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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, 2008oro

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 4011
Frazer, Pennsylvania(Address of Principal Executive Offices)

19355(Zip Code)


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

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

Title of each class

Name of each exchange on which 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 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, 2008, was approximately
$2.8 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, 2008. 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, 2008.

The
number of shares of the registrant's Common Stock outstanding as of February 17, 2009 was 68,809,077.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive proxy statement for its 2009 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

29Item 1B.

Unresolved Staff Comments

45Item 2.

Properties

45Item 3.

Legal Proceedings

46Item 4.

Submission of Matters to a Vote of Security Holders

46PART IIItem 5.

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

49Item 6.

Selected Financial Data

52Item 7.

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

53Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

89Item 8.

Financial Statements and Supplementary Data

90Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

150Item 9A.

Controls and Procedures

150Item 9B.

Other Information

150PART IIIItem 10.

Directors, Executive Officers and Corporate Governance

151Item 11.

Executive Compensation

151Item 12.

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

151Item 13.

Certain Relationships and Related Transactions, and Director Independence

151Item 14.

Principal Accountant Fees and Services

151PART IVItem 15.

Exhibits and Financial Statement Schedules

152SIGNATURES

163


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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:



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

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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 three core therapeutic areas: central nervous system ("CNS"), pain and oncology. 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
780-person U.S. field sales and sales management teams by area. We have a sales and marketing organization numbering approximately 400 persons that supports our presence in nearly
20 European countries, including France, the United Kingdom, Germany, Italy and Spain, and certain countries in Africa and the Middle East. For the year ended December 31, 2008, our
total revenues and net income were $2.0 billion and $222.5 million, respectively. Our revenues from U.S. and European operations are detailed in Note 18 to our Consolidated
Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

Our
most significant product is PROVIGIL® (modafinil) Tablets [C-IV], which comprised 51% of our total consolidated net sales for the year
ended December 31, 2008, of which 94% was in the U.S. market. For the year ended December 31, 2008, consolidated net sales of PROVIGIL increased 16% over the year ended
December 31, 2007. PROVIGIL is indicated for the treatment of excessive sleepiness associated with narcolepsy, obstructive sleep apnea/hypopnea syndrome ("OSA/HS") and shift work sleep disorder
("SWSD"). 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. Under the co-promotion agreement, TPNA provided 500 Takeda sales representatives to promote PROVIGIL to primary care
physicians and other appropriate health care professionals in the United States. As a result of the termination of the co-promotion agreement, we have supplemented our existing sales teams
with an additional 270 sales representatives who began promoting PROVIGIL and AMRIX in the first quarter of 2009. We accomplished this through a combination of new hires and use of a contract sales
force. In total, we currently have 730 sales representatives promoting PROVIGIL. In June 2007, we secured final U.S. Food and Drug Administration (the "FDA") approval of NUVIGIL®
(armodafinil) Tablets [C-IV] for the same indications as PROVIGIL. NUVIGIL is a single-isomer formulation of modafinil, the active ingredient in PROVIGIL. 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 currently intend to launch NUVIGIL in the third quarter of 2009. We expect that upon the launch of NUVIGIL, our marketing efforts with respect to PROVIGIL will decline substantially and will shift
to NUVIGIL. Currently, we do not believe 2009 CNS net sales will be adversely impacted as compared to 2008 by the decline in PROVIGIL marketing efforts associated with the launch of NUVIGIL.

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 22% of our total consolidated net sales for the year
ended December 31, 2008, of which 87% was in the U.S. market. In October 2006, we launched in the United States FENTORA, our next-generation proprietary pain product. 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

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November
2007, we submitted a supplemental new drug application ("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, which we expect to file by the end of the first quarter of 2009. In the December 2008
supplement request letter, the FDA also provided guidance for the design and implementation of the REMS Program to mitigate serious risks associated with the use of FENTORA. To address the FDA's
requests in its September 2008 and December 2008 letters, we plan to implement as part of the REMS Program a first-of-its-kind initiative designed to minimize the
potential risk of overdose from an opioid through appropriate patient selection. 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. 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 throughout 2009.

In
March 2008, we received FDA approval of TREANDA® (bendamustine hydrochloride) for the treatment of patients with chronic lymphocytic leukemia ("CLL") and we
launched the product in April 2008. 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. The FDA has granted an orphan drug designation for the CLL
indication for TREANDA.

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 February 2008, we entered into an agreement with a
contract sales organization to add 120 sales representatives to our field sales team promoting AMRIX. As described above, through an expansion of our contract sales force and through new hires, we
have added an additional 270 sales representatives who began promoting PROVIGIL and AMRIX in the first quarter of 2009. In total, we currently have 840 sales representatives promoting AMRIX. In June
2008, the U.S. Patent and Trademark Office issued a pharmaceutical formulation patent for AMRIX, which expires in February 2025.

In
January 2009, we entered into an option agreement (the "Ception Option Agreement") with Ception Therapeutics, Inc. 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 Option Period (as
defined below). As consideration for the Ception Option, we paid $50 million to Ception and also paid certain Ception stockholders an aggregate of $50 million. We, in our sole
discretion, may exercise the Ception Option by providing written notice to Ception at any time during the period from January 13, 2009 to and including the date that (i) is fifteen
business days after our receipt of the final study report for Ception's ongoing Phase IIb/III clinical trial for reslizumab in pediatric patients with eosinophilic esophagitis
("Res-5-0002 EE Study") indicating that the co-primary endpoints have been achieved or (ii) is thirty business days after our receipt of the final study
report for Res-5-0002 EE Study indicating that the co-primary endpoints have not been achieved (the "Option Period"). We anticipate that the
Res-5-0002 EE Study will be completed in the fourth quarter of 2009. If the data are positive and we

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exercise
the Ception Option, we intend to file a Biologics License Application for reslizumab with the FDA in 2010. If we exercise the Ception Option, we have agreed to pay a total of
$250 million 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 2008, we paid a $25 million non-refundable fee to Ception for exclusive rights to negotiate the Ception Option. This payment was credited
against the Ception Option Agreement payments.

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. 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 million upfront option payment upon execution and will pay a one-time $30 million license fee by early March 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 remaining term of the Phase IIb study, the Phase III studies, regulatory filings
and, assuming regulatory approval, subsequent commercialization of the product.

In
November 2008, we entered into a license and convertible note transaction with Acusphere, Inc., a specialty pharmaceutical company that develops new drugs and improved
formulations of existing drugs using its proprietary microparticle technology. In connection with the transaction, Acusphere granted us an exclusive worldwide license to all intellectual property of
Acusphere relating to celecoxib to develop and market celecoxib for all current and future indications. In connection with this license, we paid Acusphere an upfront fee of $5 million and
agreed to pay a $15 million milestone upon FDA approval of the first new drug application prepared by us with respect to celecoxib for any indication, as well as royalties on net sales. In
addition, we purchased a $15 million senior secured three-year convertible note (the "Acusphere Note") from Acusphere, secured by substantially all the assets of Acusphere
(including Acusphere's intellectual property). The Acusphere Note is convertible at our option at any time prior to November 3, 2009 into either (i) a number of shares of Acusphere
common stock at least equal to 51% of Acusphere's outstanding common stock on a fully-diluted basis on the date of conversion of the Acusphere Note, (ii) an exclusive license to all
intellectual property of Acusphere relating to Imagify (perflubutane polymer microspheres) to use, distribute and sell Imagify for all current and future indications worldwide excluding
those European countries subject to Acusphere's agreement with Nycomed Danmark ApS, or (iii) a $15 million credit against the future milestone payment under the celecoxib license
agreement. In December 2008, an FDA Advisory Committee voted not to recommend approval of Acusphere's new drug application for Imagify. 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. 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 regarding this transaction.

In
November 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® (naltrexone for extended-release injectable suspension) in the United States. The Termination Agreement is intended to reduce our
cost structure and enhance competitiveness. 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 of $12.2 million, consisting of a termination

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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. These pretax charges have been recognized in the fourth
quarter of 2008.

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.

We
have significant discovery research programs focused on developing therapeutics to treat neurological disorders and 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 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.

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 each of
Teva Pharmaceuticals USA, Inc., Mylan Pharmaceuticals Inc., Ranbaxy Laboratories Limited and Barr; in August 2006, we entered into a settlement agreement with Carlsbad
Technology, Inc. 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.

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, 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 agreed to purchase minimum amounts of modafinil through 2012, with remaining aggregate
purchase commitments totaling $57.8 million as of December 31, 2008. Based on our current assessment, we have recorded a reserve of $26.0 million for purchase commitments for
modafinil raw materials not

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expected
to be utilized. See Note 7 to our Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for additional
information.

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, 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. For more information concerning these settlements,
see "Central Nervous System DisordersModafinil ProductsPROVIGIL Patent Litigation and Settlements" below.

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 LABS INC., filed lawsuits in U.S. District Court in Delaware against Watson and Barr for
infringement of these patents. Under the provisions of the Hatch-Waxman Act, the filing of these lawsuits stays any FDA approval of each ANDA until the earlier 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
Pharmaceuticals, Inc. and Barr Laboratories, Inc., 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. Under the provisions of the Hatch-Waxman Act, the filing of these lawsuits stays any FDA approval of each ANDA until the earlier 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. 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.

In
early November 2007, we announced that we had reached an agreement in principle with the U.S. Attorney's Office ("USAO") in Philadelphia and the DOJ with respect to the USAO
investigation

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that
began in September 2004. In September 2008, to finalize our previously announced agreement in principle, we entered into a settlement agreement (the "Settlement Agreement") with the DOJ, the
USAO, the Office of Inspector General of the Department of Health and Human Services ("OIG"), TRICARE Management Activity, the U.S. Office of Personnel Management (collectively, the "United States")
and the relators identified in the Settlement Agreement (the "Relators") 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® (tiagabine hydrochloride) from January 2, 2001 through February 18, 2005 (the "Claims"). As part of the
Settlement Agreement we agreed to pay a total of $375 million (the "Payment") plus interest of $11.3 million. We also agreed to pay the Relators' attorneys' fees of $0.6 million.
Pursuant to the Settlement Agreement, the United States and the Relators released us from all Claims and the United States 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), of which $40 million applied to a criminal fine and $10 million applied to satisfy the forfeiture obligation. All of the payments
described above were made in the fourth quarter of 2008.

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 also announced that we had 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 agreed to pay a total of $6.15 million to Connecticut, of which $3.8 million will fund Connecticut Department of Public Health cancer initiatives
and $0.2 million will fund a state electronic prescription monitoring program; and (ii) Connecticut released us from any claim relating to the promotional practices that were the subject
of Connecticut's investigation. On the same date 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 agreed to pay a total of $0.7 million to Massachusetts, of which $0.45 million will fund Massachusetts cancer initiatives and benefit consumers in Massachusetts; and
(ii) Massachusetts released us from any claim relating to the promotional practices that were the subject of Massachusetts' investigation.



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 and Hong Kong. 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,

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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 products, two of which are currently marketed: PROVIGIL, for
improving wakefulness in patients with excessive daytime sleepiness associated with narcolepsy, OSA/HS and SWSD and GABITRIL, for use as adjunctive therapy in the treatment of partial seizures in
epileptic patients. NUVIGIL is approved by the FDA for the same labeled indications as PROVIGIL and we currently are planning to launch the product in the third quarter of 2009.

Modafinil Products



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.



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 FDA approval to market NUVIGIL with the same labeled indications as PROVIGIL. We currently are planning to transition our wakefulness
franchise to NUVIGIL in the third quarter of 2009, prior to the April 2012 license effectiveness dates under the generic settlement agreements related to PROVIGIL. In clinical studies, NUVIGIL was
generally well-tolerated. The most common side effects were mild to moderate in intensity and included nausea, headaches, dizziness, diarrhea, decreased appetite and upset stomach.

We
are conducting further clinical studies of NUVIGIL in a variety of areas. If the results of these studies are positive, our plan is to seek an expansion of the labeled indications for
NUVIGIL. To that end, we have begun clinical studies of NUVIGIL for the treatment of cancer related fatigue, "negative" symptoms in patients with schizophrenia, bi-polar depression and
excessive sleepiness associated with

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jet
lag disorder and with traumatic brain injury. To support a possible additional promotional claim, we have also initiated a clinical study of NUVIGIL for the treatment of obstructive sleep apnea
and co-morbid depression.



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 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 next
three years.

Under
the co-promotion agreement, TPNA provided 500 Takeda sales representatives to promote PROVIGIL to primary care physicians and other appropriate health care
professionals in the United States. As a result of the termination of the co-promotion agreement, we have supplemented our existing sales teams with an additional 270 sales representatives
who began promoting PROVIGIL and AMRIX in the first quarter of 2009. We accomplished this through a combination of new hires and use of a contract sales force. In total, we currently have 730 sales
representatives promoting PROVIGIL.



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% of patients that use CPAP
continue to experience excessive sleepiness, for which PROVIGIL and, once launched, 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.



We own various U.S. and foreign patent rights that expire between 2014 and 2015 and cover pharmaceutical compositions and uses of
modafinil, specifically, certain particle sizes of modafinil contained in the pharmaceutical composition 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 or product formulation that avoids infringement of these patents.

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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.



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. 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, 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.

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, 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 agreed to purchase minimum amounts of modafinil through 2012, with remaining aggregate
purchase commitments totaling $57.8 million as of December 31, 2008. Based on our current assessment, we have recorded a reserve of $26.0 million for purchase commitments for
modafinil raw materials not expected to be utilized. See Note 7 to our Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on
Form 10-K for additional information.

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, 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

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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 U.S. District Court for the Eastern District of Pennsylvania, 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 filed by an indirect purchaser of PROVIGIL was filed in September 2007. The plaintiffs in
all of these actions are seeking monetary damages and/or equitable relief. We moved to dismiss the class action complaints in November 2006 and those motions are still pending.

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 U.S. District Court for the
Eastern District of Pennsylvania, 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 still pending. 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 we intend to initiate a patent infringement lawsuit against Apotex. We
believe that the private antitrust complaints described in the preceding paragraph and the Apotex antitrust complaint 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
November 2005 and March 2006, we received notice that Caraco Pharmaceutical Laboratories, Ltd. 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 against either Caraco or Apotex as of the filing date of this report, although Apotex
has filed suit against us, as described above. In early August 2008, we received notice that 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 as of the filing date of this report.



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

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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 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

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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. In February 2008, we entered into an agreement with a contract sales organization to add 120 sales representatives to our field sales team promoting AMRIX. As described above, through an
expansion of our contract sales force and through new hires, we have added an additional 270 sales representatives who began promoting PROVIGIL and AMRIX in the first quarter of 2009. In total, we
currently have 840 sales representatives promoting AMRIX. 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 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 on studying FENTORA in opioid-tolerant patients with breakthrough pain associated with other conditions, including neuropathic pain and back pain.
In October 2006, January 2007 and August 2007, we announced positive data from three Phase III clinical trials of FENTORA and in November 2007 we submitted a supplemental new drug application
(an "sNDA") to the FDA seeking approval to market FENTORA for the management of breakthrough pain in opioid-tolerant patients with chronic pain conditions. The FDA held an Advisory Committee meeting
on May 6, 2008 to discuss the FENTORA sNDA. At that meeting, the Advisory Committee voted not to recommend approval of the FENTORA sNDA. On September 15, 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, which we expect to file with the FDA
by the end of the first quarter of 2009. In the December 2008 supplement request letter, the FDA also provided guidance for the design and implementation of the REMS Program to mitigate serious risks
associated with the use of FENTORA. To address the FDA's requests in its September 2008 and December 2008 letters, we plan to implement as part of the REMS Program a
first-of-its-kind initiative designed to minimize the potential risk of overdose from an opioid through appropriate patient selection. We believe 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
early 2009, we received positive results from an interim analysis of a Phase 3 clinical trial comparing the onset of breakthrough pain relief between FENTORA and
immediate-release oxycodone. Our assessment showed that FENTORA met the primary endpoint of the trial with statistical significance. With these results, we determined to end the study earlier than
scheduled. Evaluation of secondary endpoints will continue. Data from this study will be presented at a later medical meeting.

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

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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% adverse events were nausea, vomiting, back pain, dizziness, headache, and somnolence. Application site adverse events were reported in 12% 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 Program for ACTIQ and generic OTFC. We are preparing a REMS Program to meet the FDA's requirements and expect to file with the FDA by the
end of the first quarter of 2009. We anticipate initiating a REMS Program for ACTIQ and for generic OTFC upon receipt of approval from the FDA.

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. Since then, ACTIQ sales have been
meaningfully eroded by generic OTFC products sold by Barr and by us through Watson and by our launch of FENTORA, and we expect this erosion will continue throughout 2009.

Under
our agreement with Barr, we also agreed to sell to Barr generic OTFC for resale in the United States until the earlier of such time that Barr is able to gain FDA approval of its
ANDA or September 2009. Barr has invoked this supply option and we have been manufacturing generic OTFC for Barr since the launch of the product in September 2006. Under the agreement, we are
responsible for delivering bulk units to Barr and Barr is responsible for all packaging and labeling of the product.



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. We have an exclusive North American license to
this patent 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, method of treatment and manufacturing for
FENTORA expiring between 2019 and 2024. Upon FDA approval for this product, we also received a three-year period of marketing exclusivity that extends until September 2009. We also hold
rights to the FENTORA trademark.

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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.



In October 2008, Cephalon and Eurand, Inc. ("Eurand"), received Paragraph IV certification letters relating to ANDAs
submitted to the FDA by Mylan Pharmaceuticals, Inc. and Barr Laboratories, Inc., 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. Under the provisions of the Hatch-Waxman Act, the filing of these lawsuits stays any FDA approval of each ANDA until the earlier 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 LABS, filed lawsuits in U.S. District Court in Delaware
against Watson and Barr for infringement of these patents. Under the provisions of the Hatch-Waxman Act, the filing of these lawsuits stays any FDA approval of each ANDA until the earlier 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.

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:    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, EFFENTORA for our sale in certain countries in Europe, as well as generic OTFC bulk units for Barr.

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 supply product to Barr or to produce our fentanyl-based products. If we are unable to provide product to Barr, it is possible that either
Barr or the FTC could claim that such a failure would constitute a breach of our agreements with these parties.



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.

ACTIQ/FENTORA:    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 and we expect this erosion will continue throughout 2009.

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In
addition, sales of our own generic OTFC could be significantly impacted by the entrance into the market of additional generic OTFC products, which could occur at any time.

ONCOLOGY

Our U.S. oncology portfolio includes two marketed products and one product candidate to treat patients with hematologic cancers:
TREANDA, a bi-functional hybrid cytotoxic; TRISENOX®, an intravenous arsenic-based targeted therapy currently marketed in the U.S., as well as in Europe, and
CEP-701 (lestaurtinib), an oral small molecule tyrosine kinase inhibitor. 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. 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.

In
2009, we plan to commence the following clinical studies for TREANDA: a Phase III clinical study for the treatment of front-line NHL, a Phase II clinical study for the
treatment of CLL in combination with rituximab and a Phase I/II clinical study for the treatment of multiple myeloma in combination with Velcade®.



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 hydrochloride. We also hold rights to the TREANDA trademark.

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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.



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 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 are
continuing to investigate uses of TRISENOX, as a single agent or in combination with other treatments, to treat APL and other forms of hematologic cancers.



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

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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 commercial supplies 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.

CEP-701

CEP-701
is under development as a treatment for FLT-3-mutated AML, a hematologic cancer characterized by uncontrolled
growth of myeloid cells of the blood and bone marrow and the blockage of the production of normal cells, resulting in a deficiency of red cells, platelets and normal white cells. According to the
American Cancer Society, an estimated 13,000 people in the United States will be diagnosed with AML each year and approximately 9,000 people will die from AML. Approximately 25 to 30% of AML patients
have a FLT-3 genetic mutation that is associated with a poorer prognosis for relapse and survival.

Our
researchers, with our collaborators, found that in a subset of patients, their AML is caused by a mutation in a kinase called FLT-3. Normally, FLT-3 is
involved in the growth and maturation of healthy blood cells. In AML patients with FLT-3 mutations, the cell signaling pathways promote uncontrolled cell growth. CEP-701 has
been shown to block the signaling ability of the mutant FLT-3 kinase in preclinical studies. We are currently conducting a Phase II/III study of approximately 220 patients with AML
who bear a FLT-3 activating mutation at first relapse from standard induction chemotherapy. In December 2005, we announced that the preliminary data of 44 patients in this study suggest
that chemotherapy followed by the oral compound CEP-701 may offer a clinical benefit compared to chemotherapy alone. A clinical response has been achieved in all patients who showed an 85%
or greater inhibition of FLT-3 activity and baseline cellular sensitivity to CEP-701. Patients with low FLT-3-inhibitory activity or cells insensitive
to CEP-701 had a very low rate of clinical response. These data suggest that there may be the potential to predict which patients will respond positively to CEP-701.
Preliminary safety analyses indicate that CEP-701 is generally well tolerated, with only a modest increase in gastrointestinal events such as nausea and dyspepsia reported.

As
of February 2009, we have completed enrollment of patients in the Phase II/III clinical trial, who have been randomly assigned to one of two treatment arms: standard
chemotherapy alone, or chemotherapy followed two days later by a daily 80-mg orally administered dose of CEP-701, continued for up to 113 days. We anticipate completion
of this study in the third quarter of 2009.

We
are also studying CEP-701 as a treatment for myeloproliferative disorder ("MPD"). MPD consists of a group of hematologic disorders (polycythemia vera, essential
thrombocytopenia and chronic idiopathic myelofibrosis) characterized by excessive production of red blood cells by hematopoietic precursors. The clinical features of MPD include anemia, thrombosis,
hemorrhage, bone marrow fibrosis and leukemic transformation. There currently are no effective treatments for these conditions. We initiated Phase II studies of CEP-701 in patients
with MPD in late 2007.

