**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

----

**FORM 10-Q**

**[MARK ONE]**

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934

**Forthe quarterly period ended June 30, 2007**

**OR**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934

**Forthe transition periodfrom                          to**

**CommissionFile No. 000-30123**

----

**SCIELE PHARMA, INC.**

(Exact name of registrantas specified in its charter)

| **Delaware**                                              |   | **58-2004779**                           |
|-----------------------------------------------------------|--------|------------------------------------------|
| (State of  incorporation)                                 |   | (I.R.S. Employer  Identification Number) |
| ** **                                                |   | ** **                               |
| **Five  Concourse Parkway, Suite 1800, Atlanta, Georgia** |   | **30328**                                |
| (Address of  principal executive offices)                 |   | (Zip code)                               |

 

**(770) 442-9707**

(Registrant’s telephonenumber, including area code):

----

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 (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past90 days. Yes x   No o

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,or a non-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

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

 

Indicateby check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act).

o Yes   x No

Asof July 24, 2007, there were 35,701,059 shares of the Registrant’s Common Stockoutstanding.

 

----

**SCIELE PHARMA, INC. FORM 10-QINDEX**
|                                             | ** ** | ** **                                                                                                 | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|------------------------------------------------------------------------------------------------------------|------------|------------|------------|
| PART  I.   FINANCIAL  INFORMATION |       |                                                                                                       |       |
|                                        |       |                                                                                                       |       |       |       |
| Item 1.                                |       | Consolidated  Balance Sheets at June 30, 2007 and December 31, 2006                                        |       | 1          |       |
|                                        |       |                                                                                                       |       |       |       |
|                                        |       | Consolidated  Statements of Operations for the three and six months ended June 30, 2007 and  June 30, 2006 |       | 2          |       |
|                                        |       |                                                                                                       |       |       |       |
|                                        |       | Consolidated  Statements of Cash Flows for the six months ended June 30, 2007 and June 30,  2006           |       | 3          |       |
|                                        |       |                                                                                                       |       |       |       |
|                                        |       | Notes to Consolidated Financial Statements                                                                 |       | 4          |       |
|                                        |       |                                                                                                       |       |       |       |
| Item 2.                                     |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                |       | 15         |       |
|                                        |       |                                                                                                       |       |       |       |
| Item 3.                                     |       | Quantitative and Qualitative Disclosures about Market  Risk                                                |       | 24         |       |
|                                        |       |                                                                                                       |       |       |       |
| Item 4.                                     |       | Controls and Procedures                                                                                    |       | 24         |       |
|                                        |       |                                                                                                       |       |       |       |
| PART  II.   OTHER  INFORMATION    |       |                                                                                                       |       |
|                                        |       |                                                                                                       |       |       |       |
| Item  1.                                    |       | Legal  Proceedings                                                                                         |       | 25         |       |
|                                        |       |                                                                                                       |       |       |       |
| Item 2.                                     |       | Unregistered Sales of Equity Securities and Use of  Proceeds                                               |       | 25         |       |
|                                        |       |                                                                                                       |       |       |       |
| Item 3.                                     |       | Defaults upon Senior Securities                                                                            |       | 26         |       |
|                                        |       |                                                                                                       |       |       |       |
| Item 4.                                     |       | Submission of Matters to a Vote of Security Holders                                                        |       | 26         |       |
|                                        |       |                                                                                                       |       |       |       |
| Item  5.                                    |       | Other  Information                                                                                         |       | 26         |       |
|                                        |       |                                                                                                       |       |       |       |
| Item 6.                                |       | Exhibits                                                                                                   |       | 27         |       |
|                                        |       |                                                                                                       |       |       |       |
|                                        |       | Signatures                                                                                                 |       | 28         |       |
|                                        |       |                                                                                                       |       |       |       |
|                                        |       | Certifications                                                                                             |       |       |       |

 

----

**ITEM 1. FINANCIAL STATEMENTS**

**SCIELEPHARMA, INC. CONSOLIDATED BALANCE SHEET (in thousands, except share data)**
| ** **                                                                                                                                                  | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                  | ** ** | **(unaudited)**         | ** ** | ** **                  | ** ** |
| **ASSETS**                                                                                                                                                  | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Current assets:                                                                                                                                             |       |                    |       |                        |       |
| Cash and cash  equivalents                                                                                                                                  |       | $                       | 71,168     |                        | $          | 45,261 |   |
| Marketable  securities                                                                                                                                      |       | 147,646                 |       | 121,190                     |       |
| Accounts  receivable, net of allowances of $4,652 and $2,010 at June 30, 2007 and  December 31, 2006, respectively                                     |       | 61,981                  |       | 47,551                      |       |
| Inventories                                                                                                                                                 |       | 23,095                  |       | 26,640                      |       |
| Income taxes  receivable                                                                                                                                    |       | 2,016                   |       | 4,869                       |       |
| Current deferred  tax assets                                                                                                                                |       | 2,815                   |       | 2,465                       |       |
| Other current  assets                                                                                                                                       |       | 31,148                  |       | 21,091                      |       |
| Total current  assets                                                                                                                                       |       | 339,869                 |       | 269,067                     |       |
|                                                                                                                                                        |       |                    |       |                        |       |
| Property and equipment,  net                                                                                                                                |       | 15,894                  |       | 9,142                       |       |
| Other assets:                                                                                                                                               |       |                    |       |                        |       |
| Intangibles, net                                                                                                                                            |       | 416,499                 |       | 305,040                     |       |
| Long term  deferred tax assets                                                                                                                              |       | 93                      |       | 93                          |       |
| Other                                                                                                                                                       |       | 24,146                  |       | 6,663                       |       |
| Total other  assets                                                                                                                                         |       | 440,738                 |       | 311,796                     |       |
| Total assets                                                                                                                                                |       | $                       | 796,501    |                        | $          | 590,005 |   |
|                                                                                                                                                        |       |                    |       |                        |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                              | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Current liabilities:                                                                                                                                        |       |                    |       |                        |       |
| Account payable                                                                                                                                             |       | $                       | 31,638     |                        | $          | 18,874 |   |
| Accrued expenses                                                                                                                                            |       | 24,230                  |       | 18,965                      |       |
| Total current  liabilities                                                                                                                                  |       | 55,868                  |       | 37,839                      |       |
|                                                                                                                                                        |       |                    |       |                        |       |
| Long-term liabilities:                                                                                                                                      |       |                    |       |                        |       |
| Convertible debt                                                                                                                                            |       | 325,000                 |       | 150,000                     |       |
| Deferred tax  liabilities                                                                                                                                   |       | 2,942                   |       | 12,368                      |       |
| Other long-term  liabilities                                                                                                                                |       | 1,867                   |       | 1,975                       |       |
| Total  liabilities                                                                                                                                          |       | 385,677                 |       | 202,182                     |       |
|                                                                                                                                                        |       |                    |       |                        |       |
| Stockholders’ equity:                                                                                                                                  |       |                    |       |                        |       |
| Preferred stock,  1,000,000 shares authorized and none outstanding                                                                                          |       | —                  |       | —                      |       |
| Common stock,  $0.001 par value; 100,000,000 shares authorized; 37,432,417 and 35,873,121  issued at June 30, 2007 and December 31, 2006, respectively |       | 37                      |       | 36                          |       |
| Additional  paid-in capital                                                                                                                                 |       | 281,891                 |       | 282,718                     |       |
| Retained  earnings (See Note 12)                                                                                                                            |       | 151,195                 |       | 127,768                     |       |
| Accumulated  other comprehensive loss                                                                                                                       |       | (4,792                  | )          | (4,147                      | )          |
|                                                                                                                                                        |       | 428,331                 |       | 406,375                     |       |
| Less: Treasury stock at  cost, Common stock, 754,919 and 800,000 shares at June 30, 2007 and  December 31, 2006, respectively                          |       | (17,507                 | )          | (18,552                     | )          |
| Total  stockholders’ equity                                                                                                                            |       | 410,824                 |       | 387,823                     |       |
| Total liabilities and  stockholders’ equity                                                                                                            |       | $                       | 796,501    |                        | $          | 590,005 |   |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

1

----

**SCIELE PHARMA, INC. CONSOLIDATED STATEMENTS OF OPERATIONS(unaudited, in thousands, except per share data)**
| ** **                                                  | ** ** | **For The Three Months Ended June 30,** | ** ** | **For The Six Months Ended June 30,** | ** ** |
|-------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                                                  | ** ** | **2007**                                                              | ** ** | **2006**                                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net revenues                                                |       | $                                                                     | 95,662     |                                                                | $          | 72,399 |   | $ | 177,919 |   | $ | 138,852 |   |
| Operating costs  and expenses:                              |       |                                                                  |       |                                                                |       |   |   |   |   |
| Cost of revenues (excluding depreciation and  amortization) |       | 12,825                                                                |       | 10,546                                                              |       | 23,878 |   | 19,898 |   |
| Selling, general and administrative expense                 |       | 48,522                                                                |       | 36,531                                                              |       | 88,217 |   | 71,046 |   |
| Depreciation and amortization                               |       | 6,352                                                                 |       | 6,521                                                               |       | 13,023 |   | 13,035 |   |
| Research and development expense                            |       | 8,063                                                                 |       | 3,961                                                               |       | 14,044 |   | 6,821 |   |
|                                                        |       |                                                                  |       |                                                                |       |   |   |   |   |
| Total operating costs and expenses                          |       | $                                                                     | 75,762     |                                                                | $          | 57,559 |   | $ | 139,162 |   | $ | 110,800 |   |
|                                                        |       |                                                                  |       |                                                                |       |   |   |   |   |
| Operating income                                            |       | 19,900                                                                |       | 14,840                                                              |       | 38,757 |   | 28,052 |   |
|                                                        |       |                                                                  |       |                                                                |       |   |   |   |   |
| Other income  (expense):                                    |       |                                                                  |       |                                                                |       |   |   |   |   |
| Interest expense                                            |       | (1,926                                                                | )          | (760                                                                | )          | (2,859 | ) | (1,525 | ) |
| Interest income                                             |       | 3,400                                                                 |       | 1,063                                                               |       | 5,160 |   | 1,975 |   |
| Loss on extinguishment of debt                              |       | (5,256                                                                | )          | —                                                              |       | (5,256 | ) | — |   |
|                                                        |       |                                                                  |       |                                                                |       |   |   |   |   |
| Total other income (expense)                                |       | $                                                                     | (3,782     | )                                                                   | $          | 303 |   | $ | (2,955 | ) | $ | 450 |   |
|                                                        |       |                                                                  |       |                                                                |       |   |   |   |   |
| Income before  provision for income taxes                   |       | 16,118                                                                |       | 15,143                                                              |       | 35,802 |   | 28,502 |   |
| Provision for  income taxes                                 |       | 5,480                                                                 |       | 4,971                                                               |       | 12,166 |   | 9,203 |   |
|                                                        |       |                                                                  |       |                                                                |       |   |   |   |   |
| Net income                                                  |       | $                                                                     | 10,638     |                                                                | $          | 10,172 |   | $ | 23,636 |   | $ | 19,299 |   |
| Other  comprehensive gain (loss)                            |       | (628                                                                  | )          | 429                                                                 |       | (645 | ) | 567 |   |
|                                                        |       |                                                                  |       |                                                                |       |   |   |   |   |
| Comprehensive  income                                       |       | $                                                                     | 10,010     |                                                                | $          | 10,601 |   | $ | 22,991 |   | $ | 19,866 |   |
|                                                        |       |                                                                  |       |                                                                |       |   |   |   |   |
| Net income per  common share:                               |       |                                                                  |       |                                                                |       |   |   |   |   |
| Basic earnings per common share                             |       | $                                                                     | 0.30       |                                                                | $          | 0.29 |   | $ | 0.67 |   | $ | 0.55 |   |
|                                                        |       |                                                                  |       |                                                                |       |   |   |   |   |
| Diluted earnings per common share                           |       | $                                                                     | 0.29       |                                                                | $          | 0.27 |   | $ | 0.65 |   | $ | 0.49 |   |
|                                                        |       |                                                                  |       |                                                                |       |   |   |   |   |
| Weighted average  common shares outstanding:                |       |                                                                  |       |                                                                |       |   |   |   |   |
| Basic                                                       |       | 35,411                                                                |       | 35,346                                                              |       | 35,292 |   | 35,201 |   |
|                                                        |       |                                                                  |       |                                                                |       |   |   |   |   |
| Diluted                                                     |       | 36,761                                                                |       | 38,550                                                              |       | 36,557 |   | 40,602 |   |

 

