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. The 2008 Form 10-K has been supplemented by our Current Report on Form 8-K, filed with the SEC on May 20, 2009, to reflect our adoption, effective January 1, 2009 of Financial Accounting Standards Board ("FASB") Staff Position ("FSP") Accounting Principles Board ("APB") No. APB 14-1, "Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)" ("FSP APB 14-1") and Statement of Financial Accounting Standard ("FAS") No. 160, "Noncontrolling Interests in Consolidated Financial Statements" ("FAS 160").

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 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) anticipates completing its acquisition of Arana Therapeutics Limited, an Australian company, whose lead domain antibody compound, ART621, is in Phase II development for patients with certain inflammatory diseases. In addition to conducting an active research and development program, we market seven proprietary products in the United States and numerous products in various countries throughout Europe and the world. 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 six months ended June 30, 2009, of which 94% was in the U.S. market. For the six months ended June 30, 2009, consolidated net sales of PROVIGIL increased 15% over the six months ended June 30, 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 launched NUVIGIL on June 1, 2009 and have shifted 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 indication. 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 filed a supplemental new drug application (an "sNDA") for this indication with the FDA in June 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 18% of our total consolidated net sales for the six months ended June 30, 2009, of which 86% 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 supplement request letters from the FDA requesting that we submit a Risk Evaluation and Mitigation Strategy (the "REMS Program") with respect to FENTORA. We submitted our REMS Program to the FDA in early April 2009. To address the FDA's requests in its September 2008 and December 2008 letters, we plan to implement SECURE Access™, a first-of-its-kind initiative designed to minimize the potential risk of overdose from an opioid through appropriate patient selection, as part of our REMS Program. In July 2009, we exchanged correspondence with the FDA regarding elements of our REMS Programs for FENTORA and ACTIQ. Subject to the timing and nature of further discussions with the FDA, we expect to receive a response from the FDA by October 2009. 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. Subject to the timing and nature of further discussions with the FDA, we expect to receive a response from the FDA by October 2009.

In March 2008, FDA granted an orphan drug designation for TREANDA® (bendamustine hydrochloride) for the treatment of patients with chronic lymphocytic leukemia ("CLL") and, in April 2008, the product was launched. In October 2008, we received FDA approval of TREANDA for treatment of patients with indolent B-cell non-Hodgkin's lymphoma ("NHL") who have progressed during or within six months of treatment with rituximab or a rituximab-containing regimen. TREANDA comprised 10% of our total consolidated net sales for the six months ended June 30, 2009, all of which were in the U.S. market.

On April 23, 2009, we received approval from the FDA for our sNDA to update the prescribing information for TREANDA. We finalized and implemented the updated prescribing information for TREANDA in May 2009. We 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 has been updated to include these serious skin reactions. These updates communicate safety warnings when TREANDA is used in combination with allopurinol. Although the relationship between TREANDA and SJS/TEN cannot be determined, there may be an increased risk of severe skin toxicity when TREANDA and allopurinol are administered concomitantly. This update is similar to the labeling that currently exists with certain other agents used to treat indolent 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 (the "PTO") issued a pharmaceutical formulation patent for AMRIX, which expires in February 2025. In July 2009, the PTO issued a notice of allowance for an additional pharmaceutical formulation patent for AMRIX that we expect will issue by the end of 2009.

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 11 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 offer terms consisted of the following:

† Payment of Australian dollar ("A$") 1.40 cash for each Arana ordinary share less any dividends paid by Arana;

† Upon Cephalon International's receipt of a relevant interest in 90% of Arana ordinary shares, the offer price would increase by A$0.05 to A$1.45 (the "90% Premium"); and

† On March 2, 2009, Arana declared an A$0.05 fully franked special dividend (the "Dividend") per Arana ordinary share payable to all Arana shareholders on record as of March 30, 2009. The effect of the Dividend was to reduce our offer price by A$0.05.