CEP-701
is not presently indicated or approved by the FDA for the treatment of any disease.

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Assuming FDA approval, we would expect to receive a five year New Chemical Entity period of marketing exclusivity. In April 2006, the
FDA granted orphan drug designation for CEP-701 for the treatment of AML. The orphan drug designation will provide a seven-year period of marketing exclusivity for the
treatment of AML with CEP-701 from the date of final FDA marketing approval of CEP-701. We also hold rights to other patent applications directed to methods of treatment,
formulations and polymorphs for CEP-701.



If approved, CEP-701 would compete with a number of available therapeutics, particularly those that are indicated for the
treatment of hematologic cancers. We understand that Novartis and Millennium Pharmaceuticals (Takeda Oncology Company) are each developing drugs with a similar mechanism of action.

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, 2008, aggregate net sales outside the United States accounted for 19% of our total consolidated net sales. In 2008, our largest products in terms of net product sales outside the
United States are shown in the table below. Together, these products accounted for 81% of our total European segment net sales and 16% of our total consolidated net sales for the year ended
December 31, 2008.

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, SpainDILZEM (diltiazem)

Angina and mild to moderate hypertension

UK, IrelandMYOCET (liposomal doxorubicin)

Metastatic breast cancer

France, Germany, U.K., Italy, Spain, Central Eastern European Countries, Benelux and Poland.NAXY® and MONO-NAXY® (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.


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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.

Manufacturing Operations

At our manufacturing facility in Mitry-Mory, France, we produce modafinil, which is used in the production of PROVIGIL. 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, MONO-NAXY, 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 at various stages of
clinical investigation, our discovery research and development efforts focus primarily on two therapeutic areas: disorders of the central nervous system and cancers. Our research strategy is guided by
four core principles: 1) balancing risk; 2) utilizing multiple technologies within a disease focus; 3) establishing strategic alliances to complement internal expertise; and
4) innovative research and development that focuses on unmet medical needs.

In
the area of CNS disorders, "neurodegenerative disorders" (e.g., Alzheimer's and Parkinson's diseases) remain significant areas of interest for us; however, we are continuing to
explore new therapeutic approaches in sleep medicine, psychiatry, attention-deficit/hyperactivity disorder and cognition with the goal of diversifying our pre-clinical CNS pipeline. In
oncology, our efforts grew from

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our
early, pioneering research in understanding pathways involved in cell survival and death. Cancers are characterized by the uncontrolled survival and proliferation of cells that form tumors. Our
research has focused on kinases and proteases, which are key intracellular messenger systems integral to cellular integrity, cellular proliferation and survival. We have developed a proprietary
library of novel, potent, small, orally-active synthetic kinase and protease inhibitors that specifically target key kinases/proteases involved in tumor growth, the inhibition of which can promote
tumor regression. Furthermore, our efforts in understanding fundamental DNA damage and repair mechanisms necessary for cell survival and differentiation have allowed us to discover novel compounds
that, when combined with standard chemo-or radiotherapy, may provide better, more durable tumor regression without exacerbating side effects.

For
the years ended December 31, 2008, 2007 and 2006, our research and development costs were $362.2 million, $369.1 million and $424.2 million, respectively.
Additionally, for 2008 and 2006, we incurred charges associated with acquired in-process research and development of $42.0 million and $5.0 million, respectively.

CNS Disorders

Our pioneering research programs in neurodegenerative diseases have been the foundation from which we have grown our overall research
strategies. Discovery research in this area is relatively high risk given how little is known about disease etiology (molecular target
selection) and progression (prolonged clinical investigation). As such, we have utilized our experience with products in sleep medicine, pain and psychiatry to complement and balance our ongoing CNS
discovery efforts targeting unique G-Protein Coupled Receptors ("GPCR"), the targets through which many CNS drugs act. Our research is focused on discovering the next generation of
medicines to treat psychiatric, cognitive and sleep disorders and pain. CEP-26401, a histamine H3 receptor antagonist/inverse agonist, is 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 expect to file an IND for CEP-26401 in the first quarter of
2009.

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.

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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. We have shown that
inhibiting both kinases results in much greater tumor regression than would be observed with either one individually.

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 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.

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.

In
addition to AML and the oncogenic role of FLT-3 mutations, activating mutations in another kinase known as JAK-2 has been implicated as the causative event in
MPD. MPD consists of a group of hematologic disorders (polycythemia vera, essential thrombocytopenia and chronic idiopathic myelofibrosis) characterized by excessive production of red blood cells by
hematopoietic precursors. The clinical features of MPD include anemia, thrombosis, hemorrhage, bone marrow fibrosis and leukemic transformation. There currently are no effective treatments for these
conditions. Our scientists have discovered that the multikinase inhibitor, CEP-701, is a potent inhibitor of the mutated JAK-2 kinase. CEP-701 has demonstrated
anti-tumor effects in pre-clinical models of MPD and we currently are studying this molecule in a Phase II clinical trial for the treatment of MPD.

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In
addition, 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 I clinical investigation.

Neurotrophic Factors

Under a collaboration with Chiron Corporation that was terminated in February 2001, we conducted clinical trials using
IGF-I, also known as MYOTROPHIN® (mecasermin) Injection, in patients in North America and Europe
suffering from amyotrophic lateral sclerosis ("ALS"). ALS is a fatal disorder of the nervous system characterized by the chronic, progressive degeneration of motor neurons, which leads to muscle
weakness, muscle atrophy and, eventually, to the patient's death. In February 1997, we submitted an NDA to the FDA for approval to market MYOTROPHIN in the United States for the treatment of ALS. In
May 1998, the FDA issued a letter stating that the NDA was "potentially approvable," under certain conditions. We do not believe those conditions can be met without conducting an additional
Phase III clinical study, and we have no plans to conduct such a study at this time. Furthermore, we do not have a source for finished commercial supply of MYOTROPHIN in the event regulatory
approval is obtained. Certain unaffiliated physicians commenced a study of MYOTROPHIN in mid-2003 that was completed in 2007. The results from that study did not show a statistically
significant difference between patients taking MYOTROPHIN and placebo.

Other Discovery Research Efforts

One of the key components of our discovery research strategy is the establishment of strategic alliances to complement our internal
scientific expertise and to provide a more diverse therapeutic breadth and depth to our research efforts. For example, we have collaborations with Euroscreen s.a. to discover and develop small
molecule therapeutics targeting GPCRs; Ligand Pharmaceuticals Incorporated (formerly Pharmacopeia Drug Discovery, Inc.) to expand and complement our internal medicinal chemistry efforts;
Psychogenics Inc. to broaden our pharmacological expertise; and AMBIT Biosciences Inc. to utilize AMBIT's technology in interrogating the kinome, that portion of the human genome that
codes for protein kinases. In addition to these, we sponsor a number of external research collaborations with academic laboratories throughout the world.

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 3.1% of our total
consolidated revenue for the year ended December 31, 2008. 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

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formerly
performed in Salt Lake City. The transition of manufacturing activities and the closure of the Eden Prairie facility are expected to be completed within two to three years.

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 the third quarter of 2007, the U.S. Patent and Trademark Office (the "PTO") notified us that, in
response to reexamination 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 with the PTO in the fourth quarter of 2007 regarding one patent and in the second quarter of 2008 regarding the second patent. The appeals are pending.

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 71% of our total consolidated gross sales for the year ended December 31, 2008.

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COMPETITION

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

As
discussed in more detail above, our products face competition in the marketplace. We cannot be sure that we will be able to demonstrate the potential advantages of our products to
prescribing physicians and their patients on an absolute basis and/or in comparison to other presently marketed products. We also need to demonstrate to physicians, patients and third party 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, absorption, biodistribution, metabolism, excretion and clinical pharmacology, 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 dose tolerance and the optimal dose range, and to gather additional information relating to safety and potential

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

After
regulatory approval has been obtained, further studies, including Phase 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

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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. For example, the FDA has designated CEP-701 as an orphan drug for use in treating AML, because this disease currently affects fewer than 200,000
individuals in the United States. Under the Orphan Drug Act, a manufacturer of a designated orphan product can seek certain tax benefits, and the holder of the first FDA approval of a designated
orphan product will be granted a seven-year period of marketing exclusivity for that product for the orphan indication. While the marketing exclusivity of an orphan drug would prevent
other sponsors from obtaining approval of the same drug compound for the same indication unless the subsequent sponsors could demonstrate clinical superiority or a market shortage occurs, it would not
prevent other sponsors from obtaining approval of the same compound for other indications or the use of other types of drugs for the same use as the orphan drug. Orphan drug designation generally does
not confer any special or preferential treatment in the regulatory review process. The U.S. Congress has considered, and may consider in the future, legislation that would restrict the duration or
scope of the market exclusivity of
an orphan drug and, thus, we cannot be sure that the benefits of the existing statute will remain in effect. Additionally, we cannot be sure that other governmental regulations applicable to our
products will not change.

In
addition to the market exclusivity period under the Orphan Drug Act, the U.S. Drug Price Competition and Patent Term Restoration Act of 1984 permits a sponsor to 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

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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 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 15 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, 2008, we had a total of 2,780 full-time employees, of which 1,984 were employed in the United
States and 796 were located primarily at our various facilities in Europe. We believe that we have been successful in attracting skilled and experienced personnel; however, competition for such
personnel is intense.

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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 our three largest products, and our future success will depend on the continued acceptance of PROVIGIL and FENTORA, the
growth of AMRIX and TREANDA and the ability to successfully launch NUVIGIL.

For the year ended December 31, 2008, approximately 51%, 14% and 8% of our total consolidated net sales were derived from sales
of PROVIGIL, ACTIQ (including our generic OTFC product) and FENTORA, respectively. With respect to PROVIGIL, we cannot be certain that it will continue to be accepted in its market. With respect to
NUVIGIL, which we currently intend to launch in the third quarter of 2009, we cannot be sure that our sales and marketing efforts will be successful or that it will be accepted in the market. We
expect that upon the launch of NUVIGIL, our marketing efforts with respect to PROVIGIL will decline substantially and will shift to NUVIGIL. While currently we do not believe 2009 CNS net sales will
be adversely impacted as compared to 2008, it is possible that CNS net sales could decrease in the future by the decline in PROVIGIL marketing efforts associated with the launch of NUVIGIL. In
September 2006, Barr entered the market with generic OTFC. Since that time, we have experienced meaningful erosion of branded ACTIQ sales in the United States and we expect this erosion will continue
throughout 2009. In addition, sales of our own generic OTFC product could be significantly impacted by the entrance into the market of additional generic OTFC products, which could occur at any time.
The FDA has notified us that we must implement a Risk Evaluation and Mitigation Strategy (a "REMS Program") for ACTIQ and generic OTFC. We are preparing a REMS Program to meet the FDA's requirements
and expect to file with the FDA by the end of the first quarter of 2009. It is possible that prescriptions of these products could be adversely impacted.

To
counter the impact from existing and potential generic competition, we will need FENTORA, our next-generation pain product launched in October 2006, to continue to be
accepted in the market. In September 2007, we issued a letter to healthcare professionals to clarify the appropriate patient selection, dosage and administration for FENTORA, following reports of
serious adverse events in connection with the use of the product. We also expect to implement, upon the receipt of FDA approval, a REMS Program for FENTORA to mitigate serious risks associated with
the use of FENTORA. We plan to file our FENTORA REMS Program with the FDA by the end of the first quarter of 2009. It is possible that this program could have a negative impact on FENTORA prescription
growth.

For
sales to grow over the next several years, we will need our two newest products, 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, NUVIGIL (once launched), FENTORA, and ACTIQ:



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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 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 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 our supplemental new drug application ("sNDA") for an expanded label for FENTORA for the management of breakthrough pain in opioid-tolerant patients with chronic pain conditions.
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 REMS Program with respect to FENTORA, which we expect to file with the FDA
by the end of the first quarter of 2009. In the December 2008 supplement request letter, the FDA also provided guidance for the design and implementation of the REMS Program to mitigate serious risks
associated with the use of FENTORA. To address the FDA's requests in its September 2008 and December 2008 letters, we plan to implement as part of the REMS Program a
first-of-its-kind initiative designed to minimize the potential risk of overdose from an opioid through appropriate patient selection. We believe that, by working
with the FDA, it 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.

There
can be no assurance that our applications to market these and other product candidates will be submitted or reviewed in a timely manner or that the FDA will approve the product
candidates on the basis of the data contained in the applications. Even if approval is granted to market 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 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

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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.

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.

PROVIGIL / NUVIGIL

The U.S. composition of matter patent for modafinil expired in 2001. We own U.S. and foreign patent rights that expire between 2014 and
2015 and cover pharmaceutical compositions and uses of modafinil, specifically, certain particle sizes of modafinil contained in the pharmaceutical composition of PROVIGIL. 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. Ultimately, these patents might be found invalid as the result of a
challenge by a third party, or a potential competitor could develop a competing product or product formulation that avoids infringement of these patents. While we intend to vigorously defend the
validity of these patents and prevent infringement, these efforts will be both expensive and time consuming and, ultimately, may not be successful. The loss of patent protection for our
modafinil-based products would significantly and negatively impact future sales.

As
of the filing date of this Annual Report on Form 10-K, we are aware of seven ANDAs on file with the FDA for pharmaceutical products containing modafinil. Each of
these ANDAs contains a Paragraph IV certification in which the ANDA applicant certified that the U.S. particle-size modafinil patent covering PROVIGIL either is invalid or will not
be infringed by the ANDA product. 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 ANDAs filed by each of these companies with the FDA seeking approval to market a generic form of modafinil.
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. 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

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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 FTC and the Antitrust Division of the DOJ as required by the Medicare Modernization Act. The FTC conducted an investigation of each of the
PROVIGIL settlements and, in February 2008, filed suit against us in 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, 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 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 U.S. District Court for the Eastern District of Pennsylvania, 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. All but one of 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 filed by an indirect purchaser of PROVIGIL was filed in September 2007. The plaintiffs in all of these actions are seeking monetary damages and/or equitable relief. We
moved to dismiss the class action complaints in November 2006.

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 U.S. District Court for the
Eastern District of Pennsylvania, 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. 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 we intend to initiate a patent infringement lawsuit against Apotex. We
believe that the private antitrust complaints described in the preceding paragraph and the Apotex antitrust complaint are without merit.

In
November 2005 and March 2006, we received notice that Caraco Pharmaceutical Laboratories, Ltd. and Apotex, Inc., 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 patent infringement lawsuits against either Caraco or Apotex as of the filing date of this report,
although Apotex has filed suit against us, as described above. In early August 2008, we received notice that 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 as of the filing date of this report.

While
we intend to vigorously defend ourselves, our intellectual property 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.

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DURASOLV

In the third quarter of 2007, the 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 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. The appeals are pending. While we intend to vigorously defend these patents, these efforts,
ultimately, may not be successful. The invalidity of the DURASOLV patents could have a material adverse impact on revenues from our drug delivery business.

FENTORA

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 LABS, filed lawsuits in U.S. District Court in Delaware
against Watson and Barr for infringement of these patents. Under the provisions of the Hatch-Waxman Act, the filing of these lawsuits stays any FDA approval of each ANDA until the earlier 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. While we intend to vigorously defend
the FENTORA intellectual property rights, these efforts, ultimately, may not be successful.

AMRIX

In October 2008, Cephalon and Eurand, Inc. ("Eurand"), received Paragraph IV certification letters relating to ANDAs
submitted to the FDA by Mylan Pharmaceuticals, Inc. and Barr Laboratories, Inc., 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. Under the provisions of the Hatch-Waxman Act, the filing of these lawsuits stays any FDA approval of each ANDA until the
earlier 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. While we intend to
vigorously defend the AMRIX intellectual property rights, these efforts, ultimately, may not be successful.

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

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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
early November 2007, we announced that we had reached an agreement in principle with the U.S. Attorney's Office ("USAO") in Philadelphia and the DOJ with respect to the USAO
investigation that began in September 2004. In September 2008, to finalize our previously announced agreement in principle, we entered into a settlement agreement (the "Settlement Agreement") with the
DOJ, the USAO, the Office of Inspector General of the Department of Health and Human Services ("OIG"), TRICARE Management Activity, the U.S. Office of Personnel Management (collectively, the "United
States") and the relators identified in the Settlement Agreement (the "Relators") 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 agreed to pay a
total of $375 million (the "Payment") plus interest of $11.3 million. We also agreed to pay the Relators' attorneys' fees of $0.6 million. Pursuant to the Settlement Agreement,
the United States and the Relators released us from all Claims and the United States 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), of which $40 million applied to a criminal fine and $10 million applied to satisfy the forfeiture obligation. All of the payments described above were made in the fourth
quarter of 2008.

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

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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 also announced that we had 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 agreed to pay a total of $6.15 million to Connecticut, of which $3.8 million will fund Connecticut Department of Public Health cancer initiatives
and $0.2 million will fund a state electronic prescription monitoring program; and (ii) Connecticut released us from any claim relating to the promotional practices that were the subject
of Connecticut's investigation. On the same date 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 agreed to pay a total of $0.7 million to Massachusetts, of which $0.45 million will fund Massachusetts cancer initiatives and benefit consumers in Massachusetts; and
(ii) Massachusetts released us from any claim relating to the promotional practices that were the subject of Massachusetts' investigation.

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.

In
late 2007, we were served with a series of putative class action complaints filed on behalf of entities that claim to have purchased 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 2007, the plaintiffs filed a consolidated and amended complaint that also
allege violations of RICO and conspiracy to violate RICO. 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 purchased GABITRIL and PROVIGIL for uses outside of 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 complaint 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.

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In
March 2007 and March 2008, we received letters requesting information related to ACTIQ and FENTORA from Congressman Henry A. Waxman in his capacity as Chairman of the House Committee
on Oversight and Government Reform. The letters request information concerning our sales, marketing and research practices for ACTIQ and FENTORA, among other things. We have cooperated with these
requests and provided documents and other information to the Committee.

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 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 fentanyl citrate that is the active ingredient
in

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ACTIQ
and generic OTFC. Under our license and supply agreement with Barr, we are obligated to sell generic OTFC to Barr for its resale in the United States. Depending on sales volumes and our ability
to obtain additional quota from the DEA, we could face shortages of quota in the future that could negatively impact our ability to supply product to Barr or to produce ACTIQ or our generic OTFC
product. If we are unable to provide product to Barr, it is possible that either Barr or the FTC could claim that such a failure would constitute a breach of our agreements with these parties.

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 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 and PROVIGIL, which contain controlled substances.

These
events, among others, could result in adverse publicity that harms the commercial prospects of our products or lead to additional regulatory controls that could limit the
circumstances under which the product is prescribed or even lead to the withdrawal of the product from the market. In particular, 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

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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.

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

A number of analysts and investors who follow our stock have developed models to attempt to forecast future product sales and expenses,
and have established earnings expectations based upon those models. These models, in turn, are based in part on estimates of projected revenue and earnings that we disclose publicly. Forecasting
future revenues is difficult, especially when we only have a few years of commercial history and when the level of market acceptance of our products is changing rapidly. 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 that are below our stock price as of December 31,
2008. As a result, all of our convertible notes have been classified as

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current
liabilities on our consolidated balance sheet at December 31, 2008. 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:



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:



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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. 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, when launched, 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

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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. 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. 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 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.

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

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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 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 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.

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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, 2008 through February 17, 2009 our common stock traded at a high price of $81.35 and a low price of $56.20. Negative announcements, including, among
others:



could
trigger significant declines in the price of our common stock. In addition, external events, such as news concerning economic conditions, our competitors or our customers, changes in government
regulations impacting the biotechnology or pharmaceutical industries or the movement of capital into 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, 2008, 19% of our revenues

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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.

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 71% of our total consolidated gross sales for the year ended December 31, 2008. 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 15 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

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do
not believe the loss of one individual would materially harm our business, our business might be harmed by the loss of the services of multiple existing personnel, as well as the failure to recruit
additional key scientific, technical and managerial personnel in a timely manner. Much of the know-how we have developed resides in our scientific and technical personnel and is not
readily transferable to other personnel. While we have employment agreements with our key executives, we do not ordinarily enter into employment agreements with our other key scientific, technical and
managerial employees. We do not maintain "key man" life insurance on any of our employees.

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

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

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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 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 within two to three years.

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 major European countries. 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.

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

ITEM 3.    LEGAL PROCEEDINGS

The information set forth in Note 15 of the Consolidated Financial Statements included in Part II, Item 8 of this
Annual Report on Form 10-K is incorporated herein by reference.

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 2008.

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.


55

Chairman and Chief Executive OfficerValli F. Baldassano.


48

Executive Vice President and Chief Compliance OfficerJ. Kevin Buchi


53

Executive Vice President and Chief Financial OfficerPeter E. Grebow, Ph.D.


62

Executive Vice President, Worldwide Technical OperationsGerald J. Pappert


45

Executive Vice President, General Counsel and SecretaryRobert P. Roche, Jr.


53

Executive Vice President, Worldwide Pharmaceutical OperationsLesley Russell, MB.Ch.B., MRCP.


48

Executive Vice President and Chief Medical OfficerCarl A. Savini


59

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


58

Executive Vice President and Chief Scientific Officer


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

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

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.

Mr. Buchi
joined Cephalon in March 1991 and, since February 2006, he has held the position of Executive Vice President and Chief Financial Officer. From April 1996 through January
2006, Mr. Buchi was 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 received a Ph.D. in chemistry from
the University of California, Santa Barbara.

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.