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

2

----

**SCIELE PHARMA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS(unaudited, in thousands)**
| ** **                                                                         | ** ** | **For The Six Months  Ended June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2007**                                                        | ** ** | **2006** | ** ** |
| Cash flows from  operating activities:                                             |       |                                                            |       |   |   |
| Net income                                                                         |       | $                                                               | 23,636     |   | $ | 19,299 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                                            |       |   |   |
| Depreciation and amortization                                                      |       | 13,023                                                          |       | 13,035 |   |
| Non-cash compensation expense                                                      |       | 5,181                                                           |       | 4,415 |   |
| Non-cash interest expense                                                          |       | 379                                                             |       | 168 |   |
| Deferred income tax expense                                                        |       | (3,052                                                          | )          | 2,646 |   |
| Loss on extinguishment of debt                                                     |       | 5,256                                                           |       | — |   |
| Changes in assets and liabilities, net of acquired  assets and liabilities:        |       |                                                            |       |   |   |
| Accounts receivable                                                                |       | (11,680                                                         | )          | 4,212 |   |
| Inventories                                                                        |       | 4,706                                                           |       | 2,216 |   |
| Other current assets and other assets                                              |       | (6,214                                                          | )          | (691 | ) |
| Income taxes receivable                                                            |       | 2,644                                                           |       | (7,216 | ) |
| Accrued expenses and other long-term liabilities                                   |       | (4,518                                                          | )          | 1,083 |   |
| Accounts payable                                                                   |       | 7,536                                                           |       | 2,808 |   |
| Net cash provided by operating activities                                          |       | 36,897                                                          |       | 41,975 |   |
| Cash flows from  investing activities:                                             |       |                                                            |       |   |   |
| Purchase of products and licenses                                                  |       | (818                                                            | )          | (5,000 | ) |
| Purchase of property and equipment                                                 |       | (7,767                                                          | )          | (1,886 | ) |
| Advanced payment for product licenses                                              |       | (9,114                                                          | )          | — |   |
| Acquisition of business, net of cash acquired (Note  16)                           |       | (113,638                                                        | )          | — |   |
| Proceeds from sale of securities                                                   |       | 219,801                                                         |       | 42,223 |   |
| Purchase of securities                                                             |       | (252,387                                                        | )          | (61,539 | ) |
| Net cash used in investing activities                                              |       | (163,923                                                        | )          | (26,202 | ) |
| Cash flows from  financing activities:                                             |       |                                                            |       |   |   |
| Repurchase of common stock                                                         |       | (14,412                                                         | )          | (6,932 | ) |
| Financing debt costs                                                               |       | (9,173                                                          | )          | (1,775 | ) |
| Reduction in taxes payable—stock option exercises                             |       | 352                                                             |       | 2,149 |   |
| Net proceeds from issuance of common stock                                         |       | 2,083                                                           |       | 4,064 |   |
| Proceeds from long-term debt                                                       |       | 325,000                                                         |       | — |   |
| Payments on long-term debt                                                         |       | (150,000                                                        | )          | — |   |
| Net cash provided by financing activities                                          |       | 153,850                                                         |       | (2,494 | ) |
| Effect of  foreign exchange rates on cash                                          |       | (917                                                            | )          | 521 |   |
| Net change in  cash and cash equivalents                                           |       | 25,907                                                          |       | 13,800 |   |
| Cash and cash  equivalents, beginning of period                                    |       | 45,261                                                          |       | 17,043 |   |
| Cash and cash  equivalents, end of period                                          |       | $                                                               | 71,168     |   | $ | 30,843 |   |
| Non-cash  financing transactions:                                                  |       |                                                            |       |   |   |
| Issuance of restricted stock                                                       |       | $                                                               | —     |   | $ | 4,924 |   |
| Supplemental  cash flow information:                                               |       |                                                            |       |   |   |
| Cash paid for income taxes                                                         |       | $                                                               | 11,828     |   | $ | 11,449 |   |
| Cash paid for  interest                                                            |       | $                                                               | 2,108      |   | $ | 1,325 |   |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

3

----

**SCIELEPHARMA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(unaudited)**

**1.             Basis of Presentation**

Theaccompanying unaudited interim consolidated financial statements of ScielePharma Inc. (the “Company”) reflect all adjustments (consisting solely of normalrecurring adjustments) which management considers necessary for the fairpresentation of the financial position, results of operations and cash flows ofthe Company for the interim periods. Certain footnote disclosures normallyincluded in financial statements prepared according to accounting principlesgenerally accepted in the United States of America have been condensed oromitted from these interim financial statements as permitted by therules and regulations of the Securities and Exchange Commission. Interimresults are not necessarily indicative of results for the full year. Theinterim results should be read in conjunction with the financial statements andnotes thereto included in the Company’s Annual Report on Form 10-K for theyear ended December 31, 2006 (File No. 000-30123).

**2.             New Accounting Pronouncements**

 In February 2007, the Financial AccountingStandards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”)No. 159, *The Fair Value for Financial Assets and FinancialLiabilities*.  This Statementpermits entities to choose to measure financial assets and liabilities, withcertain exceptions, at fair value at specified election dates.  A business entity shall report unrealizedgains and losses on items for which the fair value option has been elected inearnings at each subsequent reporting date. This Statement is effective as of the beginning of an entity’s firstfiscal year that begins after November 15, 2007.  The Company has not determined the impact, ifany, SFAS No. 159 will have on its financial statements.

*OnSeptember 29, 2006, the FASB issued SFAS No. 158,*Employers’Accounting for Defined Benefit Pension and Other Postretirement Plans.  ThisStatement requires an employer to recognize the over funded or under fundedstatus of a defined benefit postretirement plan (other than a multiemployerplan) as an asset or liability in its statement of financial position and torecognize changes in that funded status in the year in which the changes occurthrough comprehensive income.  Thisstatement also requires an employer to measure the funded status of a plan asof the date of its year-end statement of financial position, with limitedexceptions.  An employer with publiclytraded equity securities is required to initially recognize the funded statusof a defined benefit postretirement plan and to provide the requireddisclosures as of the end of the fiscal year ending after December 15,2006.  The requirement to measure planassets and benefit obligations as of the date of the employer’s fiscal year-endstatement of financial position is effective for fiscal years ending afterDecember 15, 2008.  The adoption of SFASNo. 158 is not expected to have a material impact on the Company’s financialstatements.

OnSeptember 15, 2006 the FASB issued SFAS No. 157, *Fair ValueMeasurements.*  The Statementprovides guidance for using fair value to measure assets and liabilities.  This Statement references fair value as theprice that would be received to sell an asset or paid to transfer a liabilityin an orderly transaction between market participants in the market in whichthe reporting entity transacts. The Statement applies whenever other standardsrequire (or permit) assets or liabilities to be measured at fair value.  The Statement does not expand the use of fairvalue in any new circumstances.  It iseffective for financial statements issued for fiscal years beginning afterNovember 15, 2007, and interim periods within those fiscal years.  The adoption of SFAS No. 157 is not expectedto have a material impact on the Company’s financial statements.

InMarch 2006, the FASB issued SFAS No. 156, *Accountingfor Servicing of Financial Assets,*which amends FAS 140, *Accounting for Transfers and Servicing of Financial Assets andExtinguishments of Liabilities.*In a significant change to currentguidance, SFAS No. 156 permits an entity to choose either of the followingsubsequent measurement methods for each class of separately recognizedservicing assets and servicing liabilities: (1) Amortization Method or (2) Fair Value Measurement Method.SFAS No. 156 is effective as of the beginning of an entity’s first fiscalyear that begins after September 15, 2006.   The adoption of SFAS No. 156 did not have amaterial impact on the Company’s financial statements.

InFebruary 2006, the FASB issued SFAS No. 155, *Accountingfor Certain Hybrid Financial Instruments—an amendment of FASB StatementsNo. 133 and 140.*This Statement permits fair value ofremeasurement for any hybrid financial instrument that contains an embeddedderivative that otherwise would require bifurcation; clarifies whichinterest-only strips and principal-only strips are not subject to therequirements of SFAS No. 133, *Accounting for DerivativeInstruments and Hedging Activities,*establishes a requirement toevaluate interests in securitized financial assets to identify interests thatare freestanding derivatives or that are hybrid 

4

----

financialinstruments that contain an embedded derivative requiring bifurcation;clarifies that concentrations of credit risk in the form of subordinationare not embedded derivatives; and amended SFAS No. 140, *Accounting for Transfers and Servicing of Financial Assets andExtinguishments of Liabilities,*to eliminate the prohibition on aqualifying special-purpose entity from holding a derivative financialinstrument that pertains to a beneficial interest other than another derivativefinancial instrument. SFAS No. 155 is effective for all financialinstruments acquired, issued, or subject to a remeasurement (new basis) eventoccurring after the beginning of an entity’s first fiscal year that beginsafter September 15, 2006.  Theadoption of SFAS No. 155 did not have a material impact on the Company’sfinancial statements.

InJuly 2006, the FASB issued FASB Interpretation Number 48,*Accounting for Uncertainty in Income Taxes*(“FIN No. 48”). FIN No. 48 clarifies the accounting for income taxes byprescribing the minimum recognition threshold a tax position is required tomeet before being recognized in the financial statements. FIN No. 48 alsoprovides guidance on derecognition, measurement, classification, interest andpenalties, accounting in interim periods, disclosure and transition. Inaddition, FIN No. 48 scopes out income taxes from SFAS No. 5, *Accounting for Contingencies*.  FIN No. 48 is effective for fiscal yearsbeginning after December 15, 2006.   As a result of the implementation, the Company recognized an increase ofapproximately $209,000 to reserve for uncertain tax positions.  This increase was accounted for as anadjustment to the beginning balance of retained earnings on the Balance Sheetas of January 1, 2007.  See Note 12,“Income Taxes,” for additional information.

InJune 2006, the Emerging Issues Task Force (“EITF”) ratified the consensus onEITF 06-3, “How Taxes Collected from Customers and Remitted to GovernmentalAuthorities Should Be Presented in the Income Statement”**(“EITF 06-3”). EITF 06-3 provides thattaxes imposed by a governmental authority on a revenue producing transactionbetween a seller and a customer should be shown in the income statement oneither a gross or a net basis, based on the entity’s accounting policy, whichshould be disclosed pursuant to Accounting Principles Board Opinion No. 22, “Disclosureof Accounting Policies.” Amounts that are allowed to be charged to customers asan offset to taxes owed by a company are not considered taxes collected andremitted. If government-imposed taxes are significant, and are presented on agross basis, the amounts of those taxes should be disclosed. EITF 06-3 will beeffective for interim and annual reporting periods beginning after December 15,2006. Our policy is to account for taxes collected from customers on a netbasis. The adoption EITF 06-3 did not have a material impact on the Company’sfinancial statements.

In May2005, the FASB issued Statement 154, *Accounting Changes andError Corrections, a replacement of APB Opinion No. 20 and FASB Statement No.3. *The Statement requiresretrospective application to prior periods’ financial statements of a voluntarychange in accounting principle unless it is deemed impracticable, unless thechange in accounting relates to the principle method of depreciation,amortization, or depletion for long-lived, non-financial assets in which casethe change is accounted for as a change in accounting estimate that is affectedby a change in accounting principle.  TheStatement is effective for accounting changes and corrections of errors madeoccurring in fiscal years beginning after December 15, 2005.  The adoption of SFAS No. 154 did not have amaterial impact on the Company’s financial position or results of operations.

**3.****                                      StockBased Compensation**

As of June 30, 2007, theCompany had one stock-based compensation plan allowing for the issuance ofstock options and restricted shares and an employee stock ownership plan (“ESOP”).  Effective January 1, 2006, the Companyadopted the fair value recognition provisions of SFAS No. 123(R) (“SFAS 123R”),“*Share-Based Payment*”, using themodified-prospective-transition method. Under that transition method,compensation cost recognized in the six months ended June 30, 2007 includes:(a) compensation cost for all share-based payments granted prior to, but notyet vested as of January 1, 2006, based on the grant date fair value estimatedin accordance with the original provisions of SFAS No. 123, and (b)compensation cost for all share-based payments granted subsequent to January 1,2006, based on the grant-date fair value estimated in accordance with the provisionsof SFAS No. 123R.  The Company did not grant any stock options in thesix months ended June 30, 2007.  TheCompany recognized $0.5 million and $1.0 million of stock-based compensationexpense for stock options in the three and six months ended June 30, 2007respectively.  The Company recognized$0.8 million and $1.5 million of stock-based compensation expense for stockoptions in the three and six months ended June 30, 2006 respectively.

In  2006 and through June 30, 2007, the Companyissued restricted stock and restricted units to executives and employees. Thefollowing table summarizes restricted stock and restricted units outstanding atJune 30, 2007 and changes during the six months ended (shares in thousands):

5

----

 

|                                        | ** ** | **Number of  Shares  Subject to  Issuance** | ** ** | **Weighted  Average  Share  Price** | ** ** |
|----------------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------|------------|
| Outstanding at  December 31, 2006 |       | 1,083                                                 |       | $                                   | 18.16      |   |
| Granted                                |       | 205                                                   |       | 24.69                               |       |
| Cancelled                              |       | (8                                                    | )          | 15.79                               |       |
| Issued                                 |       | (97                                                   | )          | 17.16                               |       |
| Outstanding at June 30,  2007          |       | 1,183                                                 |       | $                                   | 19.36      |   |

The restrictions on therestricted stock and restricted units’ lapse according to one of two schedules.Under one schedule, the restrictions will lapse when specific key performanceobjectives have been reached or on the fifth anniversary date of theissuance.  Under the second schedule, therestrictions will lapse 25% annually over four years.   The fair value of the restricted stock andrestricted units are expensed over the period during which the restrictionslapse.  For the three months ended June 30,2007 and June 30, 2006, the Company recognized $1.6 million and $0.8million, respectively, in deferred compensation expenses related to restrictedshares. For the six months ended June 30, 2007 and June 30, 2006, the Companyrecognized $3.1 million and $1.5 million, respectively, in deferredcompensation expense related to the restricted shares.

