling interests in consolidated financial statements.


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

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CEPHALON, INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF EQUITY AND COMPREHENSIVE INCOME        (In thousands, except share data)

Cephalon Stockholders' EquityTotal
Stockholders'
Equity
Attributable to
Cephalon, Inc.Common Stock



Treasury Stock



Accumulated
Other
Comprehensive
IncomeAdditional Paid-in Capital

Accumulated
Deficit

Noncontrolling
InterestShares

Amount

Shares

Amount

TotalBALANCE, JANUARY 1, 2007 as previously stated


67,853,389

$
678

$
1,780,749


2,257,162

$
(151,068
)
$
(432,578
)
$
104,357

$
1,302,138

$


$
1,302,138Impact of adopting the transition provision of accounting for convertible debt instruments that may be settled in cash upon conversion (including partial
cash settlement)








(50,118
)







(48,073
)




(98,191
)




(98,191
)BALANCE, JANUARY 1, 2007 as adjusted*


67,853,389

$
678

$
1,730,631


2,257,162

$
(151,068
)
$
(480,651
)
$
104,357

$
1,203,947

$


$
1,203,947Net loss

















(226,429
)



$
(226,429
)




(226,429
)Foreign currency translation gain




















42,662


42,662





42,662Net prior service costs on retirement-related plans




















446


446





446Change in unrealized investment gains




















20


20





20Comprehensive loss






















$
(183,301
)




(183,301
)Adoption of accounting for uncertainty in income taxes

















(7,168
)




(7,168
)




(7,168
)Issuance of common stock upon conversions and exchanges of convertible notes


124





10














10





10Stock options exercised


1,853,152


19


93,881














93,900





93,900Tax benefit from equity compensation








13,633














13,633





13,633Stock-based compensation expense


250,125


3


46,692














46,695





46,695Treasury stock acquired











95,441


(7,105
)







(7,105
)




(7,105
)Adjustment to APIC for equity component of convertible debt








29,728














29,728





29,278Other




















1,218


1,218





1,218BALANCE, DECEMBER 31, 2007*


69,956,790

$
700

$
1,914,575


2,352,603

$
(158,173
)
$
(714,248
)
$
148,703

$
1,191,557

$


$
1,191,557Net income

















192,962




$
192,962


(21,073
)

171,889Foreign currency translation loss




















(105,042
)

(105,042
)




(105,042
)Net prior service costs on retirement-related plans




















(23
)

(23
)




(23
)Change in unrealized investment losses




















(8
)

(8
)




(8
)Comprehensive income






















$
87,889


(21,073
)

66,816Issuance of common stock upon conversions of convertible notes


529,269


5


285














290





290Exercise of convertible note hedge associated with conversion of convertible notes








36,585


524,754


(36,585
)













Stock options exercised


957,865


10


43,962














43,962





43,962Tax benefit from equity compensation








7,323














7,323





7,323Stock-based compensation expense


253,837


2


43,974














43,974





43,974Treasury stock acquired











93,042


(6,947
)







(6,947
)




(6,947
)Acusphere NCI upon consolidation


























21,073


21,073Adjustment to APIC for equity component of convertible debt








44,107














44,107





44,107Other


9,280





4,525














4,525





4,525BALANCE, DECEMBER 31, 2008*


71,707,041

$
717

$
2,095,324


2,970,399

$
(201,705
)
$
(521,286
)
$
43,630

$
1,416,680

$


$
1,416,680Net income

















342,627




$
342,627


(131,900
)

210,727Foreign currency translation gains




















70,170


70,170





70,170Net prior service costs on retirement-related plans




















394


394





394Unrealized investment gains





























Comprehensive income























413,191


(131,900
)

281,291Issuance of common stock upon conversions of convertible notes


54


























Stock options exercised


235,345


2


10,209














10,211





10,211Tax benefit from equity compensation








1,979














1,979





1,979Stock-based compensation expense


283,963


3


50,407














50,410





50,410Treasury stock acquired











115,445


(6,722
)







(6,722
)




(6,722
)Adjustment to APIC for equity component of convertible debt








41,096














41,096Ception NCI upon consolidation


























306,500


306,500Arana NCI upon consolidation


























104,730


104,730Acquisition of Arana NCI shares








(7,353
)













(7,353
)

(103,699
)

(111,052
)Issuance of common stock in exchange for warrants


776,361


8


(8
)



















Issuance of common stock


5,000,000


50


287,950














288,000





288,000Issuance of convertible notes








147,650














147,650





147,650Sale of warrants








37,640














37,640





37,640Purchase of convertible note hedge








(121,040
)













(121,040
)




(121,040
)Tax benefit from purchase of convertible note hedge








(9,784
)













(9,784
)




(9,784
)Deconsolidation of Acusphere


























10,634


10,634BioAssets Development Corp. NCI upon consolidation


























28,500


28,500Other


























1,350


1,350BALANCE, DECEMBER 31, 2009


78,002,764

$
780

$
2,534,070


3,085,844

$
(208,427
)
$
(178,659
)
$
114,194

$
2,261,958

$
216,115

$
2,478,073


*As
adjusted in accordance with the transition provisions of accounting for convertible debt instruments that may be settled in cash upon conversion
(including partial cash settlement) and accounting for noncontrolling interests in consolidated financial statements.


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

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CEPHALON, INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF CASH FLOWS        (In thousands)

Year Ended December 31,2009

As Adjusted
2008*

As Adjusted
2007*CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)

$
210,727

$
171,889

$
(226,429
)Adjustments to reconcile net income (loss) to net cash provided by operating activities:Deferred income tax expense (benefit)


(84,155
)

(68,043
)

(21,090
)Shortfall tax benefits from stock-based compensation


(38
)

(511
)

(360
)Depreciation and amortization


186,192


172,457


141,358Stock-based compensation expense


50,410


43,975


46,695Gain on forgiveness of debt








(5,319
)Gain on sale of investment








(5,791
)Loss on disposals of property and equipment





17,178


1,022Impairment charges


182,080


99,719


Acquired in-process research and development





16,955


Amortization of debt discount and debt issuance costs


59,145


46,740


51,033Gain on foreign exchange contracts


(26,754
)




Gain on acquisition of Arana


(10,008
)




Acquired in-process research and development from Acusphere deconsolidation


8,366





Other


(3,503
)




Changes in operating assets and liabilities, net of effect from acquisitions:Receivables


81,022


(144,975
)

(601
)Inventory


(8,604
)

(37,397
)

(2,328
)Other assets


(14,348
)

11,792


(54,838
)Accounts payable and accrued expenses


99,013


(376,232
)

385,463Other liabilities


(48,194
)

44,576


76,041Net cash provided by (used for) operating activities


681,351


(1,877
)

384,856CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment


(60,927
)

(75,871
)

(96,867
)Proceeds from sale of property and equipment





16,000


Cash balance from consolidation of variable interest entities


53,706


1,654


Acquisition of intangible assets


(53,324
)

(25,825
)

(107,246
)Investment in Ception


(75,000
)

(25,000
)

Investment in BDC


(30,000
)




Purchases of investments


(11,797
)

(6,692
)

Proceeds from sale of investment in third party








12,291Acquisition of Arana, net of cash acquired


(232,527
)




Proceeds from foreign exchange contracts


26,754





Sales and maturities of available-for-sale investments


125,026


7,596


99,131Purchases of available-for-sale investments








(80,255
)Net cash used for investing activities


(258,089
)

(108,138
)

(172,946
)CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from sale of common stock


288,000





Proceeds from exercises of common stock options


10,211


43,962


93,900Windfall tax benefits from stock-based compensation


2,017


7,834


13,993Acquisition of treasury stock


(6,722
)

(6,947
)

(7,105
)Payments on and retirements of long-term debt


(13,412
)

(217,743
)

(3,853
)Net proceeds from issuance of convertible subordinated notes


484,719





Proceeds from sale of warrants


37,640





Purchase of convertible note hedge


(121,040
)




Net cash provided by (used for) financing activities


681,413


(172,894
)

96,935EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS


18,501


(11,301
)

13,312NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS


1,123,176


(294,210
)

322,157CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR


524,459


818,669


496,512CASH AND CASH EQUIVALENTS, END OF YEAR

$
1,647,635

$
524,459

$
818,669Supplemental disclosures of cash flow information:Cash payments for interest, net of capitalized interest

$
27,211

$
29,419

$
17,814Cash payments for income taxes


154,171


100,374


84,879Non-cash investing and financing activities:Capital lease additions


2,851


1,529


1,335Acquisition of treasury stock associated with termination of convertible note hedge and warrant agreements





36,585


Exchange of convertible notes into common stock, net of debt exchange expense





824


10


*As
adjusted in accordance with the transition provisions of accounting for convertible debt instruments that may be settled in cash upon conversion
(including partial cash settlement) and accounting for noncontrolling interests in consolidated financial statements.


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

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Table of Contents

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

1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



Cephalon, Inc. is an international biopharmaceutical company dedicated to the discovery, development and commercialization of
innovative products in four core therapeutic areas: central nervous system ("CNS"), pain, oncology, and our latest area of focus, inflammatory diseases. In addition to conducting an active research
and development program, we market seven proprietary products in the United States and numerous products in various countries throughout Europe and the world.



The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
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.



The consolidated financial statements include the results of our operations and our wholly-owned subsidiaries and, when applicable,
entities for which Cephalon has a controlling financial interest. All significant intercompany accounts and transactions have been eliminated.

For
variable interest entities, we assess the terms of our interest in the entity to determine if we are the primary beneficiary. Variable interests are the ownership, contractual, or
other pecuniary interests in an entity that change with changes in the fair value of the entity's net assets excluding variable interests. The primary beneficiary of a variable interest entity is the
party that absorbs a majority of the entity's expected losses, receives a majority of its expected residual returns, or both, as a result of holding variable interests. We consolidate the following
variable interest entities:



For
additional details on our recent acquisitions and transactions, see Note 2 herein.

We
use the cost method to account for our investments in companies that do not have readily determinable market values which we do not control and for which we do not have the ability to
exercise significant influence over operating and financial policies. In accordance with the cost method, these investments are recorded at cost or fair value, as appropriate.



In December 2008, we entered into a foreign exchange contract to protect against fluctuations in the Euro against the U.S. Dollar
related to intercompany transactions and payments. This contract matured in February 2009. The contract was not designated as a hedging instrument and, accordingly, it was recorded at fair value with
changes in fair value recognized in earnings as a component of other expense. The fair value of the derivative instrument was insignificant at December 31, 2008. On

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Table of Contents

CEPHALON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except share and per share data)

1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

March 17,
2009, Cephalon entered into a foreign exchange forward contract and a foreign exchange option contract related to our Arana transaction. Together, these contracts protected against
fluctuations between the Australian Dollar and the U.S. Dollar, up to a value of $144.2 million. Changes in the value of these contracts were recognized within net income. The forwards contract
matured on May 7, 2009 and the options contracted matured on May 28, 2009. On April 29, 2009, Cephalon entered into a foreign exchange forward contract which matured on
June 4, 2009 to replace the forwards contract which matured on May 7, 2009. All foreign exchange contracts have been settled as of June 30, 2009. Other income (expense), net
includes $19.0 million of gains on these foreign exchange contracts for the year ended December 31, 2009.

For
most of our foreign operating entities with currencies other than the U.S. dollar, the local currency is the functional currency. In cases where our foreign entity primarily operates
in an economic environment using a currency other than their local currency, the currency in which the entity conducts a majority of its operations 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. The amount of foreign currency gains (losses) included in our consolidated statement of operations was $6.1 million, $7.9 million and $7.7 million for
the three years ended December 31, 2009, 2008 and 2007, respectively.

Within
our Statement of Cash Flows, the effect of exchange rate changes on cash held in foreign currencies is 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 include investments in liquid securities with original maturities of three months or less from the date of purchase.
We consider our investments to be "available-for-sale." We classify these investments as short-term and carry them at fair market value. Unrealized gains and losses
have been recorded as a separate component of accumulated other comprehensive income included in stockholders' equity. All realized gains and losses on our available-for-sale
securities are recognized in results of operations.



Our most significant products are our wakefulness products, PROVIGIL® (modafinil) Tablets
[C-IV] and NUVIGIL® (armodafinil) Tablets [C-IV]. On a combined basis, our two next most significant products are
FENTORA® (fentanyl buccal tablet) [C-II] and ACTIQ® (oral transmucosal

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CEPHALON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except share and per share data)

1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

fentanyl
citrate) [C-II] (including our generic version of ACTIQ ("generic OTFC")). These products comprised the following for the years ended December 31:

% of total
consolidated
net sales

% of
net sales in
U.S. market2009

2008

2007

2009

2008

2007PROVIGIL net sales


48
%

51
%

49
%

94
%

94
%

94
%NUVIGIL net sales


3








100





PROVIGIL and NUVIGIL net sales


51


51


49


94


94


94FENTORA net sales


7


8


8


97


100


100ACTIQ net sales (including generic OTFC)


10


14


21


69


74


84FENTORA and ACTIQ net sales (including generic OTFC)


17
%

22
%

29
%

80
%

83
%

88
%TREANDA net sales


10
%

4
%


%

100
%

100
%


%


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 total
consolidated
gross salesAt December 31,

Year Ended
December 31,2009

2008

2007

2009

2008

2007Major U.S. customers:AmerisourceBergen Corporation


14
%

13
%

7
%

20
%

17
%

13
%Cardinal Health, Inc.


23


18


17


29


28


28McKesson Corporation


16


19


15


26


26


25Total


53
%

50
%

39
%

75
%

71
%

66
%




Effective October 1, 2008, we changed our method of accounting for inventories previously valued using the last-in,
first-out (LIFO) method to the first-in, first-out (FIFO) method and adjusted our results for all of the periods presented. As a result of this change, all
inventories are now valued using the FIFO method.

We
expense pre-approval inventory unless we believe it is probable that the inventory will be saleable. We have capitalized 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. With respect to capitalization of
unapproved product

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Table of Contents

CEPHALON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except share and per share data)

1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

candidates,
we seek to produce inventory in preparation for the launch of the product and in amounts sufficient to support forecasted initial market demand. Typically, capitalization of this inventory
does not begin until the product candidate is considered to have a high probability of regulatory approval. This may occur when either the product candidate is in Phase III clinical trials or
when it is a new formulation or dosage strength of a presently approved product for which we believe there is a high probability of receiving FDA approval. If we are aware of any specific risks or
contingencies that are likely to impact the expected regulatory approval process or if there are any specific issues identified during the research process relating to safety, efficacy, manufacturing,
marketing or labeling of the product candidate, we would not capitalize the related inventory.

When
manufacturing and capitalizing inventory costs of product candidates and at each subsequent balance sheet date, we consider both the expiration dates of the inventory and
anticipated future sales once approved. Since expiration dates are impacted by the stage of completion, we seek to avoid product expiration issues by managing the levels of inventory at each stage to
optimize the shelf life of the inventory relative to anticipated market demand following launch.

Once
we have determined to capitalize inventory for a product candidate that is not yet approved, we will monitor, on a quarterly basis, the status of this candidate within the
regulatory approval process. We could be required to expense previously capitalized costs related to pre-approval inventory upon a change in our judgment of future commercial use and net
realizable value, due to a denial or delay of approval by regulatory bodies, a delay in the timeline for commercialization or other potential factors.

On
a quarterly basis, we evaluate all inventory, including inventory capitalized for which regulatory approval has not yet been obtained, to determine if any lower of cost or market
adjustment is required. As it relates to pre-approval inventory, we consider several factors including expected timing of FDA approval, projected sales volume and estimated selling price.
Projected sales volume is based on several factors including market research, sales of similar products and competition in the market. Estimated sales price is based on the price of existing products
sold for the same indications and expected market demand. See Note 8 herein.



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 40 years. Property and equipment under capital leases and leasehold improvements are depreciated or amortized over the shorter of the lease term or the
expected useful life of the assets. Expenditures for maintenance and repairs are charged to expense as incurred, while major renewals and betterments are capitalized. See Note 9 herein.

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



The carrying values of cash, cash equivalents, short-term investments, accounts receivable, accounts payable, accrued
expenses and debt instruments other than our convertible debt approximate the

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CEPHALON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except share and per share data)

1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

respective
fair values. Except for our convertible notes, our debt instruments do not have readily ascertainable market values; however, the carrying values approximate the respective fair values. As
of December 31, 2009, the fair value and carrying value of our convertible debt, based on quoted market prices was:

Fair Value

Carrying Value

Face Value2.0% convertible senior subordinated notes due June 1, 2015

$
1,162,514

$
618,464

$
820,0002.5% convertible senior subordinated notes due May 1, 2014


559,400


362,093


500,000Zero Coupon convertible subordinated notes first putable June 2010


227,456


194,232


199,549




Goodwill represents the excess of purchase price over net assets acquired. Goodwill and indefinite lived intangible assets are not
amortized; rather, they are subject to a periodic assessment for impairment by applying a fair-value-based test. We perform our annual test of impairment of goodwill as of July 1.
We review indefinite lived intangible assets for impairment on an annual basis and review all intangible assets for impairment 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 to the fair value of the assets, which is usually based on the
present value of the expected future cash flows associated with the use of the asset. See Notes 10 and 11 herein.



In the United States, we sell our proprietary products to pharmaceutical wholesalers, the largest three of which account for 75% of our
total consolidated gross sales for the year ended December 31, 2009. Decisions made by these wholesalers regarding the levels of inventory they hold (and thus the amount of product they
purchase from us) can materially affect the level of our sales in any particular period and thus may not correlate to the number of prescriptions written for our products as reported by IMS Health
Incorporated.

We
have distribution service agreements that obligate the wholesalers to provide us with periodic retail demand information and current inventory levels for our products held at their
warehouse locations; additionally, the wholesalers have agreed to manage the variability of their purchases and inventory levels within specified limits based on product demand. As of
December 31, 2009, we received information from substantially all of our U.S. wholesaler customers about the levels of inventory they held for our U.S. branded products. Based on this
information, which we have not independently verified, we believe that total inventory held at these wholesalers is approximately two to three weeks supply of our U.S. branded products at our current
sales levels. As of our most recent retail inventory survey in June 2009, our generic OTFC inventory held at wholesalers and retailers is approximately three months.

We
recognize revenue from product sales when the following four revenue recognition criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have
been

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1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

rendered,
the selling price is fixed or determinable, and collectability is reasonably assured. Additionally, revenue arrangements with multiple deliverables are divided into separate units of
accounting if the deliverables in the arrangement meet the following criteria: the delivered item has value to the customer on a standalone basis; there is objective and reliable evidence of the fair
value of undelivered items; and delivery of any undelivered item is probable.

In
the United States, we sell all commercial products F.O.B. destination. Transfer of ownership and risk of loss for the product pass to the customer at the point that the product is
received by 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 royalty payments, payments for research and development services, up-front fees
and milestone
payments. If an arrangement requires the delivery or performance of multiple deliverables or elements under a bundled sale, we determine whether the individual elements represent "separate units of
accounting." If the separate elements meet the requirements, we recognize the revenue associated with each element separately and revenue is allocated among elements based on relative fair value. If
the elements within a bundled sale are not considered separate units of accounting, the delivery of an individual element is considered not to have occurred if there are undelivered elements that are
essential to the functionality. Unearned income is amortized by the straight-line method over the term of the contracts. Also, if contractual obligations related to customer acceptance
exist, revenue is not recognized for a product or service unless these obligations are satisfied. 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 on a percentage of completion basis 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. For the years ended December 31, 2009, 2008 and 2007, incurred costs that are reflected in our operating
expenses were insignificant in connection with these collaborations.

