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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

|X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934

For the Quarterly Period Ended March 31, 2001
--------------

| | Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934

For the Transition Period from to
-------------- ---------------

Commission File Number 0-19119

CEPHALON, INC.
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(Exact Name of Registrant as Specified in its Charter)

Delaware 23-2484489
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(State Other Jurisdiction of Incorporation or (I.R.S. Employer
Organization) Identification Number)

145 Brandywine Parkway, West Chester, PA 19380-4245
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(Address of Principal Executive Offices) (Zip Code)

Registrant's Telephone Number, Including Area Code (610) 344-0200
--------------

Not Applicable
---------------------------------------------------
Former Name, Former Address and Former Fiscal Year,
If Changed Since Last Report

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -------
Applicable only to corporate issuers:

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.

Class Outstanding as of May 7, 2001
---------------------------- -----------------------------
Common Stock, par value $.01 49,562,313 Shares

This Report Includes a Total of 23 Pages

CEPHALON, INC. AND SUBSIDIARIES
-------------------------------

INDEX
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Page No.
--------

PART I - FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements (Unaudited)

Consolidated Balance Sheets - 3
March 31, 2001 and December 31, 2000

Consolidated Statements of Operations - 4
Three months ended March 31, 2001 and 2000

Consolidated Statements of Cash Flows - 5
Three months ended March 31, 2001 and 2000

Notes to Consolidated Financial Statements 6

Item 2. Management's Discussion and Analysis of 10
Financial Condition and Results of Operations

Item 3. Quantitative and Qualitative Disclosure about Market Risk 21

PART II - OTHER INFORMATION

Item 1. Legal Proceedings 22

Item 6. Exhibits and Reports on Form 8-K 22

SIGNATURES 23

CEPHALON, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
---------------------------
(Unaudited)

March 31, December 31,
2001 2000
------------- -------------
ASSETS
------

CURRENT ASSETS:
Cash and cash equivalents ............................................... $ 56,180,000 $ 36,571,000
Investments ............................................................. 37,946,000 60,813,000
Receivables, net ........................................................ 23,058,000 21,905,000
Inventory (Note 2) ...................................................... 26,731,000 20,161,000
Other ................................................................... 3,183,000 1,579,000
------------- -------------
Total current assets ............................................... 147,098,000 141,029,000

PROPERTY AND EQUIPMENT, net of accumulated
depreciation and amortization of $19,507,000 and $18,905,000 ............... 30,776,000 29,730,000
INTANGIBLE ASSETS, net of accumulated
amortization of $4,540,000 and $1,679,000 (Note 3) ......................... 132,933,000 135,794,000
OTHER ........................................................................ 1,894,000 1,882,000
------------- -------------
$ 312,701,000 $ 308,435,000
============= =============

LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------

CURRENT LIABILITIES:
Accounts payable ........................................................ $ 3,829,000 $ 3,590,000
Accrued expenses ........................................................ 29,966,000 32,758,000
Current portion of deferred revenues .................................... 2,795,000 1,469,000
Current portion of long-term debt (Note 4) .............................. 43,722,000 42,950,000
------------- -------------
Total current liabilities .......................................... 80,312,000 80,767,000

DEFERRED REVENUES ............................................................ 8,062,000 7,151,000
LONG-TERM DEBT (Note 4) ..................................................... 55,029,000 55,138,000
OTHER ........................................................................ 170,000 186,000
------------- -------------
Total liabilities .................................................. 143,573,000 143,242,000
------------- -------------

COMMITMENTS AND CONTINGENCIES (Note 6)

STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 5,000,000 shares authorized, 2,500,000
shares issued and outstanding, liquidation
preference of $126,133,000 at March 31, 2001 ........................... 25,000 25,000
Common stock, $.01 par value, 100,000,000 shares authorized,
43,124,178 and 42,478,225 shares issued and outstanding ................. 431,000 425,000
Additional paid-in capital ............................................... 697,846,000 683,004,000
Treasury stock, 138,183 shares outstanding ............................... (4,119,000) (4,119,000)
Accumulated deficit ...................................................... (527,351,000) (515,543,000)
Accumulated other comprehensive income ................................... 2,296,000 1,401,000
------------- -------------
Total stockholders' equity ......................................... 169,128,000 165,193,000
------------- -------------
$ 312,701,000 $ 308,435,000
============= =============