The Company’s ESOPprovides benefits to substantially all employees.  The annual contribution, if any, to the ESOPis at the discretion of the Board of Directors of the Company.  The Company distributed 45,081 shares and200,000 shares to the ESOP in the 2007 and 2006, respectively.  The Company did not recognize anycompensation expenses related to the ESOP for the three months ended June 30,2007, compared to $0.8 million for the 3 months ended June 30, 2006. In the sixmonths ended June 30, 2007 and June 30, 2006, the Company recognized $1.0million and $1.4 million, respectively, in compensation expense for the ESOP.

**4.             Marketable Securities**

The Company classifies its existing marketable securitiesas available-for-sale. All available-for-sale securities are classified ascurrent as the Company has the ability to use them for current operating andinvesting purposes.

The Company had no realized losses in the sixmonths ended June 30, 2007 and June 30, 2006.  The Company had a total of $0.5 million atJune 30, 2007. At December 31, 2006, the Company had net unrealized losses frommarketable securities of $0.9 million.  Thecarrying amount of available-for-sale securities and their approximate fairvalues at June 30, 2007 were as follows (in thousands):

|                                                 | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Estimated  Fair  Value** | ** ** |
|-------------------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|----------------------------|------------|
| U.S. Government  and Federal agency obligations |       | $                   | 22,337     |                         | $          | —                        |       | $                          | (390       | ) | $ | 21,947 |   |
| All other  corporate bonds                      |       | 125,821             |       | —                       |       | (122                          | )          | 125,699                    |       |
| Total marketable securities                     |       | $                   | 148,158    |                         | $          | —                        |       | $                          | (512       | ) | $ | 147,646 |   |

 

6

----

The following tablepresents the age of gross unrealized losses and fair value by investmentcategory for all securities in a loss position as of June 30, 2007 (inthousands):
| ** **                                      | ** ** | **Less than 12 Months** | ** ** | **12 Months or More** | ** ** | **Total**                  | ** ** |
|-------------------------------------------------|------------|----------------------------------------|------------|--------------------------------------|------------|----------------------------|------------|
| ** **                                      | ** ** | **Estimated  Fair  Value**             | ** ** | **Estimated  Unrealized  Losses**    | ** ** | **Estimated  Fair  Value** | ** ** | **Estimated  Unrealized  Losses** | ** ** | **Estimated  Fair  Value** | ** ** | **Estimated  Unrealized  Losses** | ** ** |
| U.S. Government  and Federal agency obligations |       | $                                      | 10,109     |                                 | $          | (130                       | )          | $ | 11,838 |   | $ | (260 | ) | $ | 21,947 |   | $ | (390 | ) |
| Corporate bonds                                 |       | 115,326                                |       | (34                                  | )          | 10,373                     |       | (88 | ) | 125,699 |   | (122 | ) |
| Total marketable securities                     |       | $                                      | 125,435    |                                 | $          | (164                       | )          | $ | 22,211 |   | $ | (348 | ) | $ | 147,646 |   | $ | (512 | ) |

The Company hasdetermined that its unrealized losses are temporary based on the minor amountof the losses compared to amortized cost and the short duration of the losses,as well as the credit worthiness of the investees. The Company expects that alllosses will be recovered, and intends to hold securities to recovery. Ifmarket, industry and/or investee conditions deteriorate, we may incurfuture impairments.

Theamortized cost and estimated fair value of marketable securities at June 30,2007 by contractual maturity are shown below (in thousands):

|                                           | ** ** | **Amortized  Cost** | ** ** | **Estimated  Fair Value** | ** ** |
|-------------------------------------------|------------|---------------------|------------|--------------------------------|------------|
| Due in one year  or less                  |       | $                   | 115,036    |                           | $          | 114,998 |   |
| Due after one  year through three years   |       | 29,167              |       | 28,725                         |       |
| Due after three  years through five years |       | 3,260               |       | 3,229                          |       |
| Due after five  years                     |       | 695                 |       | 694                            |       |
|                                      |       | $                   | 148,158    |                           | $          | 147,646 |   |

The carrying amount ofavailable-for-sale securities and their approximate fair values atDecember 31, 2006 were as follows (in thousands):

|                                                 | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Estimated  Fair  Value** | ** ** |
|-------------------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|----------------------------|------------|
| U.S. Government  and Federal agency obligations |       | $                   | 52,437     |                         | $          | —                        |       | $                          | (662       | ) | $ | 51,775 |   |
| Corporate bonds                                 |       | 69,685              |       | 2                            |       | (272                          | )          | 69,415                     |       |
| Total                                           |       | $                   | 122,122    |                         | $          | 2                             |       | $                          | (934       | ) | $ | 121,190 |   |

 

**5.             Inventories**

Inventories consist of purchased pharmaceuticalproducts and are stated at the lower of cost or market. Cost is determinedusing the first-in, first-out method, and market is considered to be netrealizable value. Inventories consist of finished product and bulk productawaiting processing and packaging into finished product.  Inventories, net of reserves of less than$0.1 million and $0.3 million at June 30, 2007 and December 31, 2006,respectively, consisted of (in thousands):

|                   | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|-------------------|------------|-------------------------|------------|-----------------------------|------------|
| Bulk product      |       | $                       | 9,109      |                        | $          | 8,559 |   |
| Finished product  |       | 13,986                  |       | 18,081                      |       |
| Total inventories |       | $                       | 23,095     |                        | $          | 26,640 |   |

**6.             Goodwill, Product Rights and Other Intangibles**

7

----

InJune 2007, the Company acquired Alliant Pharmaceuticals, Inc. (“Alliant”) in atransaction accounted for under SFAS No. 141, *Business Combinations*.Alliant is a specialty pharmaceutical company focused on acquiring, developingand commercializing proprietary products for the pediatric and pediatricspecialty markets as noted with additional detail in Note 16. 

Intangible assets which are notdeemed to have an indefinite life are amortized on a straight line basis overtheir respective useful lives.

The following table reflects thecomponents of intangible assets as of June 30, 2007 (in thousands):
| ** **                      | ** ** | **Gross Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net Amount** | ** ** | **Expected Life** | ** ** |
|---------------------------------|------------|-----------------------|------------|-------------------------------|------------|---------------------|------------|------------------------|------------|
| Licensing rights                |       | $                     | 444,542    |                          | $          | (90,073             | )          | $                      | 354,469    |   | 5 to 20 years |   |
| Trade names                     |       | 11,060                |       | (3,124                        | )          | 7,936               |       | 15 to 20 years         |       |
| Supply/Distribution  agreements |       | 10,350                |       | (5,503                        | )          | 4,847               |       | 10 years               |       |
| Other  intangibles              |       | 3,108                 |       | (918                          | )          | 2,190               |       | 20 years               |       |
| Goodwill—estimated         |       | 47,057                |       | —                        |       | 47,057              |       |                   |       |
| Total                           |       | $                     | 516,117    |                          | $          | (99,618             | )          | $                      | 416,499    |   |   |   |

 

8

----

The followingtable reflects the components of all intangible assets as of December 31,2006 (in thousands):
| ** **                      | ** ** | **Gross Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net Amount** | ** ** | **Average Life** | ** ** |
|---------------------------------|------------|-----------------------|------------|-------------------------------|------------|---------------------|------------|-----------------------|------------|
| Licensing rights                |       | $                     | 368,674    |                          | $          | (79,734             | )          | $                     | 288,940    |   | 10 to 20 years |   |
| Trade names                     |       | 11,060                |       | (2,845                        | )          | 8,215               |       | 15 to 20 years        |       |
| Contracts                       |       | 8,300                 |       | (8,049                        | )          | 251                 |       | 5 years               |       |
| Supply/Distribution  agreements |       | 10,350                |       | (4,986                        | )          | 5,364               |       | 10 years              |       |
| Other  intangibles              |       | 3,108                 |       | (838                          | )          | 2,270               |       | 20 years              |       |
| Total                           |       | $                     | 401,492    |                          | $          | (96,452             | )          | $                     | 305,040    |   |   |   |

 

For the three and six monthsended June 30, 2007, amortization expense related to the intangible assets was$5.6 million and $11.5 million, respectively. Amortization is calculated on astraight-line basis over the estimated useful life of the intangible asset.Estimated annual amortization expense for each of the five succeeding fiscalyears is as follows (in thousands):

| Fiscal year ended December 31: | ** ** | **Amount** | ** ** |
|----------------------------------------------------|------------|------------|------------|
| 2007                                               |       | $          | 25,737     |   |
| 2008                                               |       | 29,117     |       |
| 2009                                               |       | 29,117     |       |
| 2010                                               |       | 29,117     |       |
| 2011                                               |       | 28,936     |       |
|                                                    |            |            |            |  |

 

**7.             Other Long-Term Assets**

Other long term assets at June30, 2007 and December 31, 2006 consisted of the following (in thousands):

|                                | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|--------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Capitalized  finance costs     |       | $                       | 9,997      |                        | $          | 6,634 |   |
| Payments for  product licenses |       | 7,100                   |       | —                      |       |
| Deposits                       |       | 49                      |       | 29                          |       |
| Long-term  investments         |       | 7,000                   |       | —                      |       |
| Total other assets             |       | $                       | 24,146     |                        | $          | 6,663 |   |

 

In May 2007, the Company purchased a $7.0million equity stake in Plethora Solutions Holding plc (“Plethora”) inconjunction with the closing of the exclusive licensing agreement to marketPSD502 for premature ejaculation.  Scielehas purchased 1,772,505 new ordinary shares in Plethora. The Company’sinvestment in Plethora amounts to approximately 5.6% of the ordinary sharesoutstanding. Plethora is headquartered in the United Kingdom and is listed onthe London Stock Exchange (AIM:PLE).  Perthe agreement with Plethora, the shares purchased will not be sold until June2011.  The investment in Plethora isaccounted for under the cost method. The investment is classified as long termsecurities under other long term assets on the balance sheet.

**8.             Accrued Expenses**

Accrued expenses at June 30, 2007and December 31, 2006 consisted of the following (in thousands):

|                                     | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|-------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Employee  compensation and benefits |       | $                       | 6,041      |                        | $          | 3,706 |   |
| Product returns                     |       | 4,845                   |       | 1,568                       |       |
| Product rebates                     |       | 1,697                   |       | 1,763                       |       |
| Sales deductions                    |       | 3,466                   |       | 4,203                       |       |
| Accrued  royalties                  |       | 5,293                   |       | 4,960                       |       |
| Other                               |       | 2,888                   |       | 2,765                       |       |
| Total accrued expenses              |       | $                       | 24,230     |                        | $          | 18,965 |   |

 

**9.             Long-term Debt**

On May 14, 2007,the Company issued and sold $325 million aggregate principal amount of its2.625% Contingent Convertible Senior Notes due 2027 (the “2007 Notes”) in aregistered offering under the Securities Act of 1933, as amended.  TheNotes were initially sold pursuant to an underwriting agreement, dated May 9,2007, between the Company and UBS Securities LLC, 

9

----

as Representative of theunderwriters named therein.  The Notesare due May 15, 2027 and accrued interest is payable semi-annually in arrearson May 15 and November 15 of each year, beginning November 15, 2007.  Inaddition to the interest on the Notes, after May 15, 2012, we are also requiredto pay contingent interest during specified six-month periods if the averagetrading price of the Notes per $1,000 principal amount for the five day tradingperiod ending on the third trading day immediately preceding the first day ofthe applicable six-month period equals $1,200 or more. During any period whencontingent interest is payable, it will be payable at a rate equal to 0.5% perannum.  In addition, if we default in our reporting obligations under theindenture, we can elect to pay special interest on the Notes at a rate equal to0.25% per annum as the sole remedy for a specified period of time.

The Notes are oursenior unsecured obligations and rank equally in right of payment with eachother and with all of our other senior unsecured indebtedness. The Notes willbe subordinated in right of payment to all of our existing and future securedindebtedness (to the extent of the value of the collateral securing thesame).  The indenture does not contain any restriction on the payment ofdividends, the incurrence of indebtedness or the repurchase of our securities,and does not contain any financial covenants.

*ConversionRights*.  Holders may convert the Notes only under thefollowing circumstances:

·                  during anycalendar quarter, if the closing sales price of our common stock exceeds 120%of the conversion price for at least 20 trading days in the 30 consecutivetrading days ending on the last trading day of the preceding calendar quarter;

·                  if the Noteshave been called for redemption;

·                  during the ninetrading day period immediately following any five consecutive trading dayperiod in which the trading price of the Notes per $1,000 principal amount foreach day of that period was less than 95% of the product of the then applicableconversion rate per $1,000 principal amount of the Notes multiplied by thevolume-weighted average price per share of our common stock on that date;

·                  if we issuerights, warrants or options to holders of our common stock that allows suchholders to purchase shares of common stock at a price per share less than theaverage closing sale prices per share for the ten trading days immediatelypreceding the date such issuance was publicly announced;

·                  if we make adistribution to holders of our common stock and the fair market value of suchdistribution exceeds 10% of the closing sale price per share on the trading dayimmediately preceding the date we declare such distribution;

·                  if a fundamentalchange (defined below) occurs or we are a party to any other consolidation,merger, share exchange, sale of assets or other similar transaction pursuant towhich our common stock is subject to conversion into stock, securities or otherproperty (including cash); or

·                  at any time fromand including March 15, 2012 to and including May 20, 2012, and any time on orafter March 15, 2027.