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.

We
recognize revenue on new product launches when sales returns can be reasonably estimated and all other revenue recognition requirements have been met. When determining if returns can
be estimated, we consider actual returns of similar products as well as sales returns with similar customers. In cases in which a new product is not an extension of an existing line of product or
where we have no history of experience with products in a similar therapeutic category such that we cannot estimate expected returns of the new product, we defer recognition of revenue until the right
of return no longer exists or until we have developed sufficient historical experience to estimate sales returns. In

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developing
estimates for sales returns, we consider inventory levels in the distribution channel, shelf life of the product and expected demand based on market data and prescriptions.

Sales
of our generic OTFC product could be subject to retroactive price reductions for units that remain in the pipeline if the price of generic OTFC is reduced, including as a result of
another generic entrant into the market, and as a result any estimated impact of such adjustments is recorded at the time revenue is recognized. This estimate of both the potential timing of a generic
entrant and the amount of the price reduction are highly subjective. In October 2009, we understand that the FDA approved ANDAs by Barr and by Covidien to market and sell generic OTFC. As a result, we
have accrued a $1.2 million shelf stock adjustment as of December 31, 2009.



As of January 1, 2009, we adopted the revised provisions for collaborative arrangements, which resulted in the following
additional disclosures:

We
enter into collaborative arrangements with pharmaceutical or biotech companies to develop and produce orally disintegrating tablets ("ODT's") of branded and generic drugs and to
develop and improve nominated antibodies supplied by our collaboration partners using our humanization technology. In these arrangements, we earn fees for work performed, license fees, royalties on
product sales and/or risk based milestone payments. We also manufacture ODT products under supply agreements. Revenues recognized from product sales are classified as net sales and revenues recognized
from fees for services, license fees, royalties and milestone payments are classified as other revenues.

Amounts
recognized under collaborative arrangements consisted of the following:

Year ended December 31,2009

2008

2007Net sales

$
32,980

$
34,676

$
37,963Other revenues


38,482


26,686


37,846Total

$
71,462

$
61,362

$
75,809




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



Acquired in-process research and development ("IPR&D") represents the estimated fair value assigned to research and
development projects acquired in a purchase business combination (including the initial consolidation of a variable interest entity) that have not been completed at the date of acquisition and which
have no future alternative use. Effective on January 1, 2009, IPR&D acquired in a business combination is recorded as an intangible asset, while
IPR&D acquired in an asset deal is charged to expense as of the acquisition date. All IPR&D acquired prior to January 1, 2009 is charged to expense as of the acquisition date.

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The
fair value assigned to IPR&D acquired in a business combination is typically 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 IPR&D 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. The fair value assigned to IPR&D where the IPR&D was the primary asset in the business
combination may also be estimated based on the probability adjusted present value of consideration paid to acquire the business.

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 IPR&D 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.



Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. We provide for income taxes at
a rate equal to our estimated annual combined federal, state and foreign statutory effective rates and we may recognize the tax benefit from an uncertain tax position only if it is more likely than
not that the tax position will be sustained on examination by the taxing authorities, based solely on the technical merits of the position. The tax benefits recognized in the financial statements from
such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. 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, as it has for the
current year ended December 31, 2009.



Effective January 1, 2009, we adopted the transition provisions of accounting for noncontrolling interests in consolidated
financial statements. We have reclassified noncontrolling interest from liabilities to a component of equity and we attribute losses to the noncontrolling interest even if that

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attribution
results in a deficit noncontrolling interest balance. We adopted the presentation and disclosures on a retrospective basis for all periods presented.

As
of January 1, 2009, we adopted the transition provisions of accounting for convertible debt instruments that may be settled in cash upon conversion (including partial cash
settlement) to initially record the liability and equity components of the convertible debt separately. The liability component is computed based on the fair value of a similar liability that does not
include the conversion option. The equity component is computed based on the total debt proceeds less the fair value of the liability component. The equity component (debt discount) and debt issuance
costs are amortized as interest expense over the expected term of the debt facility. We adopted the transition provisions on a retrospective basis for all prior periods presented.

The
liability component of our convertible notes will be classified as current liabilities and presented in current portion of long-term debt and the equity component of our
convertible debt will be considered a redeemable security and presented as redeemable equity on our consolidated balance sheet if our debt is considered current at the balance sheet date. At
December 31, 2009, our stock price was $62.42, and, therefore, the 2.0% Notes are considered to be current liabilities based on conversion price and are presented in current portion of
long-term debt on our consolidated balance sheet. At December 31, 2009, the 2010 Zero Coupon Notes are presented in current portion of long-term debt based on maturity
date. At December 31, 2008, our stock price was $77.04, and, therefore, all of our convertible notes issued as of that date are presented in the current portion of long-term debt on
our consolidated balance sheet.

The
effect of the change to the revised accounting requirements for our convertible debt on the consolidated statements of operations for the years ended December 31, 2009, 2008
and 2007 is as follows:

Year ended December 31,2009

2008

2007Interest expense

$
(57,766
)
$
(46,740
)
$
(51,033
)Income tax benefit


21,200


17,154


18,729Net loss attributable to Cephalon, Inc.


(36,566
)

(29,586
)

(32,304
)Basic loss per share attributable to Cephalon, Inc.


(0.51
)

(0.43
)

(0.49
)Diluted loss per share attributable to Cephalon, Inc.


(0.47
)

(0.38
)

(0.49
)


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1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

The
effect of the change to the revised accounting requirements for our convertible debt on the consolidated balance sheet as of December 31, 2009 and December 31, 2008 is
as follows:

December 31, 2009

December 31, 2008Assets:Deferred tax assets

$
(75,501
)
$
(96,701
)Other assets (debt issuance costs)


8,311


10,455Total assets

$
(67,190
)
$
(86,246
)Liabilities:Current portion of long term debt, net

$
(207,307
)
$
(248,403
)Long term debt, net


14,526


Total liabilities


(192,781
)

(248,403
)Redeemable equity


207,307


248,403Cephalon stockholders' equity:Additional paid-in capital


64,813


23,717Accumulated deficit


(146,529
)

(109,963
)Total Cephalon stockholders' equity


(81,716
)

(86,246
)Total liabilities, redeemable equity and equity

$
(67,190
)
$
(86,246
)


The
effect of the change to the revised accounting requirements for our convertible debt on the consolidated statement of cash flows for the years ended December 31, 2009, 2008
and 2007 is as follows:

Year ended December 31,2009

2008

2007Net loss

$
(36,566
)
$
(29,586
)
$
(32,304
)Deferred income tax benefit


(21,200
)

(17,154
)

(18,729
)Amortization of debt discount


57,766


46,740


51,033




Certain reclassifications of prior year amounts have been made to conform to the current year presentation. These reclassifications
have no impact on our total assets, liabilities, stockholders' equity, net income (loss) or cash flows. Certain prior year amounts have been retrospectively adjusted to comply with new accounting
guidance.



In June 2009, the FASB issued revised accounting guidance for transfers of financial assets, which removes the concept of a qualifying
special-purpose entity and establishes
specific conditions for reporting a transfer of a portion of a financial asset as a sale. The new guidance is effective for annual reporting periods beginning after November 15, 2009. We are
currently evaluating the impact of adoption on our consolidated financial statements.

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In June 2009, the FASB issued revised accounting guidance for consolidation of variable interest entities ("VIE"), which replaces the previous quantitative based risk and rewards
calculation for determining the primary beneficiary of a VIE with an approach focused on identifying which enterprise has the power to direct the activities of a VIE that most significantly impact the
entity's economic performance and (1) the obligation to absorb losses or (2) the right to receive benefits. The new guidance also requires ongoing reassessments of whether an enterprise
is the primary beneficiary of a variable interest entity. It is effective for annual reporting periods beginning after November 15, 2009. We are currently evaluating the impact of adopting the
new guidance but it could change our assessment of which entities are included in our consolidated financial statements.

In
October 2009, the FASB issued revised accounting guidance for multiple-deliverable arrangements. The amendment requires that arrangement considerations be allocated at the inception
of the arrangement to all deliverables using the relative selling price method and provides for expanded disclosures related to such arrangements. It is effective for revenue arrangements entered into
or materially modified in fiscal years beginning on or after June 15, 2010. We are currently evaluating the impact of adoption on our consolidated financial statements.

2. ACQUISITIONS AND TRANSACTIONS



On May 27, 2009, we issued an aggregate of 5,000,000 shares of common stock, par value $0.01 per share, at a price of $60.00 per
share, resulting in net cash proceeds of $288.0 million. Concurrently with the equity offering, we also issued $500.0 million aggregate principal amount of 2.5% convertible senior
subordinated notes due on May 1, 2014. See Note 13 herein.



In December 2009, we entered into an agreement with UCB Pharma France under which we acquired all assets related to the development,
manufacturing, marketing and sale of VOGALENE® (metopimazine) and VOGALIB® (metopimazine) in France and French Overseas territories for $53.3 million. These products are
approved for use in the symptomatic treatment of nausea and vomiting. The injectible solution is approved for the prevention of nausea and vomiting in patients under chemotherapy.



Effective November 2009, we signed an agreement with BioAssets Development Corporation ("BDC") that sets forth our option to acquire
BDC. Under the terms of the option agreement, we paid BDC an upfront payment of $30.0 million. If we exercise the option, we have agreed to pay a total of $12.5 million plus the value of
BDC's net working capital less the amount of any outstanding debt. BDC stockholders could also receive additional future payments related to regulatory and sales milestones. BDC is currently
conducting a Phase II placebo-controlled proof of concept study with the tumor necrosis factor (TNF) inhibitor, etanercept, epidurally administered to a minimum of 40 patients with sciatica.
Sciatica is a neuropathic inflammatory pain condition that occurs when the sciatic nerve is

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2. ACQUISITIONS AND TRANSACTIONS (Continued)

compressed,
injured or irritated. BDC has secured an intellectual property estate around use of TNF inhibitors for sciatic pain in patients with intervertebral disk herniation, as well as other spinal
disorders. We may exercise our option at any time from the closing date of the option agreement until the date that is 60 days after receipt of one-month patient response data from
BDC's Phase II study. Data are anticipated to be available in the second half of 2010.

We
have determined that, because of our rights under the BDC option agreement, effective on November 18, 2009, BDC is a variable interest entity for which we are the primary
beneficiary. As a result, as of November 18, 2009 we have included the financial condition and results of operations of BDC in our consolidated financial statements. However, we do not have an
equity interest in BDC and, therefore, we have allocated the BDC losses to noncontrolling interest in the consolidated statement of operations. If the BDC option expires unexercised, we will
deconsolidate BDC and recognize a loss of $30.0 million, equal to our investment in BDC. BDC did not have a material impact on our revenues or earnings attributable to our Cephalon shareholders
for the period ended December 31, 2009 or on a pro
forma basis for the periods ended December 31, 2009 and 2008. BDC is included in our U. S. operating segment.

The
following summarizes the carrying amounts and classification of BDC's assets and liabilities included in our consolidated balance sheet as of November 18, 2009 and
December 31, 2009:

November 18,
2009

December 31,
2009Cash and cash equivalents

$
1,143

$
9,854Accounts receivable


10,600


69Other current assets


105


27Property and equipment, net


21


18Goodwill


20,391


20,391Intangible assets


48,000


48,000Accounts payable


564


362Accrued expenses


3,026


1,817Deferred tax liabilities


18,171


18,171Noncontrolling interest


28,500


28,009


The
goodwill recognized in the opening balance sheet primarily resulted from the recognition of deferred taxes associated with the value assigned to identifiable intangible assets. There
is no goodwill recognized or deductible for tax purposes. The fair value of the noncontrolling interest was computed based on the present value of the probability weighted future payments to the
current BDC stockholders.

Although
BDC is included in our consolidated financial statements, our interest in BDC's assets is limited to that accorded to us in the agreements with BDC as described above. BDC's
creditors have no recourse to the general credit of Cephalon.

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2. ACQUISITIONS AND TRANSACTIONS (Continued)



On February 27, 2009, we announced that we acquired (through our wholly owned subsidiary Cephalon International
Holdings, Inc. ("Cephalon International")), approximately 19.8% of the total issued share capital (the "Equity Stake") of Arana Therapeutics Limited, an Australian company listed on the
Australian Securities Exchange ("Arana"), for $41.4 million and that we intended to initiate a takeover offer for Arana (through Cephalon International). On March 9, 2009,
through Cephalon International, we filed a Bidder's Statement with the Australian Securities and Investments Commission in connection with our takeover offer for Arana. The offer terms consisted of
the following:



The
takeover offer closed on June 29, 2009. Cephalon International's relevant interest in Arana as of that date was 93.1%. Cephalon International exercised a compulsory
acquisition to acquire the remaining 6.9% interest in Arana's ordinary shares, which was completed on August 8, 2009. The total funds used to acquire Arana shares was $223.2 million, net
of gains on foreign exchange contracts.

Arana
is a biopharmaceutical company focused on developing next generation antibody and protein based drugs that will improve the lives of patients with inflammatory diseases and cancer.
The company's lead compound, CEPH 37247, is a new generation tumor necrosis factor (TNF) alpha blocker. Arana has a patent portfolio related to anti-TNF alpha antibodies and receives
licensing income in connection with certain patents. We acquired Arana in order to expand our technology base. Arana is included in our United States operating segment.

Our
initial investment in Arana was recorded as an available for sale investment. On May 27, 2009, we acquired additional shares for $89.8 million which increased our Arana
holdings to 50.4% of the outstanding shares. As a result, effective on that date we have included Arana in our consolidated financial statements. The 90% Premium payment is considered contingent
consideration and was initially recognized at its estimated fair value of $1.0 million for the shares purchased on May 27, 2009. Upon satisfying the 90% criteria on June 12, 2009,
the excess of the actual payments over the recorded liability for the 90% premium of $2.8 million was recorded as a charge to other income (expense), net. The fair value of the noncontrolling
interest in Arana as of May 27, 2009 was $104.7 million based on the closing stock price for Arana's shares on that date.

The
fair value of our Arana holdings of approximately 19.8% immediately prior to the acquisition on May 27, 2009 was $48.0 million. This investment was remeasured to fair
value on the acquisition date with the increase of $6.6 million over the original cost recognized in other income (expense), net. This gain is the result of an increase in the value of the
Australian dollar relative to the U.S. dollar, net of changes in the Arana share price. For the year ended December 31, 2009, we have included

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$14.0 million
of revenues and $14.6 million of net losses attributable to Cephalon, Inc. for Arana in our consolidated results.

The
following summarizes the carrying amounts and classification of Arana's assets and liabilities included in our consolidated balance sheet as of May 27, 2009:

Cash and cash equivalents

$
9,606Short term investments


122,817Accounts receivable


6,766Other current assets


2,807Property and equipment, net


7,465Intangible assets


125,009Accounts payable


2,551Accrued expenses


3,080Other liabilities


4,258Deferred tax liabilities


12,043Noncontrolling interest


104,730


The
total purchase price consideration as measured in accordance with purchase accounting requirements was A$311.2 million based on the fair value of the Arana stock on
May 27, 2009. The fair value of Arana's net assets on that date was A$324.1 million, which resulted in a gain of A$12.8 million (or $10.0 million) recognized in other
income (expense), net. This gain is primarily the difference between the 90% Premium payment actually made and the assessed probability of making the 90% Premium payment at the acquisition date. The
actual price paid for all of Arana's outstanding stock including the 90% Premium was A$322.7 million.

There
is no goodwill recognized or deductible for tax purposes. The book value of the accounts receivable approximates their fair value and gross contractual value.

The
following unaudited pro forma information presents results as if the acquisition occurred at the beginning of each annual reporting period presented:

Year ended December 31,2009

2008Revenues

$
2,200,870

$
2,006,185Net income attributable to Cephalon, Inc.


335,684


186,790Basic income per common share attributable to Cephalon, Inc.


4.64


2.75Diluted income per common share attributable to Cephalon, Inc.


4.32


2.45


We
entered into foreign exchange forward contracts and a foreign exchange option contract related to our Arana transaction to protect against fluctuations between the Australian Dollar
and the U.S. Dollar, up to a value of $144.2 million. Changes in the value of these contracts were recognized within net income. All foreign exchange contracts were settled during the second
quarter of 2009. Other

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income
(expense), net includes $19.0 million of gains on these foreign exchange contracts for the nine months ended December 31, 2009.



In January 2009, we entered into an option agreement (the "Ception Option Agreement") with Ception Therapeutics, Inc.
("Ception"). Under the terms of the Ception Option Agreement, we have the irrevocable option (the "Ception Option") to purchase all of the outstanding capital stock on a fully diluted basis of Ception
at any time on or prior to the expiration of the Ception Option Period (as defined below). As consideration for the Ception Option, we paid $50.0 million to Ception and paid Ception
stockholders an aggregate of $50.0 million. We also agreed to provide up to $25.0 million of financing to Ception during the Ception Option Period. As of December 31, 2009, we
have advanced $11.0 million to Ception under the financing agreement. As of the date of this filing, in 2010, we advanced an additional $14.0 million to Ception under the financing
agreement. We are not obligated to provide additional financing to Ception. Based on an agreement we entered into with Ception in January 2010 to amend the Ception Option Agreement, we, in our sole
discretion, may exercise the Ception Option by providing written notice to Ception at any time during the period (the "Ception Option Period") from January 13, 2009 to and including the date
that is (a) 15 business days after the later of (i) the receipt by Cephalon of the final study report for Ception's Phase IIb/III clinical trial for CINQUIL as a treatment for
pediatric eosinophilic esophagitis (the "EE Study") or (ii) the receipt by Cephalon of the top-line data from Ception's Phase II study for CINQUIL as a treatment for
eosonophilic asthma (the "EA Study") or (b) such earlier date on which Cephalon terminates the Ception Option Agreement pursuant to its terms. We received the EE Study final report in January
2010 and anticipate receiving the EA Study top-line data in the first quarter of 2010. If we exercise the Ception Option, we have agreed to pay a total of $250.0 million less any
third party debt payable by Ception in exchange for all the outstanding capital stock of Ception on a fully-diluted basis. Ception stockholders also could receive (i) additional payments
related to clinical and regulatory milestones and (ii) royalties related to net sales of products developed from Ception's program to discover small molecule, orally-active,
anti-TNF (tumor necrosis factor) receptor agents.

In
November 2009, we, together with Ception, announced top-line results from a Phase IIb/III clinical trial for CINQUIL as a treatment for pediatric eosinophilic
esophagitis ("EoE"). Based on these results, we reduced our estimate of future cash flows from an EoE indication for CINQUIL and recognized an impairment charge to reduce the associated intangible
asset carrying value to its revised estimated fair value. See Note 11 herein.

We
have determined that, because of our rights under the Ception Option Agreement, effective on January 13, 2009, Ception is a variable interest entity for which we are the
primary beneficiary. As a result, as of January 13, 2009 we have included the financial condition and results of operations of Ception in our consolidated financial statements. However, we do
not have an equity interest in Ception and, therefore, we have allocated the Ception losses to noncontrolling interest in the consolidated statement of operations. If the Ception Option expires
unexercised, we will deconsolidate Ception and recognize a loss of $100.0 million, equal to our investment in Ception. We will also need to assess Ception's ability to repay loan amounts
advanced under the financing agreement. Ception did not have a material impact on our revenues or earnings attributable to our Cephalon shareholders for

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the
period ended December 31, 2009 or on a pro forma basis for the periods ended December 31, 2009 and 2008. Ception is included in our U. S. operating segment.