CEPHALON, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(Unaudited)

Three Months Ended
March 31,
----------------------------
2001 2000
------------ ------------

REVENUES:
Product sales .................................................. $ 40,822,000 $ 16,211,000
Other revenues ................................................. 6,250,000 3,444,000
------------ ------------
47,072,000 19,655,000
------------ ------------

COSTS AND EXPENSES:
Cost of product sales .......................................... 8,298,000 2,068,000
Research and development ....................................... 19,269,000 14,581,000
Depreciation and amortization .................................. 3,489,000 503,000
Selling, general and administrative ............................ 24,707,000 17,656,000
------------ ------------
55,763,000 34,808,000
------------ ------------

LOSS FROM OPERATIONS ................................................ (8,691,000) (15,153,000)
------------ ------------

OTHER:

Income ......................................................... 1,507,000 4,039,000
Expense ........................................................ (2,358,000) (1,246,000)
------------ ------------
(851,000) 2,793,000
------------ ------------

LOSS BEFORE DIVIDENDS ON PREFERRED STOCK AND
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE ............... (9,542,000) (12,360,000)

Dividends on convertible exchangeable preferred stock ............... (2,266,000) (2,266,000)
------------ ------------

LOSS BEFORE CUMULATIVE EFFECT OF A CHANGE
IN ACCOUNTING PRINCIPLE ............................................. (11,808,000) (14,626,000)

Cumulative effect of adopting Staff Accounting Bulletin 101 (SAB 101) -- (7,434,000)
------------ ------------

LOSS APPLICABLE TO COMMON SHARES .................................... $(11,808,000) $(22,060,000)
============ ============

BASIC AND DILUTED LOSS PER COMMON SHARE:
Loss per common share before cumulative effect of adopting SAB 101 $ (0.28) $ (0.37)
Cumulative effect of adopting SAB 101 ............................. -- (0.19)
------------ ------------
$ (0.28) $ (0.56)
============ ============

WEIGHTED AVERAGE NUMBER
OF COMMON SHARES OUTSTANDING ...................................... 42,732,000 39,141,000
============ ============

CEPHALON, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)

Three Months Ended
March 31,

----------------------------
2001 2000
------------ ------------

CASH FLOWS FROM OPERATING ACTIVITIES:
Loss ......................................................... $ (9,542,000) $(19,794,000)
Adjustments to reconcile loss to net cash
used for operating activities:
Cumulative effect of adoption of SAB 101 ............... -- 7,434,000
Depreciation and amortization .......................... 3,489,000 503,000
Non-cash interest expense .............................. 1,073,000 --
Non-cash compensation expense .......................... 1,711,000 1,499,000
Other .................................................. (10,000) (500,000)
(Increase) decrease in operating assets:

Receivables ........................................ (1,915,000) 1,388,000
Inventory .......................................... (6,570,000) (7,489,000)
Other current assets ............................... (1,604,000) (2,327,000)
Other long-term assets ............................. (12,000) 14,000
Increase (decrease) in operating liabilities:

Accounts payable ................................... 239,000 (3,051,000)
Accrued expenses ................................... (2,792,000) (4,096,000)
Deferred revenues .................................. 2,237,000 (404,000)
Other long-term liabilities ........................ (16,000) --
------------ ------------

Net cash used for operating activities ............. (13,712,000) (26,823,000)
------------ ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment .......................... (1,389,000) (906,000)
Acquistion of intangible assets .............................. -- (5,000,000)
Sales and maturities (purchases) of investments, net ......... 22,972,000 70,032,000
------------ ------------