The Notes will beconvertible into cash and, if applicable, shares of our common stock asfollows.  Upon conversion, holders will receive, per $1,000 principalamount being converted, a “settlement amount” that is equal to the sum of the “dailysettlement amounts” for each of the 30 trading days during the “cash settlementaveraging period.”  The “daily settlement amount” for each trading dayconsists of (i) cash equal to the lesser of $33.33 and the “daily conversionvalue”; and (ii) to the extent the daily conversion value exceeds $33.33, anumber of shares equal to the excess of the daily conversion value over $33.33,divided by the volume-weighted average price per share of our common stock onthat trading day. The “cash settlement averaging period” is the 30 consecutivetrading days beginning on, and including, the third trading day following theconversion date; provided that if a Note is surrendered for conversion withinthe period prior to maturity, the cash settlement averaging period is the 30consecutive trading days beginning on, and including, the 30th scheduledtrading day prior to the maturity date. The “daily conversion value” on a giventrading day generally means one-thirtieth of the product of the applicableconversion rate and the volume-weighted average price per share of our commonstock on that trading day.

The Company willadjust the conversion rate applicable to the Notes in the event we make anycash distributions to holders of our common stock.  The Notes are subjectto additional anti-dilution protection that covers stock dividends,subdivisions, combinations and reclassifications of common stock, distributionsof certain rights and warrants, distributions in kind and certain 

10

----

issuer tender andexchange offers.  The Company capitalized$9.2 million in association with the issuance of the 2007 Notes.  It will be amortized over the estimated lifeof the loan.

InMarch 2004, the Company issued a total of $150.0 million of its 1.75%senior subordinated contingent convertible notes due in 2024 (the “2004 Notes”)in transactions that were exempt from registration in reliance uponRule 144A and other available exemptions under the Securities Act. In May2006 and pursuant to a registered exchange offer, the Company exchanged eachoutstanding 2004 Note with new notes (the “2006 Notes”) that, among otherthings, require the Company to redeem the $150.0 million 2004 Notes with cashinstead of common stock.

In June 2007, the Company redeemed all of its 1.75%Contingent Convertible Senior Subordinated Notes due 2024 with the proceedsfrom the issuance of the 2007 Notes, in accordance with the indenture dated May3, 2006.  In addition to the $150 million face value of the bonds,bondholders received a total of 839,930 shares of Company stock, pursuant tothe terms of the exchange offer.  The remainingcapitalized financing costs associated with the 2006 Notes exchange of $5.3million were expensed in the second quarter of 2007.

**10.          Credit Agreement**

On September 18,2006, we entered into a senior secured credit agreement (the “Credit Agreement”)with UBS Securities LLC and LaSalle Bank National Association as leadarrangers, UBS AG, Stamford Branch, as issuing bank, administrative agent andcollateral agent, Regents Bank, Fifth Third Bank and Bank of America, N.A. asco-documentation agents and UBS Loan Finance LLC, as swing line lender. TheCredit Agreement provides us and our Cayman subsidiary, Sciele Pharma CaymanLtd., with a five-year revolving credit facility of up to $100 million, with anoption to expand the facility credit line by up to an additional $75 million.

Amountsoutstanding under the new credit facility generally bear interest at thelenders’ corporate base rate or LIBOR, plus a specified margin of between 1.75%and 2.5% depending on our ratio of indebtedness to earnings. The CreditAgreement contains customary negative covenants and financial covenants.

Our obligationsunder the Credit Agreement are secured by a pledge of substantially all of ourassets and are guaranteed by substantially all of our subsidiaries that are notborrowers.

We terminated ourprevious credit agreement with LaSalle Bank National Association, datedFebruary 11, 2003, as subsequently amended, upon entering into the new CreditAgreement.

The Company had no debtoutstanding under the credit facility as of June 30, 2007.

**11.          Share Buyback Program**

The Company adopted a new share repurchase programeffective August 3, 2006, that authorizes the repurchase of up to $30.0million of its outstanding shares of common stock over the next twelve monthswith no periodic sub-limits on the amount of repurchases. This plan replacesall prior share repurchase plans and will expire on August 2, 2007.  In the third quarter of 2006, the Companyrepurchased 409,973 shares of common stock at an average cost of $19.19 per share,or $7.9 million.  In the first quarter of2007, the Company repurchased 18,822 shares of common stock at an average costof $23.87 per share, or $0.4 million. In the second quarter of 2007, theCompany repurchased 567,870 shares of common stock at an average cost of $24.59per share, or $14.0 million. These shares have been retired.  As of June 30, 2007, $7.7 million isavailable for repurchases under the program.

11

----

 
| **Fiscal Period**           | ** ** | **Total  Number of  Shares  Purchased** | ** ** | **Average  Price  Per Share** | ** ** | **Total Number of  Shares Purchased as  Part of Publicly  Announced Plans** | ** ** | **Approximate Dollar  Value of Shares  that May Yet Be  Purchased Under  the Plans** | ** ** |
|----------------------------------|------------|----------------------------------------------|------------|------------------------------------|------------|----------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------|------------|
| January 1  through March 31,2007 |       | 18,822                                       |       | $                                  | 23.87      |                                                                                                           | 18,822     |                                                                                                                         | $          | 21,669,654 |   |
| April 1 through  April 30, 2007  |       | 2,759                                        |       | $                                  | 23.61      |                                                                                                           | 2,759      |                                                                                                                         | $          | 21,604,520 |   |
| May 1 through  May 31, 2007      |       | —                                       |       | $                                  | —     |                                                                                                           | —     |                                                                                                                         | $          | 21,604,520 |   |
| June 1 through  June 30, 2007    |       | 565,111                                      |       | $                                  | 24.59      |                                                                                                           | 565,111    |                                                                                                                         | $          | 7,707,576 |   |
| Total                            |       | 586,692                                      |       | $                                  | 24.56      |                                                                                                           | 586,692    |                                                                                                                         |       |   |

 

**12.          Income Taxes**

The Company adopted FASB Interpretation 48, *Accountingfor Uncertainty in Income Taxes*(“FIN 48”), on January 1, 2007.  As a result of the implementation, theCompany recognized an increase of approximately $209,000 to reserves foruncertain tax positions.  This increasein reserves was accounted for as an adjustment to the beginning balance ofretained earnings on the Balance Sheet. Including the cumulative effect increase, on January 1, 2007, theCompany had approximately $684,000 of total gross unrecognized tax benefits,which includes interest of approximately $140,000.  Of this total, approximately $445,000 (net ofthe federal benefit on state issues) represents the amount of unrecognized taxbenefits that, if recognized, would favorably affect the effective income taxrate in any future periods.  The Companyrecognized interest and/or penalties related to income tax matters in incometax expense.

The Company and its subsidiaries are subject to U.S. federal income taxas well as income tax in multiple state and foreign jurisdictions.  The Company should not be subject to U.S.federal income tax examinations for tax years before 2003.  Furthermore, the Company should not besubject to state and local examinations before 2001 or foreign tax examinationsbefore 2002.

During 2007, the statute of limitations in certain state and localjurisdictions will expire.  However, theCompany does not expect the statute to have a material impact on their taxreserves.

**13.          Earnings Per Share**

Belowis the calculation of basic and diluted net income per share (in thousandsexcept per share data):
| ** **                                                              | ** ** | **For The Three Months  Ended June 30,** | ** ** | **For The Six Months  Ended June 30,** | ** ** |
|-------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                                              | ** ** | **2007**                                                          | ** ** | **2006**                                                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net income                                                              |       | $                                                                 | 10,638     |                                                            | $          | 10,172 |   | $ | 23,636 |   | $ | 19,299 |   |
| Add: Interest  expense on the 2004 Notes, net of tax                    |       | —                                                            |       | 161                                                             |       | — |   | 643 |   |
|                                                                    |       |                                                              |       |                                                            |       |   |   |   |   |
| Adjusted net  income                                                    |       | $                                                                 | 10,638     |                                                            | $          | 10,333 |   | $ | 23,636 |   | $ | 19,942 |   |
|                                                                    |       |                                                              |       |                                                            |       |   |   |   |   |
| Weighted average  common shares outstanding—basic                  |       | 35,411                                                            |       | 35,346                                                          |       | 35,292 |   | 35,201 |   |
| Diluted effect  of stock options restricted shares and convertible debt |       | 1,350                                                             |       | 3,204                                                           |       | 1,265 |   | 5,401 |   |
|                                                                    |       |                                                              |       |                                                            |       |   |   |   |   |
| Weighted average  common shares outstanding—diluted                |       | 36,761                                                            |       | 38,550                                                          |       | 36,557 |   | 40,602 |   |
|                                                                    |       |                                                              |       |                                                            |       |   |   |   |   |
| Basic earnings  per common share:                                       |       | $                                                                 | 0.30       |                                                            | $          | 0.29 |   | $ | 0.67 |   | $ | 0.55 |   |
|                                                                    |       |                                                              |       |                                                            |       |   |   |   |   |
| Diluted earnings per  common share:                                     |       | $                                                                 | 0.29       |                                                            | $          | 0.27 |   | $ | 0.65 |   | $ | 0.49 |   |

For the three monthsended June 30, 2007, there were 14,750 potential common shares outstanding thatwere excluded from the diluted net income per share calculation because theireffect would have been anti-dilutive. For the six months ended June 30, 2007, there were 81,475 potentialcommon shares outstanding that were excluded from the diluted net income pershare calculation 

12

----

because their effect would have been anti-dilutive. Forthe three and six months ended June 30, 2006, there were 112,932 and577,806 potential common shares outstanding, respectively, that were excludedfrom the diluted net income per share calculation because their effect wouldhave been anti-dilutive. There were no anti-dilutive unvested restricted sharesfor the three or six months ended June 30, 2007. There were 35,500 and 46,250shares of unvested restricted stock that were excluded from the diluted netincome per share because their effect would have been anti-dilutive for thethree and six periods ended June 30, 2006, respectively.

**14.          Segment Reporting**

TheCompany is engaged solely in the business of developing, marketing and sellingprescription pharmaceutical products. Accordingly, the Company’s business isclassified in a single reportable segment, the development, sale and marketingof prescription pharmaceutical products. Prescription products include avariety of branded pharmaceuticals for the treatment of cardiovascular,obstetrical and gynecological, gastroenterological and pediatric relatedconditions and disorders. Our pediatric products include products for thetreatment of allergy and immunology, psychiatry, neurology, urology andinfectious diseases.

Thefollowing presents revenues for prescription products by area of treatment:

|                         | ** ** | **For The Three Months  Ended June 30,** | ** ** | **For The Six Months  Ended June 30,** | ** ** |
|-------------------------|------------|-------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **              | ** ** | **2007**                                                          | ** ** | **2006**                                                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| Cardiovascular/Diabetes |       | $                                                                 | 70,265     |                                                            | $          | 58,236 |   | $ | 126,966 |   | $ | 105,046 |   |
| Women’s Health     |       | 19,825                                                            |       | 11,426                                                          |       | 36,393 |   | 25,168 |   |
| Pediatrics/other        |       | 5,572                                                             |       | 2,737                                                           |       | 14,560 |   | 8,638 |   |
|                    |       |                                                              |       |                                                            |       |   |   |   |   |
| Net revenues            |       | $                                                                 | 95,662     |                                                            | $          | 72,399 |   | $ | 177,919 |   | $ | 138,852 |   |

 

**15.          Commitments and Contingencies**

The Company,certain former and current officers and directors are defendants in aconsolidated securities lawsuit filed on August 22, 2002 in the UnitedStates District Court for the Northern District of Georgia. Plaintiffs in theclass action alleged in general terms that we violated Sections 11 and12(a) (a) of the Securities Act of 1933 and that we violated Sections10(b) and 20(a) of the Securities Exchange Act of 1934 andRule 10b-5 promulgated thereunder. In an amended complaint, Plaintiffsclaim that we issued a series of materially false and misleadingstatements to the market in connection with our public offering onApril 24, 2002 and thereafter relating to alleged “channel stuffing”activities. The amended complaint also alleged controlling person liability onbehalf of certain of our officers under Section 15 of the Securities Actof 1933 and Section 20 of the Securities Exchange Act of 1934. Plaintiffsseek an unspecified amount of compensatory damages.

OnSeptember 29, 2004, the U.S. District Court for the Northern District ofGeorgia held that the amended complaint was a “shotgun” pleading becauseit failed to properly link the allegations with the causes ofaction.  The court indicated that it would dismiss, withoutprejudice, the class action lawsuit  unless Plaintiffs amended theircomplaint to correct the pleading deficiencies and pay all ofthe  Defendants’  fees and costs associated with filing themotion to dismiss the lawsuit. Plaintiffs did not file a second amendedcomplaint as permitted, but instead filed a motion asking the District Court tolift the condition in its September 29, 2004 order that theymust pay Defendants’ fees and costs before further amendment. OnJune 22, 2005, the District Court denied Plaintiffs’ motion and gavethem another opportunity to amend if they paid Defendants’ fees and costs.Once again, Plaintiffs chose not to file a second amended complaint.Instead, Plaintiffs filed an appeal to the United States Court of Appealsfor the Eleventh Circuit.