Mr. Roche
joined Cephalon in January 1995 and, since February 2005, he has served as Executive Vice President, Worldwide Pharmaceutical Operations. From November 2000 to February
2005, Mr. Roche was Senior Vice President, Pharmaceutical Operations. In June 1999, he was appointed to Senior Vice President of Sales and Marketing, and prior to that was Vice President, Sales
and Marketing. Previously, Mr. Roche served as Director and Vice President, Worldwide Strategic Product Development, for SmithKline Beecham's central nervous system and gastrointestinal
products business, and held senior marketing and management positions with that company in the Philippines, Canada and Spain. Mr. Roche serves as a member of the board of directors of LifeCell
Corporation, a publicly-

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traded
biotechnology company. Mr. Roche graduated from Colgate University and received a master of business administration degree from The Wharton School, University of Pennsylvania.

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 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 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 sale prices for the common stock as reported on the NASDAQ Global Select Market for the periods indicated below.

High

Low2008First Quarter

$
74.31

$
56.20Second Quarter


71.53


59.91Third Quarter


80.39


66.47Fourth Quarter


79.00


59.452007First Quarter

$
76.65

$
64.65Second Quarter


84.83


72.80Third Quarter


83.25


66.52Fourth Quarter


79.10


70.00


As
of February 17, 2009, there were 436 holders of record of our common stock. On February 17, 2009, the last reported sale price of our common stock as reported on the
NASDAQ Global Select Market was $75.53 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, 2008




$






November 1-30, 2008











December 1-31, 2008


92,665


74.71





Total


92,665

$
74.71








---

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 December 31, 2008, including the 1987 Stock Option Plan (which expired in 1997) (the "1987 Plan"),

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the
2004 Equity Compensation Plan (the "2004 Plan") and the 2000 Equity Compensation Plan for Employees and Key Advisors (the "2000 Plan").

Equity Compensation Plan Information

Plan Category

(a)
Number of Securities to
be Issued Upon Exercise
of Outstanding Options,
Warrants and Rights(1)

(b)
Weighted Average
Exercise Price of
Outstanding
Options, Warrants
and Rights(1)

(c)
Number of Securities
Remaining Available for
Future Issuance
(Excludes
Securities Reflected in
Column (a))(2)Equity compensation plans approved by stockholders


6,220,828
(3)
$
64.68


1,053,932Equity compensation plans not approved by stockholders(4)


1,213,692

$
63.27


155,475Total


7,434,520

$
64.45


1,209,407


---

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

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participants
with an incentive for outstanding performance. The 2000 Plan currently authorizes the 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)

On November 3, 2008, we entered into a series of agreements with Acusphere, Inc. that resulted in Acusphere issuing to us
a $15 million senior secured convertible note, convertible into, among other potential options, a controlling interest in Acusphere; we also acquired license rights to certain Acusphere
intellectual property in exchange for $5 million plus future royalty payments. On March 28, 2008 we acquired certain intellectual property from Acusphere in exchange for
$10 million. We have determined that, as a result of these transactions, Acusphere is a variable interest entity and we are the primary beneficiary. As a result, we have consolidated
Acusphere's results in accordance with FIN 46R, "Consolidation of Variable Interest Entities" ("FIN 46R"), as of November 3, 2008.

We
completed the acquisitions of AMRIX® in August 2007, the issued share capital of Zeneus Holdings Limited on December 22, 2005, substantially all assets related to
the TRISENOX® (arsenic trioxide) injection business from CTI and CTI Technologies, Inc., a wholly-owned subsidiary of CTI on July 18, 2005, outstanding capital stock of
Salmedix, Inc. on June 14, 2005 and the outstanding shares of capital stock of CIMA LABS on August 12, 2004. These acquisitions have been accounted for either as business
combinations or asset purchases.

Five-year summary of selected financial data:

Year Ended December 31,Statement of operations data

2008

As Adjusted
2007*

As Adjusted
2006*

As Adjusted
2005*

As Adjusted
2004*Sales

$
1,943,464

$
1,727,299

$
1,720,172

$
1,156,518

$
980,375Other revenues


31,090


45,339


43,897


55,374


35,050Total revenues


1,974,554


1,772,638


1,764,069


1,211,892


1,015,425Settlement reserve


7,450


425,000








Impairment charges


99,719





12,417


20,820


30,071Acquired in-process research and development


41,955





5,000


366,815


185,700Debt exchange expense








48,122





28,230Write-off of deferred debt issuance costs








13,105


27,109


Restructuring charge


8,415











Loss on sale of equipment


17,178


1,022








Income tax expense (benefit)


(20,665
)

121,882


94,419


(68,870
)

45,141Loss attributable to minority interest


21,073











Net income (loss).

$
222,548

$
(194,125
)
$
146,509

$
(172,723
)
$
(74,654
)Basic income (loss) per common share

$
3.27

$
(2.91
)
$
2.42

$
(2.98
)
$
(1.32
)Weighted average number of common shares outstanding


68,018


66,597


60,507


58,051


56,489Diluted income (loss) per common share

$
2.92

$
(2.91
)
$
2.10

$
(2.98
)
$
(1.32
)Weighted average number of common shares outstanding-assuming dilution


76,097


66,597


69,672


58,051


56,489




December 31,Balance sheet data

2008

As Adjusted
2007*

As Adjusted
2006*

As Adjusted
2005*

As Adjusted
2004*Cash, cash equivalents and investments

$
524,459

$
826,265

$
521,724

$
484,090

$
791,676Total assets


3,169,188


3,496,526


3,038,175


2,810,191


2,385,676Current portion of long-term debt


1,030,021


1,237,169


1,023,312


933,160


5,114Long-term debt (excluding current portion)


3,692


3,788


224,992


763,097


1,284,410Accumulated deficit


(411,323
)

(633,871
)

(432,578
)

(579,087
)

(406,364
)Stockholders' equity


1,502,926


1,292,324


1,302,138


603,156


818,798


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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 three core therapeutic areas: central nervous system ("CNS"), pain and oncology. 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
780-person U.S. field sales and sales management teams by area. We have a sales and marketing organization numbering approximately 400 persons that supports our presence in nearly
20 European countries, including France, the United Kingdom, Germany, Italy and Spain, and certain countries in Africa and the Middle East. For the year ended December 31, 2008, our
total revenues and net income were $2.0 billion and $222.5 million, respectively. Our revenues from U.S. and European operations are detailed in Note 18 to our Consolidated
Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

Our
most significant product is PROVIGIL® (modafinil) Tablets [C-IV], which comprised 51% of our total consolidated net sales for the year
ended December 31, 2008, of which 94% was in the U.S. market. For the year ended December 31, 2008, consolidated net sales of PROVIGIL increased 16% over the year ended
December 31, 2007. PROVIGIL is indicated for the treatment of excessive sleepiness associated with narcolepsy, obstructive sleep apnea/hypopnea syndrome ("OSA/HS") and shift work sleep disorder
("SWSD"). 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. Under the co-promotion agreement, TPNA provided 500 Takeda sales representatives to promote PROVIGIL to primary care
physicians and other appropriate health care professionals in the United States. As a result of the termination of the co-promotion agreement, we have supplemented our existing sales teams
with an additional 270 sales representatives who began promoting PROVIGIL and AMRIX in the first quarter of 2009. We accomplished this through a combination of new hires and use of a contract sales
force. In total, we currently have 730 sales representatives promoting PROVIGIL. In June 2007, we secured final U.S. Food and Drug Administration (the "FDA") approval of NUVIGIL®
(armodafinil) Tablets [C-IV] for the same indications as PROVIGIL. NUVIGIL is a single-isomer formulation of modafinil, the active ingredient in PROVIGIL. 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 currently intend to launch NUVIGIL in the third quarter of 2009. We expect that upon the launch of NUVIGIL, our marketing efforts with respect to PROVIGIL will decline substantially and will shift
to NUVIGIL. Currently, we do not believe 2009 CNS net sales will be adversely impacted as compared to 2008 by the decline in PROVIGIL marketing efforts associated with the launch of NUVIGIL.

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 22% of our total consolidated net sales for the year
ended December 31, 2008, of which 87% was in the U.S. market. In October 2006, we launched in the United States FENTORA, our next-generation proprietary pain product. FENTORA is
indicated for

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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 a supplemental new drug application ("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, which we expect to file by the end of the first quarter of 2009. In the December 2008
supplement request letter, the FDA also provided guidance for the design and implementation of the REMS Program to mitigate serious risks associated with the use of FENTORA. To address the FDA's
requests in its September 2008 and December 2008 letters, we plan to implement as part of the REMS Program a first-of-its-kind initiative designed to minimize the
potential risk of overdose from an opioid through appropriate patient selection. 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. 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 throughout 2009.

In
March 2008, we received FDA approval of TREANDA® (bendamustine hydrochloride) for the treatment of patients with chronic lymphocytic leukemia ("CLL") and we
launched the product in April 2008. 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. The FDA has granted an orphan drug designation for the CLL
indication for TREANDA.

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 each of
Teva Pharmaceuticals USA, Inc., Mylan Pharmaceuticals Inc., Ranbaxy Laboratories Limited and Barr; in August 2006, we entered into a settlement agreement with Carlsbad
Technology, Inc. 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

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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
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, 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 agreed to purchase minimum amounts of modafinil through 2012, with remaining aggregate purchase
commitments totaling $57.8 million as of December 31, 2008. Based on our current assessment, we have recorded a reserve of $26.0 million for purchase commitments for modafinil raw
materials not expected to be utilized. See Note 7 to our Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for
additional information.

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, 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.

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 LABS INC., filed lawsuits in U.S. District Court in Delaware against Watson and Barr for
infringement of these patents. Under the provisions of the Hatch-Waxman Act, the filing of these lawsuits stays any FDA approval of each ANDA until the earlier 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
Pharmaceuticals, Inc. and Barr Laboratories, Inc., 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.

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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. Under the provisions of the Hatch-Waxman Act, the filing of these
lawsuits stays any FDA approval of each ANDA until the earlier 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. 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.

In
early November 2007, we announced that we had reached an agreement in principle with the U.S. Attorney's Office ("USAO") in Philadelphia and the DOJ with respect to the USAO
investigation that began in September 2004. In September 2008, to finalize our previously announced agreement in principle, we entered into a settlement agreement (the "Settlement Agreement") with the
DOJ, the USAO, the Office of Inspector General of the Department of Health and Human Services ("OIG"), TRICARE Management Activity, the U.S. Office of Personnel Management (collectively, the "United
States") and the relators identified in the Settlement Agreement (the "Relators") 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® (tiagabine hydrochloride) from January 2, 2001 through February 18, 2005 (the "Claims"). As part of the
Settlement Agreement we agreed to pay a total of $375 million (the "Payment") plus interest of $11.3 million. We also agreed to pay the Relators' attorneys' fees of $0.6 million.
Pursuant to the Settlement Agreement, the United States and the Relators released us from all Claims and the United States 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), of which $40 million applied to a criminal fine and $10 million applied to satisfy the forfeiture obligation. All of the payments
described above were made in the fourth quarter of 2008.

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 also announced that we had 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 agreed to pay a total of $6.15 million to Connecticut, of which $3.8 million will fund Connecticut Department of Public Health cancer initiatives
and $0.2 million will fund a state electronic prescription monitoring program; and (ii) Connecticut released us from any claim relating to the promotional practices that were the subject
of Connecticut's investigation. On the same date 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 agreed to pay a total of $0.7 million to Massachusetts, of which $0.45 million will fund Massachusetts cancer initiatives and benefit consumers in Massachusetts; and
(ii) Massachusetts released us from any claim relating to the promotional practices that were the subject of Massachusetts' investigation.

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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 12 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, 2008, 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.

RECENT ACQUISITIONS

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 November 25, 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. On January 30,
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 million upfront option payment upon execution and will pay a
one-time $30 million license fee by early March 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
remaining term of the Phase IIb study, the Phase III study, regulatory filings and, assuming regulatory approval, subsequent commercialization of the product.



On November 3, 2008, we entered into a license and convertible note transaction with Acusphere, Inc., a specialty
pharmaceutical company that develops new drugs and improved formulations of existing drugs using its proprietary microparticle technology. In connection with the transaction, we received an exclusive
worldwide license from Acusphere to all intellectual property of Acusphere relating to celecoxib to develop and market celecoxib for all current and future indications. In connection with this
license, we paid Acusphere an upfront fee of $5 million and agreed to pay a $15 million milestone upon FDA approval of the first new drug application prepared by us with respect

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to
celecoxib for any indication, as well as royalties on net sales. In addition, we purchased a $15 million senior secured three-year convertible note (the "Acusphere Note") from
Acusphere, secured by substantially all the assets of Acusphere (including Acusphere's intellectual property). The Acusphere Note is convertible at our option at any time prior to November 3,
2009 into either (i) a number of shares of Acusphere common stock at least equal to 51% of Acusphere's outstanding common stock on a fully-diluted basis on the date of conversion of the
Acusphere Note, (ii) an exclusive license to all intellectual property of Acusphere relating to Imagify (perflubutane polymer microspheres) to use, distribute and sell Imagify for
all current and future indications worldwide excluding those European countries subject to Acusphere's agreement with Nycomed Danmark ApS, or (iii) a $15 million credit against the
future milestone payment under the celecoxib license agreement. Separately, on March 28, 2008, we purchased license rights for Acusphere's HDDS technology for use in oncology therapeutics for
$10 million.

In
accordance with FIN 46R, we have determined that effective on November 3, 2008 Acusphere is a variable interest entity for which we are the primary beneficiary. As a
result, as of November 3, 2008 we have included the financial condition and results of operations of Acusphere in our consolidated financial statements. However, we do not have an equity
interest in Acusphere and, therefore, we have allocated the losses attributable to the minority interest in Acusphere to minority interest in the consolidated statement of operations and we have also
reduced the minority interest holders' ownership interest in Acusphere in the consolidated balance sheet by Acusphere's losses. For the year ended December 31, 2008, both of these amounts have
been limited to the value of the minority interest recorded as of November 3, 2008 but will not be limited starting January, 1 2009.

During
2008, as a result of the FDA Advisory Panel's recommendation not to approve Imagify, 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. For the year ended December 31, 2008, a total of $21.1 million of net losses were allocated to the minority interest and $11.7 million of
net losses exceeded the minority interest value.



On January 13, 2009, we entered into an option agreement (the "Ception Option Agreement") with Ception Therapeutics, Inc.
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 Option Period (as defined below). As consideration for the Ception Option, we paid $50 million to Ception and also paid certain Ception stockholders an
aggregate of $50 million. We, in our sole discretion, may exercise the Ception Option by providing written notice to Ception at any time during the period from January 13, 2009 to and
including the date that (i) is fifteen business days after our receipt of the final study report for Ception's ongoing Phase IIb/III clinical trial for reslizumab in pediatric patients
with eosinophilic esophagitis ("Res-5-0002 EE Study") indicating that the co-primary endpoints have been achieved or (ii) is thirty business days after our
receipt of the final study report for Res-5-0002 EE Study indicating that the co-primary endpoints have not been achieved (the "Option Period"). We anticipate that
the Res-5-0002 EE Study will be completed in the fourth quarter of 2009. If the data are positive and we exercise the Ception Option, we intend to file a Biologics
License Application for reslizumab with the FDA in 2010. If we exercise the Ception Option, we have agreed to pay a total of $250 million 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.

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In
November 2008, we paid a $25 million non-refundable fee to Ception for exclusive rights to negotiate the Option. This payment was credited against the Ception
Option Agreement payments. In accordance with FIN 46R, we have determined that 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 will include the financial condition and results of operations of Ception in our consolidated financial statements.



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. In February 2008, we entered into an agreement with a contract sales organization to add 120 sales
representatives to our field sales team promoting AMRIX. Through an expansion of our contract sales force and through new hires, we have added an additional 270 sales representatives who began
promoting PROVIGIL and AMRIX in the first quarter of 2009. In total, we currently have 840 sales representatives promoting AMRIX. In June 2008, the U.S. Patent and Trademark Office issued a
pharmaceutical formulation patent for AMRIX, which expires in February 2025.

RESTRUCTURING

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 currently performed in Salt Lake City. The transition of manufacturing activities and the closure of the Eden Prairie
facility are expected to be completed within two to three years. 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 170 net jobs eliminated at CIMA and approximately 80 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 expected to be recognized in 2008 through 2011 and are included in the United States segment. In 2008, we incurred
$8.4 million related to the restructuring. In addition to the costs described above, we have started to recognize pre-tax, non-cash accelerated depreciation of plant and
equipment at the Eden Prairie facility, which we expect to total approximately $18 million to $20 million.

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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 and our decision to launch
NUVIGIL in the third quarter of 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 remaining aggregate purchase commitments totaling $57.8 million as of December 31, 2008. Based on our current assessment, we have recorded
a reserve of $26.0 million for purchase commitments for modafinil raw materials not expected to be utilized. See Note 7 to our Consolidated Financial Statements included in
Part II, Item 8 of this Annual Report on Form 10-K for additional information.

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.

PROPERTY, PLANT AND EQUIPMENT

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 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 year we have recorded pre-tax, non-cash charges associated with accelerated depreciation of plant and equipment of $6.0 million related to the proposed
divestiture
based on the new estimated useful life. As of December 31, 2008, we had $34.8 million of net property and equipment related to the Mitry-Mory facility included on our balance
sheet.

TERMINATION OF CO-PROMOTION AGREEMENT

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 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. In 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 next
three years.

TERMINATION OF COLLABORATION

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. The Termination Agreement is intended to reduce our cost
structure and enhance competitiveness. 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 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. These pretax charges have been recognized in the fourth quarter of 2008.

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RESULTS OF OPERATIONS(In thousands)

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

Year Ended December 31,2008

2007

% Increase (Decrease)United
States

Europe

Total

United
States

Europe

Total

United
States

Europe

TotalSales: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
%

6
%CNS


977,427


71,688


1,049,115


852,281


57,076


909,357


15
%

26
%

15
%ACTIQ


122,980


53,541


176,521


199,407


40,665


240,072


(38
)%

32
%

(26
)%Generic OTFC


95,760





95,760


129,033





129,033


(26
)%


%

(26
)%FENTORA


155,246





155,246


135,136





135,136


15
%


%

15
%AMRIX


73,641





73,641


8,401





8,401


777
%


%

777
%Pain


447,627


53,541


501,168


471,977


40,665


512,642


(5
)%

32
%

(2
)%TREANDA


75,132





75,132












%


%


%Other Oncology


18,566


91,919


110,485


16,561


76,316


92,877


12
%

20
%

19
%Oncology


93,698


91,919


185,617


16,561


76,316


92,877


466
%

20
%

100
%Other


49,667


157,897


207,564


52,702


159,721


212,423


(6
)%

(1
)%

(2
)%Total Sales


1,568,419


375,045


1,943,464


1,393,521


333,778


1,727,299


13
%

12
%

13
%Other Revenues


29,546


1,544


31,090


40,149


5,190


45,339


(26
)%

(70
)%

(31
)%Total Revenues

$
1,597,965

$
376,589

$
1,974,554

$
1,433,670

$
338,968

$
1,772,638


11
%

11
%

11
%


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, 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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2008,
total 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


16
%Wholesaler discounts


13,897


22,172


(8,275
)

(37
)%Returns


49,159


14,116


35,043


248
%Coupons


21,068


25,419


(4,351
)

(17
)%Medicaid discounts


40,923


37,528


3,395


9
%Managed care and governmental contracts


121,438


82,749


38,689


47
%283,340


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
%


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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 heigher 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

As adjusted
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


14
%Settlement 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
)%






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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 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 15 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.

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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.

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 31,2008

2007

Change

% ChangeOther income (expense):Interest income

$
16,901

$
32,816

$
(15,915
)

(48
)%Interest expense


(28,493
)

(19,833
)

(8,660
)

44
%Gain 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
%$
(3,712
)
$
31,746

$
(35,458
)

(112
)%


Other income (expense)Other income (expense) decreased $35.5 million, or (112)%, 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 31,2008

As Adjusted
2007*

Change

% ChangeIncome tax expense (benefit)

$
(20,665
)
$
121,882

$
(142,547
)

(117
)%






Income TaxesFor the year ended December 31, 2008, we recognized $20.7 million of income tax benefit on income before income taxes and
after minority interest of $201.9 million, resulting in an overall effective tax rate of (10.2) 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 $121.9 million on a loss before income taxes of $72.2 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 16 to our Consolidated Financial Statements included in Part II, 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.

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Year ended December 31, 2007 compared to year ended December 31, 2006:

Year Ended December 31,2007

2006

% Increase (Decrease)United
States

Europe

Total

United
States

Europe

Total

United
States

Europe

TotalSales:PROVIGIL

$
801,639

$
50,408

$
852,047

$
691,779

$
43,052

$
734,831


16
%

17
%

16
%GABITRIL


50,642


6,668


57,310


54,971


4,316


59,287


(8
)%

54
%

(3
)%CNS


852,281


57,076


909,357


746,750


47,368


794,118


14
%

20
%

15
%ACTIQ


199,407


40,665


240,072


550,390


27,252


577,642


(64
)%

49
%

(58
)%Generic OTFC


129,033





129,033


54,801





54,801


135
%


%

135
%FENTORA


135,136





135,136


29,250





29,250


362
%


%

362
%AMRIX


8,401





8,401











100
%


%

100
%Pain


471,977


40,665


512,642


634,441


27,252


661,693


(26
)%

49
%

(23
)%Oncology


16,561


76,316


92,877


12,617


63,425


76,042


31
%

20
%

22
%Other


52,702


159,721


212,423


43,467


144,852


188,319


21
%

10
%

13
%Total Sales


1,393,521


333,778


1,727,299


1,437,275


282,897


1,720,172


(3
)%

18
%


%Other Revenues


40,149


5,190


45,339


35,399


8,498


43,897


13
%

(39
)%

3
%Total Revenues

$
1,433,670

$
338,968

$
1,772,638

$
1,472,674

$
291,395

$
1,764,069


(3
)%

16
%


%


SalesIn the United States, we sell our proprietary products to pharmaceutical wholesalers, the largest three of which accounted for 66% and 71% of
our total consolidated gross sales for the years ended December 31, 2007 and 2006, 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, 2007, 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 did not independently verify, we believe that total inventory held at these wholesalers was approximately two weeks supply of our U.S. branded products at our then
current sales levels. At December 31, 2007, we believed that inventory held at wholesalers and retailers of our generic OTFC product, launched in October 2006, was approximately three months
supply.