Net cash provided by investing activities .......... 21,583,000 64,126,000
------------ ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercises of common stock options and warrants . 13,883,000 11,835,000
Payments to acquire treasury stock ........................... -- (34,000)
Preferred dividends paid ..................................... (2,266,000) (2,266,000)
Principal payments on and retirements of long-term debt ...... (669,000) (30,480,000)
------------ ------------

Net cash provided by (used for) financing activities 10,948,000 (20,945,000)
------------ ------------

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS ...... 790,000 142,000
------------ ------------

NET INCREASE IN CASH AND CASH EQUIVALENTS ......................... 19,609,000 16,500,000

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD .................... 36,571,000 24,898,000
------------ ------------

CASH AND CASH EQUIVALENTS, END OF PERIOD .......................... $ 56,180,000 $ 41,398,000
============ ============

Supplemental disclosure of non-cash investing activities:

Capital lease additions ........................................ $ 259,000 $ --

1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business

Cephalon, Inc. is an international biopharmaceutical company focused on the
discovery, development and marketing of products to treat sleep disorders,
neurological disorders, cancer and pain. In addition to an active research and
development program, we market three products in the United States and eight
products in various countries in Europe.

In the United States, we maintain our corporate and research and
development headquarters and market three products: PROVIGIL(R) (modafinil)
Tablets [C-IV] for treating excessive daytime sleepiness associated with
narcolepsy, ACTIQ(R) (oral transmucosal fentanyl citrate) [C-II] for the
management of breakthrough cancer pain in opioid tolerant patients and
GABITRIL(R) (tiagabine hydrochloride) for the treatment of partial seizures
associated with epilepsy. We market these products through our two specialty
sales forces: the first, numbering approximately 130 representatives, details
PROVIGIL and GABITRIL to neurologists, psychiatrists and sleep specialists; the
second, numbering approximately 50 representatives, details ACTIQ to oncologists
and pain specialists.

In the United Kingdom, we market PROVIGIL and five other products,
including TEGRETOL(R) (carbamazepine), a treatment for epilepsy and RITALIN(R)
(methylphenidate), a treatment for attention deficit hyperactivity disorder
(ADHD). We also market other products in France, Germany, Austria and
Switzerland. In support of our European sales and marketing efforts, we have
established a European sales and marketing organization comprised of
approximately 30 persons.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnote disclosures required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. These financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in our annual report on Form 10-K, filed with the Securities and
Exchange Commission, which includes financial statements as of December 31, 2000
and 1999 and for each of the three years in the period ended December 31, 2000.
The results of our operations for any interim period are not necessarily
indicative of the results of our operations for any other interim period or for
a full year.

Merger

On October 10, 2000, we completed a merger with Anesta Corp. under which we
acquired all of the outstanding shares of Anesta in a tax-free, stock-for-stock
transaction. Under the terms of the merger agreement, each stockholder of Anesta
received 0.4765 shares of our common stock for each share of Anesta common
stock. The merger has been accounted for as a pooling-of-interests and,
accordingly, all of our prior period consolidated financial statements have been
restated to include the results of operations, financial position, and cash
flows of Anesta. Information concerning common stock, employee stock plans, and
per share data has been restated on an equivalent share basis. There were no
material adjustments required to conform the accounting policies of the two
companies. Certain amounts of Anesta have been reclassified to conform to our
reporting practices.

SAB 101

During 2000, we adopted the SEC's Staff Accounting Bulletin No. 101 (SAB
101) on revenue recognition for use in recording revenues from collaborative
research and development agreements and similar sources of other revenue.
Results for the first quarter of 2000 have been restated to give effect for the
implementation of SAB 101 in the fourth quarter of 2000 retroactively to January
1, 2000. The impact of the change resulted in an increase in total revenues and
a corresponding decrease in loss before cumulative effect of a change in
accounting principle of $29,000 for the quarter ended March 31, 2000 as compared
to amounts previously reported.