On September 18,2006, the Eleventh Circuit Court of Appeals affirmed the District Court’sdetermination that the Amended Complaint was a “shotgun pleading” that didnot satisfy the pleading requirements under the federal rules.  The Courtof Appeals, however, disagreed with the remedy ordered by the DistrictCourt.  Instead of dismissing the Amended Complaint with a right tofurther amend if Plaintiffs paid Defendants’ fees and costs, the Court ofAppeals held that the District Court should have ordered Plaintiffsto replead under Federal Rule of Civil Procedure 12(e).  The Court ofAppeals also held that Plaintiffs’ claims under the Securities Act of1933 must meet the heightened pleading standards of Federal Rule ofCivil Procedure 9(b) because those claims sound in fraud.  Accordingly,the Court of Appeals vacated the District Court’s orders and remanded withinstructions to order a repleading. On April 20,2007, Plaintiffs filed a second amended complaint. On June29, 2007, the Company filed a motion to dismiss  the secondamended complaint, which currently is pending.  ****No accrual is recorded inthe Company’s financial statements related to this case as the Company believesthat its risk of loss is remote.****

13

----

The Company shallcontinue to vigorously defend this action.

The Company isalso involved with other various legal proceedings incident to the course ofbusiness. None of these proceedings are expected to have a material adverseeffect on the consolidated financial statements.

**16.          Acquisitions**

InJune 2007, we acquired Alliant Pharmaceuticals, Inc. (“Alliant”). Alliant is aspecialty pharmaceutical company focused on acquiring, developing andcommercializing proprietary products for the pediatric and pediatric specialtymarkets.  While a unique niche, the pediatric market is one of thefastest-growing pharmaceutical sectors. Alliant’s product focus includes thesub-specialties of allergy and immunology, psychiatry, neurology, urology andinfectious diseases.

Scielepaid $109.8 million in cash for Alliant, which included approximately $14.1 millionin indebtedness.  The agreement alsoincluded potential payments of up to $62.5 million based on meeting certainprofit targets and product development targets for Alliant’s products, whichwill be capitalized if realized.  TheCompany paid $4.8 million in costs related to the acquisition

Alliant’s field force ofapproximately 85 people, was retained by Sciele and formed Sciele’s newPediatric sales division. Alliant’s pediatric product portfolio under promotionincludes: Orapred ODT for asthma; Allegra Oral Suspension for allergies; MethylinChewable Tablets for ADHD.

The Alliant acquisitionwas accounted for as a business purchase combination using the purchase methodof accounting under the provision of the SFAS No. 141, *BusinessCombination. *Accordingly, theresults of Alliant’s operations have been included in the consolidatedfinancial statements beginning June 13, 2007. The allocation of consideration for the acquisition requires extensive useof accounting estimates and management’s judgement to allocate the purchaseprice of tangible and identifiable intangible assets acquired and liabilitiesassumed based on their respective fair values. Management believes the fair values assigned to the assets acquired andliabilities assumed are based on reasonable estimates and assumptions.

The total considerationfor the Alliant acquisition is calculated as follows (in thousands):

| Net cash consideration to  Alliant shareholders |   | $      | 94,816  |   |
|-------------------------------------------------|--------|--------|---------|--------|
| Settlement of  Alliant indebtedness             |   | 14,065 |    |
| Estimated direct  transaction fees and expenses |   | 4,757  |    |
|                                            |   | $      | 113,638 |   |

 

*PurchasePrice Allocation. *Thepurchase price for the Alliant acquisition was allocated to tangible andidentifiable intangible assets acquired and liabilities assumed based on theirestimated fair values at the acquisition date, with excess being allocated togoodwill.  The purchase price allocationis preliminary pending the contingency noted above and potential adjustment toestimated fair values.  As of June 30,2007 the purchase price is allocated as follows (in thousands):
| Accounts  receivable       |   | $       | 2,750   |   |
|----------------------------|--------|---------|---------|--------|
| Inventory                  |   | 1,161   |    |
| Other current  assets      |   | 1,703   |    |
| Intangible  assets         |   | 75,800  |    |
| Other assets               |   | 19      |    |
| Goodwill—estimated    |   | 47,057  |    |
| Less: Current  liabilities |   | (14,852 | )       |
| **Net  assets acquired**   |   | $       | 113,638 |   |

 

14

----

*Identifiable IntangibleAssets.  *Acquired identifiable intangible assetsinclude licensing and promotion rights, Trade names, supply and distributionagreements and customer relationships . The amounts assigned to each class ofidentifiable intangible assets and estimated useful lives (in years) assummarizes as follows (in thousands):

|                                 | ** ** | **Useful Life** | ** ** | **Fair Value** | ** ** |
|---------------------------------|------------|----------------------|------------|---------------------|------------|
| Licensing and promotion  rights |       | 5 to 15 years        |       | $                   | 75,800     |   |
| **Net assets acquired**         |       | 5 to 15 years        |       | $                   | 75,800     |   |

 

Fair values ofidentified intangible assets were estimated by performing a discounted cashflow analysis using the “income” approach. This method utilizes forecasts ofdirect revenues and costs associated with each respective identifiableintangible asset valued and include charges for the use of contributory assetsemployed to generate future income streams over each intangibles expecteduseful life. Net cash flows attributable to each identifiable intangible assetare discounted to their present value at rates commensurate with perceivedrisks. A partial list of cash flow assumptions utilized for each of theidentified intangible assets included consideration of existing operatingmargins, the number of existing and potential competitors, product pricingpatterns, product market share analysis, product approval dates and productlaunch dates. A partial list of considerations utilized in developing estimatesof expected useful lives included the effects of competition, customerattrition rates, consolidation within the industry and generic productlifecycle estimates.

*AssumedLiabilities.  *Included in the current liabilitiesassumed at the acquisition date is a severance accrual of $0.9 million forAlliant employees to be terminated as a result of the acquisition, inaccordance with Emerging Issues Task Force Abstract Issue No. 95-3 “Recognitionof Liabilities in Connection with a Purchase Business Combination.”  As ofJune 30, 2007, $0.2 million had been paid, resulting in a remaining balance of$0.7 million at June 30, 2007.

*ProForma Results of Operations.  *Unaudited pro forma operating results forthe Company, assuming the Alliant Pharmaceuticals, Inc. had occurred as of thebeginning of each period presented are as follows (in thousands, except pershare amounts): 

|                     | ** ** | **For the Three Months  Ended June 30,** | ** ** | **For the Six Months  Ended June 30,** | ** ** |
|---------------------|------------|-------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **          | ** ** | **2007**                                                          | ** ** | **2006**                                                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net revenues        |       | $                                                                 | 99,866     |                                                            | $          | 78,874 |   | $ | 189,661 |   | $ | 153,666 |   |
| Net income          |       | $                                                                 | 11,165     |                                                            | $          | 7,645 |   | $ | 16,450 |   | $ | 13,834 |   |
|                |       |                                                              |       |                                                            |       |   |   |   |   |
| Earnings per share: |       |                                                              |       |                                                            |       |   |   |   |   |
| Basic               |       | $                                                                 | 0.32       |                                                            | $          | 0.22 |   | $ | 0.47 |   | $ | 0.39 |   |
| Diluted             |       | $                                                                 | 0.30       |                                                            | $          | 0.20 |   | $ | 0.45 |   | $ | 0.36 |   |

 

The unaudited proforma results above have been prepared for comparative purposes and do notpurport to be indicative of what would have occurred had the acquisition beenmade on January 1, 2006.  Additionallythese pro forma results are not indicative of future results.

Pro forma results ofoperations includes net revenues for Lindane of $4.9 million and $11.8 millionfor the three and six months ended June 30, 2006, respectively, and $1.7million and $5.4 million for the three and six months ended June 30, 2007,respectively.  Alliant’s rights todistribute Lindane were terminated in May 2007 prior to the acquisition ofAlliant by Sciele.

 

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

Thefollowing should be read with the consolidated financial statements and relatedfootnotes and Management’s Discussion and Analysis of Results of Operations andFinancial Condition included in the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2006 (File No. 000-30123). Theresults discussed below are not necessarily indicative of the results to beexpected in any future periods. The following discussion containsforward-looking statements that are subject to risks and uncertainties, whichcould cause actual results to differ from the statements made.

**Overview**

ScielePharma, Inc. is a pharmaceutical company specializing in sales, marketing anddevelopment of branded prescription products focused onCardiovascular/Diabetes, Women’s Health, and Pediatric treatment.  The Company’s Cardiovascular/Diabetesproducts treat patients with high cholesterol, hypertension, high triglycerides,unstable angina, and Type 2 Diabetes. Its Women’s Health products are designed to improve the health andwell-being of women of all ages, as well as expectant and nursing mothers andtheir babies.  Its Pediatric productfocus includes the sub-specialties of allergy and immunology, psychiatry,neurology, urology 

15

----

andinfectious diseases.    Headquartered in Atlanta, Georgia, andfounded in 1992, Sciele Pharma employs more than 900 people.  Our key promoted products include:

| Cardiology/Diabetes | ** ** | **Women’s Health** | ** ** | **Pediatric** |
|---------------------|------------|-------------------------|------------|---------------|
| Altoprev            |       | OptiNate                |       | Allegra       |
| Fortamet            |       | Ostiva                  |       | Methylin      |
| Nitrolingual        |       | Prenate DHA             |       | Orapred       |
| Sular               |       | Prenate Elite           |       |          |
| Triglide            |       | Zovirax                 |       |          |

 

Our current operatingplan focuses on maximizing the sales of our existing product portfolio. We alsoplan to accelerate growth by launching line extensions to our current productsand by acquiring or licensing approved products or late stage developmentproducts and other businesses. We plan to focus on products that complement ourCardiovascular/Diabetes, Women’s Health and Pediatric categories that willallow us to leverage our existing sales force infrastructure as well asadditional therapeutic areas which compliment our existing sales structure.

We currently market andsell 20 products, 13 of which are actively promoted and which accounted forapproximately 92% of our total sales for the six months ended June 30, 2007. Wepromote our products through our nationwide sales and marketing force,targeting high-prescribing primary care physicians, endocrinologists,cardiologists, obstetricians and gynecologists, and pediatrics.

**Resultsof Operations**

*Net Revenue.*    Netrevenues for the three months ended June 30, 2007 increased$23.3 million or 32% to $95.7 million, as compared to $72.4 millionfor the three months ended June 30, 2006. Net revenues for the six monthsended June 30, 2007 increased $39.0 million or 28% to $177.9 million, ascompared to $138.9 million for the six months ended June 30, 2006. Netrevenues from our promoted products increased by $20.4 million and $33.1million for the three and six months ended June 30, 2007, respectively.  This increase is the result of our growthfrom increased promotion of our products and the continued success in theexecution of our marketing strategy.  Inaddition we have seen the continued growth of Zovirax and Sular scripts whichis attributed to the successful leveraging of our improved managed careposition by our sales force, as well as price increases.  Net revenues from our non-promoted productsincreased $2.8 million and $5.9 million for the three and six months ended June30, 2007, primarily related to larger shipments of Furadantin, due tomanufacturing issues resolved in the first quarter of 2007, in the first sixmonths of 2007.  The recent addition ofour Pediatric products occurred in the last month of the quarter and alsocontributed to the increase.

**ProductOverview**
| ** **      | ** ** | **Change in total dispensed prescriptions  for the three months ended  June 30, 2007 compared  to the three months ended  June 30, 2006(a)** | ** ** | **Change in new dispensed prescriptions  for the three months ended  June 30, 2007 compared  to the three months ended   June 30, 2006(a)** | ** ** |
|-----------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Altoprev        |       | 9.7                                                                                                                                                                                                                               | %          |                                                                                                                                                                                                                                  | 8.5        | % |   |
| Fortamet        |       | (4.7                                                                                                                                                                                                                              | )%         |                                                                                                                                                                                                                                  | (22.8      | )% |   |
| Nitrolingual(c) |       | (36.0                                                                                                                                                                                                                             | )%         |                                                                                                                                                                                                                                  | (39.4      | )% |   |
| Sular           |       | 59.4                                                                                                                                                                                                                              | %          |                                                                                                                                                                                                                                  | 47.9       | % |   |
| Triglide(b)     |       | 3.9                                                                                                                                                                                                                               | %          |                                                                                                                                                                                                                                  | 4.7        | % |   |
| OptiNate(e)     |       | N/A                                                                                                                                                                                                                               |       |                                                                                                                                                                                                                                  | N/A        |   |   |
| Ostiva(f)       |       | (15.1                                                                                                                                                                                                                             | )%         |                                                                                                                                                                                                                                  | 153.2      | % |   |
| Prenate DHA(d)  |       | (4.4                                                                                                                                                                                                                              | )%         |                                                                                                                                                                                                                                  | 3.7        | % |   |
| Prenate Elite   |       | N/A                                                                                                                                                                                                                               |       |                                                                                                                                                                                                                                  | N/A        |   |   |
| Zovirax(g)      |       | N/A                                                                                                                                                                                                                               |       |                                                                                                                                                                                                                                  | N/A        |   |   |
| Allegra         |       | 148.0                                                                                                                                                                                                                             | %          |                                                                                                                                                                                                                                  | (30.4      | )% |   |
| Methylin        |       | N/A                                                                                                                                                                                                                               |       |                                                                                                                                                                                                                                  | N/A        |   |   |
| Orapred         |       | 67.9                                                                                                                                                                                                                              | %          |                                                                                                                                                                                                                                  | 67.2       | % |   |

----

16

----

*(a)**         *Source: IMS’s Next Generation PrescriptionServices data.

