The following discussion contains certain forward-looking statements that reflect management's current views of future events and operations. This discussion should be read in conjunction with the following: (a) "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2007 and in Part II, Item 1A of this report, which are supplemented by the discussion which follows; (b) our audited consolidated financial statements and related notes which are included in our Annual Report on Form 10-K for the year ended December 31, 2007; and (c) our unaudited consolidated financial statements and related notes which are included in this report on Form 10-Q. Please see the sections entitled "Risk Factors" and "A Warning About Forward-Looking Statements" for a discussion of the uncertainties, risks and assumptions associated with these statements.

I. OVERVIEW

Our Business

We are a vertically integrated pharmaceutical company that performs basic research and develops, manufactures, markets and sells branded prescription pharmaceutical products. To capitalize on opportunities in the pharmaceutical industry, we seek to develop, in-license, acquire or obtain commercialization rights to novel branded prescription pharmaceutical products in attractive markets.

Our corporate strategy is focused on specialty-driven markets, particularly neuroscience, hospital and acute care. We believe each of our targeted markets has significant market potential and our organization is aligned accordingly. We work to achieve organic growth by maximizing the potential of our currently marketed products through sales and marketing and product life-cycle management. We also work to achieve organic growth through the successful development of new branded pharmaceutical products. Additionally, we seek to achieve growth through the acquisition or in-licensing of novel branded pharmaceutical products in various stages of development and technologies that have significant market potential that complement our neuroscience, hospital and acute care medicine platforms. We may also seek company acquisitions which add products or products in development, technologies or sales and marketing capabilities in our target markets or that otherwise complement our operations.

Utilizing our internal resources and a disciplined business development process, we strive to be a leader and partner of choice in developing and commercializing innovative, clinically-differentiated therapies and technologies in our target, specialty-driven markets.

Our business consists of five segments: branded pharmaceuticals, Meridian Auto-Injector, royalties, contract manufacturing and other. Our branded pharmaceutical products are divided into the following categories:

• neuroscience (including Skelaxin® , Avinza® and Sonata® ),

• hospital (including Thrombin-JMI® and Synercid® ),

• acute care (including Bicillin® and Intal® ), and

• legacy products (including Altace® , Levoxyl® and Cytomel® ).

Our Meridian Auto-Injector segment includes EpiPen® , a commercial product, and nerve gas antidotes which we provide to the U.S. military. Our royalties segment relates to revenues we derive from successfully developed products that we have licensed to third parties.

Recent Developments

Tender Offer to Acquire Alpharma

On September 12, 2008, we commenced a tender offer, through a wholly-owned subsidiary, to acquire all of the outstanding shares of Class A Common Stock of Alpharma Inc. for $37 per share in cash. This price represents a total equity value of approximately $1.6 billion and an enterprise value of approximately $1.4 billion. On September 26, 2008, Alpharma's Board of Directors recommended that Alpharma's stockholders reject the offer and not tender their shares to us. The tender offer was originally scheduled to expire at

5:00 pm, New York City time, on Friday, October 10, 2008. We subsequently extended the tender offer until 5:00 pm, New York City time, on November 21, 2008.

Alpharma is a branded specialty pharmaceutical company with a growing branded pharmaceutical franchise in the U.S. pain market with its Kadian® capsules (morphine sulfate extended-release), Flector® Patch (diclofenac epolamine topical patch) 1.3%, and a pipeline of new pain medicines led by Embedatm, a formulation of long-acting morphine that is designed to provide controlled pain relief and deter common methods of abuse. Alpharma is also a provider of feed additives for poultry and livestock.

We believe the combination of our company and Alpharma would create a stronger foundation for sustainable, long term growth enabling us to better address the changes facing the healthcare industry. For example, we believe such a combination would deliver compelling benefits such as greater scale and commercialization capabilities, enabling the combined company to maximize the potential of its currently marketed products. These enhanced capabilities are also beneficial to the successful launch of new products, such as Remoxy® and Acurox® Tablets, and Alpharma's Embedatm. These products are focused on the treatment of pain and are designed to resist or deter common methods of abuse that are associated with currently available products. These products are also complementary, as Remoxy® is a unique long-acting formulation of oral oxycodone, Acurox® Tablets is a short-acting, immediate-release formulation of oxycodone HCI, niacin and functional inactive ingredients, and Embedatm, as previously mentioned, is a long-acting formulation of morphine. Another key benefit of the proposed combination is that it would provide greater diversification to our business. Much like our Meridian Auto-Injector segment, which manufactures EpiPen® , the addition of Alpharma's Animal Health division has the potential to be an additional source of cash flow to fuel future strategic initiatives.