2. INVENTORY

Inventory is stated at the lower of cost or market value using the
first-in, first-out method:

March 31, December 31,
2001 2000
----------- -----------
Raw material ....................... $13,762,000 $ 6,401,000
Work-in-process .................... 4,840,000 5,325,000
Finished goods ..................... 8,129,000 8,435,000
----------- -----------
$26,731,000 $20,161,000
=========== ===========

3. INTANGIBLE ASSETS

Intangible assets consisted of the following:

March 31, December 31,
2001 2000
------------- -------------
GABITRIL product rights .............. $ 71,982,000 $ 71,982,000
Novartis CNS product rights .......... 41,641,000 41,641,000
ACTIQ marketing rights ............... 23,850,000 23,850,000
------------- -------------
137,473,000 137,473,000
Less amortization .................... (4,540,000) (1,679,000)
------------- -------------
$ 132,933,000 $ 135,794,000
============= =============

4. LONG-TERM DEBT

Long-term debt consisted of the following:

March 31, December 31,
2001 2000
------------ ------------
Capital lease obligations .................. $ 2,213,000 $ 2,342,000
Mortgage and building improvement loans .... 14,618,000 14,900,000
Abbott/Novartis obligations ................ 81,920,000 80,846,000
------------ ------------
Total debt ................................. 98,751,000 98,088,000
Less current portion ....................... (43,722,000) (42,950,000)
------------ ------------
Total long-term debt ....................... $ 55,029,000 $ 55,138,000
============ ============

5. LEGAL PROCEEDINGS

In August 1999, the U.S. District Court for the Eastern District of
Pennsylvania entered a final order approving the settlement of a class action
alleging that statements made about the results of certain clinical studies of
MYOTROPHIN(R) (mecasermin) Injection were misleading. A related complaint has
been filed with the Court by a small number of plaintiffs who decided not to
participate in the settlement. This related complaint alleges that we are liable
under common law for misrepresentations concerning the results of the MYOTROPHIN
clinical trials, and that we and certain of our current and former officers and
directors are liable for the actions of persons who allegedly traded in our
common stock on the basis of material inside information. We believe that we
have valid defenses to all claims raised in this action. Moreover, even if there
is a judgment against us in this case, we do not believe it will have a material
negative effect on our financial condition or results of operations.

Due to our past involvement in promoting STADOL NS(R) (butorphanol
tartrate) Nasal Spray, a product of Bristol-Myers Squibb Company, we are
co-defendants in several product liability actions brought against
Bristol-Myers. Although we cannot predict with certainty the outcome of this
litigation, we believe that any expenses or damages that we may incur will be
paid by Bristol-Myers under the indemnification provisions of our co-promotion
agreement. As such, we do not believe that these actions will have a material
negative effect on our financial condition or results of operations.

In February 2001, a complaint was filed in Utah state court by Zars, Inc.
and one of its research scientists, against us and our subsidiary Anesta Corp.
The plaintiffs are seeking a declaratory judgment to establish their right to
develop transdermal or other products containing fentanyl and other
pharmaceutically active agents under a royalty and release agreement between
Zars and Anesta. The complaint also asks for unspecified damages for breach of
contract and interference with economic relations. We have filed a motion to
dismiss this complaint that is currently pending before the court. We believe
that we have valid defenses to all claims raised in this action. In any event,
we do not believe any judgment against us will have a material negative effect
on our financial condition or results of operations.

6. COMMITMENTS AND CONTINGENCIES

Related party

In August 1992, we exclusively licensed our rights to MYOTROPHIN for human
therapeutic use within the United States, Canada and Europe to Cephalon Clinical
Partners, L.P., or CCP. Development and clinical testing of MYOTROPHIN is
performed on behalf of CCP under a research and development agreement with CCP.

CCP has granted us an exclusive license to manufacture and market
MYOTROPHIN for human therapeutic use within the United States, Canada and Europe
in return for royalty payments equal to a percentage of product sales and a
milestone payment of approximately $16,000,000 that will be made if MYOTROPHIN
receives regulatory approval.