The takeover offer closed on June 29, 2009. Cephalon International's relevant interest in Arana as of that date was 93.1%. Cephalon International commenced a compulsory acquisition for the remaining 6.9% interest in Arana's ordinary shares on June 25, 2009 and expects to achieve a 100% relevant interest in Arana in the third quarter of 2009. At a price of A$1.40 per Arana ordinary share acquired pursuant to the takeover offer and to be acquired pursuant to the compulsory acquisition, the total funds used to acquire Arana is expected to be approximately $223.0 million, net of gains on foreign exchange contracts, of which approximately $16.0 million is for shares to be acquired under the compulsory acquisition. The final total amount will be dependent on the Australian dollar exchange rate at the time the compulsory acquisition is completed.

Arana is a biopharmaceutical company focused on developing next generation antibody based drugs that will improve the lives of patients with inflammatory diseases and cancer. The company's lead compound, ART621, is a new generation tumor necrosis factor (TNF) alpha blocker in Phase II development for patients with inflammatory diseases. Arana has a patent portfolio related to anti-TNF alpha antibodies and receives royalties in connection with the patents. We acquired Arana in order to expand our technology base. Arana is included in our United States operating segment.

Our initial investment in Arana was recorded as an available for sale investment in accordance with FAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," ("FAS 115"). On May 27, 2009, we acquired additional shares for $89.8 million which increased our Arana holdings to 50.4% of the outstanding shares. As a result, effective on that date we have consolidated Arana in accordance with FAS 141(R). The 90% Premium payment is considered contingent consideration and was initially recognized at its estimated fair value of $1.0 million for the shares purchased on May 27, 2009. Upon satisfying the 90% criteria on June 12, 2009, the excess of the actual payments over the recorded liability for the 90% premium of $2.8 million was recorded as a charge to other income (expense), net. The fair value of the noncontrolling interest in Arana as of May 27, 2009 was $104.7 million based on the closing stock price for Arana's shares on that date.

The fair value of our Arana holdings of approximately 19.8% immediately prior to the acquisition on May 27, 2009 was $48.0 million. This investment was remeasured to fair value on the acquisition date with the increase of $6.6 million over the original cost recognized in other income (expense), net. This gain is the result of an increase in the value of the

Australian dollar relative to the U.S. dollar, net of changes in the Arana share price. For the quarter ended June 30, 2009, we have included $2.0 million of revenues and $4.4 million of net losses for Arana in our consolidated results.

Ception Therapeutics, Inc.

In January 2009, we entered into an option agreement (the "Ception Option Agreement") with Ception Therapeutics, Inc. ("Ception"). Under the terms of the Ception Option Agreement, we have the irrevocable option (the "Ception Option") to purchase all of the outstanding capital stock on a fully diluted basis of Ception at any time on or prior to the expiration of the Option Period (as defined below). As consideration for the Ception Option, we paid $50.0 million to Ception and paid Ception stockholders an aggregate of $50.0 million. We also agreed to provide up to $25.0 million of financing to Ception during the Option Period. We have not provided financing as of June 30, 2009. 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"). The Res-5-0002 EE Study is now fully enrolled and we anticipate completion of the study in the fourth quarter of 2009 or 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. We expect to announce final results from the Phase IIb study by the end of 2009, and commence a large Phase IIb study in early 2010.

Acusphere, Inc.

On November 3, 2008, we entered into a license and convertible note transaction with Acusphere, Inc. In connection with the transaction, we received an exclusive worldwide license from Acusphere to all of its intellectual property relating to the development and marketing of celecoxib for all current and future indications. Under the license, we agreed to make a $15 million milestone payment, as well as royalties on net sales. In addition, we purchased a $15 million senior secured three-year convertible note (the "Acusphere Note") from Acusphere, secured by substantially all the assets of Acusphere. Separately, in March 2008, we purchased license rights for Acusphere's Hydrophobic Drug Delivery Systems (HDDS™) technology for use in oncology therapeutics for $10 million.

On June 24, 2009, we exchanged the Acusphere Note and $1.0 million for (i) the elimination of the $15 million milestone payment and any future royalty payments associated with the celecoxib license agreement and (ii) the Acusphere patent rights relating to the HDDS technology.