On September 26, 2008, we received a Request for Additional Information and Documentary Material (a "Second Request") from the U.S. Federal Trade Commission ("FTC") in connection with its review of the tender offer. The effect of the Second Request is to extend the waiting period imposed by the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, until 10 days after we have substantially complied with the request, unless that period is extended voluntarily by us or terminated sooner by the FTC. We are cooperating fully with the FTC.

On October 3, 2008, we and Alpharma entered into a confidentiality agreement allowing us access to certain non-public information regarding Alpharma and we commenced our review of the information on October 4, 2008. The confidentiality agreement does not restrict our ability to conduct the tender offer or a consent solicitation.

Remoxy®

On June 10, 2008, the New Drug Application ("NDA") for Remoxy® was submitted to the U.S. Food and Drug Administration ("FDA"). The Remoxy® NDA was accepted and granted priority review by the FDA. The FDA typically grants priority review to drug candidates that have the potential to demonstrate significant improvements compared to marketed products. The FDA goal for completing review of a drug with Priority Review status is six months from the date the application was submitted. An FDA advisory committee is scheduled to discuss Remoxy® at a public meeting on November 13, 2008. We are preparing to begin marketing Remoxy® in the first quarter of 2009 pending approval of the NDA by the FDA.

In August 2008, we and Pain Therapeutics presented the final data set of a previously announced pivotal Phase III study of Remoxy® . The final data confirm that Remoxy® provides effective around-the-clock analgesia within a patented formulation designed to resist common methods of misuse and abuse. The companies also presented results of a previously unpublished alcohol interaction study. In this study, human volunteers consumed Remoxy® 40 mg with up to eight ounces of 80-proof alcohol to simulate the amount of alcohol consumed in a 'binge drinking' session. Results confirm that Remoxy® 's formulation resists dissolution in alcohol.

Remoxy® , a unique long-acting formulation of oral oxycodone for moderate to severe chronic pain, uses extraction-resistant technology, a unique physical barrier that is designed to provide controlled pain relief and

resist common methods used to extract the opioid more rapidly than intended as can occur with currently available products. Common methods used to cause a rapid extraction of the opioid include crushing, chewing, or dissolution in alcohol. These methods are typically used to cause failure of the controlled release dosage form, resulting in "dose dumping" of oxycodone, or the immediate release of the active drug.

Purdue Pharma L.P. ("Purdue") submitted an NDA for a reformulated version of its long-acting oxycodone product. Purdue claims that the reformulated product is less susceptible to some common methods of abuse than its currently marketed formulation. If approved, this product would compete with Remoxy® , as would a number of other products. An FDA advisory committee considered some aspects of Purdue's NDA at a public meeting in early May 2008 and expressed a variety of concerns. We are uncertain as to whether or when the FDA will approve Purdue's reformulated product. In June 2008, Purdue submitted a Citizen Petition with the FDA, which Purdue supplemented in October 2008, in an apparent effort to challenge the Remoxy® NDA filing.

Acurox® Tablets

In October 2008, we, together with Acura Pharmaceuticals, Inc., reported top-line results from a Phase II assessment of the abuse liability potential of Acurox® (oxycodone HCl/niacin) Tablets in 30 subjects with a history of opioid abuse. The Phase II results demonstrate that Acurox® Tablets are disliked compared to oxycodone HCl tablets alone when excess doses are swallowed. As previously reported, in June 2008, we and Acura reported positive top-line results from the pivotal Phase III clinical trial evaluating Acurox® Tablets. The Phase III study met its primary endpoint, pain relief compared to placebo, as prospectively defined by the FDA during the Special Protocol Assessment. We and Acura expect to submit a New Drug Application for Acurox® Tablets to the FDA by the end of 2008.