We have a contractual option to purchase all of the limited partnership
interests of CCP. To exercise this purchase option, we are required to make an
advance payment of $40,275,000 in cash or, at our election, shares of common
stock with a value of $42,369,000 or a combination thereof. The purchase option
will become exercisable upon the occurrence of certain events once sales
activity commences. Should we discontinue development of MYOTROPHIN or if we do
not exercise the purchase option, our license will terminate and all rights to
manufacture or market MYOTROPHIN in the United States, Canada and Europe will
revert to CCP, which may then commercialize MYOTROPHIN itself or license or
assign its rights to a third party. In that event, we would not receive any
benefits from such commercialization, license or assignment of rights.

7. REVENUES

Revenues consisted of the following:

Three months
ended March 31,
2001 2000
----------- -----------
Product sales:
PROVIGIL .......................... $27,024,000 $13,463,000
ACTIQ ............................. 6,582,000 908,000
GABITRIL .......................... 7,216,000 1,840,000
----------- -----------
Total product sales .................. 40,822,000 16,211,000
Other revenues ....................... 6,250,000 3,444,000
----------- -----------
Total revenues ....................... $47,072,000 $19,655,000
=========== ===========

8. OTHER COMPREHENSIVE INCOME

Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," requires presentation of the components of comprehensive
income (loss). Our comprehensive loss includes net loss, unrealized gains and
losses from foreign currency translation adjustments, and unrealized investment
gains and losses. Our total comprehensive loss is as follows:

Three months
ended March 31,
2001 2000
------------ ------------
Loss applicable to common shares ............. $(11,808,000) $(22,060,000)
Other comprehensive income (loss):
Foreign currency translation adjustment .... 790,000 142,000
Unrealized investment gains (losses) ....... 105,000 (692,000)
------------ ------------
Other comprehensive loss ..................... $(10,913,000) $(22,610,000)
============ ============

9. SUBSEQUENT EVENTS

In May 2001, we completed a private placement of $300,000,000 of 5.25%
convertible subordinated notes due 2006. In connection with this private
placement, we granted the initial purchasers a 45-day option to purchase an
additional $100,000,000 in aggregate principal amount of notes. Interest on the
notes is payable each May 1 and November 1, beginning November 1, 2001. The
notes are convertible into our common stock at a conversion price of $74.00 per
share, subject to adjustment in certain circumstances. We may redeem the notes
on or after May 5, 2003. Prior to that date, we may redeem the notes if our
common stock price exceeds 150% of the conversion price for a specified period
of time. Upon early redemption, we are required to pay interest which would have
been due up through May 5, 2003.

In May 2001, the holders of 2,344,586 shares of the 2,500,000 shares
outstanding of our convertible exchangeable preferred stock converted their
preferred shares into an aggregate of 6,541,752 shares of our common stock, in
accordance with the terms of the preferred stock. As an inducement to the
holders to convert their preferred stock prior to August 2001, when we are
initially permitted to redeem the preferred stock, we agreed to pay immediately
all dividends accrued through the date of conversion as well as all dividends
that would have accrued through the August 2001 redemption date in the aggregate
amount of $4,390,000, which will result in a charge of $3,257,000 in the second
quarter of 2001. As of May 11, 2001, 155,414 shares of preferred stock remained
outstanding.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Certain Risks Related to Our Business

In addition to historical facts or statements of current condition, this report
contains forward-looking statements. Forward-looking statements provide our
current expectations or forecasts of future events. These may include statements
regarding anticipated scientific progress in our research programs, development
of potential pharmaceutical products, prospects for regulatory approval,
manufacturing capabilities, market prospects for our products, sales and
earnings projections, and other statements regarding matters that are not
historical facts. Some of these forward-looking statements may be identified by
identified by the use of words in the statements such as "anticipate,"
"estimate," except," project," "intend," "plan," "believe" or other words and
terms of similar meaning. Our performance and financial results could differ
materially from those reflected in these forward-looking statements due to
general financial, economic, regulatory and political conditions affecting the
biotechnology and pharmaceutical industries as well as more specific risks and
uncertainties such as those set forth below and in our reports to the SEC on
Forms 8-K and 10-K. Given these risks and uncertainties, any or all of these
forward-looking statements may prove to be incorrect. Therefore, you should not
rely on any such forward-looking statements. Furthermore, we do not intend (and
we are not obligated) to update publicly any forward-looking statements. This
discussion is permitted by the Private Securities Litigation Reform Act of 1995.