For
the year ended December 31, 2007, 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, 2007,
total sales remained consistent over the prior year. The other key factors that contributed to the changes in sales are summarized by product as follows:



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Other RevenuesThe increase of 3% from period to period is primarily due to an increase in 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 31,2007

2006

Change

% ChangeGross sales

$
1,941,097

$
1,890,836

$
50,261


3
%Product sales allowances:Prompt payment discounts


31,814


32,384


(570
)

(2
)%Wholesaler discounts


22,172


2,939


19,233


654
%Returns


14,116


24,735


(10,619
)

(43
)%Coupons


25,419


26,853


(1,434
)

(5
)%Medicaid discounts


37,528


45,267


(7,739
)

(17
)%Managed care and governmental contracts


82,749


38,486


44,263


115
%213,798


170,664


43,134Net sales

$
1,727,299

$
1,720,172

$
7,127



%Product sales allowances as a percentage of gross sales


11.0
%

9.0
%


Prompt
payment discounts, generally granted at 2% of sales, decreased for the year ended December 31, 2007 as compared to the year ended December 31, 2006 due to a decrease
in U.S. sales that are eligible for the discount. Wholesaler discounts increased $19.2 million period over period because cumulative price increases as of December 31, 2006 produced
wholesaler credits that significantly offset the wholesaler discounts that would have been recorded for 2006. Returns decreased as a result of our historical returns experience, particularly related
to our CNS products, which is used in the calculation of our returns reserve requirements and due to an overall decrease in U.S. sales. Coupons decreased for the year ended December 31, 2007 as
compared to the year ended December 31, 2006 as a result of the elimination and expiration of ACTIQ coupons on September 30, 2006, offset by the distribution of coupons for FENTORA,
which was launched in October 2006.

Medicaid
discounts decreased for the year ended December 31, 2007 as compared to the year ended December 31, 2006 due to the lower sales and Medicaid utilization of our
Pain products,

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Table of Contents

particularly
branded ACTIQ, offset by an increase in the reimbursement rate for ACTIQ and generic OTFC as a result of the application of the provisions of the Deficit Reduction Act of 2005 effective
October 1, 2007. Managed care and governmental contracts increased for the year ended December 31, 2007 as compared to the year ended December 31, 2006 due to additional 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 reduction in the managed care and
governmental contracts allowance of $13.3 million in the third quarter of 2006, representing amounts paid to the U.S. Department of Defense ("DoD") under the Tricare program from October 2004
through June 30, 2006. In October 2006, the DoD announced that it would reimburse all companies that had voluntarily made such payments under the Tricare program due to the U.S. Court of
Appeals September 2006 ruling.

Year Ended December 31,As adjusted
2007*

As adjusted
2006*

Change

% ChangeCosts and expenses:Cost of sales

$
345,691

$
336,110

$
9,581


3
%Research and development


369,115


424,239


(55,124
)

(13
)%Selling, general and administrative


735,799


689,492


46,307


7
%Settlement reserve


425,000





425,000



%Impairment charge





12,417


(12,417
)

(100
)%Acquired in-process research and
development





5,000


(5,000
)

(100
)%Loss on sale of equipment


1,022





1,022



%$
1,876,627

$
1,467,258

$
409,369


28
%






Cost of SalesThe cost of sales was 20.0% of net sales for the year ended December 31, 2007 and 19.5% of net sales for the year ended
December 31, 2006. For the years ended December 31, 2007 and 2006, we recognized $90.5 million and $81.7 million of amortization expense included in cost of sales,
respectively. The remainder of this fluctuation is primarily due to the following factors: lower royalty expenses for ACTIQ resulting from the decline in the royalty rate upon the expiration of the
ACTIQ patents in September 2006; the favorable mix of product margins for certain of our product sales for the year ended December 31, 2007 as compared to the year ended December 31,
2006, offset by a decrease in product margin for our Pain products resulting from the shift in market share from ACTIQ to generic OTFC; the net effect of price increases in 2006 on U.S. products; an
$8.6 million inventory reserve related to SPARLON (modafinil) Tablets [C-IV] recorded in the second quarter of 2006; and a charge of
$3.5 million in the first quarter of 2007 for the termination of a materials supply agreement.

Research and Development ExpensesResearch and development expenses decreased $55.1 million, or 13%, for the year ended December 31,
2007 as compared to the year ended December 31, 2006. For the years ended December 31, 2007 and 2006, we recognized $28.5 million and $80.5 million, respectively, in
up-front payments related to rights acquired to certain development stage products. We also recognized a $15.0 million milestone payment related to our NDA filing for TREANDA in the
third quarter of 2007. This decrease is also attributable to lower expenses associated with reduced levels of clinical activity in 2007 as compared to 2006. For the years ended December 31,
2007 and 2006, we recognized $20.6 million and $20.9 million of depreciation expense included in research and development expenses, respectively.

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Selling, General and Administrative ExpensesSelling, general and administrative expenses increased $46.3 million, or 7%, for the year ended
December 31, 2007 as compared to the year ended December 31, 2006 primarily due to the cessation of the reimbursement of expenses from Alkermes related to the promotion of VIVITROL of
$23.8 million, increased sales and marketing spending on oncology products, expenses incurred under our agreements with Takeda and Watson and $7.2 million for severance costs primarily
related to the reorganization of our sales force. These increases were offset by reduced spending on marketing expenses and continuing medical education grants for our existing products and
$6.0 million of one-time payments made for the year ended December 31, 2006 in connection with PROVIGIL settlement agreements. For the years ended December 31, 2007
and 2006, we recognized $12.7 million and $13.9 million of depreciation expense included in selling, general and administrative expenses, respectively.

Settlement Reserve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 15 of the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on
Form 10-K.

Impairment chargeIn June 2006, we announced that data from our Phase III clinical program evaluating GABITRIL for the treatment of generalized
anxiety disorder ("GAD") did not reach statistical significance on the primary study endpoints. As a result, we performed a test of impairment on the carrying value of our investment in GABITRIL
product rights and recorded an impairment charge of $12.4 million in the second quarter of 2006 related to our European rights.

Year Ended December 31,2007

2006

Change

% ChangeOther income (expense):Interest income

$
32,816

$
25,438

$
7,378


29
%Interest expense


(19,833
)

(18,922
)

(911
)

(5
)%Debt exchange expense





(48,122
)

48,122


100
%Write-off of deferred debt issuance costs





(13,105
)

13,105


100
%Gain on extinguishment of debt


5,319





5,319



%Gain on sale of investment


5,791





5,791



%Other income (expense), net


7,653


(1,172
)

8,825


753
%$
31,746

$
(55,883
)
$
87,629


157
%


Other Income (Expense)Other income (expense) increased $87.6 million, or 157%, for the year ended December 31, 2007 as compared to the
year ended December 31, 2006. The increase was attributable to the following factors:



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Year Ended December 31,As adjusted
2007*

As adjusted
2006*

Change

% ChangeIncome tax expense

$
121,882

$
94,419

$
27,463


29
%






Income TaxesFor the year ended December 31, 2007, we recognized $121.9 million of income tax expense on loss before income taxes of
$72.2 million, as we have not yet recognized a tax benefit for the $425.0 million settlement reserve recorded as of December 31, 2007 due to the uncertainty associated with the
tax treatment of the settlement. This compared to income tax expense for the year ended December 31, 2006 of $94.4 million on income before income taxes of $240.9 million,
resulting in an effective tax rate of 39.2 percent. See Note 16 to our Consolidated Financial Statements included in Part II, 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 31,2008

2007

2006Financial assets:Cash and cash equivalents and investments

$
524,459

$
818,669

$
496,512Investments





7,596


25,212Total financial assets (current)

$
524,459

$
826,265

$
521,724Debt:Current portion of long-term debtconvertible notes

$
1,019,888

$
1,233,370

$
1,019,716Current portion of long-term debtother debt


10,133


3,799


3,596Long-term debt


3,692


3,788


224,992Total debt

$
1,033,713

$
1,240,957

$
1,248,304Select measures of liquidity and capital resources:Working capital deficit

$
91,993

$
578,218

$
276,943Cash/cash equivalents/investments as a percent of total assets


17
%

24
%

17
%


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Table of Contents



Year Ended December 31,2008

2007

2006Change in cash and cash equivalentsNet cash provided by (used for) operating activities

$
(1,877
)
$
384,856

$
319,917Net cash used for investing activities


(108,138
)

(172,946
)

(20,376
)Net cash provided by (used for) financing activities


(172,894
)

96,935


(22,624
)Effect of exchange rate changes on cash and cash equivalents


(11,301
)

13,312


14,535Net increase (decrease) in cash and cash equivalents

$
(294,210
)
$
322,157

$
291,452


Our
working capital deficit is calculated as current assets less current liabilities. The fluctuation in the working capital deficit between the three periods was primarily driven by the
change in accrued expenses year over year as a result of the settlement agreement reached in 2007 with the U.S. Attorney's Office for $425.0 million, which was paid in 2008. 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 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 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. Material non-cash items impacting 2008 cash flows from operating activities include:



The
net loss for the year ended December 31, 2007 was offset by changes in accounts payable and accrued expenses resulting from the agreement in principle with the U.S. Attorney's
Office, for which $425 million was accrued but not paid. Net cash used for operating activities was $384.9 million in 2007 as compared to $319.9 million in 2006. In 2006, we
experienced growth in operating income due to increased income from sales of PROVIGIL, ACTIQ and other key products.

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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.

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 used for investing activities was $172.9 million in 2007 as compared to $20.4 million in 2006. The change between periods is primarily attributable
to:



Net Cash Provided by (Used for) Financing Activities

Financing activities for the periods presented above primarily relate to proceeds from stock option exercises and payments on
long-term debt.

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.

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Proceeds
from stock options exercises in 2008 and 2007 were $44.0 million and $93.9 million, respectively.

Net
cash provided by financing activities was $96.9 million in 2007 as compared to net cash used for financing activities of $22.7 million in 2006. The change is primarily
attributable to the payment in 2006 of $175.3 million in connection with our exchange of $437.3 million of our outstanding convertible notes for cash and common stock and the retirement
in 2006 of the remaining obligation of $10.0 million of our 2.5% Notes due December 2006. Proceeds from stock options exercises in 2007 and 2006 were $93.9 million and
$143.5 million, respectively.

Commitments and Contingencies



For a complete description of legal proceedings, see Note 15 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

2009

2010 and 2011

2012 and 2013

2014 and thereafterDebt obligations

$
2,664

$
1,678

$
986

$


$
Convertible notes


1,019,924


1,019,924








Purchase obligations


91,044


41,000


43,685


6,339


20Capital lease obligations


2,229


1,293


936





Interest payments on debt


106,871


16,594


32,877


32,800


24,600Operating leases


94,450


18,379


27,122


19,288


29,661Pension obligations


9,580


251


587


1,771


6,971Total contractual obligations

$
1,326,762

$
1,099,119

$
106,193

$
60,198

$
61,252


As
of December 31, 2008, all of our notes are convertible because the closing price of our common stock on that date was higher than the restricted conversion prices of these
notes. As a result, such notes have been classified as current liabilities on our consolidated balance sheet as of December 31, 2008 and are therefore included under the 2009 column in the
table above. For a discussion of our obligations under our convertible notes, see "OutlookIndebtedness" below.

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, 2008, the
potential milestone and other contingency payments due under current contractual agreements are $701.7 million.

The
table above excludes (i) our non-current liability for net unrecognized tax benefits, which totaled $61.2 million as of December 31, 2008, 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.

73

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Outlook

We expect to use our cash, cash equivalents, credit facility and investments on 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. However, we expect that sales of our currently marketed products should
allow us to continue to generate positive operating cash flow in 2009. At this time, we cannot accurately predict the effect of certain developments on the rate of sales growth in 2009 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 near-term product candidates.

Based
on our current level of operations, projected sales of our existing products 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 2009. 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 in the future 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.

In
2009, we have incurred cash charges of $75 million and $30 million, respectively, related to our option agreements with Ception Therapeutics, Inc. and
ImmuPharma PLC. For a complete description of these transactions, see Note 19 of the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on
Form 10-K.

In
2009, we received $67.3 million in federal tax refunds of previously paid 2008 estimated federal taxes. This refund was principally due to the tax benefit relating to the
termination of our collaboration with Alkermes for the marketing and sale of VIVITROL and the settlement with the U.S. Attorney's Office.

Marketed Products and Product Candidates

Sales growth of our modafinil-based 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 expiration beginning in
2014 and our NUVIGIL polymorph patent through its expiration beginning in 2023. See Note 15 of the Consolidated Financial Statements included in Part II, Item 8 of this Annual
Report on Form 10-K. During 2008, we experienced a 2% decline in prescription growth of PROVIGIL. We have undertaken a number of initiatives, including changes to our sales force
and the continuation of direct-to-consumer print and web-based advertising that we believe will stimulate prescription growth. Finally, growth of our
modafinil-based product sales in the future may depend in part on our ability to successfully launch NUVIGIL in the third quarter of 2009. We expect that upon the launch of NUVIGIL, our marketing
efforts with respect to PROVIGIL will decline substantially and will shift to NUVIGIL. Currently, we do not believe 2009 CNS net sales will be adversely impacted as compared to 2008 by the decline in
PROVIGIL marketing efforts associated with the launch of NUVIGIL.

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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 and Impax.

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 broader labeled indication for the
product outside of breakthrough cancer pain. In November 2007, we submitted a supplemental new drug application ("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, which we expect to file with
the FDA by the end of the first quarter of 2009. In the December 2008 supplement request letter, the FDA also provided guidance for the design and implementation of the REMS Program to mitigate
serious risks associated with the use of FENTORA. To address the FDA's requests in its September 2008 and December 2008 letters, we plan to implement as part of the REMS Program a
first-of-its-kind initiative designed to minimize the potential risk of overdose from an opioid through appropriate patient selection. We believe that, by working
with the FDA, we can design and implement a REMS Program to meet the FDA's requests and possibly provide a potential avenue for approval of the sNDA. We anticipate initiating the REMS Program upon
receipt of approval from the FDA. 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 throughout 2009.

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 2009, 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, among others: studies of TREANDA as a front-line
treatment for NHL and for the treatment of multiple myeloma; a Phase II program evaluating CEP-701 for the treatment of myeloproliferative disorder; and clinical programs with
NUVIGIL focused on cancer related fatigue/tiredness, adjunctive treatment to atypical anti-psychotics in schizophrenia patients, bi-polar depression, treatment of obstructive
sleep apnea and co-morbid depression, excessive sleepiness associated with jet lag disorder and with traumatic brain injury.

Manufacturing, Selling and Marketing Efforts

In 2009, we expect to continue to incur significant expenditures associated with manufacturing, selling and marketing our products. We
expect to continue in-process capital expenditure projects at our research and development facilities in France and West Chester, Pennsylvania. We also expect to continue in 2009 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 transfer to be completed by
2010 or 2011. The aggregate amount of our sales and marketing expenses in 2009 is expected to be higher than that incurred in 2008, primarily as a result of higher expenses associated

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with
our promotional efforts related to AMRIX and TREANDA and pre-launch expenses and subsequent post-launch promotional efforts associated with NUVIGIL.

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 and our decision to launch NUVIGIL in the third quarter of 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 $57.8 million as of December 31, 2008. Based on our
current assessment, we have recorded a reserve of $26.0 million for purchase commitments for modafinil raw materials not expected to be utilized. We also are initiating a search for a potential
acquiror of our manufacturing facility in Mitry-Mory, France where we produce modafinil. As of December 31, 2008, we had $34.8 million of property and equipment related to
the Mitry-Mory facility included on our balance 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, 2008:

Security

Outstanding

Conversion
Price

Redemption Rights and Obligations(in millions)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 either option of holder or us at a redemption price of 100.25% of the principal amount
redeemed.


---

As
of December 31, 2008, our closing stock price was $77.04, and therefore, all of our notes were convertible as of December 31, 2008. 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 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, 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

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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, 2008, all of our notes are convertible because the closing price of our common stock on that date was higher than the restricted conversion prices of these
notes. As a result, all notes have been classified as current liabilities on our consolidated balance sheet as of December 31, 2008. See Note 12 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 17, 2009, 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 convertible notes outstanding as of December 31, 2008 are $16.4 million, payable semi-annually on June 1 and
December 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 and 2010 Zero Coupon Notes each are considered Instrument C securities as defined by Emerging Issues Task Force ("EITF") Issue No. 90-19,
"Convertible Bonds with Issuer Option to Settle for Cash upon Conversion" ("EITF 90-19"); 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 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 and 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 and $72.08, respectively. However, from an accounting principles generally accepted in the United States of America ("U.S. GAAP") perspective,
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share" ("SFAS 128") considers only the impact of the convertible notes and the warrant agreements; since the
impact of the convertible note hedge agreements is always anti-dilutive, SFAS 128 requires that 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)$65.00


5,406





5,406




(5,406
)

$75.00


7,497


1,998


9,495




(7,497
)

1,998$85.00


9,096


4,496


13,592




(9,096
)

4,496$95.00


10,358


6,468


16,826




(10,358
)

6,468$105.00


11,380


8,064


19,444




(11,380
)

8,064


---

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 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.

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, 2008 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 71%
of our total consolidated gross sales for the year ended December 31, 2008. 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

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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.

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.

In
October 2007, we launched AMRIX. Sales of AMRIX to wholesalers and retailers include the right of return of expired product. Based on the sales levels and the prescription data during
the fourth quarter of 2007, and based on the number of units on hand in the pipeline at December 31, 2007 relative to the overall demand for the products, we have estimated and recorded all
applicable product sales allowances related to AMRIX as of December 31, 2007. We have therefore recognized revenues for AMRIX based on a fixed and determinable sales price in 2007 and 2008.

In
September 2006, we launched generic OTFC, utilizing Watson Pharmaceuticals, Inc. as our sales agent in this effort. We pay our sales agent a commission for these services and
record this commission as selling, general and administrative expense. In October 2006, we launched FENTORA® (fentanyl buccal table) [C-II]. Sales of
our generic OTFC product to wholesalers and retailers include both the right of return of expired product and retroactive price reductions under certain conditions, while sales of FENTORA
also include the right of return of expired product. Based on the sales levels and the prescription data during the fourth quarter of 2006, and based on the number of units on hand in the pipeline at
December 31, 2006 relative to the overall demand for the products, we have estimated and recorded all applicable product sales allowances related to generic OTFC and FENTORA as of
December 31, 2006. We have therefore recognized revenues for generic OTFC and FENTORA based on a fixed and determinable sales price in 2006, 2007 and 2008.

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. At December 31, 2008, we are not aware of any expected additional entrants into the generic OTFC market that would result in
a price reduction to customers for inventory already purchased from us, and do not believe that any revenue recognized as of December 31, 2008 would be effected by a retroactive shelf stock
adjustment. If an additional generic entrant had occurred on January 1, 2009, and generic OTFC prices were reduced by 15%, then a reduction of our reported revenues of $8.8 million would
result. We utilize Watson as our sales agent for the sales and distribution of our generic OTFC. We pay our sales agent a commission for these services and record this commission as selling, general
and administrative expense.

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

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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, 2008, less inventory appreciation adjustments for 2008 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 of FENTORA and AMRIX. Actual discounts provided could therefore exceed historical
experience and our estimates of expected discounts. If these discounts were to increase by 1.0% of 2008 gross sales from our proprietary products marketed in the U.S., then an additional provision of
$16.4 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 PROVIGIL is three years, GABITRIL is two to three years, depending on product strength, and ACTIQ, TREANDA, AMRIX 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 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, 2008, we recorded a provision for returns at a weighted average rate of 2.2% of gross sales, which is an increase over our actual historical return
percentages. Returns increased for the year ended December 31, 2008 as compared to the year ended December 31, 2007 as a result of heightened 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, at a level higher than originally expected. As a result, we have adjusted our returns percentages as it relates to current ACTIQ and FENTORA sales to more closely match this recent experience.
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 2008 gross sales from our proprietary products marketed in the U.S., then an additional
provision of $8.2 million would result.

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Based on fourth quarter 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, 2008 is $342.9 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, 2008, we recorded a provision for coupons at a weighted average rate of 0.9% 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 2008 gross sales from our proprietary products marketed in the U.S., then an
additional provision of $8.2 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, 2008, we recorded a provision for Medicaid discounts at a weighted average rate of 1.8% of gross sales. Actual Medicaid discounts could exceed
historical experience and our estimates of expected future Medicaid patient activity or unit rebate amounts. If the Medicaid discounts provision percentage were to increase by 0.5% of 2008 gross sales
from our proprietary products marketed in the U.S., then an additional provision of $8.2 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

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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.

We
recognized a reduction in the managed care and governmental contracts allowance of $13.3 million in the third quarter of 2006, representing amounts paid to the DoD under the
Tricare program from October 2004 through June 30, 2006. In October 2006, the DoD announced that it would reimburse all companies that had voluntarily made such payments under the Tricare
program due to the U.S. Court of Appeals September 2006 ruling and we received this reimbursement in December 2006. 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.