Acurox® Tablets, a short-acting, immediate-release tablet, is a composition of oxycodone HCl, niacin and functional inactive ingredients and is intended to relieve moderate to severe pain while resisting or deterring common methods of prescription drug misuse and abuse, including intravenous injection of dissolved tablets, nasal snorting of crushed tablets and intentional swallowing of excessive numbers of tablets. The properties that potentially enable the product to resist or deter common methods of misuse and abuse are provided by Acura's proprietary Aversion® Technology.

II.  RESULTS OF OPERATIONS



Three and Nine Months Ended September 30, 2008 and 2007

The following table summarizes total revenues and cost of revenues by operating
segment, excluding intercompany transactions:


                                                For the Three Months             For the Nine Months
                                                Ended September 30,              Ended September 30,
                                                2008            2007            2008             2007
                                                   (In thousands)                   (In thousands)

Total Revenues
Branded pharmaceuticals                      $   301,879      $ 472,363      $   986,966      $ 1,388,381
Meridian Auto-Injector                            67,515         47,919          165,687          141,830
Royalties                                         18,456         20,042           61,257           60,762
Contract manufacturing                               658          2,034            1,074            8,692
Other                                                (63 )        2,496            2,345            3,945

Total revenues                               $   388,445      $ 544,854      $ 1,217,329      $ 1,603,610
Cost of Revenues, exclusive of
depreciation, amortization and impairments
Branded pharmaceuticals                      $    74,178      $ 173,773      $   225,256      $   356,406
Meridian Auto-Injector                            24,705         19,169           61,819           58,357
Royalties                                          2,281          2,442            7,485            7,512
Contract manufacturing                               299          2,512              537            8,801
Other                                                  2           (135 )             14            3,669

Total cost of revenues                       $   101,465      $ 197,761      $   295,111      $   434,745

The following table summarizes our deductions from gross sales:

                                 For the Three Months            For the Nine Months
                                  Ended September 30,            Ended September 30,
                                  2008           2007           2008            2007
                                    (In thousands)                 (In thousands)

     Gross Sales               $   458,171     $ 673,111     $ 1,482,548     $ 1,975,373
     Commercial Rebates             15,390        48,902          72,398         142,965
     Medicare Part D Rebates         3,830        14,334          25,460          43,970
     Medicaid Rebates                8,045         8,323          29,351          29,219
     Chargebacks                    21,283        26,200          67,069          72,427
     Returns                         2,927         5,900          11,352          11,136
     Trade Discounts/Other          18,251        24,614          59,589          72,398

                                   388,445       544,838       1,217,329       1,603,258
     Discontinued Operations             -           (16 )             -            (352 )

     Net Sales                 $   388,445     $ 544,854     $ 1,217,329     $ 1,603,610

Gross sales were lower in the third quarter of 2008 compared to the third quarter of 2007 and in the first nine months of 2008 compared to the first nine months of 2007 primarily due to a decrease in gross sales of Altace® , partially offset by increases in gross sales of Avinza® , which we acquired on February 26, 2007, and the Meridian Auto-Injector segment. During December 2007 a competitor entered the market with a generic substitute for Altace® and additional generic competitors entered the market in June 2008.

Based on inventory data provided to us by our customers, we believe that wholesale inventory levels of our key products, Skelaxin® , Thrombin-JMI® , Altace® , Avinza® , and Levoxyl® are at or below normalized levels as of September 30, 2008. We estimate that wholesale and retail inventories of our products as of September 30, 2008 represent gross sales of approximately $115.0 million to $125.0 million.

The following tables provide the activity and ending balances for our significant deductions from gross sales:

Accrual for Rebates, including Administrative Fees (in thousands):

                                                               2008          2007

 Balance at January 1, net of prepaid amounts                $  65,301     $  53,765
 Current provision related to sales made in current period      67,155        72,088
 Current provision related to sales made in prior periods        2,982           534
 Rebates paid                                                  (83,660 )     (67,255 )

 Balance at March 31, net of prepaid amounts                 $  51,778     $  59,132

 Current provision related to sales made in current period      36,297        72,822
 Current provision related to sales made in prior periods       (6,490 )        (849 )
 Rebates paid                                                  (55,692 )     (72,924 )

 Balance at June 30, net of prepaid amounts                  $  25,893     $  58,181

 Current provision related to sales made in current period      27,225        73,760
 Current provision related to sales made in prior periods           40        (2,201 )
 Rebates paid                                                  (34,028 )     (74,672 )

Balance at September 30, net of prepaid amounts $ 19,130 $ 55,068

Rebates include commercial rebates and Medicaid and Medicare rebates.