During the next several years we will be very dependent upon the commercial
success of our products, especially PROVIGIL, and we may not be able to
consistently and meaningfully increase sales of these products during this
period, or to attain profitability on the basis of such sales.

The commercialization of our pharmaceutical products involves a number of
significant challenges. In particular, our ability to meaningfully increase
sales depends, in large part, on the success of our clinical development
programs, and our sales and marketing efforts to physicians, patients and third-
party payors. A number of factors could impact these efforts, including our
ability to demonstrate clinically that our products have utility beyond current
indications, our limited financial resources and sales and marketing experience
relative to our competitors, perceived differences between our products and
those of our competitors, the availability and level of reimbursement of our
products by third-party payors, incidents of adverse reactions, side effects or
misuse of our products and the unfavorable publicity that could result, or the
occurrence of manufacturing, supply or distribution disruptions.

Ultimately, our efforts may not prove to be as effective as the efforts of
our competitors. In the United States and elsewhere, our products face
significant competition in the marketplace. The conditions that our products
treat, and some of the other disorders for which we are conducting additional
studies, are currently treated with several drugs, many of which have been
available for a number of years or are available in inexpensive generic forms.
Thus, we will need to demonstrate to physicians, patients and third party payors
that the cost of our products is reasonable and appropriate in the light of
their safety and efficacy, the price of competing products and the related
health care benefits to the patient. Even if we are able to increase sales over
the next several years, we cannot be sure that such sales and other revenue will
reach a level at which we will attain profitability.

We may be unsuccessful in our efforts to expand the number and scope of
authorized uses of PROVIGIL, which would hamper sales growth and make it more
difficult to attain profitability.

PROVIGIL is approved for sale in the United States and abroad for use by
those suffering from excessive daytime sleepiness associated with narcolepsy.
Under current FDA regulations, we are limited in our ability to promote the use
of PROVIGIL outside of this approved indication. The market for the use of
PROVIGIL in narcolepsy patients is relatively small; it is limited to
approximately 125,000 persons in the United States, of which we estimate
approximately 50,000 seek treatment from a physician.

We have initiated clinical studies to examine whether or not PROVIGIL is
effective and safe when used to treat disorders other than narcolepsy. Although
some study data has been positive, additional studies in these disorders will be
necessary before we can apply to expand the authorized uses of PROVIGIL. We do
not know whether these studies will demonstrate safety and efficacy, or if they
do, whether we will succeed in receiving regulatory approval to market PROVIGIL
for additional disorders. If the results of some of these studies are negative,
or if adverse experiences are reported in these clinical studies or otherwise in
connection with the use of PROVIGIL by patients, this could undermine physician
and patient comfort with the product, limit the commercial success of the
product and diminish the acceptance of PROVIGIL in the narcolepsy market. Even
if the results of these studies are positive, the

impact on sales of PROVIGIL may be minimal unless we are able to obtain FDA
approval to expand the authorized use of PROVIGIL. FDA regulations restrict our
ability to communicate the results of additional clinical studies to patients
and physicians without first obtaining approval from the FDA to expand the
authorized uses for this product.

As our products are used commercially, unintended side effects, adverse
reactions or incidents of misuse may occur which could result in additional
regulatory controls, and reduce sales of our products.

Prior to 1999, the use of our products had been limited principally to
clinical trial patients under controlled conditions and under the care of expert
physicians. We cannot predict whether the widespread commercial use of our
products will produce undesirable or unintended side effects that have not been
evident in our clinical trials or the relatively limited commercial use to date.
In addition, in patients who take multiple medications, drug interactions could
occur which can be difficult to predict. Additionally, incidents of product
misuse may occur. These events, among others, could result in additional
regulatory controls that could limit the circumstances under which the product
is prescribed or even lead to the withdrawal of the product from the market.
More specifically, ACTIQ has been approved under regulations concerning drugs
with certain safety profiles, under which the FDA has established special
restrictions to ensure safe use. Any violation of these special restrictions
could lead to the imposition of further restrictions or withdrawal of the
product from the market.