For
the year ended December 31, 2008, we recorded a provision for managed care and governmental contracts at a weighted average rate of 5.4% 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 2008
gross sales from our proprietary products marketed in the U.S., then an additional provision of $8.2 million would result.

The
following table summarizes activity in each of the above categories for the years ended December 31, 2007 and 2008:

Prompt
Payment
Discounts

Wholesaler
Discounts

Returns*

Coupons

Medicaid
Discounts

Managed
Care &
Governmental
Contracts

TotalBalance at January 1, 2007

$
(3,548
)
$
(310
)
$
(28,843
)
$
(4,662
)
$
(26,402
)
$
(19,495
)
$
(83,260
)Provision:Current period


(31,819
)

(22,172
)

(16,793
)

(25,591
)

(37,681
)

(82,958
)

(217,014
)Prior periods


5





2,677


172


153


209


3,216Total


(31,814
)

(22,172
)

(14,116
)

(25,419
)

(37,528
)

(82,749
)

(213,798
)Actual:Current period


28,737


15,723





18,338


18,242


58,986


140,026Prior periods


3,543


310


17,624


4,490


25,805


18,994


70,766Total


32,280


16,033


17,624


22,828


44,047


77,980


210,792Balance 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
)


---

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.

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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 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. We intend to launch NUVIGIL commercially in the third quarter of 2009 and have included net NUVIGIL inventory balances of
$111.6 million and $104.7 million at December 31, 2008 and 2007, respectively, in other assets, rather than inventory. Upon launch, our NUVIGIL inventory balance will be
reclassified to current inventory. Based on the expiration dates and our current estimates of sales demand for NUVIGIL, no additional reserve related to NUVIGIL is required at this time. At
December 31, 2006, we had an $8.6 million inventory reserve related to the FDA's determination that the SPARLON sNDA was not approvable

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(see
Note 7 of the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K).

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 and our decision to launch NUVIGIL in the third quarter of 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 purchase commitments totaling $57.8 million as of December 31,
2008. Based on our current assessment, we have recorded a reserve of $26.0 million for purchase commitments for modafinil raw materials not expected to be utilized. See Note 7 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, 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
regularly assess our property and equipment, intangible assets, goodwill and other long lived assets to determine whether any impairment in these assets may exist and, if so, the
extent of such impairment. 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 assess whether triggering events have occurred and if so, 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.

For
example, with respect to our DURASOLV intangible assets, in the third quarter of 2007, the U.S. Patent and Trademark Office ("PTO") notified us that, on re-examination,
it has rejected the claims in the two U.S. patents for our DURASOLV ODT technology. We filed notices of appeal 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. While we intend to vigorously defend these patents, these efforts, ultimately, may not be successful. The invalidity of the DURASOLV patents could
have a material adverse impact on the $48.7 million carrying value of the DURASOLV intangible assets. For additional information regarding our significant accounting policies with respect to
goodwill, intangibles and other long-lived assets, see Note 1 of our Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on
Form 10-K.

Income taxesWe provide for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes," which requires that 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. The deferred assets and liabilities included within the consolidated results from the activities of the variable
interest entity are not realizable benefits and or liabilities to Cephalon. See

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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, 2008.

At
December 31, 2008, we have a valuation allowance of $140.4 million, against a gross deferred tax asset balance of $561.5 million. This valuation allowance is
composed entirely of state and foreign net operating losses, and state tax credits where we have concluded at 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 16 of our Consolidated Financial Statements included in Part II, Item 8 of this Annual Report
on Form 10-K.

In
July 2006, the FASB issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109"
("FIN 48") which addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN 48, a
company 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 should be measured based on the largest benefit that has a greater than fifty
percent likelihood of being realized upon ultimate settlement. FIN 48 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in
interim periods and requires increased disclosures. FIN 48 is effective for fiscal years beginning after December 15, 2006. We adopted the provisions of FIN 48 on
January 1, 2007. See Note 16 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 September 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS")
No. 157, "Fair Value Measurements" ("SFAS 157"). SFAS 157 clarifies the definition of fair value, establishes a framework for measuring fair value and expands the disclosures on
fair value measurements. In February 2008, the FASB issued two final staff positions ("FSP") amending SFAS 157. FSP SFAS 157-1 amends SFAS 157 to exclude SFAS
No. 13, Accounting for Leases and its related interpretive accounting pronouncements that address leasing transactions. FSP SFAS 157-2 delays the effective date of
SFAS 157 until fiscal years beginning after November 15, 2008 for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial
statements on a nonrecurring basis. We adopted SFAS 157 on January 1, 2008, except for the items covered by FSP SFAS 157-2.

SFAS 157
establishes a three-tier fair value hierarchy, which prioritize the inputs used in measuring fair value as follows:



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We
have no material assets or liabilities that are currently subject to recurring valuation under FAS 157.

In
November 2007, the Emerging Issues Task Force ("EITF") reached a final consensus on EITF Issue No. 07-1, "Accounting for Collaborative Arrangements Related to the
Development and Commercialization of Intellectual Property" ("EITF 07-1"). EITF 07-1 defines collaborative arrangements and establishes accounting and financial
statement disclosure requirements for such arrangements. EITF 07-1 is effective for fiscal years beginning after December 15, 2008 and interim periods within those fiscal
years. Adoption is on a retrospective basis to all prior periods presented for all collaborative arrangements existing as of the effective date. Our current accounting policies are consistent with the
accounting under EITF 07-1. Therefore, the accounting for our collaborations will not change. The implementation of EITF 07-1 will result in expanded disclosures
for collaborations.

In
December 2007, the FASB issued SFAS No. 141(R), "Business Combinations" ("SFAS 141(R)"). SFAS 141(R) will significantly change the accounting for business
combinations in a number of areas including the treatment of contingent consideration, contingencies, acquisition costs, IPR&D and restructuring costs. In addition, under SFAS 141(R), changes
in deferred tax asset valuation allowances and acquired income tax uncertainties in a business combination after the measurement period will impact income tax expense. SFAS 141(R) applies
prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Early
application is not permitted. The effect of SFAS 141(R) on our consolidated financial statements will be dependent on the nature and terms of any business combinations that occur after its
effective date.

In
December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements" ("SFAS 160"). SFAS 160 amends Accounting Research
Bulletin No. 51 to establish
accounting and reporting standards for the noncontrolling (minority) interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary
is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements and establishes a single method of accounting for changes in a parent's
ownership interest in a subsidiary that do not result in deconsolidation. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008. Early application is not
permitted. The adoption of SFAS 160 will result in the reclassification of noncontrolling interest from liabilities to a component of equity and we will continue to attribute losses to the
noncontrolling interest even if that attribution results in a deficit noncontrolling interest balance.

In
March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS 161"). The new standard is intended to help investors
better understand how derivative instruments and hedging activities affect an entity's financial position, financial performance and cash flows through enhanced disclosure requirements. The new
standard is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early adoption encouraged. We do not expect the adoption of
SFAS 161 to have a significant impact on our consolidated financial statements.

In
April 2008, the FASB issued FASB Staff Position No. FAS 142-3,"Determination of the Useful Life of Intangible
Assets" ("FSP FAS 142-3"). FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful
life of a recognized intangible asset under FASB Statement No. 142, "Goodwill and Other Intangible Assets".

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The
FSP is intended to improve the consistency between the useful life of a recognized intangible asset under Statement 142 and the period of expected cash flows used to measure the fair value of the
asset under SFAS 141(R) and other U.S. generally accepted accounting principles. The new standard is effective for financial statements issued for fiscal years and interim periods beginning
after December 15, 2008. We are currently evaluating the impact of FSP FAS 142-3 adoption on our consolidated financial statements.

In
May 2008, the FASB issued FASB Staff Position APB 14-1, "Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion" ("FSP
APB 14-1"). FSP APB 14-1 amends APB Opinion No. 14, "Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants," requiring issuers of
convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) to initially record the convertible debt at a discount based on the entity's nonconvertible
debt borrowing rate and amortize the debt discount over the expected term of the debt facility. The new standard is effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. Adoption is on a retrospective basis for all prior periods presented. Upon adoption on January 1, 2009, based on our
preliminary evaluation, our convertible debt liability will decrease by approximately $275 million (with a corresponding increase to equity, net of tax) and our 2009 interest expense for our
convertible notes will increase by approximately $47 million. APB 14-1 will have no impact on liquidity.

In
June 2008, the FASB ratified EITF Issue No. 07-5, "Determining Whether an Instrument (or embedded feature) is Indexed to an Entity's Own Stock"
("EITF 07-5"). EITF 07-5 provided guidance for determining whether an equity-linked financial instrument (or embedded feature) is indexed to an entity's own
stock. This determination is necessary for evaluating whether the instrument (or feature) is considered a derivative financial instrument under SFAS No. 133. The guidance is effective for
fiscal years beginning on or after December 15, 2008. We do not expect the adoption of EITF 07-5 to have a significant impact on our consolidated financial statements.

In
September 2008, the FASB ratified EITF Issue No. 08-7, "Accounting for Defensive Intangible Assets" ("EITF 08-7"). EITF 08-7
applies to all acquired intangible assets in situations in which the acquirer does not intend to actively use the asset but intends to hold (lock up) the asset to prevent its competitors from
obtaining access to the asset (a defensive intangible asset), unless the intangible asset must be expensed in accordance with other literature. The defensive intangible asset should be accounted for
as a separate unit of accounting and its useful life should be determined by estimating the period over which the defensive intangible asset will diminish in fair value. EITF 08-7
is effective prospectively for intangible assets acquired on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We do not expect the adoption
of EITF 08-7 to have a significant impact on our consolidated financial statements unless a future transaction results in the acquisition of a defensive intangible asset.

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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 subsidiaries that have transactions, assets, and
liabilities denominated in foreign currencies that are translated into U.S. dollars for consolidated financial reporting purposes. Historically, we have not hedged any of these foreign currency
exchange risks. For the years ended December 31, 2008 and 2007, an average 10% weakening of the U.S. dollar relative to the currencies in which our European subsidiaries operate would have
resulted in an increase of $37.7 million and $33.9 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 European subsidiaries.

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

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 will mature in February 2009. The contract has not been designated as a hedging instrument and, accordingly, it has been 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. A 10% weakening of the U.S. Dollar relative to the Euro would
result in a decrease of the fair value of the derivative instrument of $8.3 million.

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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, 2008, 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, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended
December 31, 2008 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, 2008, based on criteria established in Internal ControlIntegrated
Frameworkissued 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 16 to the consolidated financial statements, effective January 1, 2007, the Company adopted FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxesan interpretation of FASB Statement No. 109" and, as discussed in Note 1 to the consolidated financial statements, effective October 1,
2008 the Company changed its method of valuing certain inventory.

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.

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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 23, 2009

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

Year Ended December 31,2008

As adjusted
2007*

As adjusted
2006*REVENUES:Sales

$
1,943,464

$
1,727,299

$
1,720,172Other revenues


31,090


45,339


43,8971,974,554


1,772,638


1,764,069COSTS AND EXPENSES:Cost of sales


412,234


345,691


336,110Research and development


362,208


369,115


424,239Selling, general and administrative


840,873


735,799


689,492Settlement reserve


7,450


425,000


Impairment charges


99,719





12,417Restructuring charges


8,415





Acquired in-process research and development


41,955





5,000Loss on sale of equipment


17,178


1,022


1,790,032


1,876,627


1,467,258INCOME (LOSS) FROM OPERATIONS


184,522


(103,989
)

296,811OTHER INCOME (EXPENSE):Interest income


16,901


32,816


25,438Interest expense


(28,493
)

(19,833
)

(18,922
)Debt exchange expense








(48,122
)Write-off of deferred debt issuance costs








(13,105
)Gain on extinguishment of debt





5,319


Gain on sale of investment





5,791


Other income (expense), net


7,880


7,653


(1,172
)(3,712
)

31,746


(55,883
)INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST


180,810


(72,243
)

240,928INCOME TAX EXPENSE (BENEFIT)


(20,665
)

121,882


94,419NET INCOME (LOSS) BEFORE MINORITY INTEREST


201,475


(194,125
)

146,509NET LOSS ATTRIBUTABLE TO MINORITY INTEREST


21,073





NET INCOME (LOSS)

$
222,548

$
(194,125
)
$
146,509BASIC INCOME (LOSS) PER COMMON SHARE

$
3.27

$
(2.91
)
$
2.42DILUTED INCOME (LOSS) PER COMMON SHARE

$
2.92

$
(2.91
)
$
2.10WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING


68,018


66,597


60,507WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING-ASSUMING DILUTION


76,097


66,597


69,672


---

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,
2008

As adjusted
December 31,
2007*ASSETSCURRENT ASSETS:Cash and cash equivalents

$
524,459

$
818,669Investments





7,596Receivables, net


409,580


276,776Inventory, net


117,297


98,996Deferred tax assets, net


224,066


182,268Other current assets


54,120


43,267Total current assets


1,329,522


1,427,572PROPERTY AND EQUIPMENT, net


467,449


500,396GOODWILL


445,332


476,515INTANGIBLE ASSETS, net


607,332


817,828DEFERRED TAX ASSETS, net


142,775


141,752OTHER ASSETS


176,778


132,463$
3,169,188

$
3,496,526LIABILITIES AND STOCKHOLDERS' EQUITYCURRENT LIABILITIES:Current portion of long-term debt

$
1,030,021

$
1,237,169Accounts payable


87,079


91,437Accrued expenses


304,415


677,184Total current liabilities


1,421,515


2,005,790LONG-TERM DEBT


3,692


3,788DEFERRED TAX LIABILITIES, net


77,932


56,540OTHER LIABILITIES


163,123


138,084Total liabilities


1,666,262


2,204,202COMMITMENTS AND CONTINGENCIES (Note 15)





MINORITY INTEREST





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, 71,707,041 and 69,956,790 shares issued, and 68,736,642 and 67,604,187 shares
outstanding


717


700Additional paid-in capital


2,071,607


1,934,965Treasury stock, at cost, 2,970,399 and 2,352,603 shares outstanding


(201,705
)

(158,173
)Accumulated deficit


(411,323
)

(633,871
)Accumulated other comprehensive income


43,630


148,703Total stockholders' equity


1,502,926


1,292,324$
3,169,188

$
3,496,526


---

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

94

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Table of Contents

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

Common Stock



Treasury Stock



Accumulated
Other
Comprehensive
IncomeComprehensive
Income (Loss)



Additional
Paid-in
Capital

Accumulated
DeficitTotal

Shares

Amount

Shares

AmountBALANCE, JANUARY 1, 2006, as previously stated




$
612,171


58,445,405

$
584

$
1,166,166


372,843

$
(17,125
)
$
(570,072
)
$
32,618Impact of adopting change in accounting for inventory





(9,015
)
















(9,015
)Balance, January 1, 2006, as adjusted*





603,156


58,445,405


584


1,166,166


372,843


(17,125
)

(579,087
)

32,618Net income

$
146,509


146,509

















146,509Foreign currency translation gain


70,743Change in unrealized investment gains and losses


996Other comprehensive income


71,739


71,739




















71,739Comprehensive income

$
218,248Issuance of common stock upon conversions and exchanges of convertible notes





310,155


6,169,429


62


310,093Termination of warrants and convertible note hedge upon exchanges of convertible notes














129,525


1,823,847


(129,525
)Tax effect of conversions and exchanges of convertible notes





(38,490
)







(38,490
)Stock options exercised





143,491


3,058,430


30


143,461Tax benefit from equity compensation





27,189








27,189Stock-based compensation expense





42,807


180,125


2


42,805Treasury stock acquired





(4,418
)










60,472


(4,418
)BALANCE, DECEMBER 31, 2006*





1,302,138


67,853,389


678


1,780,749


2,257,162


(151,068
)

(432,578
)

104,357Net loss

$
(194,125
)

(194,125
)
















(194,125
)Foreign currency translation gain


42,662Prior service gains and losses on retirement-related plans


446Change in unrealized investment gains and losses


20Other comprehensive income


43,128


43,128




















43,128Comprehensive loss

$
(150,997
)Adoption of FIN 48





(7,168
)
















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





10


124





10Stock options exercised





93,900


1,853,152


19


93,881Tax benefit from equity compensation





13,633








13,633Stock-based compensation expense





46,695


250,125


3


46,692Treasury stock acquired





(7,105
)










95,441


(7,105
)Other





1,218




















1,218BALANCE, DECEMBER 31, 2007*





1,292,324


69,956,790


700


1,934,965


2,352,603


(158,173
)

(633,871
)

148,703Net income

$
222,548


222,548

















222,548Foreign currency translation loss


(105,042
)Prior service costs and gains on retirement-related plans


(23
)Change in unrealized investment losses


(8
)Other comprehensive loss


(105,073
)

(105,073
)



















(105,073
)Comprehensive income

$
117,475Issuance of common stock upon conversions of convertible notes





290


529,269


5


285Exercise of convertible note hedge associated with conversion of convertible notes














36,585


524,754


(36,585
)Stock options exercised





43,962


957,865


10


43,952Tax benefit from equity compensation





7,323








7,323Stock-based compensation expense





43,974


253,837


2


43,972Treasury stock acquired





(6,947
)










93,042


(6,947
)Other





4,525


9,280





4,525BALANCE, DECEMBER 31, 2008




$
1,502,926


71,707,041

$
717

$
2,071,607


2,970,399

$
(201,705
)
$
(411,323
)
$
43,630


---

*    As adjusted for the retrospective application of a change in accounting method for inventory. See
Note 1 for additional information.

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

95

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Table of Contents

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

Year Ended December 31,2008

As adjusted
2007*

As adjusted
2006*CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)

$
222,548

$
(194,125
)
$
146,509Adjustments to reconcile net income (loss) to net cash provided by operating activities:Deferred income tax expense (benefit)


(50,889
)

(2,361
)

29,045Shortfall tax benefits from stock-based compensation


(511
)

(360
)

Debt exchange expense








48,122Depreciation and amortization


172,457


141,358


128,927Write-off of debt issuance costs associated with convertible subordinated notes








13,105Stock-based compensation expense


43,975


46,695


42,807Gain on forgiveness of debt





(5,319
)

Gain on sale of investment





(5,791
)

Loss on sale of property and equipment


17,178


1,022


Impairment charges


99,719





12,417Acquired in-process research and development


16,955





Minority interest in variable interest entity


(21,073
)




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


(144,975
)

(601
)

(63,932
)Inventory


(37,397
)

(2,328
)

21,015Other assets


11,792


(54,838
)

(8,082
)Accounts payable and accrued expenses


(376,232
)

385,463


(18,375
)Other liabilities


44,576


76,041


(31,641
)Net cash provided by (used for) operating activities


(1,877
)

384,856


319,917CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment


(75,871
)

(96,867
)

(159,917
)Proceeds from sale of property and equipment


16,000





Cash balance from consolidation of variable interest entity


1,654





Acquisition of intangible assets


(25,825
)

(107,246
)

(115,850
)Investment in third party


(31,692
)




Proceeds from sale of investment in third party





12,291


Sales and maturities of available-for-sale investments


7,596


99,131


260,082Purchases of available-for-sale investments





(80,255
)

(4,691
)Net cash used for investing activities


(108,138
)

(172,946
)

(20,376
)CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from exercises of common stock options


43,962


93,900


143,491Windfall tax benefits from stock-based compensation


7,834


13,993


27,189Acquisition of treasury stock


(6,947
)

(7,105
)

(4,418
)Payments on and retirements of long-term debt


(217,743
)

(3,853
)

(188,886
)Net cash provided by (used for) financing activities


(172,894
)

96,935


(22,624
)EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS


(11,301
)

13,312


14,535NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS


(294,210
)

322,157


291,452CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR


818,669


496,512


205,060CASH AND CASH EQUIVALENTS, END OF YEAR

$
524,459

$
818,669

$
496,512Supplemental disclosures of cash flow information:Cash payments for interest, net of capitalized interest

$
29,419

$
17,814

$
20,272Cash payments for income taxes


100,374


84,879


36,954Non-cash investing and financing activities:Capital lease additions


1,529


1,335


2,134Acquisition of treasury stock associated with termination of convertible note hedge and warrant agreements


36,585





129,525Exchange of convertible notes into common stock, net of debt exchange expense


824


10


262,033


---

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

96

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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 is an international biopharmaceutical company dedicated to the discovery, development and marketing of innovative products in
three core therapeutic areas: central nervous system ("CNS") disorders, pain and oncology. 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.



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 as prescribed by FASB Interpretation 46R, "Consolidation
of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51" ("FIN 46R"). 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. Beginning in November, 2008, we consolidate
Acusphere, Inc. as a variable interest entity.

We
use the cost method to account for our investments in companies that 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.



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 believe that this change is preferable as the FIFO method provides uniformity across our operations with respect to the method for inventory accounting, and enhances comparability with
peers.

Furthermore,
this application of the FIFO method will be consistent with our accounting of inventories for U.S. income tax purposes.

97

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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)

The
change in accounting method from LIFO to FIFO was completed in accordance with Statement of Financial Accounting Standards ("SFAS") No. 154, "Accounting Changes and Error
Corrections." We applied the change in accounting principle by retrospectively adjusting prior years' financial statements.