The
following summarizes the carrying amounts and classification of Ception's assets and liabilities included in our consolidated balance sheet as of January 13, 2009 and
December 31, 2009:

January 13,
2009

December 31,
2009Cash and cash equivalents

$
52,563

$
52,500Other current assets


25,225


193Property and equipment, net


320


348Goodwill


121,918


121,918Intangible assets


374,400


199,400Debt issuance costs


16


Other assets


10


10Current portion of long-term debt, net


4,725


3,763Accounts payable


2,715


4,064Accrued expenses


8,326


5,526Long-term debt


3,394


Deferred tax liabilities


148,792


61,911Noncontrolling interest


306,500


188,105


The
goodwill recognized in the opening balance sheet primarily resulted from the recognition of deferred taxes associated with the value assigned to identifiable intangible assets. There
is no goodwill recognized or deductible for tax purposes. The fair value of the noncontrolling interest was computed based on the present value of the probability weighted future payments to the
current Ception stockholders.

Although
Ception is included in our consolidated financial statements, our interest in Ception's assets is limited to that accorded to us in the agreements with Ception as described
above. For example, Ception's cash and cash equivalents balance includes $50.0 million of Ception Option Agreement proceeds; Ception has retained the right to distribute those cash proceeds to
its current stockholders. Ception's creditors have no recourse to the general credit of Cephalon.



In November 2008, we entered into a license and convertible note transaction with Acusphere, Inc. ("Acusphere"). In connection
with the transaction, we received an exclusive worldwide license from Acusphere to all of its intellectual property relating to the development and marketing of celecoxib for all current and future
indications. Under the license, we paid Acusphere an upfront fee of $5.0 million and agreed to make a $15.0 million milestone payment, as well as royalties on net sales. In addition, we
purchased a $15.0 million senior secured three-year convertible note (the "Acusphere Note") from Acusphere, secured by substantially all the assets of Acusphere. Separately, in
March 2008, we purchased license rights for Acusphere's Hydrophobic Drug Delivery Systems (HDDS) technology for use in oncology therapeutics for $10 million.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except share and per share data)

2. ACQUISITIONS AND TRANSACTIONS (Continued)

On
June 24, 2009, we exchanged the Acusphere Note and $1.0 million for (i) the elimination of the $15.0 million milestone payment and any future royalty
payments associated with the celecoxib license agreement and (ii) the Acusphere patent rights relating to the HDDS technology.

We
had previously determined that based on the rights afforded to us under the Acusphere Note, effective on November 3, 2008 Acusphere was a variable interest entity for which we
were the primary beneficiary and began including Acusphere in our consolidated financial statements. Effective with the termination of the Acusphere Note, we are no longer considered the primary
beneficiary and deconsolidated Acusphere, resulting in a $9.4 million charge to acquired in-process research and development as a result of the elimination of the royalty and
milestone payments associated with the celecoxib license agreement.

Effective
January 1, 2009 through the deconsolidation of Acusphere on June 24, 2009, we attributed Acusphere's losses to the noncontrolling interest, which increased net
income attributable to Cephalon, Inc. by $10.6 million during the year ended December 31, 2009.



In March 2009, we paid $0.8 million to exercise our option pursuant to the Option and Exclusivity Agreement with SymBio
Pharmaceuticals Limited ("SymBio"), granting Cephalon an exclusive sublicense to bendamustine hydrochloride in China and Hong Kong and acquired $9.1 million of SymBio common stock. In November
2009, we participated in an additional equity offering by SymBio and acquired $2.2 million of SymBio shares. We also re-valued our existing holdings in SymBio to the per share price
in their November 2009 equity offering and recognized a $7.1 million impairment charge. Our investment in SymBio is recorded as a cost basis investment. As of December 31, 2009, we owned
14.8% of SymBio's outstanding common stock.



In August 2007, we acquired exclusive North American rights to AMRIX® (cyclobenzaprine hydrochloride extended-release
capsules) from E. Claiborne Robins Company, Inc., a privately-held company d/b/a ECR Pharmaceuticals ("ECR"). We made an initial payment of $100.1 million cash to ECR upon
the closing of the acquisition, $0.9 million and $99.2 million of which was capitalized as inventory and an intangible asset, respectively. Under the acquisition agreement, ECR also
could receive up to an additional $255 million in milestone payments that are contingent on attainment of certain agreed-upon sales levels of AMRIX. Two dosage strengths of AMRIX
(15 mg and 30 mg) were approved in February 2007 by the FDA for short-term use as an adjunct to rest and physical therapy for relief of muscle spasm associated with acute, painful
musculoskeletal conditions. We made the product available in the United States in October 2007 and commenced a full U.S. launch in November 2007.



With respect to the marketing of PROVIGIL in the United States, on August 29, 2008, we terminated our co-promotion
agreement with Takeda Pharmaceuticals North America, Inc. ("TPNA") effective November 1, 2008. As a result of the termination, we are required under the agreement to

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(In thousands, except share and per share data)

2. ACQUISITIONS AND TRANSACTIONS (Continued)

make
payments to TPNA during the three years following the termination of the agreement (the "Sunset Payments"). The Sunset Payments were calculated based on a percentage of royalties to TPNA during
the final twelve months of the agreement. During 2008, we recorded an accrual of $28.2 million representing the present value of the Sunset Payments due to TPNA. Payment of this accrual will
occur over the three year period ending December 10, 2011.



In November 2008, we entered into an option agreement (the "ImmuPharma Option Agreement") with ImmuPharma PLC ("ImmuPharma")
providing us with an option to obtain an exclusive, worldwide license to the investigational medication LUPUZOR for the treatment of systemic lupus erythematosus. Under the terms of the
ImmuPharma Option Agreement, we paid ImmuPharma a $15.0 million upfront option payment upon
execution, which was expensed as in-process research and development in the Consolidated Statement of Operations. On January 30, 2009, we exercised the option and entered into a
Development and Commercialization Agreement with ImmuPharma based on a review of interim results of a Phase IIb study for LUPUZOR. In February 2009, we paid $30.0 million in exchange for
the exclusive, worldwide license rights to LUPUZORTM and expensed this amount as IPR&D.

3. RESTRUCTURING



In October 2009, we began to restructure our discovery research organization to focus on our pipeline opportunities, primarily in
oncology, inflammatory diseases and pain, with an emphasis on our biologic opportunities, wind down our internal research efforts in CNS and reduce our overall cost structure. As part of this
restructuring, we have recently announced worldwide restructuring efforts. Beginning in 2009 and continuing in 2010, we expect to eliminate approximately 89 jobs worldwide through a combination of
voluntary resignations and terminations. As of December 31, 2009, 7 positions have been eliminated. The total estimated pre-tax costs of these restructuring efforts are
$9.6 million. Total estimated charges and spending related to worldwide restructuring efforts recognized in the consolidated statement of operations and included primarily in the United States
segment are as follows:

Year ended
December 31,
2009Restructuring reserves, beginning of period

$
Severance costs


8,830Payments


(968
)Restructuring reserves, end of period

$
7,862


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except share and per share data)

3. RESTRUCTURING (Continued)



On January 15, 2008, we announced a restructuring plan under which we intend to (i) transition manufacturing activities
at our CIMA LABS INC. ("CIMA") facility in Eden Prairie, Minnesota, to our recently expanded manufacturing facility in Salt Lake City, Utah, and (ii) consolidate at CIMA's Brooklyn Park,
Minnesota, facility certain drug delivery research and development activities performed in Salt Lake City. The phased transition of manufacturing activities and the closure of the Eden Prairie
facility are expected to be completed in 2011. The consolidation of drug delivery research and development activities at Brooklyn Park was completed in 2008. The plan is intended to increase
efficiencies in manufacturing and research and development activities, reduce our cost structure and enhance competitiveness.

As
a result of this plan, we will incur certain costs associated with exit or disposal activities. As part of the plan, we estimate that approximately 90 jobs will be eliminated in
total, with approximately 175 net jobs eliminated at CIMA and approximately 85 net jobs added in Salt Lake City.

The
total estimated pre-tax costs of the plan are as follows:

Severance costs

$
14 - 16 millionManufacturing and personnel transfer costs


7 - 8 millionTotal

$
21 - 24 million


The
estimated pre-tax costs of the plan are being recognized between 2008 and 2011 and are included in the United States segment. Through December 31, 2009, we have
incurred a total of $13.4 million related to the restructuring plan. In addition to the costs described above, we recognized pre-tax, non-cash accelerated depreciation
of plant and equipment at the Eden Prairie facility, which we expect to total approximately $18.0 million to $20.0 million. Through December 31, 2009, we have incurred a total of
$13.8 million in accelerated depreciation charges.

Total
charges and spending related to the restructuring plan recognized in the consolidated statement of operations and included in the United States segment are as follows:

Year ended
December 31,2009

2008Restructuring reserves, beginning of period

$
3,733

$
Severance costs


3,417


6,877Manufacturing and personnel transfer costs


1,578


1,538Payments


(1,645
)

(4,682
)Restructuring reserves, end of period

$
7,083

$
3,733


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except share and per share data)

4. ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT EXPENSE

In 2009, we recognized acquired in-process research and development expense of:



In
2008, we recognized acquired in-process research and development expense of:



5. OTHER INCOME (EXPENSE)

Other income (expense), net consisted of the following:

Year ended, December 312009

2008

2007Gains on foreign exchange derivative instruments

$
19,022

$


$
Arana dividend income


1,567





Loss on Arana contingent consideration (90% ownership incentive payment)


(2,773
)




Gain on excess of Arana net assets over consideration


10,008





Gain on pre-bid Arana holding


6,596





Foreign exchange gains


6,095


7,880


7,653Other income (expense), net

$
40,515

$
7,880

$
7,653


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except share and per share data)

6. ACCUMULATED OTHER COMPREHENSIVE INCOME

The components of accumulated other comprehensive income, all of which apply to Cephalon, Inc., as of December 31, 2009, 2008 and 2007 are as follows:

2009

2008

2007Foreign currency translation gains

$
112,159

$
41,989

$
147,031Prior service gains and losses on retirement-related plans


2,035


1,641


1,664Change in unrealized investment gains and losses








8Accumulated other comprehensive income

$
114,194

$
43,630

$
148,703


Our
noncontrolling interests do not have any accumulated other comprehensive income balances.

7. RECEIVABLES, NET

At December 31, receivables, net consisted of the following:

2009

2008Trade receivables

$
350,173

$
342,904Other receivables


32,631


81,476382,804


424,380Less reserve for sales discounts and allowances


(6,728
)

(14,800
)$
376,076

$
409,580


Trade
receivables are recorded at the invoiced amount and do not bear interest. In 2009 and 2008, other receivable includes income taxes receivable of $16.0 million and
$71.9 million, respectively. Our allowance for doubtful accounts is our best estimate of probable credit losses in our existing accounts receivable. 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. Certain European receivable balances with government operated hospitals are over 90 days past due but we believe are collectible and are therefore, not reserved. In the
past, our historical write-off experience has not been significant. We do not have any off-balance sheet credit exposure related to our customers.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except share and per share data)

8. INVENTORY, NET

At December 31, inventory, net consisted of the following:

2009

2008Raw materials

$
27,105

$
27,555Work-in-process


144,145


35,501Finished goods


69,326


54,241Total inventory, net

$
240,576

$
117,297Inventory, net included in other non-current assets

$


$
111,598


Inventory
is stated at the lower of cost or market value. Effective October 1, 2008, we changed our method of accounting for inventories previously valued using the
last-in, first-out (LIFO) method to the first-in, first-out (FIFO) method and adjusted our results for all of the periods presented. As a result of this
change, all inventories are now valued using the FIFO method.

We
have capitalized 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. In March 2008, we secured final FDA approval of TREANDA, which was launched in the United States in April 2008.

In
June 2007, we secured final FDA approval of NUVIGIL. Prior to the commercial launch of NUVIGIL, we included net NUVIGIL inventory balances in other non-current assets. We
launched NUVIGIL commercially on June 1, 2009 and reclassified our NUVIGIL inventory balances to current inventory at that time. At December 31, 2008, we included NUVIGIL inventory
balances of $111.6 million in other non-current assets, rather than inventory.

Over
the past few years, we have been developing a manufacturing process for the active pharmaceutical ingredient in NUVIGIL that is more cost effective than our prior process of
separating modafinil into armodafinil. As a result of our plan to manufacture armodafinil in the future using this new process coupled the launch of NUVIGIL in 2009, we assessed the potential impact
of these items on certain of our existing agreements to purchase modafinil and, during the third quarter of 2008, we recorded a reserve of $26.0 million for purchase commitments for modafinil
raw materials not expected to be utilized as a charge to cost of sales. We reassessed our future modafinil needs during the second quarter of 2009, in association with the accelerated launch of
NUVIGIL, and increased the reserve by $3.0 million, to $29.0 million. During the third quarter of 2009, we entered into an agreement with one of our modafinil suppliers, paying
$13.5 million in exchange for a $23.0 million reduction in our existing purchase commitments with this supplier, which resulted in a $9.5 million gain recorded in cost of sales.
During the fourth quarter of 2009, we reassessed our future modafinil needs as well as our commitments and increased the reserve by $3.0 million. As of December 31, 2009, our aggregate
future purchase commitments remaining total $15.9 million and our reserve balance for excess purchase commitments is $9.0 million.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except share and per share data)

9. PROPERTY AND EQUIPMENT, NET

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

Estimated
Useful Lives

2009

2008Land and improvements



$
8,873

$
8,783Buildings and improvements

3 - 40 years


331,879


316,740Laboratory, machinery and other equipment

3 - 30 years


271,575


270,881Computer software

3 - 5 years


95,390


76,552Construction in progress




35,273


51,223742,990


724,179Less accumulated depreciation and amortization




(291,111
)

(256,730
)$
451,879

$
467,449


Depreciation
and amortization expense related to property and equipment, excluding depreciation related to assets used in the production of inventory, was $52.9 million,
$54.3 million and $33.3 million for the years ended December 31, 2009, 2008 and 2007, respectively. $43.7 million and $50.5 million of capitalized computer software
costs included in property and equipment, net, at December 31, 2009 and 2008, respectively. Depreciation and amortization expense related to capitalized software costs was $17.7 million,
$15.6 million and $11.0 million for the years ended December 31, 2009, 2008 and 2007, respectively. We had $7.8 million and $9.0 million of capitalized software
costs included in construction in progress at December 31, 2009 and 2008, respectively.

During
2008, we determined that the carrying value of Acusphere's long-lived assets exceeded the expected cash flows from the use of its assets. Accordingly, we reduced the
property and equipment carrying values to their estimated fair value based on prices for similar assets and recognized a $9.3 million impairment charge.

During
2008, we incurred a $17.2 million loss on sale of the product manufacturing equipment and other capital improvements relating to our termination agreement with
Alkermes, Inc. related to VIVITROL. See Note 11 for additional details.

During
2008, our subsidiary Cephalon France SAS informed the French Works Councils of its intention to search for a potential acquiror of the manufacturing facility at
Mitry-Mory, France. We are considering the proposed divestiture due to a reduction of manufacturing activities at the Mitry-Mory manufacturing site. The proposed divestiture is
subject to completion of a formal consultation process with the French Works Councils and employees representatives. As a result of this decision, we reevaluated the remaining carrying value and
useful life of the Mitry-Mory assets and reduced the estimated useful life to approximately two years. During the years ended December 31, 2009 and 2008, we have recorded
pre-tax, non-cash charges associated with accelerated depreciation of plant and equipment of $13.5 million and $6.0 million, respectively, related to the proposed
divestiture based on the new estimated useful life. As of December 31, 2009, we had $19.4 million of net property and equipment related to the Mitry-Mory facility included on
our balance sheet.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except share and per share data)

10. GOODWILL

Goodwill consisted of the following:

United States

Europe

TotalDecember 31, 2007

$
266,393

$
210,122

$
476,515Release of pre-acquisition tax reserves and valuation allowance


(4,593
)

3,754


(839
)Foreign currency translation adjustment





(30,344
)

(30,344
)Other


82,510


(82,510
)

December 31, 2008


344,310


101,022


445,332Foreign currency translation adjustment





2,643


2,643Increase due to acquisitions, including VIE's


142,309





142,309December 31, 2009

$
486,619

$
103,665

$
590,284


We
completed our annual test of impairment of goodwill as of July 1, 2009 and concluded that goodwill was not impaired.

11. INTANGIBLE ASSETS, NET AND OTHER ASSETS

At December 31, intangible assets, net consisted of the following:

December 31, 2009

December 31, 2008Estimated
Useful
Lives

Gross
Carrying
Amount

Accumulated
Amortization

Net
Carrying
Amount

Gross
Carrying
Amount

Accumulated
Amortization

Net
Carrying
AmountModafinil developed technology

15 years

$
99,000

$
52,800

$
46,200

$
99,000

$
46,200

$
52,800DURASOLV technology

14 years


70,000


26,174


43,826


70,000


21,304


48,696ACTIQ marketing rights

10 - 12 years


83,454


61,091


22,363


83,454


53,637


29,817GABITRIL product rights

9 - 15 years


107,206


69,126


38,080


107,148


61,848


45,300TRISENOX product rights

8 - 13 years


112,455


40,172


72,283


111,945


31,022


80,923AMRIX product rights

18 years


99,303


22,027


77,276


99,332


16,932


82,400MYOCET trademark

20 years


170,059


34,013


136,046


143,077


21,462


121,615CINQUIL product rights

Indefinite


199,400





199,400








TNF inhibitor product rights

Indefinite


141,806





141,806








Arana platform technology

20 years


26,301


767


25,534








Arana royalty agreements

1 year


22,203


10,361


11,842








VOGALENE trademark

10 years


53,324





53,324








Other product rights

5 - 20 years


300,606


186,729


113,877


289,337


143,556


145,781$
1,485,117

$
503,260

$
981,857

$
1,003,293

$
395,961

$
607,332


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except share and per share data)

11. INTANGIBLE ASSETS, NET AND OTHER ASSETS (Continued)

Intangible assets are amortized over their estimated useful economic life using the straight line method. Amortization expense was
$97.5 million, $100.7 million, and $90.5 million for the years ended December 31, 2009, 2008, and 2007, respectively.

In
June 2008, the U.S. Patent and Trademark Office issued a pharmaceutical formulation patent for AMRIX; this patent expires in February 2025. As a result of this issuance, in June 2008,
we increased the estimated useful life of the AMRIX product rights from 5 to 18 years.

Estimated
amortization expense of intangible assets currently being amortized for each of the next five years is $96.9 million in 2010, $77.6 million in 2011,
$67.9 million in 2012, $57.6 million in 2013 and $57.2 million in 2014. For further discussion of the status of the re-examination of our DURASOLV patents, see
Note 16 herein.



In 2009, we recognized a $182.1 million impairment charge to reduce the CINQUIL intangible by $175.0 million and our
investment in SymBio by $7.1 million. The CINQUIL intangible with a carrying amount of $374.4 million was written down to its revised fair value of $199.4 million as a result of
reducing our estimate of future cash flows from an EoE indication for CINQUIL based on the results from a Phase IIb/III clinical trial obtained in November 2009. In estimating future cash flows
for CINQUIL, some of the more significant judgments included the expected development costs, net product profitability and probability and timing of regulatory approval. The investment in SymBio with
a carrying value of $16.3 million was written down to the per share price in their November 2009 equity offering.

