Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to provide information to assist you in better understanding and evaluating our financial condition and results of operations. We encourage you to read this MD&A in conjunction with our consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, as well as our Annual Report on Form 10-K for the year ended December 31, 2008.

EXECUTIVE SUMMARY

Cephalon, Inc. is an international biopharmaceutical company dedicated to the discovery, development and commercialization of innovative products in four core therapeutic areas: central nervous system ("CNS"), pain, oncology, and our latest area of focus, inflammatory diseases. Cephalon has recently completed certain transactions designed to build a portfolio of potential products targeted to the treatment of inflammatory diseases. In the first quarter of 2009, Cephalon (i) acquired an exclusive, worldwide license to the ImmuPharma investigational compound, LUPUZOR™, which is in development for the treatment of systemic lupus erythematosus; (ii) purchased an option to acquire privately-held Ception Therapeutics, Inc., whose lead humanized monoclonal antibody compound, reslizumab, is in development for the treatment of pediatric eosinophilic esophagitis; and (iii) launched a takeover offer for Arana Therapeutics Limited, an Australian company, whose lead domain antibody compound, ART621, is in development for the treatment of rheumatoid arthritis and psoriasis. In addition to conducting an active research and development program, we market seven proprietary products in the United States and numerous products in various countries throughout Europe and the world. Consistent with our core therapeutic areas, we have aligned our approximately 780-person U.S. field sales and sales management teams by area. We have a sales and marketing organization numbering approximately 400 persons that supports our presence in nearly 20 European countries, including France, the United Kingdom, Germany, Italy and Spain, and certain countries in Africa and the Middle East.

Our most significant product is PROVIGIL® (modafinil) Tablets [C-IV], which comprised 49% of our total consolidated net sales for the three months ended March 31, 2009, of which 94% was in the U.S. market. For the three months ended March 31, 2009, consolidated net sales of PROVIGIL increased 19% over the three months ended March 31, 2008. PROVIGIL is indicated for the treatment of excessive sleepiness associated with narcolepsy, obstructive sleep apnea/hypopnea syndrome ("OSA/HS") and shift work sleep disorder ("SWSD"). In June 2007, we secured final U.S. Food and Drug Administration (the "FDA") approval of NUVIGIL® (armodafinil) Tablets [C-IV] for the same indications as PROVIGIL. NUVIGIL is a single-isomer formulation of modafinil, the active ingredient in PROVIGIL. The product is protected by a composition of matter patent that will expire on December 18, 2023 and covers a novel polymorphic form of armodafinil, the active pharmaceutical ingredient in NUVIGIL. We currently intend to launch NUVIGIL within the next few months of the filing date of this Report. We are shifting our CNS marketing efforts from PROVIGIL to NUVIGIL.
Currently, we do not believe 2009 CNS net sales will be adversely impacted as compared to 2008 by the decline in PROVIGIL marketing efforts associated with the launch of NUVIGIL. In March 2009, we announced positive results from a Phase 2 clinical trial of NUVIGIL as adjunctive therapy for treating major depressive disorder in adults with bipolar I disorder and our plan to advance to Phase 3 trials for this indiciation. In April 2009, we announced positive results from a Phase 3 clinical trial of NUVIGIL as a treatment for excessive sleepiness associated with jet lag disorder and our plan to file a supplemental new drug application (an "sNDA") with the FDA to expand the indications for NUVIGIL during the third quarter of 2009. In May 2009, we announced positive results from a Phase 4 study of NUVIGIL in obstructive sleep apnea and comorbid major depressive disorder requiring ongoing antidepressant therapy.

On a combined basis, our two next most significant products are FENTORA®
(fentanyl buccal tablet) [C-II] and ACTIQ® (oral transmucosal fentanyl citrate)
[C-II] (including our generic version of ACTIQ ("generic OTFC")). Together, these products comprised 19% of our total consolidated net sales for the three months ended March 31, 2009, of which 87% was in the U.S. market. In October 2006, we launched FENTORA in the United States. FENTORA is indicated for the management of breakthrough pain in patients with cancer who are already receiving and are tolerant to opioid therapy for their underlying persistent cancer pain. In April 2008, we received marketing authorization from the European Commission for EFFENTORA™ for the same indication as FENTORA and launched the product in certain European countries in January 2009. We have focused our clinical strategy for FENTORA on studying the product in opioid-tolerant patients with breakthrough pain associated with chronic pain conditions, such as neuropathic pain and back pain. In November 2007, we submitted an sNDA to the FDA seeking approval to market FENTORA for the management of breakthrough pain in opioid tolerant patients with chronic pain conditions. In May 2008, an FDA Advisory Committee voted not to recommend approval of the FENTORA sNDA. In September 2008, we received a complete response letter, in which the FDA requested that we implement and demonstrate the effectiveness of proposed enhancements to the current FENTORA risk management