The
effect of the change on the consolidated statements of operations for the years ended December 31, 2008, 2007 and 2006 is as follows:

2008 (in millions)

As
Computed
under LIFO

As
Reported
under FIFO

Effect of
ChangeCost of sales

$
419.1

$
412.2

$
(6.9
)Income before income tax and after minority interest


195.0


201.9


6.9Income tax benefit


23.3


20.7


(2.6
)Net income

$
218.2

$
222.5

$
4.3Basic earnings per share

$
3.21

$
3.27

$
0.06Diluted earnings per share

$
2.87

$
2.92

$
0.05




2007 (in millions)

As
originally
reported under
LIFO

As
Adjusted

Effect of
ChangeCost of sales

$
341.9

$
345.7

$
3.8Loss before income tax


(68.4
)

(72.2
)

(3.8
)Income tax expense


123.3


121.9


(1.4
)Net loss

$
(191.7
)
$
(194.1
)
$
(2.4
)Basic earnings per share

$
(2.88
)
$
(2.91
)
$
(0.03
)Diluted earnings per share

$
(2.88
)
$
(2.91
)
$
(0.03
)




2006 (in millions)

As
originally
reported under
LIFO

As
Adjusted

Effect of
ChangeCost of sales

$
338.8

$
336.1

$
(2.7
)Income before income tax


238.2


240.9


2.7Income tax expense


93.4


94.4


1.0Net income

$
144.8

$
146.5

$
1.7Basic earnings per share

$
2.39

$
2.42

$
0.03Diluted earnings per share

$
2.08

$
2.10

$
0.02


98

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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)

The
effect of the change on the consolidated balance sheets as of December 31, 2008 and 2007 is as follows:

2008 (in millions)

As
Computed
under LIFO

As
Reported
under FIFO

Effect of
ChangeAssets:Inventory, net

$
112.3

$
117.3

$
5.0Deferred tax assets, net


221.0


224.1


3.1Other assets


190.3


176.8


(13.5
)Total assets

$
3,174.6

$
3,169.2

$
(5.4
)Stockholders' Equity:Accumulated deficit

$
(405.9
)
$
(411.3
)
$
(5.4
)




2007 (in millions)

As
originally
reported under
LIFO

As
Adjusted

Effect of
ChangeAssets:Inventory, net

$
99.1

$
99.0

$
(0.1
)Deferred tax assets, net


176.6


182.3


5.7Other assets


147.8


132.5


(15.3
)Total assets

$
3,506.2

$
3,496.5

$
(9.7
)Stockholders' Equity:Accumulated deficit

$
(624.1
)
$
(633.8
)
$
(9.7
)


The
effect of the change on consolidated statement of cash flows for the years ended December 31, 2008, 2007 and 2006 is as follows:

2008 (in millions)

As
Computed
under LIFO

As
Reported
under FIFO

Effect of
ChangeNet income:Adjustments to reconcile net income to net cash provided by operating activities

$
218.2

$
222.5

$
4.3Deferred income tax expense (benefit)


(53.5
)

(50.9
)

2.6Change in inventory


(32.3
)

(37.4
)

(5.1
)Change in other assets


13.6


11.8


(1.8
)


99

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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)



2007 (in millions)

As
originally
reported under
LIFO

As
Adjusted

Effect of
ChangeNet loss:Adjustments to reconcile net loss to net cash provided by operating activities

$
(191.7
)
$
(194.1
)
$
(2.4
)Deferred income tax expense (benefit)


(1.0
)

(2.4
)

(1.4
)Change in inventory


(6.0
)

(2.3
)

3.7Change in other assets


(54.9
)

(54.8
)

0.1




2006 (in millions)

As
originally
reported under
LIFO

As
Adjusted

Effect of
ChangeNet income:Adjustments to reconcile net income to net cash provided by operating activities

$
144.8

$
146.5

$
1.7Deferred income tax expense (benefit)


28.0


29.0


1.0Change in inventory


22.6


21.0


(1.6
)Change in other assets


(7.0
)

(8.1
)

(1.1
)




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 will mature in February 2009. The contract has not been designated as a hedging instrument and, accordingly, it has been 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.

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 $8.0 million, $7.7 million and ($0.8) million for the
three years ended December 31, 2008, 2007 and 2006, respectively.

Statement
of Financial Accounting Standards ("SFAS") No. 95, "Statement of Cash Flows" requires that the effect of exchange rate changes on cash held in foreign currencies be
reported as a separate item in the reconciliation of beginning and ending cash and cash equivalents. All other foreign

100

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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)

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



Our three most significant products are PROVIGIL® (modafinil) Tablets [C-IV],
FENTORA® (fentanyl buccal tablet) [C-II] and ACTIQ® (oral transmucosal 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. market2008

2007

2006

2008

2007

2006PROVIGIL sales


51
%

49
%

43
%

94
%

94
%

94
%FENTORA sales


8
%

8
%

2
%

100
%

100
%

100
%ACTIQ sales (including generic OTFC)


14
%

21
%

36
%

80
%

89
%

96
%FENTORA and ACTIQ sales (including generic OTFC)


22
%

29
%

38
%

87
%

92
%

96
%


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 31,2008

2007

2006

2008

2007

2006Major U.S. customers:AmerisourceBergen Corporation


13
%

7
%

8
%

17
%

13
%

15
%Cardinal Health, Inc.


18
%

17
%

17
%

28
%

28
%

30
%McKesson Corporation


19
%

15
%

15
%

26
%

25
%

26
%Total


50
%

39
%

40
%

71
%

66
%

71
%


101

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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)



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. See Note 7 herein.

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 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 7 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

102

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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)

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 8 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 and accrued
expenses approximate the respective fair values. The market value of our 2.0% convertible senior subordinated notes was $1.4 billion as compared to a carrying value of $820.0 million and
the market value of our 2010 zero coupon convertible subordinated notes was $273.7 million as compared to a carrying value of $199.5 million, at December 31, 2008 based on quoted
market values. The majority of our other debt instruments that
were outstanding as of December 31, 2008 do not have readily ascertainable market values; however, management believes that the carrying values approximate the respective fair values. See
Note 12 herein.



Goodwill represents the excess of purchase price over net assets acquired. In accordance with SFAS No. 142, "Goodwill and Other
Intangible Assets," goodwill is not amortized; rather, it is 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. In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," we review amortizable assets for impairment on an
annual basis or whenever changes in circumstances indicate the carrying value of the asset may not be recoverable. If impairment is indicated, we measure the amount of such impairment by comparing the
carrying value 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 Note 9 herein.



In the United States, we sell our proprietary products to pharmaceutical wholesalers, the largest three of which account for 71% of our
total consolidated gross sales for the year ended December 31, 2008. 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 believe that speculative buying of product, particularly in anticipation of possible price increases, has been the historic practice of many pharmaceutical wholesalers. In past years,
we attempted to minimize these fluctuations both by providing, from time to time, discounts to our customers to stock normal amounts of inventory (which we had historically defined as approximately
one month's supply at our current sales level) and by canceling orders if we believe a particular customer is speculatively buying inventory in anticipation of possible price increases.

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

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

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.

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 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" under the requirements of Emerging Issues Task Force Issue 00-21, "Multiple-Deliverable Revenue Arrangements" ("EITF 00-21"). If the
separate elements meet the requirements listed in EITF 00-21, 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. In connection with these collaborations, we also incurred costs that are
reflected in our operating expenses of $14.0 million for the year ended December 31, 2006. For the years ended December 31, 2008 and

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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 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.

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. At December 31, 2008, we are not aware of any expected additional entrants into the generic OTFC market that would result in a price
reduction to customers for inventory already purchased from us, and do not believe that any revenue recognized as of December 31, 2008 would be effected by a retroactive shelf stock adjustment.



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 or from 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. Accordingly, these costs are charged to expense as of the acquisition date.

The
value assigned to IPR&D is 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.

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

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.



We follow SFAS No. 130, "Reporting Comprehensive Income." This statement requires the classification of items of other
comprehensive income by their nature and disclosure of the accumulated balance of other comprehensive income, separately within the equity section of the balance sheet. Comprehensive income is
comprised of net earnings and other comprehensive income, which includes certain changes in equity that are excluded from net earnings.

At
December 31, accumulated other comprehensive income, net of taxes, consisted of the following:

2008

2007Foreign currency translation gains

$
41,989

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


1,641


1,664Change in unrealized investment gains and losses





8Other comprehensive income

$
43,630

$
148,703




We provide for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes," which requires that 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. 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, 2008.

In
July 2006, the FASB issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109"
("FIN 48"). FIN 48 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under
FIN 48, 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

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financial
statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. FIN 48
also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. FIN 48 is
effective for fiscal years beginning after December 15, 2006. We adopted the provisions of FIN 48 on January 1, 2007. See Note 16 herein.



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.



In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS 157"). SFAS 157 clarifies the
definition of fair value, establishes a framework for measuring fair value and expands the disclosures on fair value measurements. In February 2008, the FASB issued two final staff positions ("FSP")
amending SFAS 157. FSP SFAS 157-1 amends SFAS 157 to exclude SFAS No. 13, Accounting for Leases and its related interpretive accounting pronouncements that
address leasing transactions. FSP SFAS 157-2 delays the effective date of SFAS 157 until fiscal years beginning after November 15, 2008 for nonfinancial assets and
nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. We adopted SFAS 157 on January 1, 2008, except for the items
covered by FSP SFAS 157-2.

SFAS 157
establishes a three-tier fair value hierarchy, which prioritize the inputs used in measuring fair value as follows:



We
have no material assets or liabilities that are currently subject to recurring valuation under FAS 157.

In
November 2007, the EITF reached a final consensus on EITF Issue No. 07-1, "Accounting for Collaborative Arrangements Related to the Development and
Commercialization of Intellectual Property" ("EITF 07-1"). EITF 07-1 defines collaborative arrangements and establishes accounting and financial statement
disclosure requirements for such arrangements. EITF 07-1 is effective for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years.
Adoption is on a retrospective basis to all prior periods presented for all collaborative arrangements existing as of the effective date. Our current accounting policies are consistent with the
accounting under EITF 07-1. Therefore, the accounting for our collaborations will not change. The implementation of EITF 07-1 will result in expanded disclosures
for collaborations.

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

In
December 2007, the FASB issued SFAS No. 141(R), "Business Combinations" ("SFAS 141(R)"). SFAS 141(R) will significantly change the accounting for business
combinations in a number of areas including the treatment of contingent consideration, contingencies, acquisition costs, IPR&D and restructuring costs. In addition, under SFAS 141(R), changes
in deferred tax asset valuation allowances and acquired income tax uncertainties in a business combination after the measurement period will impact income tax expense. SFAS 141(R) applies
prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Early
application is not permitted. The effect of SFAS 141(R) on our consolidated financial statements will be dependent on the nature and terms of any business combinations that occur after its
effective date.

In
December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements" ("SFAS 160"). SFAS 160 amends Accounting Research
Bulletin No. 51 to establish accounting and reporting standards for the noncontrolling (minority) interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a
noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements and establishes a single method
of accounting for changes in a parent's ownership interest in a subsidiary that do not result in deconsolidation. SFAS 160 is effective for fiscal years beginning on or after
December 15, 2008. Early application is not permitted. The adoption of SFAS 160 will result in the reclassification of noncontrolling interest from liabilities to a component of equity
and we will continue to attribute losses to the noncontrolling interest even if that attribution results in a deficit noncontrolling interest balance.

In
March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS 161"). The new standard is intended to help investors
better understand how
derivative instruments and hedging activities affect an entity's financial position, financial performance and cash flows through enhanced disclosure requirements. The new standard is effective for
financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early adoption encouraged. We do not expect the adoption of SFAS 161 to have a
significant impact on our consolidated financial statements.

In
April 2008, the FASB issued FASB Staff Position No. FAS 142-3,"Determination of the Useful Life of Intangible
Assets" ("FSP FAS 142-3"). FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful
life of a recognized intangible asset under FASB Statement No. 142, "Goodwill and Other Intangible Assets". The FSP is intended to improve the consistency between the useful life of a
recognized intangible asset under Statement 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141(R) and other U.S. generally accepted accounting
principles. The new standard is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. We are currently evaluating the impact of FSP
FAS 142-3 adoption on our consolidated financial statements.

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

In May 2008, the FASB issued FASB Staff Position APB 14-1, "Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion" ("FSP
APB 14-1"). FSP APB 14-1 amends APB Opinion No. 14, "Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants," requiring issuers of
convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) to initially record the convertible debt at a discount based on the entity's nonconvertible
debt borrowing rate and amortize the debt discount over the expected term of the debt facility. The new standard is effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. Adoption is on a retrospective basis for all prior periods presented. Upon adoption on January 1, 2009, based on our
preliminary evaluation, our convertible debt liability will decrease by approximately $275 million (with a corresponding increase to equity, net of tax) and our 2009 interest expense for our
convertible notes will increase by approximately $47 million.

In
June 2008, the FASB ratified EITF Issue No. 07-5, "Determining Whether an Instrument (or embedded feature) is Indexed to an Entity's Own Stock"
("EITF 07-5"). EITF 07-5 provided guidance for determining whether an equity-linked financial instrument (or embedded feature) is indexed to an entity's own
stock. This determination is necessary for evaluating whether the instrument (or feature) is considered a derivative financial instrument under SFAS No. 133. The guidance is effective for
fiscal years beginning on or after December 15, 2008. We do not expect the adoption of EITF 07-5 to have a significant impact on our consolidated financial statements.

In
September 2008, the FASB ratified EITF Issue No. 08-7, "Accounting for Defensive Intangible Assets" ("EITF 08-7"). EITF 08-7
applies to all acquired intangible assets in situations in which the acquirer does not intend to actively use the asset but intends to hold (lock up) the asset to prevent its competitors from
obtaining access to the asset (a defensive intangible asset), unless the intangible asset must be expensed in accordance with other literature. The defensive intangible asset should be accounted for
as a separate unit of accounting and its useful life should be determined by estimating the period over which the defensive intangible asset will diminish in fair value. EITF 08-7
is effective prospectively for intangible assets acquired on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We do not expect the adoption
of EITF 08-7 to have a significant impact on our consolidated financial statements unless a future transaction results in the acquisition of a defensive intangible asset.

2. ACQUISITIONS AND TRANSACTIONS



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

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2. ACQUISITIONS AND TRANSACTIONS (Continued)

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 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 next three years.



On November 3, 2008, we entered into a license and convertible note transaction with Acusphere, Inc., a specialty
pharmaceutical company that develops new drugs and improved formulations of existing drugs using its proprietary microparticle technology. In connection with the transaction, we received an exclusive
worldwide license from Acusphere to all intellectual property of Acusphere relating to celecoxib to develop and market celecoxib for all current and future indications. In connection with this
license, we paid Acusphere an upfront fee of $5 million and agreed to pay a $15 million milestone upon FDA approval of the first new drug application prepared by us with respect to
celecoxib for any indication, as well as royalties on net sales. In addition, we purchased a $15 million senior secured three-year convertible note (the "Acusphere Note") from
Acusphere, secured by substantially all the assets of Acusphere (including Acusphere's intellectual property). The Acusphere Note is convertible at our option at any time prior to November 3,
2009 into either (i) a number of shares of Acusphere common stock at least equal to 51% of Acusphere's outstanding common stock on a fully-diluted basis on the date of conversion of the
Acusphere Note, (ii) an exclusive license to all intellectual property of Acusphere relating to Imagify (perflubutane polymer microspheres) to use, distribute and sell Imagify for
all current and future indications worldwide excluding those European countries subject to Acusphere's agreement with Nycomed Danmark ApS, or (iii) a $15 million credit against the
future milestone payment under the celecoxib license agreement. Separately, on March 28, 2008, we purchased license rights for Acusphere's HDDS technology for use in oncology therapeutics for
$10 million.

In
accordance with FIN 46R, we have determined that effective on November 3, 2008 Acusphere is a variable interest entity for which we are the primary beneficiary. As a
result, as of November 3, 2008 we have included the financial condition and results of operations of Acusphere in our consolidated financial statements. However, we do not have an equity
interest in Acusphere and, therefore, we have allocated the losses attributable to the minority interest in Acusphere to minority interest in the consolidated statement of operations and we have also
reduced the minority interest holders' ownership interest in Acusphere in the consolidated balance sheet by Acusphere's losses. For the year ended December 31, 2008, both of these amounts have
been limited to the value of the minority interest recorded as of November 3, 2008, but will not be limited starting January 1, 2009.

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2. ACQUISITIONS AND TRANSACTIONS (Continued)

During
2008, as a result of the FDA Advisory Panel's recommendation not to approve Imagify, 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. For the year ended December 31, 2008, a total of $21.1 million of net losses were allocated to the minority interest and $11.7 million of
net losses exceeded the minority interest value.

The
following summarizes the carrying amounts and classification of Acusphere's assets and liabilities included in our consolidated statement of financial position as of
December 31, 2008:

Cash and cash equivalents

$
16,450Receivables, net


4Other current assets


1,232Property and equipment, net


5,379Other assets


949Current portion of long-term debt


7,127Accounts payable


959Accrued expenses


4,886Long-term debt


1,769Other liabilities


741Accumulated deficit


(11,661
)


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



On November 25, 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. Under the terms of the
Immupharma Option Agreement, we paid ImmuPharma a $15 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. See Note 19 for additional details.



In November 2008, we paid a $25 million non-refundable fee to Ception for exclusive rights to negotiate an option to
purchase Ception at any time through the completion of its Phase IIb/III clinical trial for reslizumab in pediatric patients with eosinophilic esophagitis. This charge has been recorded in
other assets on our balance sheet. In January 2009, we entered into the option agreement with Ception. See Note 19 for additional details.

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3. RESTRUCTURING

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 currently performed in Salt Lake City. The transition of manufacturing activities and the closure of the Eden Prairie facility are expected to be completed within
two to three years. 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 170 net jobs eliminated at CIMA and approximately 80 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 expected to be recognized in 2008 through 2011 and are included in the United States segment. In addition to the costs described
above, we have started to recognize pre-tax, non-cash accelerated depreciation of plant and equipment at the Eden Prairie facility, which we expect to total approximately
$18 million to $20 million.

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:

Restructuring reserves as of January 1, 2008

$
Severance costs


6,877Manufacturing and personnel transfer costs


1,538Payments


(4,682
)Restructuring reserves as December 31, 2008

$
3,733


4. ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT EXPENSE

In 2008 we recognized acquired in-process research and development expense of (i) $10.0 million related to our purchased of license rights for Acusphere's HDDS
technology for use in oncology therapeutics, (ii) 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 and (iii) $17.0 million in connection with the initial consolidation of Acusphere, a variable interest entity for which we are the primary beneficiary.

In
2006, we recorded acquired in-process research and development expense of $5.0 million related to our armodafinil license and assignment agreement with TransForm
Pharmaceuticals, Inc.

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(In thousands, except share and per share data)

5. CASH, CASH EQUIVALENTS AND INVESTMENTS

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

2008

2007Cash and cash equivalents:Demand deposits

$
524,459

$
487,683Repurchase agreements





330,986Commercial paper





524,459


818,669Short-term investments (at market value):U.S. government agency obligations





Asset-backed securities





Bonds





1,599Commercial paper





5,997


7,596$
524,459

$
826,265


The
contractual maturities of our investments in cash, cash equivalents, and investments at December 31, 2008 are all less than one year.

6. RECEIVABLES, NET

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

2008

2007Trade receivables

$
342,904

$
280,091Receivables from collaborations





57Other receivables


81,476


8,984424,380


289,132Less reserve for sales discounts and allowances


(14,800
)

(12,356
)$
409,580

$
276,776


Trade
receivables are recorded at the invoiced amount and do not bear interest. In 2008, other receivable includes income taxes receivable of $71.9 million. 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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7. INVENTORY, NET

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

2008

As Adjusted
2007*Raw materials

$
27,555

$
32,139Work-in-process


35,501


23,743Finished goods


54,241


43,114Total inventory, net

$
117,297

$
98,996Inventory, net included in other non-current assets

$
111,598

$
104,688






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. At December 31, 2007, we had $0.4 million of capitalized inventory costs related to TREANDA included in inventory. 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. We intend to launch NUVIGIL commercially in the third quarter of 2009 and have included net NUVIGIL inventory balances of
$111.6 million and $104.7 million at December 31, 2008 and December 31, 2007, respectively, in other non-current assets, rather than inventory. Upon launch, our
NUVIGIL inventory balance will be reclassified to current 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 and our decision to launch NUVIGIL in the third quarter of 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 purchase commitments totaling $57.8 million as of December 31, 2008. Based on our current assessment, we have recorded a reserve of $26.0 million for purchase
commitments for modafinil raw materials not expected to be utilized.

In
August 2006, we announced that we received a letter from the FDA stating that our supplemental new drug application ("sNDA") for SPARLON (modafinil) Tablets
[C-IV], a proprietary dosage form of modafinil for the treatment of attention-deficit/hyperactivity disorder in children and adolescents, was not approvable. In
light of the FDA's decision, we currently are not pursuing development of SPARLON. Prior to the FDA's decision that the sNDA for SPARLON was not approvable, we had net capitalized inventory costs
related to SPARLON of $8.6 million. In

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except share and per share data)

7. INVENTORY, NET (Continued)

consideration
of the FDA's decision, we have fully reserved all of these capitalized inventory costs related to SPARLON at December 31, 2006.

8. PROPERTY AND EQUIPMENT, NET

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

Estimated Useful Lives

2008

2007Land and improvements




$
8,783

$
9,094Buildings and improvements


3-40 years


316,740


277,666Laboratory, machinery and other equipment


3-30 years


347,433


262,749Construction in progress





51,223


98,157724,179


647,666Less accumulated depreciation and amortization





(256,730
)

(147,270
)$
467,449

$
500,396


Depreciation
and amortization expense related to property and equipment, excluding depreciation related to assets used in the production of inventory, was $54.3 million,
$33.3 million and $34.8 million for the years ended December 31, 2008, 2007 and 2006, respectively. We had $50.5 million and $50.0 million of capitalized computer
software costs included in property and equipment, net, at December 31, 2008 and 2007, respectively. Depreciation and amortization expense related to capitalized software costs was
$15.6 million, $11.0 million and $11.2 million for the years ended December 31, 2008, 2007 and 2006, respectively. We had $9.0 million and $28.8 million of
capitalized software costs included in construction in progress at December 31, 2008 and 2007, respectively.