The
fair values utilized consisted of the following:

Fair Value Measurements at Reporting Date UsingDescription

December 31, 2009

Quoted Prices in
Active Markets
for Identical
Assets (Level 1)

Significant
Other
Observable
Inputs (Level 2)

Significant
Unobservable
Inputs
(Level 3)

Total Gains
(Losses)CINQUIL product rights

$
199,400

$


$


$
199,400

$
(175,000
)Investment in SymBio


9,255





9,255





(7,080
)Total

$
208,655

$


$
9,255

$
199,400

$
(182,080
)


On
November 26, 2008, we entered into a termination agreement (the "Termination Agreement") with Alkermes, Inc. to end our collaboration. As of December 1, 2008, we
are no longer responsible for the marketing and sale of VIVITROL in the United States. Pursuant to the Termination Agreement, we will incur certain costs associated with exit or disposal activities.
The pretax charges associated with the Termination Agreement total $119.8 million. These charges include (i) cash charges, classified as selling, general and administrative expenses
within our statement of operations, of $12.2 million, consisting of a termination payment of $11.0 million to Alkermes and severance costs of $1.2 million and
(ii) non-cash charges of $107.6 million, consisting of the $17.2 million loss on sale of the Product Manufacturing Equipment and other Capital Improvements (as such
terms are defined in the supply agreement effective as of June 23, 2005 between the parties, as amended to date) and the $90.4 million impairment charge to write-off the net
book value of the VIVITROL intangible assets from the U.S.

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(In thousands, except share and per share data)

11. INTANGIBLE ASSETS, NET AND OTHER ASSETS (Continued)

segment,
which have been classified as a loss on sale of equipment and an impairment charge within our statement of operations, respectively. These pretax charges have been recognized in the fourth
quarter 2008.

12. ACCRUED EXPENSES

At December 31, accrued expenses consisted of the following:

2009

2008Accrued compensation and benefits

$
63,013

$
51,383Accrued contractual sales allowances


92,287


76,769Accrued product sales returns allowances


66,033


36,423Accrued sales and marketing costs


30,971


32,721Accrued license fees and royalties


32,817


25,015Accrued income taxes


54,077


13,933Accrued clinical trial fees


9,812


7,973Accrued research and development


1,935


2,140Other accrued expenses


79,264


58,058$
430,209

$
304,415


13. LONG-TERM DEBT

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

2009

As adjusted
2008*2.0% convertible senior subordinated notes due June 1, 2015

$
820,000

$
820,000Debt discount on 2.0% convertible senior subordinated notes due June 1, 2015


(201,536
)

(230,614
)2.5% convertible senior subordinated notes due May 1, 2014


500,000


Debt discount on 2.5% convertible senior subordinated notes due May 1, 2014


(137,907
)

Zero Coupon convertible subordinated notes first putable June 2010


199,968


199,888Debt discount on Zero Coupon convertible subordinated notes first putable June 2010


(5,771
)

(17,789
)Mortgage and building improvement loans


336


1,288Capital lease obligations


3,065


2,229Acusphere, Inc. obligations





8,896Ception Therapeutics, Inc. obligations


3,763


Other


703


1,412Total debt


1,182,621


785,310Less current portion


(818,925
)

(781,618
)Total long-term debt

$
363,696

$
3,692


*As
adjusted in accordance with the transition provisions of accounting for convertible debt instruments that may be settled in cash upon conversion (including
partial cash settlement).


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(In thousands, except share and per share data)

13. LONG-TERM DEBT (Continued)




At
December 31, 2009, we have included $3.8 million of short-term debt related to Ception, a variable interest entity for which we are the
primary beneficiary. Ception's liabilities represent contractual obligations of Ception for general corporate purposes. Ception's creditors have no recourse to the general credit of Cephalon.

Aggregate
maturities of long-term debt at December 31, 2009 are as follows:

2010

$
1,026,2322011


1,3712012


2322013


2014


500,0002014 and thereafter


$
1,527,835Debt discount


(345,214
)$
1,182,621


On
August 15, 2008, we established a $200 million, three-year revolving credit facility with JP Morgan Chase Bank, N.A. and certain other lenders. The
credit facility is available for letters of credit, working capital and general corporate purposes and is guaranteed by certain of our domestic
subsidiaries. The credit agreement contains customary covenants, including but not limited to covenants related to total debt to Consolidated EBITDA (as defined in the credit agreement), senior debt
to Consolidated EBITDA, interest expense coverage and limitations on capital expenditures, asset sales, mergers and acquisitions, indebtedness, liens, and transactions with affiliates. As of the date
of this filing, we have not drawn any amounts under the credit facility.

In
the event that a significant conversion of our convertible debt did occur, we believe that we have the ability to fund the payment of principal amounts due through a combination of
utilizing our existing cash on hand, accessing our credit facility, raising money in the capital markets or selling our note hedge instruments for cash.



As of January 1, 2009, we adopted the transition provisions of accounting for convertible debt instruments that may be settled
in cash upon conversion (including partial cash settlement), which required that the liability and equity components of the convertible debt be recorded separately. The liability component is computed
based on the fair value of a similar liability that does not include the conversion option. The equity component is computed based on the total debt proceeds less the fair value of the liability
component. The equity component (debt discount) and debt issuance costs are amortized as interest expense over the expected term of the debt facility. We adopted the transition provisions on a
retrospective basis for all prior periods presented.

The
liability component of our convertible notes will be classified as current liabilities and presented in current portion of long-term debt and the equity component of our
convertible debt will be considered a redeemable security and presented as redeemable equity on our consolidated balance sheet if our debt is considered current at the balance sheet date. At
December 31, 2009, our stock

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except share and per share data)

13. LONG-TERM DEBT (Continued)

price
was $62.42, and, therefore, the 2.0% Notes are considered to be current liabilities based on conversion price and are presented in current portion of long-term debt on our
consolidated balance sheet. At December 31, 2009, the 2010 Zero Coupon Notes are presented in current portion of long-term debt based on maturity date. At December 31, 2008,
our stock price was $77.04, and, therefore, all of our convertible notes issued as of that date are presented in the current portion of long-term debt on our consolidated balance sheet.

For
the years ended December 31, 2009, 2008 and 2007, changes in the value of redeemable equity, which were recognized in Cephalon stockholders' equity under additional
paid-in capital, were $41.1 million, $44.1 million and $29.7 million, respectively.

During
the second quarter of 2008, we delivered a notice of redemption to the holders of our Zero Coupon Notes first putable June 2008 (the "2008 Notes"). Prior to the redemption date,
all but $0.1 million of aggregate principal amount of the 2008 Notes were converted. Holders who converted their 2008 Notes received from us an aggregate of $213.0 million in cash and
528,110 shares of our common stock, under the terms of the 2008 Notes. Concurrently with the conversion, we received from Credit Suisse First Boston ("CSFB") 524,754 shares of our common stock in
settlement of the convertible note hedge agreement associated with the 2008 Notes. The warrant held by CSFB and associated with the 2008 Notes expired without exercise. The $0.1 million of 2008
Notes that were not converted were redeemed by us for cash of $0.1 million.



In May 2009, we issued through a public offering $500.0 million aggregate principal amount of 2.5% convertible senior
subordinated notes due May 1, 2014 (the "2.5% Notes"), all of which remain outstanding as of December 31, 2009. Interest on the 2.5% Notes is payable semi-annually in arrears
on May 1 and November 1 of each year, commencing November 1, 2009.

The
2.5% Notes are subordinate to existing and future senior indebtedness, equal to our existing and future senior subordinated indebtedness and senior in right of payment to our
existing and future subordinated indebtedness. We may not redeem the 2.5% Notes prior to maturity. The 2.5% Notes are convertible prior to maturity, subject to certain conditions described below, into
cash and, under certain circumstances, shares, of our common stock at an initial conversion price of $69.00, subject to adjustment (equivalent to an initial conversion rate of approximately 14.4928
shares per $1,000 principal amount of the 2.5% Notes).

The
Holders of the 2.5% Notes may surrender their notes for conversion any time prior to the close of business on November 1, 2013 only if any of the following conditions is
satisfied:



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13. LONG-TERM DEBT (Continued)



Holders
also may surrender their 2.5% Notes for conversion after November 1, 2013 and on or prior to the close of business on the business day immediately prior to the stated
maturity date regardless if any of the foregoing conditions have been satisfied.

Each
$1,000 principal amount of 2.5% Notes is convertible into cash and, under certain circumstances, shares of our common stock, based on an amount (the "Daily Conversion Value"),
calculated for each of the 25 trading days beginning on and including the third trading day after 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 2.5% Notes is equal to one-twenty-fifth (1/25th) 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 2.5% Notes surrendered for conversion, we will deliver to holders of the 2.5% Notes, on the third business day following the end of the
Conversion Period, the aggregate of the following for each trading day during the related conversion period:



If
the 2.5% Notes are converted in connection with certain fundamental changes that occur prior to maturity of the 2.5% Notes, we may also be obligated to pay an additional (or "make
whole") premium with respect to the 2.5% Notes so converted. In addition, if certain fundamental changes occur with respect to Cephalon, holders of the 2.5% Notes will have the option to require us to
purchase for cash all or a portion of the 2.5% Notes at a purchase price equal to 100% of the principal amount of the 2.5% Notes plus accrued and unpaid interest.

Transaction
costs of $15.5 million related to the issuance of the 2.5% Notes are allocated to the liability and equity components in proportion to the allocation of the proceeds
and accounted for as debt issuance costs and equity issuance costs, respectively. Transaction costs of $10.7 million have been capitalized as debt issuance costs and are being amortized through
May 1, 2014.



Concurrent with the offering of the 2.5% Notes in May 2009, we purchased a convertible note hedge from Deutsche Bank AG ("DB") at a
cost of $121.0 million. The convertible note hedge must be net share settled. Under the convertible note hedge, if the market price per share of our common stock is between $69.00 and $100.00
per share, DB will deliver to us the number of shares of the Company's common stock that the Company is obligated to deliver to the holders of the 2.5% Notes with respect to the conversion, with cash
in lieu of any fractional shares. We recorded the convertible

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13. LONG-TERM DEBT (Continued)

note
hedge in additional paid-in capital, and will not recognize subsequent changes in fair value. We also recognized a deferred tax asset of $46.2 million for the effect of the
future tax benefits related to the convertible note hedge.



Concurrent with the offering of the 2.5% Notes in May 2009, we sold to DB warrants to purchase an aggregate of 7,246,377 shares of our
common stock and received net proceeds from the sale of these warrants of $37.6 million. The warrants have a strike price of $100.00 per share, subject to customary adjustments. The warrants
expire in approximately equal tranches over the forty trading days beginning July 30, 2014 and ending September 24, 2014. The warrants are
exercisable only on the applicable expiration date (European style). If the warrants are exercised, we will settle the warrants under net share settlement. We recorded the warrants in additional
paid-in capital, and will not recognize subsequent changes in fair value.

Together,
the convertible note hedge and warrant transactions are expected to have the impact of increasing the effective conversion price of the 2.5% Notes from our perspective from
$69.00 per share of our common stock to $100.00 per share of our common stock.



In June and July 2005, we issued through a public offering $920 million of 2.0% Notes, of which $820 million remains
outstanding as of December 31, 2009. Interest on the 2.0% Notes is payable semi-annually in arrears on June 1 and December 1 of each year, commencing
December 1, 2005.

The
2.0% Notes are subordinated to our existing and future senior indebtedness and senior to our existing and future subordinated indebtedness. The 2.0% Notes are convertible prior to
maturity, subject to certain conditions described below, into cash and shares of our common stock at an initial conversion price of $46.70 per share, subject to adjustment (equivalent to a conversion
rate of approximately 21.4133 shares per $1,000 principal amount of 2.0% Notes).

The
2.0% Notes also contain a restricted convertibility feature that does not affect the conversion price of the 2.0% Notes but, instead, places restrictions on a holder's ability to
convert their 2.0% Notes into shares of our common stock (the "conversion shares"). A holder may convert the 2.0% Notes prior to December 1, 2014 only if one or more of the following conditions
are satisfied:



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13. LONG-TERM DEBT (Continued)

Holders
also may surrender their 2.0% Notes for conversion anytime after December 1, 2014 and on or prior to the close of business on the business day immediately preceding the
maturity date, regardless if any of the foregoing conditions have been satisfied. Upon the satisfaction of any of the foregoing conditions as of the last day of the reporting period, or during the
twelve months prior to December 1, 2014, we would classify the then-aggregate principal balance of the 2.0% Notes as a current liability on our consolidated balance sheet.

Each
$1,000 principal amount of the 2.0% 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 twenty 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 the 2.0% Notes is equal to one-twentieth 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 the 2.0% Notes surrendered for conversion, we will deliver the aggregate of the following for each trading day during the Conversion
Period:



If
the 2.0% Notes are converted in connection with certain fundamental changes that occur prior to June 2015, we may be obligated to pay an additional (or "make whole") premium with
respect to the 2.0% Notes so converted.



Concurrent with the sale of the 2.0% Notes, we purchased convertible note hedges from Deutsche Bank AG ("DB") at a cost of
$382.3 million. The convertible note hedge must be settled using net shares. Under the convertible note hedge, DB will deliver to us the aggregate number of shares we are required to deliver to
a holder of 2.0% Notes that presents such notes for conversion. We recorded the convertible note hedges in additional paid-in capital, and will not recognize subsequent changes in fair
value. We also recognized a deferred tax asset of $133.8 million for the effect of the future tax benefits related to the convertible note hedge.



Concurrent with the sale of the 2.0% Notes, we sold to DB warrants to purchase an aggregate of 19,700,214 shares of our common stock
and received net proceeds from the sale of these warrants of $217.1 million. The warrants have a strike price of $67.92. The warrants are exercisable only on the respective expiration dates
(European style). We issued and sold the warrants to DB in a transaction exempt from the registration requirements of the Securities Act of 1933, as amended, because the offer and sale did not involve
a public offering. There were no underwriting commissions or discounts in connection with the sale of the warrants. We recorded the warrants in additional paid-in capital, and

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13. LONG-TERM DEBT (Continued)

will
not recognize subsequent changes in fair value. There are 17,558,887 warrants outstanding as of December 31, 2009.

At
issuance, the convertible note hedge and warrant agreements, taken together, have the effect of increasing the effective conversion price of the 2.0% Notes from our perspective to
$67.92 per share if held to maturity. At our option, the warrants may be settled in either net cash or net shares.



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 2008 Notes and our 2010 Notes for any and all of our outstanding Old 2008 Notes and Old 2010 Notes. Upon expiration of the
exchange offer, we issued $374.7 million principal amount at maturity of 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 2010 Notes in exchange for a like principal amount at maturity of our outstanding Old 2010 Notes. Following our exchange of convertible debt for
cash and stock in December 2006, there remains outstanding as of December 31, 2009, $199.5 million aggregate principal amount of the 2010 Notes.

The
Zero Coupon 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 Zero Coupon Notes.

During
the second quarter of 2008, we delivered a notice of redemption to the holders of our 2008 Notes. Prior to the redemption date, all but $0.1 million of aggregate principal
amount of the 2008 Notes were converted. Holders who converted their 2008 Notes received from us an aggregate of $213.0 million in cash and 528,110 shares of our common stock, under the terms
of the 2008 Notes. Concurrently with the conversion, we received from Credit Suisse First Boston ("CSFB") 524,754 shares of our common stock in settlement of the convertible note hedge agreement
associated with the 2008 Notes. The warrant held by CSFB and associated with the 2008 Notes expired without exercise. The $0.1 million of 2008 Notes that were not converted were redeemed by us
for cash of $0.1 million. In 2006, our Zero Coupon Notes became convertible and the related deferred debt issuance costs of $13.1 million were written off.

The
2008 Notes were first putable on June 15, 2008 at a price of 100.25% of the face amount of the 2008 Notes. The holders of the 2008 Notes were also entitled to require us to
repurchase all or a portion of the 2008 Notes for cash on June 15, 2013, June 15, 2018, June 15, 2023 and June 15, 2028, in each case at a price equal to the face amount of
the 2008 Notes. The 2008 Notes were convertible prior to maturity, subject to certain conditions described below, into cash and shares of our common stock at a conversion price of $59.50 per share (an
equivalent conversion rate of approximately 16.8067

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13. LONG-TERM DEBT (Continued)

shares
per $1,000 principal amount of notes). We redeemed any outstanding 2008 Notes for cash in June 2008 at a price equal to 100.25% of the principal amount of such notes.

The
2010 Notes are first putable for cash on June 15, 2010 at a price of 100.25% of the face amount of the 2010 Notes. The holders of the 2010 Notes may also require us to
repurchase all or a portion of the 2010 Notes for cash on June 15, 2015, June 15, 2020, June 15, 2025 and June 15, 2030, in each case at a price equal to the face amount of
the 2010 Notes. The 2010 Notes are convertible prior to maturity, subject to certain conditions described below, into cash and shares of our common stock at a conversion price of $56.50 per share (an
equivalent conversion rate of approximately 17.6991 shares per $1,000 principal amount of notes). We may redeem any outstanding 2010 Notes for cash on June 15, 2010 at a price equal to 100.25%
of the principal amount of such notes redeemed and after June 15, 2010 at a price equal to 100% of the principal amount of such notes redeemed.

The
2010 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 2010 Notes only if one or more of the following conditions are
satisfied:



Upon
the satisfaction of any one of these conditions, we would classify the then-aggregate outstanding principal balance of 2010 Notes as a current liability on our
consolidated balance sheet.

Each
$1,000 principal amount of 2010 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 2010 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.

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13. LONG-TERM DEBT (Continued)

For each $1,000 aggregate principal amount of 2010 Notes surrendered for conversion, we will deliver the aggregate of the following for each trading day during the Conversion
Period:



If
the 2010 Notes are converted in connection with a Fundamental Change that occurs prior to June 15, 2010, we may also be obligated to pay an additional premium with respect to
the 2010 Notes so converted.



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. In connection with our exchange of Old Notes for Zero Coupon Notes, we amended the convertible note hedge to reflect the mandatory net share
settlement feature of the Zero Coupon Notes. 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 Zero Coupon Notes that presents such Zero Coupon Notes for conversion. We recorded the convertible note hedge 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.



Concurrent with the private placement of the Old Notes, 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. Following the December 2006 amendment of the warrant agreements, the expiration of the warrants associated with the
2008 Notes, and conversions of the 2010 Notes that occur from time to time, there remain outstanding warrants to purchase 3,532,035 shares of our common stock. At our option, the warrants may be
settled in either net cash or net shares. The warrants have a strike price of $72.08. The 3,531,840 warrants outstanding as of December 31, 2009 are associated with the 2010 Notes and expire 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. We recorded the warrants in additional
paid-in capital as of June 30, 2003, and do not recognize subsequent changes in fair value.

Taken
together, the convertible note hedge and warrants have the effect of increasing the effective conversion price of the Zero Coupon Notes from our perspective to $72.08 if held to
maturity, a 50% premium to the last reported NASDAQ composite bid for our common stock on the day preceding the date of the original agreements.