*(b)         *Triglidewas launched in July 2005.

*(c)          *We believe that IMS data does not captureprescriptions of Nitrolingual from some of the non-retail channels andprescription trends in the non-retail channel which may have a significantimpact on the reported change.

*(d)         *Prenate DHA was launched in June 2007.

*(e)*           OptiNate was launched in March 2005.

*(f)           *Ostiva was launched in September 2006.

*(g)         *We acquired Zovirax marketing rights inDecember 2006 and launched our promotion in January 2007.

Net revenues from our Cardiovascular/Diabetes products(namely Sular, Fortamet, Altoprev, Triglide and Nitrolingual) were $70.3million and $127.0 million for the three and six months ended June 30, 2007,compared to $58.2 million and $105.0 million for the three and six months endedJune 30, 2006, respectively.  Theincrease was primarily due to the continued growth of Sular, NitrolingualPumpspray, and Triglide, as well as price increases implemented in the firstquarter of 2007.  Cardiovascular/diabetesproducts represented 74% of the Company’s total sales in the second quarter of2007.

Netrevenues from our promoted Women’s Health products (namely Prenate DHA, PrenateElite, OptiNate, Ponstel, Ostiva and Zovirax), were $19.8 million and $36.4million for the three and six months ended June 30, 2007 compared to $11.4million and $25.1 million for the three and six months ended June 30,2006. This increase is primarily related to the expansion of our women’s healthsales force in the first quarter of 2007, which resulted in an increase inPrenate Elite’s market share. In June 2007, the Company launched Prenate DHA,the first and only prescription prenatal vitamin with 300 milligrams of DHA,(from a total 365 mg of Omega-3 fatty acids), which is the highest amountavailable in a prescription prenatal vitamin. During the first three weeks ofthe launch, Prenate DHA has gained 3% of the new prescription market andshowing a similar growth trend achieved during the initial launch of PrenateElite.

Net revenues from our Pediatrics/Other products, were $5.6 million and$14.6 million for the three and six months ended June 30, 2007 compared to $2.8million and $8.7 million for the three and six months ended June 30, 2006.   Theincrease in revenues for pediatricand non-promoted products were theresult of larger shipments of Furadantin as we experienced delays in productdelivery due to manufacturing issues, which were resolved in the first quarter,and a continuous strength in our Robinul sales. 

*Cost of Revenues.*    Cost of revenues forthe three and six months ended June 30, 2007 were $12.8 million and $23.9million compared to $10.5 million and $19.9 million for the three and sixmonths ended June 30, 2006, respectively. The increase in cost of revenues isrelated to the change in product mix, increases in freight costs and theincrease in sales for the three and six months ended June 30, 2007 as comparedto the equivalent periods ending June 30, 2006.

*GrossMargin.*    Grossmargin for the three and six months ended June 30, 2007 were 86.6% and 86.6%compared to 85.4% and 85.7% for the three and six months ended June 30, 2006,respectively.  This increase in gross margin for the three andsix months ended June 30, 2007 is the result of a change in product mix andprice increases.

*Selling,General and Administrative Expenses.*    Selling, general and administrative expensesincreased $12.0 million, or 33%, to $48.5 million for the threemonths ended June 30, 2007 compared to $36.5 million for the three months endedJune 30, 2006. Selling, general and administrative expenses increased$17.2 million, or 24%, to $88.2 million for the six months ended June 30,2007 compared to $71.0 million for the six months ended June 30, 2006.The increase in SG&A expense in thesecond quarter of 2007 is primarily due to costs associated with the launch ofPrenate DHA, the cost of integrating the Alliant sales force, higher royaltiesand commissions, new marketing programs associated with cardiovascularproducts. Also affecting selling, general 

17

----

and administrative expenses was an increase in stockcompensation expense in the first three months of 2007 related to theacceleration of vesting for restricted shares. The acceleration is the result of the achievement of defined goals bythe Company.

*Depreciation and Amortization Expense.*    Depreciation andamortization expense decreased $0.1 million, or 1.5%, to $6.4 millionfor the quarter ended June 30, 2007 compared to $6.5 million for thequarter ended June 30, 2006. The decrease in amortization expense isrelated to completing the amortization of a portion of Sular intangible assetsin the first quarter of 2007.  Thisdecrease was partially offset by additions of intangibles from Ostiva, Zoviraxand the final Sular milestone paid in 2006. Depreciation and amortization expense remained consistent at $13.0million for the six months ended June 30, 2007 and June 30, 2006.

The Companybelieves there are no intangible asset impairments and there were no otherasset write-downs as of June 30, 2007.

*Research and Development Expense.*    Research anddevelopment expense increased $4.1 million to $8.1 million for thethree months ended June 30, 2007 compared to $4.0 million for the three monthsended June 30, 2006, respectively. Research and development expenseincreased $7.2 million to $14.0 million for the six months ended June 30, 2007compared to $6.8 million for the same period in 2006.  This increase was primarily related to theclinical trials and regulatory filing of the Company’s new Sular formulation,and Phase III clinical trials of Glycopyrrolate and the Pravastatin/Fenofibratecombination.

*Interest Expense.*    Interest expense was$1.9 million and $2.9 million for the three and six months endedJune 30, 2007 compared to $0.8 million and $1.5 million for the three andsix months ended June 30, 2006.  Theincrease is due to the issuance of the $325 million convertible bonds (see Note9) as well as the entry into the new $100 million secured credit facility inSeptember 2006 (see Note 10).  Theincrease was partially offset by the elimination of the interest expenserelated to our retired $150 million contingent convertible note.

*Interest Income.*    Interest income was$3.4 million and $5.2 million for the three and six months ended June30, 2007 compared to $1.1 million and $2.0 million for the three and six monthsended June 30, 2006, respectively. The increase is primarily due to higheraverage cash, due to timing of the new $325 million contingent convertiblenotes being issued in May and the extinguishment of the $150 millioncontingent convertible notes in June and the closing of the acquisition ofAlliant in June, and marketable securities balance as a result of cashgeneration from sales and higher returns on current investments.

*Other Expense.    *Other expense was $5.3 million for the threeand six months ended June 30, 2007.  Thiswas related to the retirement of $150 million contingent convertible debt andthe write-off of the related capitalized finance costs.  There were no comparative expenses for thesame period in 2006.

*Provision for Income Taxes.*    Income taxes wereprovided for at a rate of 34.0% and 34.0% for the three and six months endedJune 30, 2007, respectively, compared to 32.8% and 32.3% for the three and sixmonths ended June 30, 2006, respectively. This increase in the effective tax rate is due to the change in the mixof tax jurisdictions, both domestic and international, as a result of ourimplementation of international operations where our income was earned, as wellas a change in the ratio of non-deductible expenses to pre-tax income.

**Liquidityand Capital Resources**

Our cash and cash equivalents were $71.2 million on June 30, 2007compared to $45.3 million in the prior year. Net cash provided by operatingactivities for the six months ended June 30, 2007 was $36.9 million. This sourceof cash was primarily the result of net income of $23.6 million resultingprimarily from the sales of our promoted products, an increase in accountspayable of $7.5 million primarily related to increased business volume, adecrease in inventory of $4.7 million primarily related to increased sales andan decrease of $2.6 million in income taxes receivable related primarily to theestimated tax payments for the year. Additional providers of cash includenon-cash items of depreciation and amortization of $13.0 million, stock basedcompensation expenses of $5.2 million primarily related the restricted shares,interest expense of $0.4 million primarily related to capitalized financingcosts on our new debt and a $5.3 million loss on the remaining capitalizedfinancing costs related to the extinguishment our old debt. Partiallyoffsetting these providers of cash were uses of cash including an increase inaccounts receivable of $11.7 million as a result of an increase in overallsales, and an increase in other current assets of $6.2 million as a result ofthe increase in samples on hand and an increase in prepaid expenses, a $4.5million increase in accrued expenses and other liabilities, and a decrease indeferred income tax expense of $3.1 million related to estimated tax liabilityfor the year.

18

----

Our cash and cash equivalents were $30.8 million on June 30, 2006compared to $13.4 million in the prior year. Net cash provided by operatingactivities for the six months ended June 30, 2006 was $42.0 million. Thissource of cash was primarily the result of net income of $19.3 million,resulting primarily from the sales of our promoted products, a decrease inaccounts receivable of $4.2 million, as a result of an overall reduction in ourdays sales outstanding, an increase in accounts payable of $2.8 million,primarily related to increased business volume, a decrease in inventory of $2.2million, primarily related to increased sales and an increase in accruedexpenses and other long-term liabilities, primarily related to increasedcommissions and royalties as a result of increased sales of $1.1 million.Additional providers of cash include non-cash items of depreciation andamortization of $13.0 million, stock based compensation expenses of $4.4million, interest expense of $0.2 million and deferred income tax expenses of$2.6 million. Partially offsetting these providers of cash were uses of cashwere increase in income tax receivable of $7.2 million related primarily to estimatedtax payments made during the year.

We maintain supply agreementswith third party suppliers for most of our products. Some of these supplyagreements contain minimum purchase requirements. For most of these supplyagreements, we believe that our inventory requirements and related purchases ofinventory will exceed the minimum purchase requirement in 2007. In those casesin which we do not believe our purchases will exceed the minimum purchaserequirements, we are seeking to negotiate waivers or modifications of theminimum purchase requirements.

Net cash used in investing activities for the six months ended June 30,2007 was $163.9 million. The primary uses of this cash was related to the$113.7 million acquisition of Alliant (see Note 16 to the Company’sunaudited financial statements for the three and six months ended June 30,2007), $0.8 million for the purchase of products and product licenses, thepurchase of securities of $252.4 million, advance payments for productlicenses of $9.1 million and the acquisition of property plant and equipment of$7.8 million, primarily for the construction of a manufacturing line for Sular of $5.1 million and new computer andaudio-visual systems for the home office. The uses of cash were offset by proceeds from the sale of securities of$219.8 million.

Net cash used in investing activities for the six months ended June 30,2006 was $26.2 million. The primary uses of this cash was for the purchaseof marketable securities of $61.5 million which was $42.2 million inmaturing investments that were reinvested upon maturity, and $19.3 millionof investment of cash generated from operations, the purchase of property andequipment, primarily for new office furniture and computer systems for the newhome office, of $1.9 million, and $5.0 million for a milestonepayment to Bayer.

Net cash provided in financing activities was $153.9 million for the sixmonths ended June 30, 2007 primarily resulting from the issuance of $325.0million contingent convertible senior notes, $2.1 million from theissuances of common stock related to shares issued in connection with theretirement of the $150 million convertible notes and executive and employeestock options and restricted shares, and $0.4 million for a non-cash reductionin taxes payable relating to stock options. Partially offsetting the cash proceeds was  the retirement of the $150.0 million seniorsubordinated contingent convertible notes, the repurchase of our common stockfor $14.4 million and $9.2 millions in capitalizable debt cost related to theissuance of the $325 million notes costs associated with the exchange of thecontingent convertible debt, discussed in footnote 10 of our financialstatements.

Net cash used in financing activities was $2.5 million for the sixmonths ended June 30, 2006 primarily resulting from the repurchase of ourcommon stock for $6.9 million and the costs associated with the exchange of thecontingent convertible debt, discussed in footnote 10 of our financialstatements, of $1.8 million. Partially offsetting this net cash used was$4.1 million for the issuances of common stock related to executive andemployee stock options and $2.1 million for a non-cash reduction in taxes payablerelating to stock options.

During the six months ended June 30,2007, there were no borrowings or repayments under our $100 million seniorsecured credit facility.

We believe that our cash on hand, cash we expect togenerate from our operations and available under our revolving credit facilitywill be sufficient to fund these working capital requirements, at least for thenext twelve months. However, in the event that we make significantacquisitions, we may need to raise additional funds through additionalborrowings or the issuance of debt or equity securities, or both. Some of oursupply agreements contain minimum purchase requirements. We do not expect thatmeeting those requirements will result in the acquisition of excessiveinventory. We expect we will also experience growth in our accounts receivableas our sales increase.

On May 14, 2007,the Company issued and sold $325 million aggregate principal amount of its2.625% Contingent Convertible Senior Notes due 2027 (the “2007 Notes”) in aregistered offering under the Securities Act of 1933, as amended.  TheNotes were initially sold pursuant to an underwriting agreement, dated May 9,2007, between the Company and UBS Securities LLC, as Representative of theunderwriters named therein, all as more thoroughly described in Note 10 to ourfinancial statements.

19

----

In June 2007, following the closing of its 2.625%Contingent Convertible Senior Notes Due 2027, the Company redeemed all of its1.75% Contingent Convertible Senior Subordinated Notes Due 2024 with theproceeds from the issuance of the 2007 Notes, in accordance with the indenturedated May 3, 2006.  In addition to the $150 million face value of thebonds, bondholders received a total of 839,930 shares of Company stock,pursuant to the terms of the exchange offer.