During
2008, as a result of the FDA Advisory Panel's recommendation not to approve Imagify, 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.

On
November 26, 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 10 for additional details.

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 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 year we have recorded pre-tax, non-cash charges
associated with accelerated depreciation of plant and equipment of $6.0 million related to the proposed divestiture based on the new estimated useful life. As of December 31, 2008, we
had $34.8 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)

9. 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

$
445,332


We
completed our annual test of impairment of goodwill as of July 1, 2008 and concluded that goodwill was not impaired. During 2008, we revised our segment reporting to reflect
our current operating structure. The goodwill allocation between segments above has also been reallocated based on changes to the way we view our reporting units, which has also been impacted by the
decision surrounding the Mitry-Mory facility.

10. INTANGIBLE ASSETS, NET AND OTHER ASSETS

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

December 31, 2008

December 31, 2007Estimated Useful Lives

Gross Carrying Amount

Accumulated Amortization

Net Carrying Amount

Gross Carrying Amount

Accumulated Amortization

Net Carrying AmountModafinil developed technology

15 years

$
99,000

$
46,200

$
52,800

$
99,000

$
39,600

$
59,400DURASOLV technology

14 years


70,000


21,304


48,696


70,000


16,435


53,565ACTIQ marketing rights

10-12 years


83,454


53,637


29,817


83,454


46,183


37,271GABITRIL product rights

9-15 years


107,148


61,848


45,300


107,215


54,636


52,579TRISENOX product rights

8-13 years


111,945


31,022


80,923


113,836


22,749


91,087VIVITROL product rights

15 years











110,000


12,833


97,167AMRIX product rights

18 years


99,332


16,932


82,400


99,257


6,204


93,053MYOCET trademark

20 years


143,077


21,462


121,615


194,653


19,465


175,188Other product rights

5-20 years


289,337


143,556


145,781


269,956


111,438


158,518$
1,003,293

$
395,961

$
607,332

$
1,147,371

$
329,543

$
817,828


Intangible assets are amortized over their estimated useful economic life using the straight line method. Amortization expense was
$100.7 million, $90.5 million, and $81.7 million for the years ended December 31, 2008, 2007, and 2006, respectively.

A
payment of $25 million, made in March 2008 upon FDA approval of TREANDA, was capitalized as an intangible asset and will be amortized over the useful life of the product. 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. In October 2008, Cephalon and 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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except share and per share data)

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

Laboratories, Inc.
In late November 2008, Cephalon and Eurand filed a lawsuit in U.S. District Court in Delaware against Mylan and Barr 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. These lawsuits are further described in Note 15. We do not believe
that this has an effect on our useful life of AMRIX at this time.

Estimated
amortization expense of intangible assets for each of the next five years is $85.2 million in 2009, $76.1 million in 2010, $68.9 million in 2011,
$59.3 million in 2012 and $49.0 million in 2013. For further discussion of the status of the re-examination of our DURASOLV patents, see Note 15 herein.



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. The Termination Agreement is intended to reduce our cost
structure and enhance competitiveness. 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. 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.

In
June 2006, we announced that data from our Phase III clinical program evaluating GABITRIL for the treatment of generalized anxiety disorder ("GAD") did not reach statistical
significance on the
primary study endpoints. We have no further plans to continue studying GABITRIL for the treatment of GAD. As a result, we performed a test of impairment on the carrying value of our investment in
GABITRIL product rights and recorded an impairment charge of $12.4 million in the second quarter of 2006 related to our European rights.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except share and per share data)

11. ACCRUED EXPENSES

At December 31, accrued expenses consisted of the following:

2008

2007Accrued settlement reserve

$


$
425,000Accrued compensation and benefits


51,383


52,749Accrued contractual sales allowances


76,769


51,400Accrued product sales returns allowances


36,423


25,335Accrued sales and marketing costs


32,721


24,412Accrued license fees and royalties


25,015


13,391Accrued income taxes


13,933


18,063Accrued clinical trial fees


7,973


5,069Accrued research and development


2,140


4,625Accrued product related costs





10,347Other accrued expenses


58,058


46,793$
304,415

$
677,184


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, which was paid in 2008. See Note 15 herein.

12. LONG-TERM DEBT

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

2008

20072.0% convertible senior subordinated notes due June 1, 2015

$
820,000

$
820,000Zero Coupon convertible subordinated notes first putable June 2008





213,564Zero Coupon convertible subordinated notes first putable June 2010


199,888


199,806Mortgage and building improvement loans


1,288


2,165Capital lease obligations


2,229


2,841Acusphere, Inc. obligations


8,896


Other


1,412


2,581Total debt


1,033,713


1,240,957Less current portion


(1,030,021
)

(1,237,169
)Total long-term debt

$
3,692

$
3,788


At
December 31, 2008, we have included $1.8 million of long-term debt and $7.1 million of short-term debt related to Acusphere, a variable
interest entity for which we are the primary beneficiary. Acusphere liabilities represent contractual obligations of Acusphere for intellectual property rights, equipment financing, construction
financing and lease obligations. Acusphere's creditors have no recourse to the general credit of Cephalon.

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(In thousands, except share and per share data)

12. LONG-TERM DEBT (Continued)

Aggregate
maturities of long-term debt at December 31, 2008 are as follows:

2009

$
1,030,0212010


2,6982011


5182012


1532013


1612014 and thereafter


162$
1,033,713


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 2006, our 2008 Notes and Zero Coupon convertible subordinated notes first putable June 2010 ("2010 Notes")
(collectively, the "Zero Coupon Notes") became convertible and the related deferred debt issuance costs of $13.1 million were written off.

Our
convertible notes will be classified as current liabilities and presented in current portion of long-term debt on our consolidated balance sheet if our stock price is
above the restricted conversion prices of $56.04 or $67.80 with respect to the 2.0% convertible senior subordinated notes due June 1, 2015 (the "2.0% Notes") or the 2010 Notes, respectively at
the balance sheet date. At December 31, 2008, our stock price was $77.04 and, therefore, all of our convertible notes are considered to be current liabilities and are presented in current
portion of long-term debt on our consolidated balance sheet. At December 31, 2007, our stock price was $71.76, and, therefore, all of our convertible notes were considered to be
current liabilities and are presented in current portion of long-term debt on our consolidated balance sheet.

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 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.

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(In thousands, except share and per share data)

12. LONG-TERM DEBT (Continued)



For the year ended December 31, 2007, we recognized a $5.3 million gain on extinguishment of debt related to the
Pennsylvania Industrial Development Authority ("PIDA") loan forgiveness. See "Mortgage and Building Improvement Loans" below.

In
December 2006, certain holders of our Zero Coupon Notes and 2.0% Notes approached us and we agreed to exchange $436.9 million aggregate principal amount of our convertible
notes for cash payments totaling $175.3 million and the issuance of 6.2 million shares of our common stock. We recorded $310.1 million in additional paid-in capital
related to the shares issued. Concurrent with these exchanges, we amended our convertible note hedge agreements (described below) related to the Zero Coupon Notes and 2.0% Notes and amended the
warrant agreements related to the Zero Coupon Notes. The effect of these amendments was to terminate the portion of the convertible note hedge and, with respect to the Zero Coupon Notes, the warrants
agreements related to the $436.9 million principal amount of notes exchanged. In settlement of these amendments, we received 1.8 million shares of our common stock from the
counterparties to these agreements. We recorded $129.5 million in additional paid-in capital and treasury stock related to the shares received. The warrants related to the 2.0%
Notes exchanged in December 2006 remain outstanding.

For
the year ended December 31, 2006, we recognized $48.1 million of debt exchange expense in accordance with SFAS No. 84, "Induced Conversion of Convertible Debt"
("SFAS 84") as follows:

Fair value of cash and securities transferred

Fair value issuable under original conversion

Total debt exchange expenseZero Coupon Notes

$
445,617

$
412,646

$
32,9712.0% Notes


167,335


152,184


15,151Total for 2006

$
612,952

$
564,830

$
48,122




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, 2008. 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%

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(In thousands, except share and per share data)

12. LONG-TERM DEBT (Continued)

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:



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. We also 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

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12. LONG-TERM DEBT (Continued)

$217.1 million.
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. 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. If the market price per share
of our common stock is above $67.92 per share, we will be required to deliver either shares of our common stock or cash to DB representing the value of the warrants in excess of the strike price of
the warrants. In accordance with EITF Issue No. 00-19, "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled In, a Company's Own Stock"
("EITF 00-19") and SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150"), we recorded the
convertible note hedges and warrants 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.

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.



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, 2008, $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

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(In thousands, except share and per share data)

12. LONG-TERM DEBT (Continued)

$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 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:



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12. LONG-TERM DEBT (Continued)



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.

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. 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 2010 Notes that
occur from time to time, there remain outstanding warrants to purchase 3,532,035 shares of our common stock. 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. 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. At our option, the warrants may be settled in either net cash or net shares; the convertible note hedge must be settled using net shares. Under the
convertible note hedge, CSFBI will deliver to us the aggregate number of shares we are required to deliver to a holder of Zero Coupon Notes that presents such Zero Coupon Notes for conversion,
provided, however, that if the market price per share of our common stock is above $72.08, we will be

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except share and per share data)

12. LONG-TERM DEBT (Continued)

required
to deliver either shares of our common stock or cash to CSFBI representing the value of the warrants in excess of the strike price of the warrants. In accordance with EITF
No. 00-19 and SFAS 150, we recorded the convertible note hedge and warrants in additional paid-in capital as of June 30, 2003, and do not recognize
subsequent changes in fair value. We also recognized a deferred tax asset of $90.5 million in the second quarter of 2003 for the effect of the future tax benefits related to the convertible
note hedge.

The
warrants have a strike price of $72.08. The 3,532,035 warrants outstanding as of December 31, 2008 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.



In March 1995, we purchased the buildings housing our administrative offices and research facilities in West Chester, Pennsylvania for
$11.0 million. We financed the purchase through the assumption of an existing $6.9 million first mortgage and from $11.6 million in state funding provided by the Commonwealth of
Pennsylvania. The first mortgage has a 15-year term
with an annual interest rate of 9.625%. The state funding has a 15-year term with an annual interest rate of 2%. The loans require annual aggregate principal and interest payments of
$1.8 million. The loans are secured by the buildings and by all our equipment located in Pennsylvania that is otherwise unsecured.

In
November 2002, 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 the
third quarter of 2007.

13. 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 14.0 million and 4.3 million shares authorized for issuance under the 2004 Plan and the 2000 Plan,
respectively. At

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(In thousands, except share and per share data)

13. STOCKHOLDERS' EQUITY (Continued)

December 31,
2008, the shares available for future grants of stock options or restricted stock units were 1,209,407, of which up to 116,300 may be issued as restricted stock units.

Effective
January 1, 2006, we adopted the fair value recognition provisions of SFAS 123(R), using the modified-prospective transition method. Under this transition method,
stock-based compensation is recognized in the consolidated financial statements for stock granted. Compensation expense recognized in the financial statements includes estimated expense for stock
options granted after December 31, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R), and the estimated expense for the stock options
granted prior to, but not vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123. SFAS 123(R) also
requires us to estimate forfeitures in calculating the expense relating to stock-based compensation as opposed to only recognizing forfeitures and the corresponding reduction in expense as they occur.
We recorded an adjustment for this cumulative effect for restricted stock units and recognized a reduction in stock-based compensation in the first quarter of 2006 consolidated statements of
operations allocated equally between research and development and selling, general and administrative expenses based on the employees' compensation allocation between these line items. The adjustment
was not significant to the consolidated statement of operations.

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

2008

2007

2006Stock option expense

$
26,018

$
29,945

$
31,370Restricted stock unit expense


17,956


16,750


11,437Total stock-based compensation expense*

$
43,974

$
46,695

$
42,807Total stock-based compensation expense after-tax

$
28,583

$
29,558

$
27,097






Compensation
expense is recognized in the period the employee performs the service in accordance with SFAS 123(R). For the year ended December 31, 2006, the
impact of the adoption of SFAS 123(R) on basic and diluted income per common share was $0.32 and $0.28, respectively. The impact of capitalizing stock-based compensation was not significant at
December 31, 2008, 2007 and 2006 respectively.

During
the second quarter of 2006, we elected to adopt the short-cut method of FASB Staff Position No. SFAS 123(R)-3 "The Transition Election Related to
Accounting for the Tax Effects of Share Based Payment Awards" ("FSP SFAS 123(R)-3") to determine our pool of windfall tax benefits under SFAS 123(R). Under the
short-cut method, our historical pool of windfall tax benefits was calculated as cumulative net increases to additional paid-in capital related to tax benefits from stock-

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(In thousands, except share and per share data)

13. STOCKHOLDERS' EQUITY (Continued)

based
compensation after the election date of SFAS 123 less the product of cumulative SFAS 123 compensation cost, as adjusted, multiplied by the blended statutory tax rate at adoption of
SFAS 123(R).
Using this calculation, we determined our historical windfall tax pool was zero as of January 1, 2006. Following the guidance within FSP SFAS 123(R)-3, we retrospectively
applied the short-cut method to our consolidated financial statements for the three months ended March 31, 2006. Under the transition provisions of the short-cut method,
for awards fully vested at the adoption date of SFAS 123(R) and subsequently settled, the pool of windfall tax benefits is equal to the total tax benefit recognized in additional
paid-in capital upon settlement. Prior to the election of the short-cut method, we accounted for the on-going income tax effects for partially or fully vested
awards as of the date of SFAS 123(R) adoption using the "as if" method of accounting required by the long-form method under SFAS 123(R). The retrospective application
adjustments to our consolidated financial statements for the three months ended March 31, 2006 had no impact on our financial position or results of operations. For the three months ended
March 31, 2006, there was no change to our total net cash flows; however, our net cash used for operating activities increased by $21.5 million to $33.6 million and our net cash
provided by financing activities increased by $21.5 million to $127.9 million. Upon adoption during the second quarter of 2006, the impact of the election was not significant to our
consolidated financial statements. The cumulative pool of windfall tax benefits was $48.0 million and $40.8 million as of December 31, 2008 and 2007, 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:

2008

2007

2006Stock option expected forfeiture rate


13.9
%

12.7
%

12.2
%Restricted stock unit expected forfeiture rate


16.5
%

14.4
%

12.2
%


Under the provisions of SFAS 123(R), 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, as described in SEC's Staff Accounting Bulletin No. 107, "Share-Based Payment." 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.

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(In thousands, except share and per share data)

13. STOCKHOLDERS' EQUITY (Continued)

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:

2008

2007

2006Risk free interest rate


2.16
%

3.73
%

4.62
%Expected term (years)


5.62


5.64


6.18Expected volatility


35.6
%

32.5
%

41.0
%Expected dividend yield



%


%


%Estimated fair value per stock option granted

$
26.75

$
28.64

$
33.20


On
May 17, 2007, the 2004 Plan was amended, following approval by Cephalon stockholders, to increase by 1,000,000 shares the total number of shares of common stock
authorized for issuance under the 2004 Plan, from 11,450,000 shares to 12,450,000 shares. This amendment also provides that no more than 400,000 shares of common stock may be issued pursuant to
restricted stock unit awards granted under the 2004 Plan after May 16, 2007.

On
May 23, 2008, the 2004 Plan was further amended, following approval by Cephalon stockholders, to increase by 1,500,000 shares the total number of shares of common stock
authorized for issuance under the 2004 Plan, from 12,450,000 shares to 13,950,000 shares. This amendment also provides that no more than 500,000 shares of common stock may be issued pursuant to
restricted stock unit awards granted under the 2004 Plan after May 22, 2008.



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

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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(In thousands, except share and per share data)

13. 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




2006Shares

Weighted
Average
Exercise Price

Weighted
Average
Remaining
Contractual
Life (years)

Aggregate
Intrinsic ValueOutstanding, January 1,


9,955,904

$
50.84Granted


1,116,800


69.85Exercised


(3,058,430
)

47.46Forfeited


(305,475
)

50.54Expired


(14,501
)

50.62Outstanding, December 31,


7,694,298

$
54.90


6.7

$
121,836Vested stock options at end of period


5,143,900

$
53.39


5.6

$
89,430


As
of December 31, 2008, there was $45.8 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, 2008, 2007 and 2006, we received net proceeds of $44.0 million, $93.9 million and
$143.5 million, respectively, from the exercise of stock options.

The
intrinsic value of stock options exercised for the years ended December 31, 2008, 2007 and 2006 was $26.2 million, $50.2 million and $79.8 million,
respectively. The estimated fair value of shares that vested for the years ended December 31, 2008, 2007 and 2006 was $24.8 million, $35.6 million and $40.8 million,
respectively.

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(In thousands, except share and per share data)

13. STOCKHOLDERS' EQUITY (Continued)



The following tables summarize the restricted stock units activity for the years ended December 31:

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




2006Shares

Weighted Average Fair ValueNonvested, January 1,


624,575

$
49.52Granted


325,900


71.06Vested


(180,125
)

49.23Forfeited


(60,450
)

49.48Nonvested, December 31,


709,900

$
59.49Intrinsic value as of December 31,

$
49,984


As
of December 31, 2008, there was $38.7 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

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13. STOCKHOLDERS' EQUITY (Continued)

pre-tax
compensation up to established federal limits on aggregate participant contributions. For the year ended December 31, 2006, participants were permitted to contribute up to
20% 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% of the employee elected salary deferral up to six % of eligible compensation. For the years ended December 31, 2008, 2007, and 2006, we contributed $12.3 million,
$12.6 million and $11.8 million to the plan, respectively.



At December 31, 2008, the conversion or exercise of all outstanding stock options and restricted stock units would increase the
outstanding number of shares of common stock by 7.4 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.



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.

14. 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 or "if converted" method, as follows:



The
2.0% Notes and New Zero Coupon Notes each are considered to be Instrument C securities as defined by EITF 90-19, "Convertible Bonds with Issuer Option to
Settle for Cash upon Conversion"; 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

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

the
average market price is above the applicable conversion prices of the 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 and the New Zero
Coupon Notes. SFAS No. 128, "Earnings Per Share" ("SFAS 128"), however, requires us 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. SFAS 128 further requires that the impact of the sale of
the warrants be computed using the treasury stock method. For example, using the treasury stock method, if the average price of our stock during the period ended December 31, 2008 had been
$75.00, $85.00 or $95.00, the shares from the warrants to be included in diluted EPS would have been 2.1 million, 5.0 million and 7.3 million shares, respectively. The total
number of shares that could potentially be included under the warrants is 26.8 million.

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)

2008

2007*

2006Average market price per share of Cephalon stock

$
69.42

$
74.90

$
66.05Shares included in diluted EPS calculation:2.0% Notes


5,747





5,755New Zero Coupon Notes


813





1,553Warrants related to 2.0% Notes


425






Warrants related to New Zero Coupon Notes









Total (Treasury Stock Method)


6,985





7,308Other ("If-Converted" Method)


4





124Total


6,989





7,432






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(In thousands, except share and per share data)

14. 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)

2008

As Adjusted 2007*

As Adjusted 2006*Basic income (loss) per common share computation:Numerator:Net income (loss) used for basic income (loss) per common share

$
222,548

$
(194,125
)
$
146,509Denominator:Weighted average shares used for basic income (loss) per common share


68,018


66,597


60,507Basic income (loss) per common share

$
3.27

$
(2.91
)
$
2.42Diluted income (loss) per common share computation:Numerator:Net income (loss) used for basic income (loss) per common share

$
222,548

$
(194,125
)
$
146,509Interest on convertible notes, net of tax








154Net income (loss) used for diluted income (loss) per common share

$
222,548

$
(194,125
)
$
146,663Denominator:Weighted average shares used for basic income (loss) per common share


68,018


66,597


60,507Effect of dilutive securities:Convertible subordinated notes and warrants


6,989





7,432Employee stock options and restricted stock units


1,090





1,733Weighted average shares used for diluted income (loss) per common share


76,097


66,597


69,672Diluted income (loss) per common share

$
2.92

$
(2.91
)
$
2.10






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(In thousands, except share and per share data)

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



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

(In thousands)

2008

2007

2006Weighted average shares excluded:Convertible subordinated notes and warrants


25,006


35,042


26,821Employee stock options and restricted stock units


2,963


2,888


2,69327,969


37,930


29,514


15. 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 $22.6 million, $22.7 million and $20.0 million in 2008, 2007, and 2006, respectively.

Estimated
lease expense for each of the next five years as of December 31, 2008 is as follows:

2009

$
18,3792010


15,1192011


12,0032012


9,9042013


9,3832014 and thereafter


29,662$
94,450




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.

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.

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15. COMMITMENTS AND CONTINGENCIES (Continued)



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. 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.

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, 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 agreed to purchase minimum amounts of modafinil through 2012, with aggregate remaining
purchase commitments totaling $57.8 million as of December 31, 2008. Based on our current assessment, we have recorded a reserve of $26.0 million for purchase commitments for
modafinil raw materials not expected to be utilized. See Note 7 herein.

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, 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

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15. COMMITMENTS AND CONTINGENCIES (Continued)

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 U.S. District Court for the Eastern District of Pennsylvania, 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 filed by an indirect purchaser of PROVIGIL was filed in September 2007. The plaintiffs in all of these actions are seeking monetary damages and/or equitable relief. We moved to
dismiss the class action complaints in November 2006 and those motions are still pending.