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(In thousands, except share and per share data)

13. LONG-TERM DEBT (Continued)



In November 2002, in connection with our planned relocation to a new corporate headquarters, the PIDA board authorized the forgiveness
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 and our creation of a specified number of new jobs in the Commonwealth. 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.
In January 2006, the PIDA board voted to extend the deadline to December 31, 2007 for the job creation obligations, and eliminated the requirement to commence construction of a new headquarters
facility by December 31, 2005. At a meeting held in September 2007, the PIDA board determined to forgive the outstanding principal balance of the loan. As such, we recognized a
$5.3 million gain on extinguishment of debt in 2007.

14. STOCKHOLDERS' EQUITY



We have established equity compensation plans for our employees, directors and certain other individuals. The Stock Option and
Compensation Committee of our Board of Directors approves all grants and the terms of such grants, subject to ratification by the Board of Directors. We may grant non-qualified stock
options under the Cephalon, Inc. 2004 Equity Compensation Plan (the "2004 Plan") and the Cephalon, Inc. 2000 Equity Compensation Plan (the "2000 Plan"), and also may grant incentive
stock options and restricted stock units under the 2004 Plan. Stock options and restricted stock units generally become exercisable or vest ratably over four years from the grant date, and stock
options must be exercised within ten years of the grant date. There are currently 15.0 million and 4.3 million shares authorized for issuance under the 2004 Plan and the 2000 Plan,
respectively. At December 31, 2009, the shares available for future grants of stock options or restricted stock units were 690,707 of which up to 189,200 may be issued as restricted stock
units.

Total
stock-based compensation expense recognized in the consolidated statement of operations for the years ended December 31:

2009

2008

2007Stock option expense

$
28,480

$
26,018

$
29,945Restricted stock unit expense


21,930


17,956


16,750Total stock-based compensation expense*

$
50,410

$
43,974

$
46,695Total stock-based compensation expense after-tax

$
32,630

$
28,583

$
29,558


*Beginning
with the second half of 2008, total stock-based compensation is allocated 4% to cost of sales, 38% to research and development and 58% to selling,
general and administrative expenses based on the employees' compensation allocation between these line items. From 2007 through the first half of 2008, total stock-based compensation


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14. STOCKHOLDERS' EQUITY (Continued)

expense
was recognized equally between research and development and selling, general and administrative expenses based on the employees' compensation allocation between these line items.


The
cumulative pool of windfall tax benefits was $50.0 million and $48.0 million as of December 31, 2009 and 2008, respectively.

Based
on our historical experience of stock option and restricted stock unit pre-vesting forfeitures, we have assumed the following weighted average expected forfeiture rates
over the four year life of the stock option and restricted stock unit for all new stock options and restricted stock units granted, excluding stock options and restricted stock units granted to the
Chief Executive Officer and members of the Board of Directors for which a zero forfeiture rate is assumed, for the years ended December 31:

2009

2008

2007Stock option expected forfeiture rate


13.6
%

13.9
%

12.7
%Restricted stock unit expected forfeiture rate


15.2
%

16.5
%

14.4
%


We
will record additional expense if the actual pre-vesting forfeiture rate is lower than we estimated and will record a recovery of prior expense if the actual forfeitures
are higher than our estimate.

Beginning
with our December 2007 stock option grant, our expected term of stock options granted was derived from our historical data as we have assumed that our historical stock option
exercise experience is a relevant indicator of future exercise patterns. Prior to the December 2007 stock option grant, our expected term of stock options granted was derived from the average midpoint
between vesting and the contractual term. Expected volatilities are based on a combination of implied volatilities from traded options on our stock and the historical volatility of our stock for the
related vesting period. The risk-free interest rate is based on the implied yield available on U.S. Treasury zero-coupon issues with an equivalent term. We have not paid
dividends in the past and do not plan to pay any dividends in the foreseeable future.

The
fair value of each stock option grant at the grant date is calculated using the Black-Scholes option-pricing model with the following weighted average assumptions for the years ended
December 31:

2009

2008

2007Risk free interest rate


2.21
%

2.16
%

3.73
%Expected term (years)


5.61


5.62


5.64Expected volatility


31.6
%

35.6
%

32.5
%Expected dividend yield



%


%


%Estimated fair value per stock option granted

$
19.18

$
26.75

$
28.64


The
2004 Plan was amended, following approval by Cephalon stockholders, as follows:



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14. STOCKHOLDERS' EQUITY (Continued)





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

2009Shares

Weighted
Average
Exercise Price

Weighted
Average
Remaining
Contractual
Life (years)

Aggregate
Intrinsic ValueOutstanding, January 1,


6,643,115

$
63.54Granted


1,256,500


57.08Exercised


(235,345
)

43.39Forfeited


(90,350
)

72.36Expired


(34,775
)

68.71Outstanding, December 31,


7,539,145


62.96


6.6

$
Vested stock options at end of period


4,853,320


61.27


5.8


5,600




2008Shares

Weighted
Average
Exercise Price

Weighted
Average
Remaining
Contractual
Life (years)

Aggregate
Intrinsic ValueOutstanding, January 1,


6,805,897

$
59.70Granted


1,215,900


72.63Exercised


(957,865
)

45.90Forfeited


(293,263
)

67.67Expired


(127,554
)

68.16Outstanding, December 31,


6,643,115


63.54


7.0

$
89,959Vested stock options at end of period


4,167,815


58.61


5.0


77,049


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14. STOCKHOLDERS' EQUITY (Continued)



2007Shares

Weighted
Average
Exercise Price

Weighted
Average
Remaining
Contractual
Life (years)

Aggregate
Intrinsic ValueOutstanding, January 1,


7,694,298

$
54.90Granted


1,178,000


76.23Exercised


(1,853,152
)

50.70Forfeited


(193,175
)

57.87Expired


(20,074
)

48.90Outstanding, December 31,


6,805,897


59.70


6.6

$
87,496Vested stock options at end of period


4,434,571


55.04


5.3


74,902


As
of December 31, 2009, there was $38.3 million of total unrecognized compensation cost related to outstanding stock options that is expected to be recognized over a
weighted-average period of 1.6 years. For the years ended December 31, 2009, 2008 and 2007, we received net proceeds of $10.2 million, $44.0 million and
$93.9 million, respectively, from the exercise of stock options.

The
intrinsic value of stock options exercised for the years ended December 31, 2009, 2008 and 2007 was $5.2 million, $26.2 million and $50.2 million,
respectively. The estimated fair value of shares that vested for the years ended December 31, 2009, 2008 and 2007 was $27.9 million, $24.8 million and $35.6 million,
respectively.



The following tables summarize the restricted stock unit's activity for the years ended December 31:

2009Shares

Weighted Average
Fair ValueNonvested, January 1,


791,888

$
72.08Granted


411,000


56.08Vested


(283,963
)

69.14Forfeited


(23,675
)

72.55Nonvested, December 31,


895,250


65.65Intrinsic value as of December 31,

$
55,882


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14. STOCKHOLDERS' EQUITY (Continued)



2008Shares

Weighted Average
Fair ValueNonvested, January 1,


747,050

$
67.82Granted


383,700


73.25Vested


(253,837
)

62.84Forfeited


(85,025
)

67.49Nonvested, December 31,


791,888


72.08Intrinsic value as of December 31,

$
61,007




2007Shares

Weighted Average
Fair ValueNonvested, January 1,


709,900

$
59.49Granted


324,850


76.11Vested


(250,125
)

55.92Forfeited


(37,575
)

61.30Nonvested, December 31,


747,050


67.82Intrinsic value as of December 31,

$
53,608


As
of December 31, 2009, there was $36.2 million of total unrecognized compensation cost related to nonvested restricted stock units that is expected to be recognized over
a weighted-average period of 1.6 years.



We have a profit sharing plan pursuant to section 401(k) of the Internal Revenue Code. As of January 1, 2007,
participants are permitted to contribute any whole percentage of their eligible annual pre-tax compensation up to established federal limits on aggregate participant contributions. Our
discretionary matching contribution is made solely in cash on 100 percent of the employee elected salary deferral up to six percent of eligible compensation. For the years ended
December 31, 2009, 2008, and 2007, we contributed $13.0 million, $12.3 million and $12.6 million to the plan, respectively.



At December 31, 2009, the conversion or exercise of all outstanding stock options and restricted stock units would increase the
outstanding number of shares of common stock by 8.4 million shares, or 11%. The conversion of our convertible subordinated notes and warrants into shares of Cephalon common stock in accordance
with their terms is dependent upon actual stock price at the time of conversion.

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14. STOCKHOLDERS' EQUITY (Continued)



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.

15. EARNINGS PER SHARE ("EPS")

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 number of common shares outstanding and, if there is net income during the period, the dilutive impact of common stock equivalents outstanding during the period. Common stock
equivalents are measured under the treasury stock method.

The
2.5% Notes, 2.0% Notes and New Zero Coupon Notes each are considered to be Instrument C securities; therefore, these 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 these notes based on the average market price of the
stock during the period (assuming the average market price is above the applicable conversion prices of the 2.5%, 2.0% and New Zero Coupon Notes), and include that number in the total diluted shares
figure for the period.

We
have entered into convertible note hedge and warrant agreements that, in combination, have the economic effect of reducing the dilutive impact of the 2.0% Notes, 2.5% Notes and the
2010 Zero Coupon Notes. However, we are required to analyze separately the impact of the convertible note hedge and warrant agreements on diluted EPS. As a result, the purchases of the convertible
note hedges are excluded because their impact will always be anti-dilutive. The impact of the warrants is 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, 2009 had been $75.00, $85.00 or $95.00, the shares from the warrants to be included in diluted EPS would have been
1.8 million, 4.1 million and 5.9 million shares, respectively. The total number of shares that could potentially be included under the warrants is 28.3 million.

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(In thousands, except share and per share data)

15. EARNINGS PER SHARE ("EPS") (Continued)

The
number of shares included in the diluted EPS calculation for the convertible subordinated notes and warrants for the years ended December 31:

(In thousands, except per share data)

2009

2008

2007*Average market price per share of Cephalon stock

$
62.01

$
69.42

$
74.90Shares included in diluted EPS calculation:2.0% Notes


4,335


5,747


2.5% Notes








Zero Coupon Notes


314


813


Warrants related to 2.0% Notes





425


Warrants related to 2.5% Notes








Warrants related to Zero Coupon Notes








Other


1


4


Total


4,650


6,989





*Since
there was a net loss for the year ended December 31, 2007, there is no impact from these notes or warrants on the number of diluted shares
included in the diluted EPS calculation.


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15. EARNINGS PER SHARE ("EPS") (Continued)




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 for the
years ended December 31:

(In thousands, except per share data)

2009

As Adjusted
2008*

As Adjusted
2007*Basic income (loss) per common share computation:Numerator:Net income (loss) used for basic income (loss) per common share attributable to Cephalon, Inc.

$
342,627

$
192,962

$
(226,429
)Denominator:Weighted average shares used for basic income (loss) per common share attributable to Cephalon, Inc.


72,342


68,018


66,597Basic income (loss) per common share attributable to Cephalon, Inc.

$
4.74

$
2.84

$
(3.40
)Diluted income (loss) per common share computation:Numerator:Net income (loss) used for diluted income (loss) per common share attributable to Cephalon, Inc.

$
342,627

$
192,962

$
(226,429
)Denominator:Weighted average shares used for basic income (loss) per common share attributable to Cephalon, Inc.


72,342


68,018


66,597Effect of dilutive securities:Convertible subordinated notes and warrants


4,650


6,989


Employee stock options and restricted stock units


741


1,090


Weighted average shares used for diluted income (loss) per common share attributable to Cephalon, Inc.


77,733


76,097


66,597Diluted income (loss) per common share attributable to Cephalon, Inc.

$
4.41

$
2.54

$
(3.40
)


*As
adjusted in accordance with the transition provisions of accounting for convertible debt instruments that may be settled in cash upon conversion (including
partial cash settlement).


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(In thousands, except share and per share data)

15. EARNINGS PER SHARE ("EPS") (Continued)




The
following reconciliation shows the shares excluded from the calculation of diluted income (loss) per common share attributable to Cephalon, Inc. as the inclusion of such
shares would be anti-dilutive for the years ended December 31:

(In thousands)

2009

2008

2007Weighted average shares excluded:Convertible subordinated notes and warrants


26,385


25,006


35,042Employee stock options and restricted stock units


4,098


2,963


2,88830,483


27,969


37,930


16. COMMITMENTS AND CONTINGENCIES



We lease certain of our offices and automobiles under operating leases in the United States and Europe that expire at various times
through 2022. Lease expense under all operating leases totaled $22.8 million, $22.6 million and $22.7 million in 2009, 2008, and 2007, respectively.

Estimated
lease expense for each of the next five years as of December 31, 2009 is as follows:

2010

$
21,7152011


19,0782012


16,2212013


11,7452014


10,9182015 and thereafter


22,329$
102,006




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

CCP
has granted us an exclusive license to manufacture and market MYOTROPHIN for human therapeutic use within the United States, Canada and Europe in return for royalty payments equal to
a percentage of product sales and a milestone payment of approximately $12.4 million that will be made if MYOTROPHIN receives regulatory approval.

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16. COMMITMENTS AND CONTINGENCIES (Continued)

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 $30.9 million in cash or, at our election,
approximately $32.5 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 March 2003, we filed a patent infringement lawsuit against four companiesTeva Pharmaceuticals USA, Inc., Mylan
Pharmaceuticals, Inc., Ranbaxy Laboratories Limited and Barr Laboratories, Inc.based upon the abbreviated new drug applications ("ANDA") filed by each of these firms with
the FDA seeking approval to market a generic form of modafinil. The lawsuit claimed infringement of our U.S. Patent No. RE37,516 (the "'516 Patent") which covers the pharmaceutical compositions and
methods of treatment with the form of modafinil contained in PROVIGIL and which expires on April 6, 2015. We believe that these four companies were the first to file ANDAs with
Paragraph IV certifications and thus are eligible for the 180-day period of marketing exclusivity provided by the provisions of the Federal Food, Drug and Cosmetic Act. In early
2005, we also filed a patent infringement lawsuit against Carlsbad Technology, Inc. ("Carlsbad") based upon the Paragraph IV ANDA related to modafinil that Carlsbad filed with the FDA.

In
late 2005 and early 2006, we entered into settlement agreements with each of Teva, Mylan, Ranbaxy and Barr; in August 2006, we entered into a settlement agreement with Carlsbad and
its development partner, Watson Pharmaceuticals, Inc., which we understand has the right to commercialize the Carlsbad product if approved by the FDA. As part of these separate settlements, we
agreed to grant to each of these parties a non-exclusive royalty-bearing license to market and sell a generic version of PROVIGIL in the United States, effective in April 2012, subject to
applicable regulatory considerations. Under the agreements, the licenses could become effective prior to April 2012 only if a generic version of PROVIGIL is sold in the United States prior to this
date. Various factors could lead to the sale of a generic version of PROVIGIL in the United States at any time prior to April 2012, including if (i) we lose patent protection for PROVIGIL due
to an adverse judicial decision in a patent
infringement lawsuit; (ii) all parties with first-to file ANDAs relinquish their right to the 180-day period of marketing exclusivity, which could allow a subsequent
ANDA filer, if approved by the FDA, to launch a generic version of PROVIGIL in the United States at-risk; (iii) we breach or the applicable counterparty breaches a PROVIGIL
settlement agreement; or (iv) the FTC prevails in its lawsuit against us in the U.S. District Court for the Eastern District of Pennsylvania described below.

We
also received rights to certain modafinil-related intellectual property developed by each party and in exchange for these rights, we agreed to make payments to Barr, Mylan, Ranbaxy
and Teva

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16. COMMITMENTS AND CONTINGENCIES (Continued)

collectively
totaling up to $136.0 million, consisting of upfront payments, milestones and royalties on net sales of our modafinil products. In order to maintain an adequate supply of the
active drug substance modafinil, we entered into agreements with three modafinil suppliers whereby we have agreed to purchase minimum amounts of modafinil through 2012, with aggregate remaining
purchase commitments totaling $15.9 million as of December 31, 2009. See Note 8 for additional details.

We
filed each of the settlements with both the U.S. Federal Trade Commission (the "FTC") and the Antitrust Division of the U.S. Department of Justice (the "DOJ") as required by the
Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the "Medicare Modernization Act"). The FTC conducted an investigation of each of the PROVIGIL settlements and, in February 2008,
filed suit against us in the U.S. District Court for the District of Columbia challenging the validity of the settlements and related agreements entered into by us with each of Teva, Mylan, Ranbaxy
and Barr. We filed a motion to transfer the case to the U.S. District Court for the Eastern District of Pennsylvania (the "EDPA"), which was granted in April 2008. The complaint alleges a violation of
Section 5(a) of the Federal Trade Commission Act and seeks to permanently enjoin us from maintaining or enforcing these agreements and from engaging in similar conduct in the future. We believe
the FTC complaint is without merit and we have filed a motion to dismiss the case. While we intend to vigorously defend ourselves and the propriety of the settlement agreements, these efforts will be
both expensive and time consuming and, ultimately, due to the nature of litigation, there can be no assurance that these efforts will be successful.

Numerous
private antitrust complaints have been filed in the EDPA, each naming Cephalon, Barr, Mylan, Teva and Ranbaxy as co-defendants and claiming, among other things, that
the PROVIGIL settlements violate the antitrust laws of the United States and, in some cases, certain state laws. These actions have been consolidated into a complaint on behalf of a class of direct
purchasers of PROVIGIL and a separate complaint on behalf of a class of consumers and other indirect purchasers of PROVIGIL. A separate complaint was filed by an indirect purchaser of PROVIGIL in
September 2007. The plaintiffs in all of these actions are seeking monetary damages and/or equitable relief. In addition, in December 2009, we entered a tolling agreement with the Attorneys General of
Arkansas, California, Florida, New York and Pennsylvania to suspend the running of the statute of limitations to any claims or causes of action relating to our PROVIGIL settlements pending the
resolution of the FTC litigation described above.

Separately,
in June 2006, Apotex, Inc., a subsequent ANDA filer seeking FDA approval of a generic form of modafinil, filed suit against us, also in the EDPA, alleging similar
violations of antitrust laws and state law. Apotex asserts that the PROVIGIL settlement agreements improperly prevent it from obtaining FDA approval of its ANDA, and seeks monetary and equitable
remedies. Apotex also seeks a declaratory judgment that the '516 Patent is invalid, unenforceable and/or not infringed by its proposed generic. In late 2006, we filed a motion to dismiss the Apotex
case, which is pending. In May 2009, Apotex also filed a declaratory judgment complaint in the EDPA that our U.S. Patent No. 7,297,346 (the "'346 Patent") is invalid, unenforceable and/or not
infringed by its proposed generic. The '346 Patent covers pharmaceutical compositions of modafinil and expires in May 2024. Separately, in April 2008, the Federal Court of Canada dismissed our
application to prevent regulatory approval of Apotex's generic modafinil tablets in Canada. We have learned that Apotex has launched its generic modafinil tablets in Canada, and in April 2009 we filed
a patent infringement lawsuit against Apotex in

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16. COMMITMENTS AND CONTINGENCIES (Continued)

Canada.
We believe that the private antitrust complaints described in the preceding paragraph and the Apotex antitrust and declaratory judgment complaints are without merit. While we intend to
vigorously defend ourselves and the propriety of the settlement agreements, these efforts will be both expensive and time consuming and, ultimately, due to the nature of litigation, there can be no
assurance that these efforts will be successful.