On September 18,2006, we entered into a senior secured credit agreement (the “Credit Agreement”)with UBS Securities LLC and LaSalle Bank National Association as leadarrangers, UBS AG, Stamford Branch, as issuing bank, administrative agent andcollateral agent, Regents Bank, Fifth Third Bank and Bank of America, N.A. asco-documentation agents and UBS Loan Finance LLC, as swing line lender. TheCredit Agreement provides us and our Cayman subsidiary, Sciele Pharma CaymanLtd., with a five-year revolving credit facility of up to $100 million, with anoption to expand the facility credit line by up to an additional $75 million.

Amountsoutstanding under the new credit facility generally bear interest at thelenders’ corporate base rate or the LIBOR, plus a specified margin of between1.75% and 2.5% depending on our ratio of indebtedness to earnings. The CreditAgreement contains customary negative covenants and financial covenants.

Our obligationsunder the Credit Agreement are secured by a pledge of substantially all of ourassets and are guaranteed by substantially all of our subsidiaries that are notborrowers.

We terminated ourprevious credit agreement with LaSalle Bank National Association, datedFebruary 11, 2003, as subsequently amended, upon entering into the new CreditAgreement.

The Companyadopted a new share repurchase program effective August 3, 2005, thatauthorized the repurchase of up to $20.0 million of its outstanding shares ofcommon stock over the next twelve months with no periodic sub-limits on theamount of repurchases.  In the firstquarter of 2005, the Company repurchased 127,169 shares of common stock at anaverage cost of $16.44 per share, or $2.1 million. In the fourth quarterof 2005, the Company repurchased 300,000 shares of common stock at an averagecost of $14.79 per share, or $4.4 million. In the second quarter of 2006, theCompany repurchased 334,100 shares of common stock at an average cost of $20.71per share, or $6.9 million.  These shareshave been retired.  This plan expired onAugust 2, 2006.

The Company adopted a new share repurchase programeffective August 3, 2006, that authorizes the repurchase of up to $30.0million of its outstanding shares of common stock over the next twelve monthswith no periodic sub-limits on the amount of repurchases. This plan replacesall prior share repurchase plans and will expire on August 2, 2007.  In the third quarter of 2006, the Companyrepurchased 409,973 shares of common stock at an average cost of $19.19 pershare, or $7.9 million.  In the firstquarter of 2007, the Company repurchased 18,822 shares of common stock at anaverage cost of $23.87 per share, or $0.4 million. In the second quarter of2007, the Company repurchased 567,870 shares of common stock at an average costof $24.59 per share, or $14.0 million. These shares have been retired.  As of June 30, 2007, $7.7 million isavailable for repurchases under the program.

We expect that ourexisting sources of working capital or liquidity will be sufficient to enableus to execute our main operational goals of maximizing the sales of ourexisting products and acquiring companies having such products, acceleratinggrowth by launching line extensions to our current products and acquiring orlicensing approved products or late stage development products, as well as anycapital requirements necessary to meet these operational goals.

**CriticalAccounting Policies**

Weview our critical accounting policies to be those policies which are veryimportant to the portrayal of our financial condition and results ofoperations, and require management’s most difficult, complex or subjectivejudgments. The circumstances that make these judgments difficult or complexrelate to the need for management to make estimates about the effect of mattersthat are inherently uncertain. We believe our critical accounting policies areas follows:

·              *Allowance for doubtful accounts.*   Weare required to estimate the level of accounts receivable recorded on ourbalance sheet which we assess will ultimately not be paid. Among other things,this assessment requires analysis of the financial strength of our customerswhich can be highly subjective. Our policy is to estimate bad debt expensebased on prior experience supplemented by a periodic customer specific reviewwhen needed. If we over or under estimate the level of accounts receivable thatwill not be paid, there may be a material impact to our financial statements.

20

----

·              *Sales deductions.*   We provide volumerebates, contractual price reductions with drug wholesalers and insurancecompanies, and certain other sales related deductions on a regular basis. Theexact level of these deductions is not always immediately known and thus wemust record an estimate at the time of sale. Our estimates are based onhistorical experience with similar programs, and since we have a relativelysmall customer base, customer specific historical experience is often useful indetermining the estimated level of deductions expected to be refunded to ourcustomers when sales incentives are offered. If we over or under estimate thelevel of sales deductions, there may be a material impact to our financialstatements.

·              *Product returns.*   In thepharmaceutical industry, customers are normally granted the right to returnproduct for a refund if the product has not been used prior to its expirationdate which is typically two to four years from the date of manufacture. Ourreturn policy allows product returns for products within an eighteen-monthwindow from six months prior to the expiration date and up to twelve monthsafter the expiration date. Our return policy conforms to industry standardpractices. We believe that we have sufficient data to accurately estimatefuture returns over the return time period at the time of sale. We are requiredto estimate the level of sales which will ultimately be returned pursuant toour return policy and record a related reserve at the time of sale. Theseamounts are deducted from our gross sales to determine our net revenues. Ourestimates take into consideration historical returns of a given product,product specific information provided by our customers and information obtainedregarding the levels of inventory being held by our customers, as well asoverall purchasing patterns by our customers. Management periodically reviewsthe reserves established for returns and adjusts them based on actualexperience. If we over or under estimate the level of sales which willultimately be returned, there may be a material impact to our financialstatements.

·              *Liabilities assumed with the acquisition of productrights.*   In connection with the acquisition of product rights,we assume certain liabilities for returns of product shipped by the sellerprior to the acquisition date. At the acquisition date, we estimate the amountof the assumed liabilities based on actual sales return data from the sellerand include that amount in the allocation of the total purchase price. Wereview the estimated liability on an annual basis. If we over or under estimateliabilities assumed, there may be a material impact to our financialstatements.

·              *Intangible assets*.   When we acquirethe rights to manufacture and sell a product, we record the aggregate purchaseprice, along with the value of the product related liabilities that we assume,as intangible assets. We use the assistance of valuation experts to help usallocate the purchase price to the fair value of the various intangible assetsand related liabilities that we have acquired. Then, we must estimate theeconomic useful life of each of these intangible assets in order to amortizetheir cost as an expense in our statement of operations over the estimatedeconomic useful life of the related asset. The factors that drive the actualeconomic useful life of a pharmaceutical product are inherently uncertain, andinclude patent protection, physician loyalty and prescribing patterns,competition by products prescribed for similar indications, futureintroductions of competing products not yet FDA approved, the impact ofpromotional efforts and many other issues. We use all of these factors ininitially estimating the economic useful lives of our products, and we alsocontinuously monitor these factors for indications of appropriate revisions.

In assessing the recoverability of our intangibleassets, we must make assumptions regarding estimated future cash flows andother factors. If the estimated undiscounted future cash flows do not exceedthe carrying value of the intangible assets, we must determine the fair valueof the intangible assets. If the fair value of the intangible assets is lessthan its carrying value, an impairment loss will be recognized in an amountequal to the difference. We review intangible assets for impairment at leastannually and whenever events or changes in circumstances indicate that thecarrying amount of an asset may not be recoverable. Such events orcircumstances may include but are not limited to, lack of promotionalsensitivity, the introduction of competitive products and changes in governmentregulations. If we determine that an intangible asset is impaired, a non-cashimpairment charge would be recognized. If we should incur an impairment loss,there may be a material impact to the financial statements.

·              *Income Taxes*.   Income taxes areprovided for under the liability method. This approach requires the recognitionof deferred tax assets and liabilities for the expected future tax consequencesof differences between the tax basis of assets or liabilities and their carryingamounts in the consolidated financial statements. A valuation allowance isprovided for deferred tax assets if it is more likely than not that these itemswill either expire before we are able to realize their benefit or if futuredeductibility is uncertain.

21

----

Developing the provision for income taxes requiressignificant judgment and expertise in international, federal and state incometax laws, regulations and strategies, including the determination of deferredtax assets and liabilities and, if necessary, any valuation allowances that maybe required for deferred tax assets. Our judgments and tax strategies aresubject to audit by various taxing authorities. While we believe we haveprovided adequately for our income tax liabilities in our consolidated financialstatements, adverse determinations by these taxing authorities could have amaterial adverse effect on our financial statements.

·              *Inventory obsolescence.*   Our productshave shelf lives ranging from 24 to 48 months. We must estimate the amountof inventory recorded on our balance sheet that will not be sold prior toexpiration. This estimate requires analysis of forecasted demand for ourproducts, our promotional focus, amounts of our products currently held by ourcustomers and the impact on our products of competing products. If we over orunder estimate the amount of inventory that will not be sold prior toexpiration, there may be a material impact to our financial statements.

**ForwardLooking Statements**

This Quarterly Report contains forward-lookingstatements within the meaning of the Private Securities Litigation Reform Actof 1995. These statements involve a number of risks and uncertainties. Althoughour forward-looking statements reflect the good faith judgment of ourmanagement, these statements can only be based on facts and factors currentlyknown by us. Consequently, forward-looking statements are inherentlysubject to risks and uncertainties. Actual results and outcomes may differ materially from results andoutcomes discussed in the forward-looking statements.

Risksand uncertainties that could cause our forward-looking statements to fail tooccur include, but are not limited to, the following:

·              We may notattain expected revenues and earnings;

·              If we areunsuccessful in obtaining or renewing third party payor contracts for ourproducts, we may experience reductions in sales levels and may failto reach anticipated sales levels;

·              If demand for ourproducts exceeds our initial expectations or the ability of our suppliers toprovide demand-meeting quantities of product and samples, our future ability tosell these products could be adversely impacted;

·              The potential growthrate for our promoted products may be limited by slower growth for theclass of drugs to which our promoted products belong and unfavorableclinical studies about such class of drugs;

·              Wemay encounter problems in the manufacture or supply of our products, forwhich we depend entirely on third parties;

·              Strong competitionexists in the sale of our promoted products, which could adversely affectexpected growth of our promoted products’ sales or increase our costs to sellour promoted products;

·              We may not beable to protect our competitive position for our promoted products from patentinfringers;

·              Certain of ourproducts have experienced manufacturing issues. If the issues recur and cannotbe resolved, our ability to acquire product for sale and sampling will beadversely affected;

·              We may incurunexpected costs in integrating new products into our operations;

·              We may beunable to develop or market line extensions for our products including Prenate,Sular, Triglide, Nitrolingual, Altoprev and Fortamet, or, even if developed,obtain patent protection for our line extensions; further, introductions by usof line extensions of our existing products may require that we makeunexpected changes in our estimates for future product returns and reserves forobsolete inventory. If these risks occur, our financial results could beadversely affected;

22

----

·              If we havedifficulties acquiring new products or rights to market new products from thirdparties, our financial results could be adversely impacted;

·              Ourlicensor/supplier can terminate our rights to commercialize Nitrolingual andthe 60 dose size of this product has not yet met our expectation;

·              We depend on a smallsenior management group, the departure of any member of which would likelyadversely affect our business if a suitable replacement member could not beretained;

·              An adverseinterpretation or ruling by one of the taxing jurisdictions in which we operatecould adversely impact our operating results;

·              A small number ofcustomers account for a large portion of our sales and the loss of one of them,or changes in their purchasing patterns, could result in substantially reducedsales, substantially and adversely impacting our financial results;

·              If third-partypayors do not adequately reimburse patients for our products, doctorsmay not prescribe them;

·              Our business issubject to increasing government price controls and other healthcare costcontainment measures;

·              Side effects ormarketing or manufacturing problems with our products could result in productliability claims which could be costly to defend and could result in thewithdrawal or recall of products from the market which would adversely affectour business;

·              We rely onoperational data obtained from IMS, an industry accepted data source. IMS datamay not accurately reflect actual prescriptions (for instance, we believeIMS data does not capture all product prescriptions from some non-retailchannels);

·              An adverse judgmentin the securities class action litigation in which we and certain currentand former directors and executive officers are defendants could have amaterial adverse effect on our financial results and liquidity;

·              If we fail toobtain, or encounter difficulties in obtaining, regulatory approval for newproducts or new uses of existing products, or if our development agreements areterminated, we will have expended significant resources for no return;

·              Our business andproducts are highly regulated; the regulatory status of some of our productsmakes these products subject to increased competition and other risks; and werun the risk that we, or third parties on whom we rely, could violate thegoverning regulations;

·              We may be foundnoncompliant with applicable federal, state or international laws,rules or regulations which could result in fines and/or product recalls orotherwise cause us to expend significant resources to correct suchnon-compliance;

·              We may notexperience the beneficial results of the Alliant acquisition which we expect toreceive and the Alliant products may not meet our sales expectations;

·              If genericcompetitors that compete with any of our products are introduced, our revenuesmay be adversely affected; and

·              Some unforeseendifficulties may occur.

These risk factors are not exhaustive. We may not havecorrectly identified and appropriately assessed all factors affecting ourbusiness and the publicly available and other information with respect to thesematters may not be complete and correct. Additional risks and uncertainties notpresently known to us or that we currently believe to be immaterial also mayadversely impact us. Should any risks and uncertainties develop into actualevents, these developments could have material adverse effects on our business,financial condition, and results of operations. For these reasons, we cautionyou not to place undue reliance on our forward-looking statements.