program. In December 2008, we also received a supplement request letter from the FDA requesting that we submit a Risk Evaluation and Mitigation Strategy (the "REMS Program") with respect to FENTORA. We submitted our REMS Program to the FDA in early April 2009 and expect to receive a response from the FDA by October 2009. To address the FDA's requests in its September 2008 and December 2008 letters, we plan to implement as part of our REMS Program SECURE Access™, a first-of-its-kind initiative designed to minimize the potential risk of overdose from an opioid through appropriate patient selection. We believe that, by working with the FDA, we can design and implement a REMS Program to meet the FDA's requests and possibly to provide a potential avenue for approval of the sNDA. We anticipate initiating the REMS Program upon receipt of approval from the FDA. With respect to ACTIQ, its sales have been meaningfully eroded by the launch of FENTORA and by generic OTFC products sold since June 2006 by Barr Laboratories, Inc. and by us through our sales agent, Watson Pharmaceuticals, Inc. We expect this erosion will continue throughout 2009. We submitted our REMS Program for ACTIQ and generic OTFC in early April 2009 and expect to receive a response from the FDA by October 2009.

In March 2008, we received FDA approval of TREANDA® (bendamustine hydrochloride) for the treatment of patients with chronic lymphocytic leukemia ("CLL") and we launched the product in April 2008. In October 2008, we received FDA approval of TREANDA for treatment of patients with indolent B-cell non-Hodgkin's lymphoma ("NHL") who have progressed during or within six months of treatment with rituximab or a rituximab-containing regimen. The FDA has granted an orphan drug designation for the CLL indication for TREANDA. TREANDA comprised 10% of our total consolidated net sales for the three months ended March 31, 2009, all of which were in the U.S. market.

On April 23, 2009, we received approval from the FDA for our supplemental new drug application to update the prescribing information for TREANDA. We will finalize and implement the updated prescribing information for TREANDA in early May 2009. We have identified two postmarketing cases of Stevens Johnson Syndrome ("SJS")/toxic epidermal necrolysis ("TEN") in patients treated concomitantly with TREANDA and allopurinol; one of these cases was fatal. Allopurinol is known to cause SJS/TEN. In the non-fatal case, the patient also received other drugs that can cause SJS. TREANDA's prescribing information will be updated to include these serious skin reactions. These updates communicate safety warnings when TREANDA is used in combination with allopurinol. Although the relationship between TREANDA and SJS/TEN cannot be determined, there may be an increased risk of severe skin toxicity when TREANDA and allopurinol are administered concomitantly. This update is similar to the labeling that currently exists with certain other agents used to treat indolent NHL and/or CLL, such as RITUXAN® (rituximab), REVLIMID® (lenalidomide) and cyclophosphamide, all of which also reference SJS/TEN in their current respective prescribing information.

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

We have significant discovery research programs focused on developing therapeutics to treat neurological disorders and cancers. Our technology principally focuses on an understanding of kinases and proteases and the role they play in cellular integrity survival and proliferation. We have coupled this knowledge with a library of novel, small, orally-active synthetic molecules that inhibit the activities of specific kinases. We also work with our collaborative partners to provide a more diverse therapeutic breadth and depth to our research efforts.

We are or may become a party to litigation in the ordinary course of our business, including, among others, matters alleging employment discrimination, product liability, patent or other intellectual property rights infringement, patent invalidity or breach of commercial contract. In particular, as a biopharmaceutical company, our future success is highly dependent on obtaining and maintaining patent protection or regulatory exclusivity for our products and technology. We intend to vigorously defend the validity, and prevent infringement, of our patents. The loss of patent protection or regulatory exclusivity on any of our existing products, whether by third-party challenge, invalidation, circumvention, license or expiration, could materially impact our results of operations. For more information regarding these matters, please see Note 10 to our Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.

While we seek to increase profitability and cash flow from operations, we will need to continue to achieve growth of product sales and other revenues sufficient for us to attain these objectives. The rate of our future growth will depend, in part, upon our ability to obtain and maintain adequate intellectual property protection for our currently marketed products, and to successfully develop or acquire and commercialize new product candidates.