In
August 2009, the private antitrust class (e.g. the direct and indirect purchasers), Apotex and the FTC filed amended complaints and, subsequently, we filed motions to dismiss
each amended complaint. The private antitrust class, Apotex and the FTC have filed responses to our motions to dismiss. The EDPA heard oral arguments for each motion to dismiss in October 2009.

In
November 2005 and March 2006, we received notice that Caraco Pharmaceutical Laboratories, Ltd. ("Caraco") and Apotex, respectively, also filed Paragraph IV ANDAs with
the FDA in which each firm is seeking to market a generic form of PROVIGIL. We have not filed a patent infringement lawsuit in the United States against either Caraco or Apotex, although Apotex has
filed suit against us, as described above. In early August 2008, we received notice that Hikma Pharmaceuticals plc ("Hikma Pharmaceuticals") filed a Paragraph IV ANDA with the FDA in
which it is seeking to market a generic form of PROVIGIL. We have not filed a patent infringement lawsuit against Hikma Pharmaceuticals.

The
EU Commission is conducting a pharmaceutical sector inquiry of over 100 companies regarding, among other matters, settlements by branded pharmaceutical companies (such as Cephalon)
with generic pharmaceutical companies. We are cooperating with the EU Commission's inquiry and have provided questionnaire responses regarding our business and documents related to our PROVIGIL
settlement with Teva's UK affiliate in 2005.



In February 2010, we received a Paragraph IV certification letter relating to an ANDA submitted to the FDA by Lupin Limited
requesting approval to market and sell a generic version of NUVIGIL. Lupin alleges that our U.S. Patent Numbers 7,132,570 (the "'570 Patent"), 7,297,346 (the "'346 Patent") and RE37,516 (the
"'516 Patent") are invalid, unenforceable and/or will not be infringed by the manufacture, use or sale of the product described in Lupin's ANDA submission. Under the provisions of the Hatch-Waxman
Act, if we initiate a patent infringement lawsuit against Lupin within 45 days of our receipt of Lupin's letter, then the FDA would be automatically precluded from approving the Lupin ANDA
until the earlier of entry of a district court judgment in favor of Lupin or 30 months from the date of our receipt of Lupin's letter. We intend to vigorously defend our NUVIGIL intellectual
property rights.



In December 2009 and January 2010, we filed patent infringement lawsuits against five companiesTeva, Actavis, Mylan,
Watson and Sandozbased upon the abbreviated new drug applications ("ANDA") filed by each of these firms with the FDA seeking approval to market a generic form of armodafinil . The
lawsuits claimed infringement of our '570 Patent, '346 Patent and '516 Patent. Cephalon has a three-year period of marketing exclusivity for NUVIGIL that extends until

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(In thousands, except share and per share data)

16. COMMITMENTS AND CONTINGENCIES (Continued)

June 15,
2010. In addition, including the six-month pediatric extension, the '516 Patent, the '346 Patent, and the '570 Patent expire on April 6, 2015, May 29, 2024,
and June 18, 2024, respectively.

Under
the provisions of the Hatch-Waxman Act, the filing of the Teva, Actavis, Mylan, Watson and Sandoz lawsuits stays any FDA approval of the applicable ANDA until the earlier of entry
of a district court judgment in favor of the ANDA holder or 30 months from the date of our receipt of the respective Paragraph IV certification letter.



In October 2008, Cephalon and Eurand, Inc. ("Eurand"), received Paragraph IV certification letters relating to ANDAs
submitted to the FDA by Mylan and Barr, each requesting approval to market and sell a generic version of the 15 mg and 30 mg strengths of AMRIX. In November 2008, we received a similar certification
letter from Impax Laboratories, Inc. Mylan and Impax each allege that the U.S. Patent Number 7,387,793 (the "Eurand Patent"), entitled "Modified Release Dosage Forms of Skeletal Muscle
Relaxants," issued to Eurand will not be infringed by the manufacture, use or sale of the product described in the applicable ANDA and reserves the right to challenge the validity and/or
enforceability of the Eurand Patent. Barr alleges that the Eurand Patent is invalid, unenforceable and/or will not be infringed by its manufacture, use or sale of the product described in its ANDA.
The Eurand Patent does not expire until February 26, 2025. In late November 2008, Cephalon and Eurand filed a lawsuit in U.S. District Court in Delaware against Mylan (and its parent) and Barr
(and its parent) for infringement of the Eurand Patent. In January 2009, Cephalon and Eurand filed a lawsuit in U.S. District Court in Delaware against Impax for infringement of the Eurand Patent.

In
late May 2009, Cephalon and Eurand received a Paragraph IV certification letter relating to an ANDA submitted to the FDA by Anchen Pharmaceuticals, Inc. ("Anchen")
requesting approval to market and sell a generic version of the 15 mg and 30 mg strengths of AMRIX. Anchen alleges that the Eurand Patent is invalid, unenforceable and/or will not be infringed by its
manufacture, use or sale of the product described in its ANDA. In July 2009, Cephalon and Eurand filed a lawsuit in U.S. District Court in Delaware against Anchen for infringement of the Eurand
Patent.

Under
the provisions of the Hatch-Waxman Act, the filing of the Mylan, Barr, Impax and Anchen lawsuits stays any FDA approval of the applicable ANDA until the earlier of entry of a
district court judgment in favor of the ANDA holder or 30 months from the date of our receipt of the respective Paragraph IV certification letter.



In April 2008 and June 2008, we received Paragraph IV certification letters relating to ANDAs submitted to the FDA by Watson
Laboratories, Inc. and Barr, respectively, requesting approval to market and sell a generic equivalent of FENTORA. Both Watson and Barr allege that our U.S. Patent Numbers 6,200,604 and
6,974,590 covering FENTORA are invalid, unenforceable and/or will not be infringed by the manufacture, use or sale of the product described in their respective ANDAs. The 6,200,604 and 6,974,590
patents cover methods of use for FENTORA and do not expire until 2019. In June 2008 and July 2008, we and our wholly-owned subsidiary, CIMA, filed lawsuits in U.S. District Court in Delaware against
Watson and Barr for infringement of these patents. Under the provisions of

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16. COMMITMENTS AND CONTINGENCIES (Continued)

the
Hatch-Waxman Act, the filing of these lawsuits stays any FDA approval of each ANDA until the earlier of entry of a district court judgment in favor of the ANDA holder or 30 months from the
date of our receipt of the respective Paragraph IV certification letter. On January 6, 2010 we received a Paragraph IV certification notice letter regarding an ANDA submitted to
the FDA by Sandoz requesting approval to market and sell a generic version of FENTORA. Cephalon is currently reviewing the Notice Letter.

In
November 2009, we entered into a binding agreement-in-principle (the "Barr Agreement") with Barr to settle its pending patent infringement lawsuit related to
FENTORA. The Barr Agreement does not affect the status of our separate FENTORA patent litigation with Watson pending in the U.S. District Court in Delaware. In connection with the Barr Agreement, we
will grant Barr a non-exclusive, royalty-free right to market and sell a generic version of FENTORA in the United States. Barr's license will become effective in October 2018.
If another generic version of FENTORA enters the U.S. market prior to October 2018, Barr may enter the U.S. market on the same date, subject to the expiration of any applicable regulatory
exclusivities of any first filer with respect to FENTORA and subject, in certain circumstances, to the payment of royalties to us. Upon execution of the definitive written agreement giving effect to
the terms set forth in the Barr Agreement (the "Definitive Agreement"), the parties will promptly file dismissals with prejudice with the United States District Court for the District of Delaware,
which will conclude the pending FENTORA patent litigation with Barr. We plan to file the Barr Agreement and the Definitive Agreement with both the FTC and the Antitrust Division of the DOJ as required
by the Medicare Prescription Drug, Improvement and Modernization Act of 2003. There can be no assurance that the FTC and/or the DOJ will not raise objections to, or request modifications to, the Barr
Agreement and the Definitive Agreement; that any such modifications will be acceptable to the parties; or that the Barr Agreement and the Definitive Agreement will continue to be effective on the
terms currently proposed or at all.

While
we intend to vigorously defend the NUVIGIL, AMRIX and FENTORA intellectual property rights, these efforts will be both expensive and time consuming and, ultimately, due to the
nature of litigation, there can be no assurance that these efforts will be successful.



In September 2008, we entered into a settlement agreement (the "Settlement Agreement") with the DOJ, the USAO, the OIG, TRICARE
Management Activity, the U.S. Office of Personnel Management (collectively, the "United States Government") and the relators identified in the Settlement Agreement to settle the outstanding False
Claims Act claims alleging off-label promotion of ACTIQ and PROVIGIL from January 1, 2001 through December 31, 2006 and GABITRIL from January 2, 2001 through
February 18, 2005 (the "Claims"). As part of the Settlement Agreement we paid a total of $375 million (the "Payment") plus interest of $11.3 million. Pursuant to the Settlement
Agreement, the United States Government and the relators released us from all Claims and the United States Government agreed to refrain from seeking our exclusion from Medicare/Medicaid, the TRICARE
Program or other federal health care programs. In connection with the Settlement Agreement, we pled guilty to one misdemeanor violation of the U.S. Food, Drug and Cosmetic Act and agreed to pay
$50 million (in addition to the Payment). All of the payments described above were made in the fourth quarter of 2008.

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16. COMMITMENTS AND CONTINGENCIES (Continued)

As
part of the Settlement Agreement, we entered into a five-year Corporate Integrity Agreement (the "CIA") with the OIG. The CIA provides criteria for establishing and
maintaining compliance. We are also subject to periodic reporting and certification requirements attesting that the provisions of the CIA are being implemented and followed. We also agreed to enter
into a State Settlement and Release Agreement (the "State Settlement Agreement") with each of the 50 states and the District of Columbia. Upon entering into the State Settlement Agreement, a state
will receive its portion of the Payment allocated for the compensatory state Medicaid payments and related interest amounts. Each state also agrees to refrain from seeking our exclusion from its
Medicaid program.

In
September 2008, we entered into an Assurance of Voluntary Compliance (the "Connecticut Assurance") with the Attorney General of the State of Connecticut and the Commissioner of
Consumer Protection of the State of Connecticut (collectively, "Connecticut") to settle Connecticut's investigation of our promotion of ACTIQ, GABITRIL and PROVIGIL. Pursuant to the Connecticut
Assurance, (i) we paid a total of $6.15 million to Connecticut and (ii) Connecticut released us from any claim relating to the promotional practices that were the subject of
Connecticut's investigation. We also entered into an Assurance of Discontinuance (the "Massachusetts Settlement Agreement") with the Attorney General of the Commonwealth of Massachusetts
("Massachusetts") to settle Massachusetts' investigation of our promotional practices with respect to fentanyl-based products. Pursuant to the Massachusetts Settlement Agreement, (i) we paid a
total of $0.7 million to Massachusetts and
(ii) Massachusetts released us from any claim relating to the promotional practices that were the subject of Massachusetts' investigation.

In
late 2007, we were served with a series of putative class action complaints filed in the EDPA on behalf of entities that claim to have reimbursed for prescriptions of ACTIQ for uses
outside of the product's approved label in non-cancer patients. The complaints allege violations of various state consumer protection laws, as well as the violation of the common law of
unjust enrichment, and seek an unspecified amount of money in actual, punitive and/or treble damages, with interest, and/or disgorgement of profits. In May 2008, the plaintiffs filed a consolidated
and amended complaint that also alleges violations of RICO and conspiracy to violate RICO. The RICO allegations were dismissed with prejudice in May 2009. In February 2009, we were served with an
additional putative class action complaint filed on behalf of two health and welfare trust funds that claim to have reimbursed for prescriptions of GABITRIL and PROVIGIL for uses outside the products
approved labels. The complaint alleges violations of RICO and the common law of unjust enrichment and seeks an unspecified amount of money in actual, punitive and/or treble damages, with interest. We
believe the allegations in the complaints are without merit, and we intend to vigorously defend ourselves in these matters and in any similar actions that may be filed in the future. These efforts
will be both expensive and time consuming and, ultimately, due to the nature of litigation, there can be no assurance that these efforts will be successful.

In
May 2009, we were served with a putative class action complaint filed in New Jersey state court. The complaint alleged violations of the New Jersey consumer fraud act and the common
law of fraud and fraudulent concealment and seeks an unspecified amount of money in actual, punitive and/or treble damages, with interest. In July 2009, we removed the complaint to the U.S. District
Court for the District of New Jersey and, in October 2009, the court granted our motion to dismiss the complaint.

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16. COMMITMENTS AND CONTINGENCIES (Continued)



In January 2008, a purported stockholder of the company filed a derivative suit on behalf of Cephalon in the U.S. District Court for
the District of Delaware naming each member of our Board of Directors as defendants. The suit alleges, among other things, that the defendants failed to exercise reasonable and prudent supervision
over the management practices and controls of Cephalon, including with respect to the marketing and sale of ACTIQ, and in failing to do so, violated their fiduciary duties to the stockholders. The
complaint seeks an unspecified amount of money damages, disgorgement of all compensation and other equitable relief. In August 2009, our Motion for Judgment on the Pleadings was granted. The
plaintiffs have appealed this ruling. We believe the plaintiff's allegations in this matter are without merit and we intend to vigorously defend ourselves
in this matter. These efforts will be both expensive and time consuming and, ultimately, due to the nature of litigation, there can be no assurance that these efforts will be successful.



In the third quarter of 2007, the U.S. Patent and Trademark Office ("PTO") notified us that, in response to re-examination
petitions filed by a third party, the Examiner rejected the claims in the two U.S. patents for our DURASOLV ODT technology. We disagree with the Examiner's position, and we filed notices of appeal to
the Board of Patent Appeals of the PTO's decisions in the fourth quarter of 2007 regarding one patent and in the second quarter of 2008 regarding the second patent. In September 2009, the Board
affirmed the Examiner's position with respect to one of the DURASOLV patents. We have the right to appeal this rejection and, as of the filing date of this report, we are awaiting a hearing and a
determination with respect to our appeal regarding the other patent. These efforts will be both expensive and time consuming and, ultimately, due to the nature of patent appeals, there can be no
assurance that these efforts will be successful. The invalidity of the DURASOLV patents could reduce our ability to enter into new contracts with regard to our drug delivery business.



We are a party to certain other litigation in the ordinary course of our business, including, among others, European patent
oppositions, patent infringement litigation and matters alleging employment discrimination, product liability and breach of commercial contract. We 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.



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, 2009, the potential milestone, option exercise payments and other contingency payments due under current contractual agreements are $1.8 billion.

141

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Table of Contents

CEPHALON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except share and per share data)

17. INCOME TAXES

The components of income (loss) before income taxes for the years ended December 31:

2009

As Adjusted
2008*

As Adjusted
2007*United States

$
317,272

$
157,722

$
(87,955
)Foreign


(27,865
)

(23,652
)

(35,321
)Total

$
289,407

$
134,070

$
(123,276
)


*As
adjusted in accordance with the transition provisions of accounting for convertible debt instruments that may be settled in cash upon conversion (including
partial cash settlement) and accounting for noncontrolling interests in consolidated financial statements.


The
components of the provision (benefit) for income taxes for the years ended December 31:

2009

As Adjusted
2008*

As Adjusted
2007*Current taxes:United States

$
145,093

$
21,587

$
101,090Foreign


10,988


5,519


19,497State


6,754


3,118


3,656162,835


30,224


124,243Deferred taxes:United States


(63,203
)

(47,878
)

14,036Foreign


(15,656
)

(29,234
)

(95,299
)State


5,041


(4,901
)

1,684(73,818
)

(82,103
)

(79,579
)Change in valuation allowance


(10,337
)

13,970


58,489(84,155
)

(68,043
)

(21,090
)Total

$
78,680

$
(37,819
)
$
103,153


*As
adjusted in accordance with the transition provisions of accounting for convertible debt instruments that may be settled in cash upon conversion (including
partial cash settlement) and accounting for noncontrolling interests in consolidated financial statements.


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CEPHALON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except share and per share data)

17. INCOME TAXES (Continued)




A
reconciliation of the United States Federal statutory rate to our effective tax rate for the years ended December 31:

2009

As Adjusted
2008*

As Adjusted
2007*U.S. Federal statutory rateexpense (benefit)


35.0
%

35.0
%

(35.0
)%Manufacturers' deduction


(2.6
)




(5.1
)Meals and entertainment


1.1


2.5


2.3Executive compensation


1.2


2.8


3.2Other permanent book/tax differences


(2.2
)

1.3


1.9Revision of prior years' estimates


1.1


6.3


(8.9
)State income taxes, net of U.S. federal tax benefit


(3.7
)

(2.9
)

4.9Tax rate differential & permanent items on foreign income


3.6


(3.9
)

(51.7
)Change in valuation allowance


2.1


9.8


53.2Research and development credit


(4.3
)

(15.3
)

(6.9
)Settlement reserve


(4.8
)

(61.4
)

120.8Non-deductible loss of variable interest entity





8.5


Taxable benefit on acquisition of IPR&D


(0.8
)




Change in reserve for uncertain tax positions


0.7


(10.7
)

5.7Rate change


1.1





Other


(0.3
)

(0.2
)

(0.6
)Consolidated effective tax rate


27.2
%

(28.2
)%

83.8
%


*As
adjusted in accordance with the transition provisions of accounting for convertible debt instruments that may be settled in cash upon conversion (including
partial cash settlement) and accounting for noncontrolling interests in consolidated financial statements.


For
the year ended December 31, 2007, we recorded settlement reserves totaling $425.0 million related to the resolution of the U.S. Attorney's investigation. See
Note 16 herein. However, the tax benefit was not recorded until 2008 when the agreement was reached and the nature of the settlement payments was defined. In August 2009 we recognized an
additional tax benefit of $13.8 million over the benefits recorded at December 31, 2008, due to our closing agreement with the IRS in which both parties agreed that the nondeductible
punitive portion of the Settlement Agreement is $152.3 million.

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CEPHALON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except share and per share data)

17. INCOME TAXES (Continued)

Unrecognized
tax benefits for the year ended December 31:

2009

2008Unrecognized tax benefits beginning of year

$
62,602

$
79,593Gross change for current year positions


7,739


7,591Increase for prior period positions


1,101


2,986Decrease for prior period positions


(232
)

(21,347
)Decrease due to settlements and payments





(6,221
)Decrease due to statute expirations





Unrecognized tax benefits end of year

$
71,210

$
62,602


The
amount of unrecognized tax benefits at December 31, 2009 and 2008 is $71.2 million and $62.6 million, respectively, of which $30.2 million and
$27.5 million would impact our effective tax rate, respectively, if recognized. We do not believe that the total amount of unrecognized tax benefits will increase or decrease significantly over
the next twelve months.

Interest
expense related to income taxes is included in interest expense. Net interest (expense)/benefit related to unrecognized tax benefits for the years ended December 31, 2009
and 2008 were $(1.7) million and $0.9 million, respectively. The 2008 benefit is principally due to the settlement of the 2003-2005 Internal Revenue Service ("IRS") audit. Accrued
interest expense as of December 31, 2009 and December 31, 2008 was $4.7 million and $3.0 million respectively. Income tax penalties are included in other income (expense).
Accrued tax penalties are not significant.