A competitor entered the market with a generic substitute for Altace® during December 2007 and additional competitors entered the market in June 2008. As a result of this competition, sales of Altace® and utilization of Altace® by rebate-eligible customers decreased in each quarter of 2008. The significant decrease in utilization of Altace® by rebate-eligible customers has significantly decreased the "current provision related to sales made in the current period" in the table above. As Altace® sales continue to decline, we expect rebate payments to continue to exceed the current provision as shown in the table above. Rebate payments are made to rebate eligible customers approximately one quarter after the utilization. When Altace® sales stabilize, we anticipate our rebate payments will more closely approximate our current provision for rebates. For a discussion regarding Altace® net sales, please see "Altace® " within the "Sales of Key Products" section below.

Our calculation for Medicaid, Medicare and commercial rebate reserves are based on estimates of utilization by rebate-eligible customers, estimates of the level of inventory of our products in the distribution channel that remain potentially subject to those rebates, and the terms of our rebate obligations. During the first quarter of 2008, we estimated the effect that the initial generic substitute would have on Altace® utilization by rebate-eligible customers. Actual Altace® rebates for the first quarter were lower than originally anticipated, resulting in a change in estimate during the second quarter of 2008. This change in estimate resulted in a decrease in rebate expense of approximately $5.0 million and a corresponding increase in Altace® net sales in the second quarter of 2008 and is included in the "current provision related to sales made in prior periods" in the table above. As a result of this increase in net sales, the co-promotion expense related to net sales of Altace® in the second quarter of 2008 increased by approximately $1.0 million. Accordingly, the effect of the change in estimate on second quarter 2008 operating income was an increase of approximately $4.0 million, fully offsetting the effect of the estimate in the first quarter of 2008.

Accrual for Returns (in thousands):


                                                   2008         2007

                Balance at January 1             $ 32,860     $ 42,001
                Current provision                   4,450       (1,254 )
                Actual returns                     (4,135 )     (6,295 )

                Ending balance at March 31       $ 33,175     $ 34,452

                Current provision                   3,975        6,490
                Actual returns                     (6,845 )     (4,767 )

                Ending balance at June 30        $ 30,305     $ 36,175

                Current provision                   2,927        5,900
                Actual returns                     (5,832 )     (4,713 )

                Ending balance at September 30   $ 27,400     $ 37,362

Our calculation for product returns reserves is based on historical sales and return rates over the period during which customers have a right of return. We also consider current wholesale inventory levels of our products. Because actual returns related to sales in prior periods were lower than our original estimates, we recorded a decrease in our reserve for returns in the first quarter of 2007. During the first quarter of 2007, we decreased our reserve for returns by approximately $8.0 million and increased our net sales from branded pharmaceuticals, excluding the adjustment to sales classified as discontinued operations, by the same amount. The effect of the change in estimate on first quarter 2007 operating income was an increase of approximately $5.0 million.

Accrual for Chargebacks (in thousands):


                                                  2008          2007

               Balance at January 1             $  11,120     $  13,939
               Current provision                   20,212        23,645
               Actual chargebacks                 (21,080 )     (26,557 )

               Ending balance at March 31       $  10,252     $  11,027

               Current provision                   25,574        22,582
               Actual chargebacks                 (25,286 )     (22,962 )

               Ending balance at June 30        $  10,540     $  10,647

               Current provision                   21,283        26,200
               Actual chargebacks                 (22,918 )     (25,289 )

               Ending balance at September 30   $   8,905     $  11,558

Branded Pharmaceuticals Segment


                                    For the Three Months                Change                  For the Nine Months                Change
                                     Ended September 30,            2008 vs. 2007               Ended September 30,            2008 vs. 2007
                                     2008           2007            $             %            2008           2007             $             %
                                       (In thousands)                                             (In thousands)