RECENT ACQUISITIONS AND TRANSACTIONS

Arana Therapeutics Limited

On February 27, 2009, we announced that we acquired (through our wholly owned subsidiary Cephalon International Holdings, Inc. ("Cephalon International")), approximately 19.8% of the total issued share capital (the "Equity Stake") of Arana Therapeutics Limited, an Australian company listed on the Australian Securities Exchange ("Arana") for $41.4 million and that we intended to initiate a takeover offer for Arana (through Cephalon International). On March 9, 2009, through Cephalon International, we filed a Bidder's Statement with the Australian Securities and Investments Commission in connection with our takeover offer for Arana. The Bidder's Statement was mailed to Arana's shareholders on March 25, 2009 to officially open the offer for acceptance by the shareholders. The offer is currently scheduled to close on June 1, 2009. The offer has the support of the Arana independent directors and has been recommended to Arana shareholders in the absence of a superior proposal. Cephalon International offered to pay Australian dollar ("A$") 1.40 cash for each Arana ordinary share cum dividends and other rights. If Cephalon obtains a relevant interest in 90% of Arana shares and the offer conditions are satisfied or waived, Cephalon will increase its offer price by 5 Australian cents per share. This offer price increase will be payable to all shareholders no matter when their acceptances are received. In these circumstances accepting Arana shareholders will receive A$1.45 per share. On March 2, 2009, Arana declared an A$0.05 fully franked special dividend payable to all shareholders of Arana with a record date of March 30, 2009. The amount of the dividend will be set off against the offer price (reducing it to A$1.35 (or A$1.40 if the 90% condition is met)). The offer is currently subject to certain basic conditions, including a 50.1% minimum acceptance condition. As of March 31, 2009, assuming a purchase price of A$1.40 per share, the total offer value (including the value of the Equity Stake) was approximately $220 million (A$318 million).

On March 17, 2009, Cephalon entered into a foreign exchange forward contract and a foreign exchange option contract related to our Arana transaction. Together, these contracts protect against fluctuations between the Australian Dollar and the U.S. Dollar, up to a value of $144.2 million. Changes in the value of these contracts are recognized within net income. The forwards contract will mature on May 7, 2009 and the options contract will mature on June 17, 2009. See Note 6 for additional details. On April 29, 2009, Cephalon entered into a foreign exchange forward contract which will mature on June 4, 2009 to replace the forwards contract which matures on May 7, 2009.

Ception Therapeutics, Inc.

In January 2009, we entered into an option agreement (the "Ception Option Agreement") with Ception Therapeutics, Inc. Under the terms of the Ception Option Agreement, we have the irrevocable option (the "Ception Option") to purchase all of the outstanding capital stock on a fully diluted basis of Ception at any time on or prior to the expiration of the Option Period (as defined below). As consideration for the Ception Option, we paid $50.0 million to Ception and also paid certain Ception stockholders an aggregate of $50.0 million. We also agreed to provide up to $25.0 million of financing to Ception during the Option Period. We have not provided financing as of the date of this filing. We, in our sole discretion, may exercise the Ception Option by providing written notice to Ception at any time during the period from January 13, 2009 to and including the date that (i) is fifteen business days after our receipt of the final study report for Ception's ongoing Phase IIb/III clinical trial for reslizumab in pediatric patients with eosinophilic esophagitis ("Res-5-0002 EE Study") indicating that the co-primary endpoints have been achieved or (ii) is thirty business days after our receipt of the final study report for Res-5-0002 EE Study indicating that the co-primary endpoints have not been achieved (the "Option Period"). We anticipate that the Res-5-0002 EE Study will be completed in the first quarter of 2010. If the data are positive and we exercise the Ception Option, we intend to file a Biologics License Application for reslizumab with the FDA in 2010. If we exercise the Ception Option, we have agreed to pay a total of $250.0 million less any third-party debt payable by Ception in exchange for all the outstanding capital stock of Ception on a fully-diluted basis. Ception stockholders also could receive (i) additional payments related to clinical and regulatory milestones and (ii) royalties related to net sales of products developed from Ception's program to discover small molecule, orally-active, anti-TNF (tumor necrosis factor) receptor agents.