The
Internal Revenue Service ("IRS") currently is examining Cephalon, Inc.'s 2006 and 2007 U.S. federal income tax returns. Zeneus Pharma S.a.r.L. is under examination by the
French Tax Authorities for 2003, 2004 and 2006 to 2008. Cephalon Gmbh, in Germany, is under examination for 2004 to 2006. During the first quarter of 2009, Cephalon Pharma S.L., in Spain, completed
its income tax audit for 2003 with no material findings. Our filings in the United Kingdom remain open to examination for 2006 to 2009. In other significant foreign jurisdictions, the tax years that
remain open for potential examination range from 2001 to 2009. We do not believe at this time that the results of these examinations will have a material impact on the financial statements.

In
the regular course of business, various state and local tax authorities also conduct examinations of our state and local income tax returns. Depending on the state, state income tax
returns are generally subject to examination for a period of three to five years after filing. The state impact of any federal changes that may result from the 2006 and 2007 IRS examination and the
agreed to federal changes from the 2003 to 2005 IRS examination, settled in 2008, remain subject to examination by various states for a period of up to one year after formal notification to the
states. We currently have several state income tax returns in the process of examination.

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CEPHALON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except share and per share data)

17. INCOME TAXES (Continued)

During
2008, we recognized a tax benefit of $84.5 million, of which $82.3 million related to the settlement with the USAO, for which the related expense was recorded in
2007 and $2.2 million related to the settlements with Connecticut and Massachusetts, for which the related expense was recorded in the third quarter of 2008. These settlements are discussed in
Note 16. During 2008 we realized a net benefit of $11.1 million related to the release of reserves related to the settlement of Cephalon, Inc.'s
2003 - 2005 IRS audit.

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

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CEPHALON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except share and per share data)

17. INCOME TAXES (Continued)

tax
credit carryforwards. Significant components of net deferred tax assets and deferred tax liabilities at December 31:

2009

As Adjusted
2008*Deferred tax assets:Net operating loss carryforwards

$
182,948

$
172,962Original issue discount


124,287


97,896Capitalized research and development expenditures


2,229


6,096Unrealized profit in inventory


72,803


89,040Research and development tax credits


6,102


14,912Acquired product rights and intangible assets


62,190


33,108Reserves and accrued expenses


65,498


64,256Alternative minimum tax credit carryforwards


662


461Deferred revenue


3,289


1,014Deferred compensation


9,544


8,466Stock-based compensation expense


32,969


22,675Deferred charges on convertible debentures


9,922


7,323Accounts receivable discounts and allowance


40,408


39,041Other comprehensive income





1,025Commitment prepayment


4,390


Transaction costs


1,303


Other, net


8,397


3,257Total deferred tax assets


626,941


561,532Valuation allowance


(132,741
)

(140,448
)Net deferred tax assets

$
494,200

$
421,084Deferred tax liabilities:Acquired intangible assets from Group Lafon acquisition

$
16,026

$
18,338Acquired intangible assets from CIMA LABS acquisition


20,438


24,344Acquired intangible assets from CTI acquisition


11,041


12,500Acquired intangible assets from Zeneus acquisition


49,237


43,450Acquired intangiblesOther


146,478


Implementation of the transition provisions of accounting for convertible debt instruments that may be settled in cash upon conversion (including partial
cash settlement)


131,443


96,703Deferred revenue





91Fixed assets


34,466


32,609Other comprehensive income


752


Other


164


843Total deferred tax liabilities

$
410,045

$
228,878Net deferred tax assets

$
84,155

$
192,206


*As
adjusted in accordance with the transition provisions of accounting for convertible debt instruments that may be settled in cash upon conversion (including
partial cash


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CEPHALON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except share and per share data)

17. INCOME TAXES (Continued)

settlement)
and accounting for noncontrolling interests in consolidated financial statements.


The
above overall net deferred tax assets for the year ended December 31, 2009 and 2008 are presented in the consolidated balance sheet as: current deferred tax
assets, net; non-current deferred tax assets, net; and long-term deferred tax liabilities, net.

At
December 31, 2009, we had gross operating loss carryforwards for U.S. federal income tax purposes of $58.5 million and apportioned state gross operating losses of
$237.4 million that expire in varying years starting in 2010. We also have foreign gross operating losses of $543.4 million, of which $150.3 million will begin to expire in 2010
and $393.1 million may be carried forward with indefinite expiration dates. Federal and state research tax credits of $6.1 million are available to offset future tax liabilities and
expire starting in 2010. 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.

We
believe that all of our domestic federal net operating loss carryforwards, portions of foreign operating loss carryforwards, domestic tax credits and certain other deferred tax assets
are more likely than not to be recovered. The remaining deferred tax assets are offset by a valuation allowance of
$132.7 million and $140.4 million at December 31, 2009 and 2008, respectively. This consists of certain state tax credits, existing and acquired foreign and state operating loss
carryforwards that we believe are not more likely than not to be recovered. For the year ended December 31, 2009, the decrease in valuation allowance of $7.7 million was principally due
to a decrease of $1.4 million in the company's U.S. state and foreign net operating losses that are not more likely than not to be recovered, plus $8.9 million due to the release of the
valuation allowance on foreign net operating losses, for which a benefit to income was recorded, offset by increases of $1.8 million in currency translation adjustments and a
$0.8 million increase due to the acquisition of Arana Therapeutics Limited.

The
tax benefits associated with employee exercises of non-qualified stock options and disqualifying dispositions of stock acquired with incentive stock options reduce taxes
payable. Tax benefits of $2.0 million and $7.3 million associated with the exercise of employee stock options and other equity compensation were recorded to additional
paid-in capital for the years ended December 31, 2009 and 2008, respectively.

Our
foreign subsidiaries had no net unremitted earnings at December 31, 2009 and 2008. To the extent a subsidiary has unremitted earnings, such amounts have been included in the
consolidated financial statements without giving effect to deferred taxes since it is management's intent to reinvest such earnings in foreign operations.

The
deferred assets and liabilities included within the consolidated results from the activities of the variable interest entities are not realizable benefits and or liabilities to
Cephalon shareholders. For additional information, see Note 2 herein.

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Table of Contents

CEPHALON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except share and per share data)

18. SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)

2009 Quarter EndedDecember 31,

September 30,

June 30,

March 31,Statement of Operations Data:Net sales

$
562,938

$
535,223

$
539,021

$
514,366Gross profit


457,734


444,767


433,614


416,596Net income (loss)


(192
)

95,097


72,040


43,782Net income attributable to Cephalon, Inc.

$
96,558

$
102,722

$
84,764

$
58,583Basic income per common share attributable to Cephalon, Inc.

$
1.29

$
1.38

$
1.19

$
0.85Weighted average number of common shares outstanding


74,720


74,647


71,119


68,792Diluted income per common share attributable to Cephalon, Inc

$
1.23

$
1.31

$
1.11

$
0.75Weighted average number of common shares outstanding-assuming dilution


78,508


78,431


76,629


77,993




2008 Quarter Ended*December 31,

September 30,

June 30,

March 31,Statement of Operations Data:Net sales

$
534,861

$
489,664

$
485,042

$
433,897Gross profit


435,338


368,187


383,724


343,981Net income (loss)


(16,042
)

105,598


51,891


30,442Net income attributable to Cephalon, Inc.

$
5,031

$
105,598

$
51,891

$
30,442Basic income per common share attributable to Cephalon, Inc.

$
0.07

$
1.55

$
0.77

$
0.45Weighted average number of common shares outstanding


68,505


68,118


67,777


67,665Diluted income per common share attributable to Cephalon, Inc

$
0.06

$
1.34

$
0.69

$
0.41Weighted average number of common shares outstanding-assuming dilution


77,823


78,920


74,852


74,286


*As
adjusted in accordance with the transition provisions of accounting for convertible debt instruments that may be settled in cash upon conversion (including
partial cash settlement) and accounting for noncontrolling interests in consolidated financial statements.


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CEPHALON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except share and per share data)




19. SEGMENT INFORMATION

Revenues by segment for the years ended December 31:

2009

2008

2007United
States

Europe

Total

United
States

Europe

Total

United
States

Europe

TotalNet sales:PROVIGIL

$
961,070

$
63,618

$
1,024,688

$
924,986

$
63,432

$
988,418

$
801,639

$
50,408

$
852,047NUVIGIL


73,391





73,391

















GABITRIL


51,100


5,386


56,486


52,441


8,256


60,697


50,642


6,668


57,310CNS


1,085,561


69,004


1,154,565


977,427


71,688


1,049,115


852,281


57,076


909,357ACTIQ


75,418


71,527


146,945


105,351


71,170


176,521


181,039


59,033


240,072Generic OTFC


83,032





83,032


95,760





95,760


129,033





129,033FENTORA


136,563


4,114


140,677


155,246





155,246


135,136





135,136AMRIX


114,435





114,435


73,641





73,641


8,401





8,401Pain


409,448


75,641


485,089


429,998


71,170


501,168


453,609


59,033


512,642TREANDA


222,112





222,112


75,132





75,132








Other Oncology


18,281


95,470


113,751


18,566


91,919


110,485


16,561


76,316


92,877Oncology


240,393


95,470


335,863


93,698


91,919


185,617


16,561


76,316


92,877Other


32,981


143,050


176,031


49,667


157,897


207,564


52,702


159,721


212,423Total Net Sales


1,768,383


383,165


2,151,548


1,550,790


392,674


1,943,464


1,375,153


352,146


1,727,299Other Revenues


39,846


914


40,760


29,546


1,544


31,090


40,149


5,190


45,339Total External Revenues


1,808,229


384,079


2,192,308


1,580,336


394,218


1,974,554


1,415,302


357,336


1,772,638Inter-Segment Revenues


24,400


1,863


26,263


22,397


99,686


122,083


26,092


100,992


127,084Elimination of Inter-Segment Revenues


(24,400
)

(1,863
)

(26,263
)

(22,397
)

(99,686
)

(122,083
)

(26,092
)

(100,992
)

(127,084
)Total Revenues

$
1,808,229

$
384,079

$
2,192,308

$
1,580,336

$
394,218

$
1,974,554

$
1,415,302

$
357,336

$
1,772,638


Income (loss) before income taxes by segment for the years ended December 31:

2009

As Adjusted
2008*

As Adjusted
2007*United States

$
326,461

$
141,899

$
(118,808
)Europe


(37,054
)

(7,829
)

(4,468
)Total

$
289,407

$
134,070

$
(123,276
)


Long-lived
assets by segment at December 31:

2009

As Adjusted
2008*United States

$
1,612,753

$
1,341,263Europe


479,387


412,157Total

$
2,092,140

$
1,753,420


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Table of Contents

CEPHALON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except share and per share data)

19. SEGMENT INFORMATION (Continued)

Total
assets by segment at December 31:

2009

As Adjusted
2008*United States

$
3,896,131

$
2,324,694Europe


761,964


758,248Total

$
4,658,095

$
3,082,942


*As
adjusted in accordance with the transition provisions of accounting for convertible debt instruments that may be settled in cash upon conversion (including
partial cash settlement) and accounting for noncontrolling interests in consolidated financial statements. Certain reclassifications of prior year amounts have been made to conform to current year
presentation.


Revenues
and income (loss) before income taxes are attributed to geographic areas based on customer location. Income (loss) before income taxes exclude inter-segment transactions.

20. SUBSEQUENT EVENTS

We have evaluated subsequent events through February 12, 2010, the date at which our financial statements were issued.



On January 31, 2010, we entered into a Share Purchase Agreement with Mepha Holding AG pursuant to which we agreed to purchase
all of the issued share capital of Mepha AG ("Mepha"), a privately-held, Swiss-based pharmaceutical company, for CHF 622.5 million (or approximately US$590 million) in
cash, subject to certain closing adjustments. The closing of the transaction is subject to customary closing conditions, including receipt of the applicable antitrust approvals. The transaction is
expected to close in the second quarter of 2010. Founded in 1949, Mepha markets branded and non-branded generics as well as specialty products in more than 50 countries. Mepha develops and
manufactures its products in Aesch/Basel, Switzerland with a focus on Swiss-quality standards. Mepha's research and development focuses on the development of improved and innovative generics providing
additional benefits for patients. Furthermore, Mepha is active in malaria research offering innovative life-saving therapies for adults and children. Mepha is the leading company on the
Swiss generic market, with more than 120 products in over 500 packaging forms. Mepha has operational subsidiaries in Portugal and the Baltics. Through partnerships, Mepha markets its products in other
European countries, in the Middle East, Africa, South and Central America as well as in Asia. Mepha employs approximately 1,000 people worldwide, 500 of them in Switzerland.

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Table of Contents

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 Annual Report on Form 10-K. 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 Annual Report on Form 10-K 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

The effectiveness of our internal control over financial reporting as of December 31, 2009 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) Changes 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

On February 10, 2010, the Board of Directors (the "Board") of the Company approved an amendment to Section 2.05(b) of the
Company's By-laws (the "By-laws") to change the vote standard for the election of directors from plurality to a majority of votes cast in uncontested elections. A majority of
the votes cast means that the number of votes cast "for" a director's election exceeds the number of votes cast "against" that director's election, with "abstentions" and "broker nonvotes" not counted
as a vote cast either "for" or "against" that director's election. In elections involving a person nominated by a stockholder and the stockholder has not withdrawn that nomination on or prior to the
fourteenth (14th) day before the Company first mails its notice of meeting for the applicable meeting to the stockholders, the vote standard will continue to be a plurality of
votes cast.

In
addition, if a nominee who already serves as a director is not elected and no successor has been elected at such meeting, the director shall promptly tender his or her resignation to
the Board. The Corporate Governance and Nominating Committee or another committee designated by the Board will make a recommendation to the Board on whether to accept or reject the resignation, or
whether other

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Table of Contents

action
should be taken. The Board will act on the tendered resignation, taking into account the committee's recommendation, and publicly disclose (by a press release, a filing with the Securities and
Exchange Commission or other broadly disseminated means of communication) its decision regarding the tendered resignation and the rationale behind the decision within 90 days following
certification of the election results. The director who tenders his or her resignation shall not participate in the recommendation of the committee or the decision of the Board with respect to his or
her resignation. If such incumbent director's resignation is not accepted by the Board, such director shall continue to serve until the next annual meeting of stockholders and until his or her
successor is duly elected, or his or her earlier resignation or removal. If the Board accepts a director's resignation, or if a nominee for director is not elected and the nominee is not an incumbent
director, then the Board, in its sole discretion, may fill any resulting vacancy or decrease the size of the Board.

The
amended By-laws are effective as of February 10, 2010. The foregoing summary of the amended By-laws does not purport to be a complete description
thereof and the summary is qualified in its entirety by reference to the full text of the amended By-laws which are attached as Exhibit 3.2 to this Annual Report on
Form 10-K.

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Table of Contents

PART III

ITEM 10.    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

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 2010 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 2010 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 2010 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 related to the 2010 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
related to the 2010 annual meeting of stockholders.

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by Item 13 is incorporated by reference to the information contained in our definitive proxy statement
related to the 2010 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
related to the 2010 annual meeting of stockholders.

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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 Annual
Report on Form 10-K under Item 8 of Part II hereof:

1. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

Report of Management.Report of Independent Registered Public Accounting Firm.Consolidated Balance Sheets as of December 31, 2009 and 2008.Consolidated Statements of Operations for the years ended December 31, 2009, 2008 and 2007.Consolidated Statements of Equity and Comprehensive Income for the years ended December 31, 2009, 2008 and 2007.Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008 and 2007.Notes to Consolidated Financial Statements.


2. FINANCIAL STATEMENT SCHEDULE

Schedule IIValuation and Qualifying Accounts.


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.

Description2.1

Agreement and Plan of Merger by and among Cephalon, Inc., Cepsal Acquisition Corp., Salmedix, Inc., David S. Kabakoff, Arnold L. Oronsky, and Paul Klingenstein dated May 12, 2005, filed as Exhibit 2.1
to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 20052.2

Share Purchase Agreement dated as of December 5, 2005 between Cephalon, Inc., Cephalon International Holdings, Inc. and certain shareholders of Zeneus Holdings Limited, filed as Exhibit 2.1 to the
Company's Current Report on Form 8-K filed on December 22, 2005.3.1
(a)
Restated Certificate of Incorporation, as amended, filed as Exhibit 3.1 to the Company's Annual Report on Form 10-K for the 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 ended June 30, 2002.


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Exhibit No.

Description3.1
(c)
Certificate of Amendment of Restated Certificate of Incorporation, filed as Exhibit 3.1 to the Company's Current Report on Form 8-K filed on May 17, 2007.*3.2

Third Amended and Restated Bylaws of the Registrant.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 year ended December 31, 1993.4.2
(a)
Second 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, 2003.4.2
(b)
Agreement of Appointment and Joinder and Amendment No. 1 to the Second Amended and Restated Rights Agreement, dated as of February 9, 2007, by and between Cephalon, Inc. and American Stock
Transfer & Trust Company, as Rights Agent, filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed on February 13, 2007.4.3
(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,
2003.4.3
(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, 2003.4.4
(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 filed on December 21,
2004.4.4
(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 filed on
December 21, 2004.4.5
(a)
Indenture, dated June 7, 2005, between Cephalon, Inc. and U.S. Bank, National Association, as trustee, filed as Exhibit 4.1 to the Company's Current Report on Form 8-K filed on June 8,
2005.4.5
(b)
Form of 2.00% convertible senior subordinated notes due 2015, filed as Exhibit 4.2 to the Company's Current Report on Form 8-K filed on June 8, 2005.4.6
(a)
Indenture, dated May 27, 2009, between Cephalon, Inc. and U.S. Bank National Association, as trustee, filed as Exhibit 4.1 to the Company's Current Report on Form 8-K filed on May 28,
2009.4.6
(b)
Form of 2.50% Convertible Senior Subordinated Notes due May 1, 2014, filed as Exhibit 4.2 to the Company's Current Report on Form 8-K filed on May 28, 2009.10.1
(a)
Restated Executive Severance Agreement between Frank Baldino, Jr. and Cephalon, Inc. dated June 24, 2008, filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed on June 25,
2008.


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Exhibit No.

Description10.1
(b)
Form of Restated Executive Severance Agreement between Certain Executives and Cephalon, Inc. dated June 24, 2008, filed as Exhibit 10.2 to the Company's Current Report on Form 8-K filed June 24,
2008.10.1
(c)
List of Executive Officers subject to the Form of Severance Agreement between Certain Executive Officers and the Company (see Exhibit 10.1(b) above).10.1
(d)
Amendment 2008-1 to the Restated Executive Severance Agreement between Frank Baldino, Jr. and Cephalon, Inc. dated as of December 31, 2008, filed as Exhibit 10.1 to the Company's Current Report on
Form 8-K filed on January 7, 200910.1
(e)
Form of Amendment 2008-1 to the Restated Executive Severance Agreement between certain executive officers and Cephalon, Inc. dated as of December 31, 2008, filed as Exhibit 10.2 to the Company's Current
Report on Form 8-K filed on January 7, 200910.2
(a)
Advisory Services Agreement and Release, dated as of February 8, 2008, by and between Cephalon, Inc. and John E. Osborn, filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed on
February 8, 2008.10.2
(b)
Cephalon, Inc. 2006 Management Incentive Compensation Plan, filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed on February 2, 2006.10.2
(c)
Cephalon, Inc. 2007 Management Incentive Compensation Plan, filed as Exhibit 10.2 to the Company's Current Report on Form 8-K filed on February 13, 2007.10.2
(d)
Cephalon, Inc. 2008 Management Incentive Compensation Plan, filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed on February 1, 2008.10.2
(e)
Cephalon, Inc. 2009 Management Incentive Compensation Plan, filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed on January 30, 2009.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. 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
(c)
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
(d)
Cephalon, Inc. 2000 Equity Compensation PlanForm of Nonqualified Stock Option Agreement for Employees (For Grants Made On or After October 17, 2005), filed as Exhibit 10.3 to the Company's Current
Report on Form 8-K filed on October 21, 2005.10.3
(e)
Amendment 2007-1 to the Cephalon, Inc. 2000 Equity Compensation Plan for Employees and Key Advisors, effective as of February 8, 2007, filed as Exhibit 10.3 to the Company's Quarterly Report on
Form 10-Q for the period ended March 31, 2007.10.3
(f)
Cephalon, Inc. 2004 Equity Compensation Plan, as amended and restated, effective as of May 23, 2008, filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed on May 23,
2008.