In accordance with FASB Interpretation No. 46R "Consolidation of Variable Interest Entities," ("FIN 46R"), we had previously determined that effective on November 3, 2008 Acusphere was a variable interest entity for which we were the primary beneficiary and began including Acusphere in our consolidated financial statements. Effective with the termination of the Acusphere Note, we are no longer considered the primary beneficiary and deconsolidated Acusphere, resulting in a $9.4 million charge to acquired in-process research and development, as a result of the elimination of the royalty and milestone payments associated with the celecoxib license agreement.

RESULTS OF OPERATIONS

(In thousands)

Three months ended June 30, 2009 compared to three months ended June 30, 2008:

                                         Three months ended
                                              June 30,
                               2009                               2008                      % Increase (Decrease)
                  United                             United                               United
                  States      Europe      Total      States      Europe      Total        States        Europe    Total
Sales:
PROVIGIL         $ 246,583   $ 15,485   $ 262,068   $ 218,942   $ 15,869   $ 234,811              13 %      (2 )%    12 %
NUVIGIL*            16,786          -      16,786           -          -           -               -         -        -
GABITRIL            10,749      1,026      11,775      14,307      2,039      16,346             (25 )     (50 )    (28 )
CNS                274,118     16,511     290,629     233,249     17,908     251,157              18        (8 )     16

ACTIQ               25,153     12,712      37,865      38,051     14,130      52,181             (34 )     (10 )    (27 )
Generic OTFC        23,390          -      23,390      28,958          -      28,958             (19 )       -      (19 )
FENTORA             30,617        814      31,431      36,374          -      36,374             (16 )       -      (14 )
AMRIX               30,867          -      30,867      17,119          -      17,119              80         -       80
Pain               110,027     13,526     123,553     120,502     14,130     134,632              (9 )      (4 )     (8 )

TREANDA             55,820          -      55,820      14,381          -      14,381             288         -      288
Other Oncology       4,193     22,168      26,361       4,380     25,372      29,752              (4 )     (13 )    (11 )
Oncology            60,013     22,168      82,181      18,761     25,372      44,133             220       (13 )     86

Other                8,380     34,278      42,658      13,117     42,003      55,120             (36 )     (18 )    (23 )
Total Sales        452,538     86,483     539,021     385,629     99,413     485,042              17       (13 )     11
Other Revenues       8,443        349       8,792       7,243        430       7,673              17       (19 )     15
Total Revenues   $ 460,981   $ 86,832   $ 547,813   $ 392,872   $ 99,843   $ 492,715              17 %     (13 )%    11 %

Sales-In the United States, we sell our proprietary products to pharmaceutical wholesalers, the largest three of which accounted for 75% of our total consolidated gross sales for the three months ended June 30, 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. Various factors can impact the decisions made by wholesalers and retailers regarding the levels of inventory they hold, including, among other factors, their assessment of anticipated demand for products, timing of sales made by them, their review of historical product usage trends, and their purchasing patterns.

As of June 30, 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. Wholesalers held additional supply of NUVIGIL, which was launched on June 1, 2009. Based on a retail inventory survey in June 2009, we believe that our generic OTFC inventory held at wholesalers and retailers is approximately three months. We do not expect that potential future fluctuations in inventory levels of generic OTFC held by retailers will have a significant impact on our financial position and results of operations.

For the three months ended June 30, 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 16% decrease in European sales.

For the three months ended June 30, 2009, total sales increased by 11% over the prior year. The other key factors that contributed to the increase in sales, period to period, are summarized by product as follows:

† In CNS, sales of PROVIGIL increased 12 percent. Sales of PROVIGIL in the U.S. increased by 13%, due primarily to domestic price increases of 10% in early 2009, offset by a 3% decline in U.S. prescriptions for PROVIGIL, according to IMS Health. European sales of PROVIGIL decreased 2% due primarily to the unfavorable effect of exchange rates, partially offset by increases in unit sales. We launched NUVIGIL on June 1, 2009, recording net sales of $16.8 million for the month. Sales of GABITRIL in the U.S. decreased 25%, due primarily to a 19% decline in U.S. prescriptions for GABITRIL, according to IMS Health. Sales . . .