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 U.S. District Court for the
Eastern District of Pennsylvania, 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. 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 we intend to initiate a patent infringement lawsuit against Apotex. We
believe that the private antitrust complaints described in the preceding paragraph and the Apotex antitrust complaint 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
November 2005 and March 2006, we received notice that Caraco Pharmaceutical Laboratories, Ltd. 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 against either Caraco or Apotex as of the filing date of this report, although Apotex has filed suit against us, as
described above. In early August 2008, we received notice that 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 as of the filing date of this report.



In October 2008, Cephalon and Eurand, Inc. ("Eurand"), received Paragraph IV certification letters relating to ANDAs
submitted to the FDA by Mylan Pharmaceuticals, Inc. and Barr Laboratories, Inc., 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

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15. COMMITMENTS AND CONTINGENCIES (Continued)

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. Under the provisions of the Hatch-Waxman
Act, the filing of these lawsuits stays any FDA approval of each ANDA until the earlier 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
LABS, filed lawsuits in U.S. District Court in Delaware against Watson and Barr for infringement of these patents. Under the provisions of the Hatch-Waxman Act, the filing of these lawsuits stays any
FDA approval of each ANDA until the earlier 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.

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.



In early November 2007, we announced that we had reached an agreement in principle with the U.S. Attorney's Office ("USAO") in
Philadelphia and the DOJ with respect to the USAO investigation that began in September 2004. In September 2008, to finalize our previously announced agreement in principle, we entered into a
settlement agreement (the "Settlement Agreement") with the DOJ, the USAO, the Office of Inspector General of the Department of Health and Human Services ("OIG"), TRICARE Management Activity, the U.S.
Office of Personnel Management (collectively, the "United States") and the relators identified in the Settlement Agreement (the "Relators") 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 agreed to pay a total of $375 million (the "Payment") plus interest of $11.3 million. We also agreed to pay the Relators' attorneys'
fees of $0.6 million. Pursuant to the Settlement Agreement, the United States and the Relators released us from all Claims and the United States agreed to refrain from seeking our

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15. COMMITMENTS AND CONTINGENCIES (Continued)

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), of which $40 million applied to a criminal fine and $10 million applied to satisfy the forfeiture
obligation. All of the payments described above were made in the fourth quarter of 2008.

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 also announced that we had 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 agreed to pay a total of $6.15 million to Connecticut, of which $3.8 million will fund Connecticut Department of Public Health cancer initiatives
and $0.2 million will fund a state electronic prescription monitoring program; and (ii) Connecticut released us from any claim relating to the promotional practices that were the subject
of Connecticut's investigation. On the same date 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 agreed to pay a total of $0.7 million to Massachusetts, of which $0.45 million will fund Massachusetts cancer initiatives and benefit consumers in 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 on behalf of entities that claim to have purchased 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 2007, the plaintiffs filed a consolidated and amended complaint that also
allege violations of RICO and conspiracy to violate RICO. 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 purchased 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 complaint 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

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15. COMMITMENTS AND CONTINGENCIES (Continued)

and,
ultimately, due to the nature of litigation, there can be no assurance that these efforts will be successful.

In
March 2007 and March 2008, we received letters requesting information related to ACTIQ and FENTORA from Congressman Henry A. Waxman in his capacity as Chairman of the House Committee
on Oversight and Government Reform. The letters request information concerning our sales, marketing and research practices for ACTIQ and FENTORA, among other things. We have cooperated with these
requests and provided documents and other information to the Committee.



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. We believe the plaintiff's allegations in this matter are without merit and we
intend to vigorously defend ourselves in this matter.



In the third quarter of 2007, the 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 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. The appeals are pending. While we intend to vigorously defend these patents, these efforts,
ultimately, may not be successful. The invalidity of the DURASOLV patents could have a material adverse impact on revenues from 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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except share and per share data)

15. COMMITMENTS AND CONTINGENCIES (Continued)

contingencies.
As of December 31, 2008, the potential milestone and other contingency payments due under current contractual agreements are $701.7 million.

We
have committed to make future minimum payments to third parties for certain raw material inventories. Under these contracts, we have agreed to purchase minimum amounts of modafinil
through 2012, with aggregate purchase commitments totaling $57.8 million as of December 31, 2008. Based on our current assessment, we have recorded a reserve of $26.0 million for
purchase commitments for modafinil raw materials not expected to be utilized. The minimum purchase commitments totaled $83.0 million as of December 31, 2007, the majority of which relate
to modafinil and armodafinil.

Acusphere
liabilities represent contractual obligations of Acusphere for intellectual property rights, equipment financing, construction financing and lease obligations. Acusphere's
creditors have no recourse to the general credit of Cephalon.

16. INCOME TAXES

In July 2006, the FASB issued FIN 48 which addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the
financial statements. Under FIN 48, a company 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 should be measured based on
the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. FIN 48 also provides guidance on de-recognition, classification,
interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. We adopted the provisions of FIN 48 on January 1, 2007, and as a result of the
adoption of FIN 48, we recognized a $33.9 million increase in the liability for unrecognized tax benefits. This increase in liability resulted in a decrease to the January 1, 2007
retained earnings balance in the amount of $7.2 million, a net reduction in deferred tax liabilities of $18.5 million and a net increase in deferred tax assets of $8.2 million.

Unrecognized
tax benefits for the year ended December 31:

2008

2007(1)Unrecognized tax benefits beginning of year

$
79,593

$
50,551Gross change for current year positions


7,591


15,890Increase for prior period positions


2,986


15,348Decrease for prior period positions


(21,347
)

(2,196
)Decrease due to settlements and payments


(6,221
)

Decrease due to statute expirations





Unrecognized tax benefits end of year

$
62,602

$
79,593






The
amount of unrecognized tax benefits at December 31, 2008 is $62.6 million and $79.6 million at December 31, 2007 of which $27.5 million and
$27.8 million would impact our effective tax rate,

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(In thousands, except share and per share data)

16. INCOME TAXES (Continued)

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 benefit related to unrecognized tax benefits for the year ended December 31, 2008 was
$0.9 million compared to an expense of $2.5 million in 2007, principally due to the settlement of the 2003-2005 Internal Revenue Service ("IRS") audit. Accrued interest
expense as of December 31, 2008 and December 31, 2007 was $3.0 million and $3.9 million respectively. Income tax penalties are included in other income (expense). Tax
penalties decreased during the year by $0.9 million. Accrued tax penalties are not significant.

During
2008 the IRS has completed its examination of Cephalon, Inc.'s 2003, 2004 and 2005 federal income tax returns. We have been contacted by the IRS to begin the examination of
the Cephalon, Inc. U.S. federal income tax returns for the years 2006 and 2007 during the first quarter of 2009. Cephalon, Inc. remains open for examination by the IRS for the tax years
ended 2006, 2007 and 2008. Zeneus Pharma S.a.r.L. is under examination by the French Tax Authorities for 2003 and 2004. During 2008 Cephalon France completed its income tax audit for the years 2004
and 2005 with no material findings. During the fourth quarter of 2008 Cephalon Pharma GmbH, in Germany, completed its examination for 2000-2004 with no material findings. Cephalon Germany
GmbH is under examination for years 2004-2008. Cephalon Pharma S.L., in Spain, is under examination for 2003 and during 2008 agreed to a proposal from the Spanish authorities to settle
this examination. We have reserved our right to appeal this settlement. Our filings in the United Kingdom remain open to examination for 2005-2008. In other significant foreign
jurisdictions, the tax years that remain open for potential examination range from 2001-2008. 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 from the 2003-2005 IRS settlement is expected not to
be material but will be subject to examinations, and the 2006-2008 calendar years, remains 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.

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 15. 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.

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(In thousands, except share and per share data)

16. INCOME TAXES (Continued)

The
components of income (loss) before income taxes, and after minority interest, for the years ended December 31:

2008

As Adjusted
2007*

As Adjusted
2006*United States

$
225,535

$
(36,922
)
$
310,172Foreign


(23,652
)

(35,321
)

(69,244
)Total

$
201,883

$
(72,243
)
$
240,928






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

2008

As Adjusted
2007*

As Adjusted
2006*Current taxes:United States

$
21,587

$
101,090

$
61,182Foreign


5,519


19,497


4,679State


3,118


3,656


(487
)30,224


124,243


65,374Deferred taxes:United States


(30,724
)

32,765


35,493Foreign


(29,234
)

(95,299
)

(13,052
)State


(4,901
)

1,684


(8,092
)(64,859
)

(60,850
)

14,349Change in valuation allowance


13,970


58,489


14,696(50,889
)

(2,361
)

29,045Total

$
(20,665
)
$
121,882

$
94,419






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16. INCOME TAXES (Continued)



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

2008

As Adjusted
2007*

As Adjusted
2006*U.S. Federal statutory rateexpense (benefit)


35.0
%

(35.0
)%

35.0
%Manufacturers' deduction





(8.8
)

(0.8
)Meals and entertainment


1.7


4.0


1.0Executive compensation


1.9


5.4


1.4Other permanent book/tax differences


0.9


3.3


0.5Revision of prior years' estimates


4.2


(15.1
)

0.2State income taxes, net of U.S. federal tax benefit


(2.0
)

8.4


(2.2
)Tax rate differential & permanent items on foreign income


(2.6
)

(88.2
)

1.5Change in valuation allowance


6.5


90.7


6.1Research and development credit


(10.1
)

(11.7
)

(1.2
)Settlement reserve


(40.8
)

206.1


Non-deductible loss of variable interest entity


2.0





Change in reserve for contingent liability


(7.1
)

9.7


(2.6
)Other


0.2


(0.1
)

0.3Consolidated effective tax rate


(10.2
)%

168.7
%

39.2
%






For
the year ended December 31, 2007, we recorded reserves totaling $425.0 million related to the resolution of the U.S. Attorney's investigation discussed in
Note 15. However, the tax benefit was not recorded until 2008 when the agreement was reached and the nature of the settlement payments was defined.

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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(In thousands, except share and per share data)

16. INCOME TAXES (Continued)

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

2008

As Adjusted
2007*Deferred tax assets:Net operating loss carryforwards

$
172,962

$
158,384Original issue discount


97,896


109,970Capitalized research and development expenditures


6,096


11,081Unrealized profit in inventory


89,040


61,493Research and development tax credits


14,912


6,208Acquired product rights and intangible assets


33,108


90,998Reserves and accrued expenses


64,256


30,005Alternative minimum tax credit carryforwards


461


13Deferred revenue


1,014


1,259Deferred compensation


8,466


8,736SFAS 123(R) stock-based compensation expense


22,675


15,883Deferred charges on convertible debentures


7,323


9,431Accounts receivable discounts and allowance


39,041


28,174Other comprehensive income


1,025


Other, net


3,257


3,867Total deferred tax assets


561,532


535,502Valuation allowance


(140,448
)

(132,949
)Net deferred tax assets

$
421,084

$
402,553Deferred tax liabilities:Acquired intangible assets from Group Lafon acquisition

$
18,338

$
30,319Acquired intangible assets from CIMA LABS acquisition


24,344


28,250Acquired intangible assets from CTI acquisition


12,500


14,586Acquired intangible assets from Zeneus acquisition


43,450


49,034Deferred revenue


91


1,816Fixed assets


32,609


10,704Other comprehensive income





206Other


843


158Total deferred tax liabilities

$
132,175

$
135,073Net deferred tax assets

$
288,909

$
267,480






In
accordance with SFAS 109, the above overall net deferred tax assets for the year ended December 31, 2008 and 2007 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except share and per share data)

16. INCOME TAXES (Continued)

At
December 31, 2008, we had gross operating loss carryforwards for U.S. federal income tax purposes of $68.8 million and apportioned state gross operating losses of
$645.9 million that expire in varying years starting in 2009. We also have foreign gross operating losses of $427.4 million, of which $105.2 million will begin to expire in 2009
and $322.2 million may be carried forward with indefinite expiration dates. Federal and state research tax credits of $14.9 million are available to offset future tax liabilities and
expire starting in 2009. 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 not more likely than not to be recovered. The remaining deferred tax assets are offset by a valuation allowance of $140.4 million and $132.9 million at December 31, 2008 and
2007, 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. A
portion of the remaining valuation allowance at December 31, 2008 and December 31, 2007 in the amount of $ 23.1 million and $28.2 million respectively relate to acquired
foreign net operating losses for which upon release of the associated valuation allowance a benefit to income may result. For the year ended December 31, 2008, the increase in valuation
allowance of $7.5 million was principally due to an increase of $17.8 million in the company's U.S. state and foreign net operating losses that are not more likely than not to be
recovered, partially offset by decreases of $4.7 million due to currency translation adjustments and $4.4 million due to the release of the valuation allowance to acquired foreign net
operating losses, for which a reduction in goodwill was recorded.

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 $7.3 million and $13.6 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, 2008 and 2007, respectively.

Our
foreign subsidiaries had no net unremitted earnings at December 31, 2008 and 2007. 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 entity are not realizable benefits and or liabilities to
Cephalon. See Note 2 for additional information.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except share and per share data)

17. SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)

2008 Quarter EndedDecember 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

$
11,586

$
112,043

$
60,068

$
38,851Basic income per common share

$
0.17

$
1.64

$
0.89

$
0.57Weighted average number of common shares outstanding


68,505


68,118


67,777


67,665Diluted income per common share

$
0.15

$
1.42

$
0.80

$
0.52Weighted average number of common shares outstanding-assuming dilution


77,823


78,920


74,852


74,286




2007 Quarter EndedAs Adjusted
December 31*,

September 30,

June 30,

March 31,Statement of Operations Data:Net sales

$
439,497

$
428,729

$
435,194

$
423,879Gross profit


345,776


346,471


352,028


337,333Net income (loss)

$
41,761

$
(306,763
)
$
(4,308
)
$
75,185Basic income (loss) per common share

$
0.62

$
(4.58
)
$
(0.06
)
$
1.14Weighted average number of common shares outstanding


67,187


66,931


66,445


65,806Diluted income (loss) per common share

$
0.53

$
(4.58
)
$
(0.06
)
$
0.99Weighted average number of common shares outstanding-assuming dilution


78,734


66,931


66,445


75,835


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except share and per share data)

18. SEGMENT INFORMATION

Revenues by segment for the years ended December 31:

2008

2007

2006United
States

Europe

Total

United
States

Europe

Total

United
States

Europe

TotalSales:PROVIGIL

$
924,986

$
63,432

$
988,418

$
801,639

$
50,408

$
852,047

$
691,779

$
43,052

$
734,831GABITRIL


52,441


8,256


60,697


50,642


6,668


57,310


54,971


4,316


59,287CNS


977,427


71,688


1,049,115


852,281


57,076


909,357


746,750


47,368


794,118ACTIQ


122,980


53,541


176,521


199,407


40,665


240,072


550,390


27,252


577,642Generic OTFC


95,760





95,760


129,033





129,033


54,801





54,801FENTORA


155,246





155,246


135,136





135,136


29,250





29,250AMRIX


73,641





73,641


8,401





8,401








Pain


447,627


53,541


501,168


471,977


40,665


512,642


634,441


27,252


661,693TREANDA


75,132





75,132

















Other Oncology


18,566


91,919


110,485


16,561


76,316


92,877


12,617


63,425


76,042Oncology


93,698


91,919


185,617


16,561


76,316


92,877


12,617


63,425


76,042Other


49,667


157,897


207,564


52,702


159,721


212,423


43,467


144,852


188,319Total Sales


1,568,419


375,045


1,943,464


1,393,521


333,778


1,727,299


1,437,275


282,897


1,720,172Other Revenues


29,546


1,544


31,090


40,149


5,190


45,339


35,399


8,498


43,897Total External Revenues


1,597,965


376,589


1,974,554


1,433,670


338,968


1,772,638


1,472,674


291,395


1,764,069Inter-Segment Revenues


22,397


99,686


122,083


26,092


100,992


127,084


14,806


88,879


103,685Elimination of Inter-Segment Revenues


(22,397
)

(99,686
)

(122,083
)

(26,092
)

(100,992
)

(127,084
)

(14,806
)

(88,879
)

(103,685
)Total Revenues

$
1,597,965

$
376,589

$
1,974,554

$
1,433,670

$
338,968

$
1,772,638

$
1,472,674

$
291,395

$
1,764,069


Income (loss) before income taxes and after minority interest by segment for the years ended December 31:

2008

As Adjusted
2007*

As Adjusted
2006*United States

$
222,710

$
(53,380
)
$
297,862Europe


(20,827
)

(18,863
)

(56,934
)Total

$
201,883

$
(72,243
)
$
240,928


Long-lived
assets by segment at December 31:

2008

As Adjusted
2007*United States

$
1,395,840

$
1,412,337Europe


443,826


656,617Total

$
1,839,666

$
2,068,954


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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. SEGMENT INFORMATION (Continued)

Total
assets by segment at December 31:

2008

As Adjusted 2007*United States

$
2,379,271

$
2,587,557Europe


789,917


908,969Total

$
3,169,188

$
3,496,526






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.

19. SUBSEQUENT EVENTS



On January 13, 2009, we entered into an option agreement (the "Ception Option Agreement") with Ception Therapeutics, Inc.
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 Option Period (as defined below). As consideration for the Ception Option, we paid $50 million to Ception and also paid certain Ception stockholders an
aggregate of $50 million. We, in our sole discretion, may
exercise the Ception Option by providing written notice to Ception at any time during the period from January 13, 2009 to and including the date that (i) is fifteen business days after
our receipt of the final study report for Ception's ongoing Phase IIb/III clinical trial for reslizumab in pediatric patients with eosinophilic esophagitis ("Res-5-0002
EE Study") indicating that the co-primary endpoints have been achieved or (ii) is thirty business days after our receipt of the final study report for
Res-5-0002 EE Study indicating that the co-primary endpoints have not been achieved (the "Option Period"). We anticipate that the Res-5-0002
EE Study will be completed in the fourth quarter of 2009. If the data are positive and we exercise the Ception Option, we intend to file a Biologics License Application for reslizumab with the
FDA in 2010. If we exercise the Ception Option, we have agreed to pay a total of $250 million 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 2008, we paid a $25 million non-refundable fee to Ception for
exclusive rights to negotiate the Ception Option. This payment was credited against the Ception Option Agreement payments.

In
accordance with FIN 46R, we have determined that 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 will include the financial condition and results of operations of Ception in our 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. SUBSEQUENT EVENTS (Continued)



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. 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 million upfront option payment upon execution and will pay a one-time $30 million license fee by early
March 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 remainder of the term of the Phase IIb study, the
Phase III study, regulatory filings and, assuming regulatory approval, subsequent commercialization of the product.

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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, 2008 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

Not applicable.

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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 2009 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 2009 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 2009 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 2009 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 2009 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 2009 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 2009 annual meeting of stockholders.

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Table of Contents

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:





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.

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Table of Contents

(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, 2002.3.1(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

Second Amended and Restated Bylaws of the Registrant, filed as Exhibit 3.1 to the Company's Current Report on Form 8-K filed on December 12, 2008.4.1

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.


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Table of Contents

Exhibit No.

Description4.4(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.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.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.10.3(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.


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Table of Contents

Exhibit No.

Description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,
2008.10.3(g)

[Intentionally Omitted]10.3(h)

[Intentionally Omitted]10.3(i)

[Intentionally Omitted]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(r)

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.


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Table of Contents

Exhibit No.

Description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, 2008.10.5

[Intentionally Omitted]10.6

[Intentionally Omitted]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)10.11(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.


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Exhibit No.

Description10.12(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(c) 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)10.13(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.


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Exhibit No.

Description10.13(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, 2004.10.15(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.


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Exhibit No.

Description10.15(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, 2006.10.17(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)


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Table of Contents

Exhibit No.

Description10.17(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)10.22

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.10.23

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.


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Exhibit No.

Description10.24

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, 2008.10.25

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.*12.1

Statement Regarding Computation of Ratios*21

List of Subsidiaries*23.1

Consent of PricewaterhouseCoopers LLP.*23.2

Letter of Understanding of Preferability 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.


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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:2008

$
89,091

$
282,996

$
(244,095
)
$
127,9922007

$
84,980

$
214,302

$
(210,191
)
$
89,0912006

$
72,935

$
171,293

$
(159,248
)
$
84,980Reserve for inventories:2008

$
8,349

$
4,254

$
(6,918
)
$
5,6852007*

$
13,100

$
13,212

$
(17,963
)
$
8,3492006*

$
2,265

$
20,855

$
(10,020
)
$
13,100Reserve for income tax valuation allowance:2008

$
132,949

$
13,970

$
(6,471
)
$
140,4482007

$
78,043

$
58,489

$
(3,583
)
$
132,9492006

$
76,840

$
14,696

$
(13,493
)
$
78,043


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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 23, 2009

CEPHALON, 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 23, 2009/s/ J. KEVIN BUCHI J. Kevin Buchi

Executive Vice President and Chief Financial Officer (Principal financial and accounting officer)

February 23, 2009/s/ WILLIAM P. EGAN William P. Egan

Director

February 23, 2009/s/ MARTYN D. GREENACRE Martyn D. Greenacre

Director

February 23, 2009/s/ VAUGHN M. KAILIAN Vaughn M. Kailian

Director

February 23, 2009/s/ KEVIN E. MOLEY Kevin E. Moley

Director

February 23, 2009/s/ CHARLES A. SANDERS Charles A. Sanders, M.D.

Director

February 23, 2009/s/ GAIL R. WILENSKY Gail R. Wilensky, Ph.D.

Director

February 23, 2009/s/ DENNIS L. WINGER Dennis L. Winger

Director

February 23, 2009


163

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