Lupuzor License

In November 2008, we entered into an option agreement (the "ImmuPharma Option Agreement") with ImmuPharma plc ("ImmuPharma") providing us with an option to obtain an exclusive, worldwide license to the investigational medication LUPUZOR™ for the treatment of systemic lupus erythematosus. In January 2009, we exercised the option and entered into a Development and Commercialization Agreement with ImmuPharma based on a review of interim results of a Phase IIb study for

LUPUZOR. Under the terms of the ImmuPharma Option Agreement, we paid ImmuPharma a $15.0 million upfront option payment upon execution and a one-time $30.0 million license fee in February 2009.

Acusphere, Inc.

In November 2008, we entered into a license and convertible note transaction with Acusphere, Inc. ("Acusphere"), a specialty pharmaceutical company that develops new drugs and improved formulations of existing drugs using its proprietary microparticle technology. In connection with the transaction, Acusphere granted us an exclusive worldwide license to all intellectual property of Acusphere relating to celecoxib to develop and market celecoxib for all current and future indications. In connection with this license, we paid Acusphere an upfront fee of $5.0 million and agreed to pay a $15.0 million milestone upon FDA approval of the first new drug application prepared by us with respect to celecoxib for any indication, as well as royalties on net sales. In addition, we purchased a $15.0 million senior secured three-year convertible note (the "Acusphere Note") from Acusphere, secured by substantially all the assets of Acusphere (including Acusphere's intellectual property). The Acusphere Note is convertible at our option at any time prior to November 3, 2009 into either (i) a number of shares of Acusphere common stock at least equal to 51% of Acusphere's outstanding common stock on a fully-diluted basis on the date of conversion of the Acusphere Note, (ii) an exclusive license to all intellectual property of Acusphere relating to Imagify™ (perflubutane polymer microspheres) to use, distribute and sell Imagify for all current and future indications worldwide excluding those European countries that were subject to Acusphere's agreement with Nycomed Danmark ApS ("Nycomed"), or
(iii) a $15.0 million credit against the future milestone payment under the celecoxib license agreement. In December 2008, an FDA Advisory Committee voted not to recommend approval of Acusphere's new drug application for Imagify. In February 2009, Acusphere filed an amendment to its Imagify NDA with the FDA to limit the proposed indication for Imagify to a subset of patients undergoing pharmacologic stress techniques where the risk-to-benefit ratio is more compelling than the broader indication set forth in the original NDA. In March 2009, Acusphere signed an agreement to terminate and transition its Collaboration, License and Supply Agreement dated as of July 6, 2004, as subsequently amended, with Nycomed. Under the Termination and Transition Agreement, Acusphere reacquired the rights previously granted to Nycomed to develop, promote, market and distribute Imagify in the European Union, Turkey, Russia and the other members of the Commonwealth of Independent States. Separately, in March 2008, we purchased license rights for Acusphere's Hydrophobic Drug Delivery Systems (HDDS™) technology for use in oncology therapeutics for $10.0 million.

On March 3, 2009, Acusphere voluntarily filed a Form 15 with the Securities and Exchange Commission ("SEC") to suspend Acusphere's SEC reporting obligations. Upon the filing of the Form 15, Acusphere's obligation to file periodic and current reports with the SEC, including Forms 10-K, 10-Q and 8-K, was immediately suspended. Acusphere was eligible to file Form 15 because its common shares were held of record by less than 300 persons.

RESULTS OF OPERATIONS

(In thousands)

Three months ended March 31, 2009 compared to three months ended March 31, 2008:

                                         Three months ended
                                              March 31,
                               2009                               2008                   % Increase (Decrease)
                  United                             United                            United
                  States      Europe      Total      States      Europe      Total     States    Europe    Total
Sales:
PROVIGIL         $ 238,429   $ 14,933   $ 253,362   $ 198,469   $ 14,766   $ 213,235        20 %      1 %      19 %
GABITRIL            14,749      1,505      16,254      11,131      2,293      13,424        33      (34 )      21
CNS                253,178     16,438     269,616     209,600     17,059     226,659        21       (4 )      19

ACTIQ               26,417     11,747      38,164      37,517     12,203      49,720       (30 )     (4 )     (23 )
Generic OTFC        24,112          -      24,112      27,318          -      27,318       (12 )      -       (12 )
FENTORA             33,290        423      33,713      38,933          -      38,933       (14 )      -       (13 )
AMRIX               26,237          -      26,237       9,768          -       9,768       169        -       169
Pain               110,056     12,170     122,226     113,536     12,203     125,739        (3 )      -        (3 )