23

----

**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK**

TheCompany is exposed to certain market risks that arise in the ordinary course ofbusiness. A discussion of the Company’s primary market risk exposure ispresented below.

**ForeignCurrency Exchange Risk**

Our purchases of Sular, Triglideand Nitrolingual are made in Euros. Although we did not enter into any forwardcontracts in the second quarter of 2007, we may eliminate risks from foreigncurrency fluctuations after the time of shipment of product by entering intoforward contracts for these purchases of inventory at the time of productshipments. The Company’s earnings and cash flows could be adverselyaffected in the future by the relationship of the U.S. dollar with foreigncurrencies.

**MarketRisk on Investments**

The fair value of our investmentportfolio would be negatively affected by an increase in interest rates. Sincethe majority of the Company’s investments are fixed rate interest-bearingsecurities and therefore subject to the risk of loss in market value from anincrease in rates or a change in the underlying risk of the issuers of thenotes, the Company’s future earnings and cash flows could be affected adverselyif the Company were to sell the securities prior to their maturity date. Therewere no realized losses from the sale of investments for the quarter ended June30, 2007. At June 30, 2007, the Company had total net unrealized losses frommarketable securities of $0.5 million.

**MarketRisk on Variable Rate Debt**

Inconnection with borrowings incurred under the senior secured revolving creditfacility arranged by UBS Securities LLC, we could experience market risk withrespect to changes in the general level of the interest rates and its effectupon our interest expense. Borrowings under this facility bear interest atvariable rates. Because such rates are variable, an increase in interest rateswill result in additional interest expense and a reduction in interest rateswill result in reduced interest expense. Accordingly, our present exposure tointerest rate fluctuations is primarily dependent on rate changes thatmay occur while borrowings under this credit facility are outstanding. OnJune 30, 2007, there was no debt outstanding under this facility.

**MarketRisk on Fixed Rate Debt**

TheCompany’s long-term fixed interest rate senior subordinated contingentconvertible notes are also subject to market risk. Fixed rate debt outstandingat June 30, 2007 was $325 million with an interest rate of 2.625%. Allother things being equal, the fair market value of the Company’s fixed ratedebt will increase as rates decline and will decrease as rates rise. The fixedrate notes outstanding totaling $325 million at June 30, 2007 had a fairvalue of $330.9 million based on quoted market rates.

**ITEM 4. CONTROLS AND PROCEDURES**

**Evaluationof Disclosure Controls and Procedures**

We maintain a set ofdisclosure controls and procedures that are designed to ensure that informationrequired to be disclosed in the reports that we file under the SecuritiesExchange Act of 1934, as amended (“Exchange Act”).  These reports are recorded, processed,summarized and reported within the time periods specified in the SEC’srules and forms. We carried out an evaluation under the supervision andwith the participation of management, including our President and ChiefExecutive Officer and our Chief Financial Officer, of the effectiveness of thedesign and operation of our disclosure controls and procedures pursuant toRule 13a-15(e) of the Exchange Act as of the end of the periodcovered by this report. Our President and Chief Executive Officer and ChiefFinancial Officer concluded that our disclosure controls and procedures wereeffective as of June 30, 2007.

**Changesin Internal Control over Financial Reporting**

Therehave been no material changes in Sciele Pharma’s primary internal controls overfinancial reporting during the second fiscal quarter of 2007 that havematerially affected, or are reasonably likely to materially affect, ScielePharma’s internal controls over financial reporting.

24

----

 

**PART II—OTHER INFORMATION**

**ITEM 1: LEGAL PROCEEDINGS**

The Company,certain former and current officers and directors are defendants in aconsolidated securities lawsuit filed on August 22, 2002 in the UnitedStates District Court for the Northern District of Georgia. Plaintiffs in theclass action alleged in general terms that we violated Sections 11 and12(a) (a) of the Securities Act of 1933 and that we violated Sections10(b) and 20(a) of the Securities Exchange Act of 1934 andRule 10b-5 promulgated thereunder. In an amended complaint, Plaintiffsclaim that we issued a series of materially false and misleadingstatements to the market in connection with our public offering on April 24,2002 and thereafter relating to alleged “channel stuffing” activities. Theamended compliant also alleged controlling person liability on behalf ofcertain of our officers under Section 15 of the Securities Act of 1933 andSection 20 of the Securities Exchange Act of 1934. Plaintiffs seek anunspecified amount of compensatory damages.

OnSeptember 29, 2004, the U.S. District Court for the Northern District ofGeorgia held that the amended complaint was a “shotgun” pleading becauseit failed to properly link the allegations with the causes ofaction.  The court indicated that it would dismiss, withoutprejudice, the class action lawsuit  unless Plaintiffs amended theircomplaint to correct the pleading deficiencies and pay all ofthe  Defendants’  fees and costs associated with filing themotion to dismiss the lawsuit. Plaintiffs did not file a second amendedcomplaint as permitted, but instead filed a motion asking the District Court tolift the condition in its September 29, 2004 order that theymust pay Defendants’ fees and costs before further amendment. OnJune 22, 2005, the District Court denied Plaintiffs’ motion and gavethem another opportunity to amend if they paid Defendants’ fees and costs.Once again, Plaintiffs chose not to file a second amended complaint.Instead, Plaintiffs filed an appeal to the United States Court of Appealsfor the Eleventh Circuit.

On September 18,2006, the Eleventh Circuit Court of Appeals affirmed the District Court’sdetermination that the Amended Complaint was a “shotgun pleading” that didnot satisfy the pleading requirements under the federal rules.  The Courtof Appeals, however, disagreed with the remedy ordered by the DistrictCourt.  Instead of dismissing the Amended Complaint with a right tofurther amend if Plaintiffs paid Defendants’ fees and costs, the Court ofAppeals held that the District Court should have ordered Plaintiffsto replead under Federal Rule of Civil Procedure 12(e).  The Court ofAppeals also held that Plaintiffs’ claims under the Securities Act of1933 must meet the heightened pleading standards of Federal Rule ofCivil Procedure 9(b) because those claims sound in fraud.  Accordingly,the Court of Appeals vacated the District Court’s orders and remanded withinstructions to order a repleading. On April 20,2007, Plaintiffs filed a second amended complaint. On June29, 2007, the Company filed a motion to dismiss  the secondamended complaint, which currently is pending.  ****No accrual is recorded inthe Company’s financial statements related to this case as the Company believesthat its risk of loss is remote.****

The Company shallcontinue to vigorously defend this action.

No accrual is recorded in the Company’s financialstatements related to this case as the Company believes that its risk of lossis remote.

The Company is also involved with other various legalproceedings incident to the course of business. None of these proceedings areexpected to have a material adverse effect on the consolidated financialstatements.

**ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES ANDUSE OF PROCEEDS**

The Company adopted a new share repurchase programeffective August 3, 2006, that authorizes the repurchase of up to $30.0million of its outstanding shares of common stock over the next twelve monthswith no periodic sub-limits on the amount of repurchases. This plan replacesall prior share repurchase plans and will expire on August 2, 2007.  In the third quarter of 2006, the Companyrepurchased 409,973 shares of common stock at an average cost of $19.19 pershare, or $7.9 million.  In the firstquarter of 2007, the Company repurchased 18,822 shares of common stock at anaverage cost of $23.87 per share, or $0.4 million. In the second 

25

----

quarter of 2007, theCompany repurchased 567,870 shares of common stock at an average cost of $24.59per share, or $14.0 million. These shares have been retired.  As of June 30, 2007, $7.7 million isavailable for repurchases under the program.
| **Fiscal Period**           | ** ** | **Total  Number of  Shares  Purchased** | ** ** | **Average  Price  Per Share** | ** ** | **Total Number of  Shares Purchased as  Part of Publicly  Announced Plans** | ** ** | **Approximate Dollar  Value of Shares  that May Yet Be  Purchased Under  the Plans** | ** ** |
|----------------------------------|------------|----------------------------------------------|------------|------------------------------------|------------|----------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------|------------|
| January 1  through March 31,2007 |       | 18,822                                       |       | $                                  | 23.87      |                                                                                                           | 18,822     |                                                                                                                         | $          | 21,669,654 |   |
| April 1 through  April 30, 2007  |       | 2,759                                        |       | $                                  | 23.61      |                                                                                                           | 2,759      |                                                                                                                         | $          | 21,604,520 |   |
| May 1 through  May 31, 2007      |       | —                                       |       | $                                  | —     |                                                                                                           | —     |                                                                                                                         | $          | 21,604,520 |   |
| June 1 through  June 30, 2007    |       | 565,111                                      |       | $                                  | 24.59      |                                                                                                           | 565,111    |                                                                                                                         | $          | 7,707,576 |   |
| Total                            |       | 586,692                                      |       | $                                  | 24.56      |                                                                                                           | 586,692    |                                                                                                                         |       |   |

 

**ITEM 3:DEFAULTS UPON SENIOR SECURITIES**

None.

**ITEM 4:SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

The Company heldits 2006 annual meeting of stockholders on April 25, 2007.  The stockholders considered three proposals:(1) the election of Class B Directors to the Company’s board of directors for athree year term, (2) the approval of the 2007 Stock Incentive Plan (3) theratification of the appointment of BDO Seidman, LLP as the Company’sindependent registered public accounting firm for the year ending December 31,2007.  All three proposals were approvedby the stockholders.  The following iscertain information with respect to each proposal.

Proposal 1.  The election of Class B directors.

| Nominee              | ** ** | **Votes For** | ** ** | **Votes Withheld** | ** ** |
|----------------------|------------|--------------------|------------|-------------------------|------------|
| Patrick P.  Fourteau |       | 32,776,484         |       | 535,278                 |       |
| Jon S. Saxe          |       | 30,640,059         |       | 2,671,703               |       |
| Jerry C. Griffin     |       | 32,779,011         |       | 532,751                 |       |

 

The Class B directorswill serve a three year term.  The termof office of the following directors continued after the meeting:

| Class A Directors | ** ** | **Class C Directors** |
|-------------------|------------|-----------------------|
| Jerry N. Ellis    |       | Pierre Lapalme        |
|              |       | William J.  Robinson  |
|              |       | Patrick J.  Zenner    |

 

Proposal 2.  The approval of the 2007 Stock Incentive Plan

| Votes For: 32,779,236 |   | Votes Against:  532,526 |   | Non Votes:  1,953,330 |   | Abstentions: 0 |
|-----------------------|--------|-------------------------|--------|-----------------------|--------|----------------|

 

Proposal 3.  The ratification of the appointment of BDOSeidman, LLP.

| Votes For: 28,032,347 |   | Votes Against:  2,475,388 |   | Non Votes:  4,725,922 |   | Abstentions:  31,437 |
|-----------------------|--------|---------------------------|--------|-----------------------|--------|----------------------|

 

**ITEM 5:OTHER INFORMATION**

None.

26

----

**ITEM 6:EXHIBITS**
| 4.1  |   | Form  of Indenture, dated as of May 14, 2007, by and between Sciele Pharma, Inc. and  LaSalle Bank National Association as Trustee (incorporated by reference to  Exhibit 4.1 on Form 8-K as filed May 15, 2007).                                                                                                                                |   |
|------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| 4.2  |   | Form  of 2.625% Contingent Convertible Senior Note due 2027 (incorporated by  reference to Exhibit 4.2 on Form 8-K filed May 15, 2007).                                                                                                                                                                                                          |   |
| 10.1 |   | Agreement  and Plan of Merger dated April 24, 2007, between Sciele Pharma, Inc., Sciele  Pharma Acquisition Corporation, Alliant Pharmaceuticals, Inc., The  Shareholders of Alliant Pharmaceuticals, Inc., and John N. Kapoor as the shareholder  representative (incorporated by reference to Exhibit 10.1 on Form 8-K filed  April 27, 2007). |   |
| 10.2 |   | First  Amendment to Agreement and Plan of Merger dated June 12, 2007 (incorporated  by reference to Exhibit 10.1 on Form 8-K filed June 13, 2007).                                                                                                                                                                                               |   |
| 31.1 |   | Certifications  of Chief Executive Officer and President pursuant to Securities Exchange Act  Rules 13a-14 and 15d-14, as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                          |   |
| 31.2 |   | Certifications  of Chief Financial Officer, Secretary and Treasurer pursuant to Securities  Exchange Act Rules 13a-14 and 15d-14, as adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                               |   |
| 32.1 |   | Certification  of Chief Executive Officer and President pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                               |   |
| 32.2 |   | Certification of Chief  Financial Officer, Secretary and Treasurer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                    |   |

 

27

----

**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.
|                      | **SCIELE  PHARMA, INC.**(Registrant) |
|----------------------|--------------------------------------|
| ** **           | ** **                           |
| ** **           | ** **                           |
| Date: July 30,  2007 | By:                                  | /s/ PATRICK P. FOURTEAU |
|                 |                                 | Patrick P. Fourteau |
|                 |                                 | *Chief Executive Officer and President   (principal executive officer)* |
|                 | * *                             |
| Date: July 30,  2007 | By:                                  | /s/ DARRELL BORNE |
|                 |                                 | Darrell Borne |
|                 |                                 | *Executive Vice President, Chief Financial  Officer, Secretary and Treasurer  (principal accounting and financial officer)* |

 

28

----