Branded Pharmaceutical revenue:
Skelaxin®                         $   109,990     $ 105,653     $    4,337         4.1 %     $ 333,095     $   325,778     $    7,317         2.2 %
Thrombin-JMI®                          66,813        68,968         (2,155 )      (3.1 )       197,585         198,099           (514 )      (0.3 )
Altace®                                29,950       168,524       (138,574 )     (82.2 )       154,485         488,440       (333,955 )     (68.4 )
Avinza®                                35,928        31,802          4,126        13.0         102,941          76,051         26,890        35.4
Levoxyl®                               17,608        20,596         (2,988 )     (14.5 )        53,462          68,237        (14,775 )     (21.7 )
Other                                  41,590        76,820        (35,230 )     (45.9 )       145,398         231,776        (86,378 )     (37.3 )

Total revenue                     $   301,879     $ 472,363     $ (170,484 )     (36.1 )%    $ 986,966     $ 1,388,381     $ (401,415 )     (28.9 )%

Cost of revenues, exclusive of
depreciation, amortization and
impairments                       $    74,178     $ 173,773     $  (99,595 )     (57.3 )%    $ 225,256     $   356,406     $ (131,150 )     (36.8 )%

Sales of Key Products

Skelaxin®

Net sales of Skelaxin® increased in the third quarter and first nine months of 2008 from the third quarter and first nine months of 2007 primarily due to a price increase taken in the fourth quarter of 2007 and decreases in wholesale inventory levels during 2007, partially offset by a decrease in prescriptions. During the first nine months of 2007, net sales of Skelaxin® benefited from a favorable change in estimate during the first quarter of 2007 in the product's reserve for returns as discussed above. Due to increased competition, total prescriptions for Skelaxin® decreased approximately 13.6% and 11.2% in the third quarter of 2008 and the first nine months of 2008, respectively, compared to the same periods of the prior year according to IMS Health Incorporated ("IMS") monthly prescription data. We believe 2008 Skelaxin® net sales will approximate 2007 net sales.

For a discussion regarding the risk of potential generic competition for Skelaxin® , please see Note 8, "Commitments and Contingencies," in Part I, Item 1, "Financial Statements."

Thrombin-JMI®

Net sales of Thrombin-JMI® decreased in the third quarter of 2008 compared to the third quarter of 2007 primarily due to price concessions. A competing product entered the market in the fourth quarter of 2007 and another entered the market in the first quarter of 2008. We believe net sales of Thrombin-JMI® will continue to decrease due to additional price concessions as a result of these competing products.

Altace®

Net sales of Altace® decreased significantly in the third quarter and first nine months of 2008 from the third quarter and first nine months of 2007 primarily due to a competitor entering the market in December 2007 and additional competitors entering the market in June 2008 with generic substitutes for Altace® capsules. During the third quarter of 2008, net sales of Altace® benefited by approximately $4.0 million as a result of a reduction in the reserve for rebates due to changes in wholesale inventory channels and actual rebate payments for the second quarter of 2008 being lower than originally estimated. As a result of the entry of generic competition, we expect net sales of Altace® to continue to decline in the future. Total prescriptions for Altace® decreased approximately 88.3% and 69.0% in the third quarter of 2008 and the first nine months

of 2008, respectively, compared to the same periods of the prior year, according to IMS monthly prescription data.

For a discussion regarding generic competition for Altace® , please see Note 8, "Commitments and Contingencies" in Part I, Item 1, "Financial Statements."

Avinza®

We acquired all rights to Avinza® in the United States, its territories and Canada on February 26, 2007. Net sales of Avinza® increased in the third quarter of 2008 compared to the third quarter of 2007 primarily due to a price increase taken in the fourth quarter of 2007 and an increase in prescriptions. Net sales of Avinza® in the first nine months of 2007 reflect sales occurring from February 26, 2007 through September 30, 2007. Total prescriptions for Avinza® increased approximately 8.4% and 2.6% in the third quarter of 2008 and the first nine months of 2008, respectively, compared to the same periods of the prior year according to IMS monthly prescription data.

On March 24, 2008, we received a letter from the United States Food and Drug Administration, Division of Drug Marketing, Advertising, and Communications ("DDMAC") regarding promotional material for Avinza® that was created and submitted to the DDMAC by Ligand Pharmaceuticals (the company from which we acquired Avinza® ). The letter expressed concern with the balance of the . . .