TREANDA             50,197          -      50,197           -          -           -         -        -         -
Other Oncology       5,326     21,032      26,358       5,188     22,270      27,458         3       (6 )      (4 )
Oncology            55,523     21,032      76,555       5,188     22,270      27,458       970       (6 )     179

Other               11,155     34,814      45,969      13,527     40,514      54,041       (18 )    (14 )     (15 )
Total Sales        429,912     84,454     514,366     341,851     92,046     433,897        26       (8 )      19
Other Revenues       5,623        (21 )     5,602       8,663        659       9,322       (35 )   (103 )     (40 )
Total Revenues   $ 435,535   $ 84,433   $ 519,968   $ 350,514   $ 92,705   $ 443,219        24 %     (9 )%     17 %

Sales-In the United States, we sell our proprietary products to pharmaceutical wholesalers, the largest three of which accounted for 74% of our total consolidated gross sales for the three months ended March 31, 2009. Decisions made by these wholesalers regarding the levels of inventory they hold (and thus the amount of product they purchase from us) can materially affect the level of our sales in any particular period and thus may not necessarily correlate to the number of prescriptions written for our products as reported by IMS Health Incorporated.

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

As of March 31, 2009, we received information from substantially all of our U.S. wholesaler customers about the levels of inventory they held for our U.S. branded products. Based on this information, which we have not independently verified, we believe that total inventory held at these wholesalers is approximately two to three weeks supply of our U.S. branded products at our current sales levels. Based on our annual retail inventory survey in November 2008, we believe that our generic OTFC inventory held at wholesalers and retailers is approximately five months.

For the three months ended March 31, 2009, sales were impacted by changes in the product sales allowances deducted from gross sales as described further below and by changes in the relative levels of the number of units of inventory held at wholesalers and retailers. Declines in foreign exchange rates versus the U.S. dollar caused a 10% decrease in European sales. For the three months ended March 31, 2009, total sales increased by 19% over the prior year. The other key factors that contributed to the increase in sales are summarized by product as follows:

† In CNS, sales of PROVIGIL increased 19 percent. Sales of PROVIGIL in the U.S. increased by 20%, due primarily to domestic price increases of 10% in February 2009, resulting in an average price increase of 25% period to period, offset by a decline in U.S. prescriptions for PROVIGIL of 4%, according to IMS Health. European sales of PROVIGIL increased 1% due primarily to increases in unit sales, partially offset by the unfavorable effect of exchange rates. Throughout 2009, we expect CNS sales to increase as compared to 2008 as a result of increased sales for PROVIGIL, based on the full year impact of the 2008 price increases and the launch of NUVIGIL within the next few months of the filing date of this Report.

† In Pain, sales decreased 3 percent. Sales of ACTIQ in the United States were impacted by domestic price increases during 2008, resulting in an average price increase of 24% period to period. This price impact was offset by a 45% decrease in U.S. prescriptions period to period, according to IMS Health, resulting from the introduction of generic competition to ACTIQ in October 2006. For the three months ended March 31, 2009, sales of our own generic OTFC and shipments of our generic OTFC to Barr decreased 12%, resulting from a 12% decrease in U.S. prescriptions, according to IMS Health. Sales of FENTORA decreased 13%, due to a decrease in tablets dispensed of 20%, offset by domestic price increases in 2008. Sales of ACTIQ in Europe decreased 4%, as impact of the unfavorable effect of exchange rate changes exceeded the moderate increase in unit sales. The decreases in sales of FENTORA, ACTIQ and generic OTFC were largely offset by a 169% increase in AMRIX sales. AMRIX prescriptions increased 202% and the price of AMRIX increased by 5%. Throughout 2009, we expect overall sales of our Pain products to increase as compared to 2008 based on the growth in sales of AMRIX.

† In Oncology, sales increased 179 percent. This increase was primarily attributable to the addition of TREANDA, which launched in April 2008. Sales of our European oncology products decreased 6%, due primarily to the unfavorable effect of exchange rate changes, which offset moderate increases in unit sales. Throughout 2009, we expect Oncology sales to increase as compared to 2008 based on the growth in sales of TREANDA.

† Other sales, which consist primarily of sales of other products and certain third party products, decreased 15 percent, primarily due to the November 2008 termination of our agreement with Alkermes, Inc., ending our collaboration related to VIVITROL.

Other Revenues-The decrease of 40% from period to period is primarily due to . . .