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Exhibit No.

Description10.3
(g)
Amendment 2009-1 to the Cephalon, Inc. 2004 Equity Compensation Plan, as amended and restated, effective as of May 13, 2009, filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed on
May 15, 2009.10.3
(h)
Cephalon, Inc. 2004 Equity Compensation PlanForm of Notice of Grant of Non-Qualified Stock Option and Form of Grant Agreement for electronic acceptance under the Company's 2004 Equity Compensation Plan, filed
as Exhibit 10.2 to the Company's Current Report on Form 8-K filed on May 15, 2009.10.3
(i)
Cephalon, Inc. 2004 Equity Compensation PlanForm of Notice of Grant of Restricted Stock Award and Form of Grant Agreement for electronic acceptance under the Company's 2004 Equity Compensation Plan, filed as
Exhibit 10.3 to the Company's Current Report on Form 8-K filed on May 15, 2009.10.3
(j)
[Intentionally Omitted]10.3
(k)
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 filed on December 17, 2004.10.3
(l)
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.10.3
(m)
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
(n)
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.10.3
(o)
Cephalon, Inc. 2004 Equity Compensation PlanForm of Incentive Stock Option Agreement for Employees (For Grants Made On or After October 17, 2005), filed as Exhibit 10.1 to the Company's Current Report
on Form 8-K filed on October 21, 2005.10.3
(p)
Cephalon, Inc. 2004 Equity Compensation PlanForm of Nonqualified Stock Option Agreement for Employees (For Grants Made On or After October 17, 2005), filed as Exhibit 10.2 to the Company's Current
Report on Form 8-K filed on October 21, 2005.10.3
(q)
Cephalon, Inc. 2004 Equity Compensation PlanForm of Nonqualified Stock Option Agreement for Non-Employee Directors (For Grants Made On or After October 17, 2005) (Initial Grants Upon Joining Board), filed
as Exhibit 10.4 to the Company's Current Report on Form 8-K filed on October 21, 2005.10.3
(c)
Cephalon, Inc. 2004 Equity Compensation PlanForm of Nonqualified Stock Option Agreement for Non-Employee Directors (For Grants Made On or After October 17, 2005) (Annual Grants to Non-Employee Directors)
filed as Exhibit 10.5 to the Company's Current Report on Form 8-K filed on October 21, 2005.10.3
(s)
Cephalon, Inc. Amended and Restated Non-Qualified Deferred Compensation Plan, filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed on December 12, 2008.10.4

Summary of Oral Agreement for Payment of Services between Cephalon, Inc. and its Board of Directors, dated May 22, 2008, filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed
May 28, 2008.


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Exhibit No.

Description10.5

Development and Commercialization Option Agreement dated November 21, 2008 between Cephalon, Inc., Anesta AG, ImmuPharma (France) S.A. and ImmuPharmaAG (Switzerland), filed as Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the period ended September 30, 2009.(1)10.5
(b)
Development and Commercialization Agreement dated as of February 25, 2009 between ImmuPharma (France) S.A. and Anesta AG, filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the
period ended September 30, 2009.(1)10.5
(c)
Trademark License Agreement dated as of February 25, 2009 between ImmuPharma AG. and Anesta AG, filed as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the period ended September 30,
2009.(1)10.6
(a)
Option Agreement dated as of January 13, 2009 between Cephalon, Inc. and Ception Therapeutics, Inc., filed as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the period ended
March 31, 2009.(1)*10.6
(b)
Third Amendment to Option Agreement effective January 26, 2010 between Cephalon, Inc. and Ception Therapeutics, Inc.10.7
(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).10.7
(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, 2004.10.8

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, 2004.10.9

Acquisition Agreement by and among Cell Therapeutics, Inc., CTI Technologies, Inc. and Cephalon, Inc. dated June 10, 2005, incorporated by reference from Exhibit 10.1 to Cell Therapeutics' Current
Report on Form 8-K filed on June 14, 2005.10.10
(a)
License and Collaboration Agreement between Alkermes, Inc. and Cephalon, Inc. dated as of June 23, 2005, filed as Exhibit 10.5(a) to the Company's Quarterly Report on Form 10-Q for the period
ended June 30, 2005.(1)10.10
(b)
Supply Agreement between Alkermes, Inc. and Cephalon, Inc. dated as of June 23, 2005, filed as Exhibit 10.5(b) to the Company's Quarterly Report on Form 10-Q for the period ended June 30,
2005.(1)10.10
(c)
Amendment to the Supply Agreement between Alkermes, Inc. and Cephalon, Inc. dated as of December 21, 2006, filed as Exhibit 10.13(c) to the Company's Annual Report on Form 10-K for the year ended
December 31, 2006.(1)10.10
(d)
Amendment to the License and Collaboration Agreement between Alkermes, Inc. and Cephalon, Inc. dated as of December 21, 2006, filed as Exhibit 10.13(d) to the Company's Annual Report on Form 10-K
for the year ended December 31, 2006.(1)10.11
(a)
Office Lease between The Multi-Employer Property Trust and Cephalon, Inc. dated January 14, 2004, filed as Exhibit 10.20(a) to the Company's Annual Report on Form 10-K for the year ended
December 31, 2004.(1)


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Exhibit No.

Description10.11
(b)
First Amendment to Lease, entered into as of May 11, 2006, by and between the New Tower Trust Company Multi-Employer Property Trust (f/k/a the Multi-Employer Property Trust), and Cephalon, Inc., filed as
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2006.(2)10.11
(c)
Consent to Sublease between The Multi-Employer Property Trust, Systems & Computer Technology Corporation and Cephalon, Inc. dated April 2, 2004, filed as Exhibit 10.20(b) to the Company's Annual
Report on Form 10-K for the year ended December 31, 2004.(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 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 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© to the Company's Annual Report on Form 10-K for the 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 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 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 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 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 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 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 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)


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Exhibit No.

Description10.13
(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) filed on January 7, 1993.10.13
(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, 1993.10.13
(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, 1993.10.13
(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, 1993.10.13
(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, 1993.10.13
(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, 1993.10.14
(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, 2003.10.14
(d)
Termination of Letter Agreement dated July 22, 2005, between Credit Suisse First Boston International and Cephalon, Inc., filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the
period ended September 30, 2005.10.15
(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, 2004.10.15
(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.


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Exhibit No.

Description10.15
(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,
2004.10.15
(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,
2004.10.15
(e)
Amendment to Five Year Warrant, dated December 13, 2006, between the Company and Credit Suisse International (f/k/a Credit Suisse First Boston International) filed as Exhibit 10.19(e) to the Company's Annual
Report on Form 10-K for the year ended December 31, 2006.10.15
(f)
Amendment to Seven Year Warrant, dated December 13, 2006, between the Company and Credit Suisse International (f/k/a Credit Suisse First Boston International) filed as Exhibit 10.19(f) to the Company's Annual
Report on Form 10-K for the year ended December 31, 2006.10.15
(g)
Form of Five Year Convertible Note Hedge Amendment, dated December 13, 2006, between the Company and Credit Suisse International (f/k/a Credit Suisse First Boston International) filed as Exhibit 10.19(g) to the
Company's Annual Report on Form 10-K for the year ended December 31, 2006.10.15
(h)
Form of Seven Year Convertible Note Hedge Amendment, dated December 13, 2006, between the Company and Credit Suisse International (f/k/a Credit Suisse First Boston International) filed as Exhibit 10.19(h) to the
Company's Annual Report on Form 10-K for the year ended December 31, 2006.10.16
(a)
Convertible Note Hedge Confirmation, dated as of June 2, 2005, between the Company and Deutsche Bank AG, filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed on June 8,
2005.10.16
(b)
Warrant Confirmation, dated as of June 2, 2005, between the Company and Deutsche Bank AG, filed as Exhibit 10.2 to the Company's Current Report on Form 8-K filed on June 8, 2005.10.16
(c)
Amendment to Hedge Confirmation dated as of June 2, 2005 by and among the Company, Deutsche Bank AG, New York and Deutsche Bank AG, London, filed as Exhibit 10.1 to the Company's Current Report on Form 8-K
filed on July 7, 2005.10.16
(d)
Hedge Confirmation dated as of June 28, 2005 by and among the Company, Deutsche Bank AG, New York and Deutsche Bank AG, London, filed as Exhibit 10.2 to the Company's Current Report on Form 8-K filed on
July 7, 2005.10.16
(e)
Amendment to Warrant Confirmation dated as of June 2, 2005 by and among the Company, Deutsche Bank AG, New York and Deutsche Bank AG, London, filed as Exhibit 10.3 to the Company's Current Report on
Form 8-K filed on July 7, 2005.10.16
(f)
Termination and Assignment Agreement, dated as of December 19, 2006, between Deutsche Bank AG and Cephalon, Inc., filed as Exhibit 10.20(f) to the Company's Annual Report on Form 10-K for the year
ended December 31, 2006.10.16
(g)
Amended and Restated Convertible Noted Hedge Confirmation, dated as of May 22, 2009, between Cephalon, Inc. and Deutsche Bank AG, London Branch, filed as Exhibit 10.1 to the Company's Current Report on
Form 8-K filed on May 28, 2009.


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Exhibit No.

Description10.16
(h)
Amended and Restated Warrant Confirmation, dated as of May 22, 2009, between Cephalon, Inc. and Deutsche Bank AG, London Branch, filed as Exhibit 10.2 to the Company's Current Report on Form 8-K filed
on May 28, 2009.10.17
(a)
Agreement dated as of December 8, 2005 by and between Cephalon, Inc., Teva Pharmaceutical Industries Ltd., and Teva Pharmaceuticals USA, Inc., filed as Exhibit 10.21 to the Company's Annual Report
on Form 10-K for the year ended December 31, 2005.(1)10.17
(b)
Settlement Agreement dated as of December 22, 2005 by and between Cephalon, Inc. and Ranbaxy Laboratories Limited., filed as Exhibit 10.22 to the Company's Annual Report on Form 10-K for the year ended
December 31, 2005.(1)10.17
(c)
Settlement Agreement dated January 9, 2006 by and between the Company and Mylan Pharmaceuticals Inc., filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the period ended
March 31, 2006.(1)10.17
(d)
PROVIGIL Settlement Agreement dated February 1, 2006 by and between the Company and Barr Laboratories, Inc., filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the period ended
March 31, 2006.(1)10.17
(e)
Modafinil License and Supply Agreement dated as of February 1, 2006 by and between the Company and Barr Laboratories, Inc., filed as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the
period ended March 31, 2006.(1)10.17
(f)
ACTIQ Settlement Agreement dated February 1, 2006 by and among the Company, the University of Utah Research Foundation and Barr Laboratories, Inc., filed as Exhibit 10.4 to the Company' Quarterly Report on
Form 10-Q for the period ended March 31, 2006.(1)10.18
(g)
ACTIQ Supplemental License and Supply Agreement dated as of February 1, 2006 by and between the Company and Barr Laboratories, Inc., filed as Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q
for the period ended March 31, 2006.(1)10.18
(h)
Settlement and License Agreement dated August 2, 2006 by and between the Company, Carlsbad Technology, Inc. and Watson Pharmaceuticals, Inc., filed as Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the period ended September 30, 2006.(1)10.19
(a)
Form of Aircraft Time Share Agreement between Cephalon, Inc. and certain executive officers, filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed November 6, 2006.10.19
(b)
Amendment to the Second Amended and Restated Timesharing Agreement between Cephalon, Inc. and Frank Baldino, Jr., Ph.D. dated April 4, 2007, filed as Exhibit 10.2 to the Company's Quarterly Report on
Form 10-Q for the period ended June 30, 2007.10.20

Co-Promotion Agreement dated as of June 12, 2006 by and between the Company and Takeda Pharmaceuticals North America, Inc., filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for
the period ended June 30, 2006.(1)10.20
(a)
Termination Letter dated as of August 29, 2008 of Co-Promotion Agreement dated as of June 12, 2006 by and between the Company and Takeda Pharmaceuticals North America, Inc. filed as Exhibit 10.1 to the
Company's Current Report on Form 8-K filed on September 3, 2008.10.21

Asset Purchase Agreement by and between Anesta AG and E. Claiborne Robins Company, Inc., dated as of August 23, 2007, filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the
period ended September 30, 2007.(2)


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Exhibit No.

Description10.22

Credit Agreement dated as of August 15, 2008 among Cephalon, Inc., the lenders named therein, JPMorgan Chase Bank, N.A., as administrative agent, Deutsche Bank Securities Inc. and Bank of America N.A.,
as co-syndication agents, Wachovia Bank, N.A. and Barclays Bank plc, as co-documentation agents, and J.P. Morgan Securities Inc., Deutsche Bank Securities Inc. and Banc of America Securities LLC, as joint bookrunners and joint
lead arrangers filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed on August 18, 2008.10.22
(a)
First Amendment dated December 3, 2008 to the Credit Agreement dated as of August 15, 2008 among Cephalon, Inc., the lenders named therein, JPMorgan Chase Bank, N.A., as administrative agent, Deutsche Bank
Securities Inc. and Bank of America N.A., as co-syndication agents, Wachovia Bank, N.A. and Barclays Bank plc, as co-documentation agents, and J.P. Morgan Securities Inc., Deutsche Bank Securities Inc. and Banc of America
Securities LLC, as joint bookrunners and joint lead arrangers.10.22
(b)
Second Amendment dated February 27, 2009 to the Credit Agreement dated as of August 15, 2008 among Cephalon, Inc., the lenders named therein, JPMorgan Chase Bank, N.A., as administrative agent, Deutsche
Bank Securities Inc. and Bank of America N.A., as co-syndication agents, Wachovia Bank, N.A. and Barclays Bank plc, as co-documentation agents, and J.P. Morgan Securities Inc., Deutsche Bank Securities Inc. and Banc of America
Securities LLC, as joint bookrunners and joint lead arrangers, filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed for the period ended March 31, 2009.10.22
(c)
Third Amendment dated as of May 21, 2009 to the Credit Agreement dated as of August 15, 2008 among Cephalon, Inc., the lenders named therein, JPMorgan Chase Bank, N.A., as administrative agent, Deutsche
Bank Securities Inc. and Bank of America N.A., as co-syndication agents, Wachovia Bank, N.A. and Barclays Bank plc, as co-documentation agents, and J.P. Morgan Securities Inc., Deutsche Bank Securities Inc. and Banc of America
Securities LLC, as joint bookrunners and joint lead arrangers, filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed on May 27, 2009.10.22
(d)
Fourth Amendment dated as of December 22, 2009 to the Credit Agreement dated as of August 15, 2008 among Cephalon, Inc., the lenders named therein, JPMorgan Chase Bank, N.A., as administrative agent,
Deutsche Bank Securities Inc. and Bank of America N.A., as co-syndication agents, Wachovia Bank, N.A. and Barclays Bank plc, as co-documentation agents, and J.P. Morgan Securities Inc., Deutsche Bank Securities Inc. and Banc of
America Securities LLC, as joint bookrunners and joint lead arrangers, filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed on December 29, 2009.10.23

Settlement Agreement dated as of September 29, 2008 among Cephalon, Inc., the U.S. Department of Justice, the U.S. Attorney's Office for the Eastern District of Pennsylvania, the Office of Inspector General
of the Department of Health and Human Services, TRICARE Management Activity, the U.S. Office of Personnel Management and the relators identified therein, filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed on
September 29, 2008.10.24

Corporate Integrity Agreement dated as of September 29, 2008 between the Office of Inspector General of the Department of Health and Human Services and Cephalon, Inc., filed as Exhibit 10.2 to the
Company's Current Report on Form 8-K filed on September 29, 2008.


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Exhibit No.

Description10.25

Form of State Settlement Agreement and Release dated as of September 29, 2008 between Cephalon, Inc. and each of the 50 States and the District of Columbia, filed as Exhibit 10.3 to the Company's
Current Report on Form 8-K filed on September 29, 2008.*10.26

Term Sheet dated November 6, 2009 by and among the Company, CIMA Labs, Inc., and Anesta Corp. and Barr Pharmaceuticals, LLC, as successor in interest to Barr Pharmaceuticals, Inc and Barr Laboratories,
 Inc.(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.


*Filed
herewith.Compensation
plans and arrangements for executives and others.(1)Portions
of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment granted by the Securities and
Exchange Commission.(2)Portions
of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and
Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.


ABELCET,
ACTIQ, AMRIX, DILZEM, DURASOLV, EFFENTORA, FENTORA, FONZYLANE, GABITRIL, LOPERAMIDE LYOC, MODIODAL, MYOCET, MYOTROPHIN, NUVIGIL, ORASOLV, ORAVESCENT, PARALYOC, PROVIGIL, PROXALYOC, SPARLON,
SPASFON, SPASFON LYOC, TREANDA, TRISENOX and VIGIL are trademarks or registered trademarks of Cephalon, Inc. or its subsidiaries. All other brands and names used herein are trademarks of their
respective owners.

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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 YearReserve for sales discounts, returns and allowances:2009

$
127,992

$
317,729

$
(280,673
)
$
165,0482008


89,091


282,996


(244,095
)

127,9922007


84,980


214,302


(210,191
)

89,091Reserve for inventories:2009


5,685


7,695


(4,780
)

8,6002008


8,349


4,254


(6,918
)

5,6852007


13,100


13,212


(17,963
)

8,349Reserve for income tax valuation allowance:2009


140.448


(10,337
)

2,630


132,7412008


132,949


13,970


(6,471
)

140,4482007


78,043


58,489


(3,583
)

132,949


(1)Amounts
represent charges and reductions to expenses and revenue.(2)Amounts
represent utilization and adjustments of balance sheet reserve accounts.


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Table of Contents

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: February 12, 2010CEPHALON, INC.By:

/s/ FRANK BALDINO, JR. Frank Baldino, Jr., Ph.D. Chairman and Chief Executive Officer


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)

February 12, 2010/s/ WILCO GROENHUYSEN Wilco Groenhuysen

Executive Vice President and Chief Financial Officer (Principal financial and accounting officer)

February 12, 2010/s/ WILLIAM P. EGAN William P. Egan

Director

February 12, 2010/s/ MARTYN D. GREENACRE Martyn D. Greenacre

Director

February 12, 2010/s/ VAUGHN M. KAILIAN Vaughn M. Kailian

Director

February 12, 2010/s/ KEVIN E. MOLEY Kevin E. Moley

Director

February 12, 2010/s/ CHARLES A. SANDERS Charles A. Sanders, M.D.

Director

February 12, 2010/s/ GAIL R. WILENSKY Gail R. Wilensky, Ph.D.

Director

February 12, 2010/s/ DENNIS L. WINGER Dennis L. Winger

Director

February 12, 2010


166

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