We may not be able to maintain adequate patent protection or market exclusivity
for our products and therefore potential competitors may develop competing
products, which could result in a decrease in sales and market share, cause us
to reduce prices to compete successfully, and limit our commercial success.

We place considerable importance on obtaining patent protection for new
technologies, products and processes. To that end, we file applications for
patents covering the composition of matter or uses of our drug candidates or our
proprietary processes. We could incur substantial costs in asserting our patent
rights, including those licensed to us by third parties, and in defending patent
infringement suits against us or our employees relating to ownership of, or
rights to, patents and other intellectual property of third parties. Such
disputes could substantially delay our drug development or commercialization.
The Patent Trademark Office, or PTO, or a private party could institute an
interference proceeding involving us in connection with one or more of our
patents or patent applications. Such proceedings could result in an adverse
decision as to priority of invention, in which case we would not be entitled to
a patent on the invention at issue in the interference proceeding. The PTO or a
private party could also institute reexamination proceedings involving us in
connection with one or more of our patents, and such proceedings could result in
an adverse decision as to the validity or scope of the patents. We could be
forced to either seek a license to intellectual property rights of others, which
may not be available to us on acceptable terms, if at all, or alter our products
or processes so that they no longer infringe on the proprietary rights of
others.

We also rely on trade secrets, know-how and continuing technological
advancements to support our competitive position. Although we have entered into
confidentiality and invention rights agreements with our employees, consultants,
advisors and collaborators, we cannot be sure that such agreements will be
honored or that we will be able to effectively protect our rights to our
unpatented trade secrets and know-how. Moreover, we cannot be sure that others
will not independently develop substantially equivalent proprietary information
and techniques or otherwise gain access to our trade secrets and know-how. In
addition, many of our scientific and management personnel have been recruited
from other biotechnology and pharmaceutical companies where they were conducting
research in areas similar to those that we now pursue. As a result, we could be
subject to allegations of trade secret violations and other claims.

PROVIGIL

We hold exclusive license rights to a composition-of-matter patent covering
modafinil, the active drug substance in PROVIGIL. This patent was to have
expired in 1998 in the United States, but we have applied for a patent extension
that, if granted, would extend the term of this patent until November 2001. In
addition, we own a U.S. patent covering the particle size of modafinil that was
issued in 1997 and expires on October 6, 2014. However, we may not succeed in
obtaining any extension for the composition-of-matter patent, and we cannot
guarantee that any of our patents will be found to be valid if challenged by a
third party. Additionally, we cannot be sure that a potential competitor will
not develop a competing product or product formulation that would avoid
infringement of these patents or any patent owned or licensed by us.

In the United States, the Orphan Drug Act provides incentives to drug
manufacturers to develop and manufacture drugs for the treatment of rare
disorders. The FDA has granted orphan drug status to PROVIGIL for its use in the
treatment of excessive daytime sleepiness associated with narcolepsy. The grant
of orphan drug status to PROVIGIL allows us a seven-year period of marketing
exclusivity for the product in that indication. While the marketing exclusivity
provided by the orphan drug law should prevent other sponsors from obtaining
approval of the same compound for the same indication (unless the other sponsor
can demonstrate clinical superiority or we are unable to provide or obtain
adequate supplies of PROVIGIL), it would not prevent approval of the same
compound for other indications that otherwise are non-exclusive, or approval of
other compounds for the same indication.

ACTIQ

We hold exclusive worldwide licenses to U.S. and foreign patents covering
this product that are held by the University of Utah and its assignee, the UURF.
Specifically, we have U.S. patents covering the currently approved formulation,
methods for administering fentanyl via this formulation and a method of
producing the approved product. These patents are currently set to expire in
2005. Corresponding patents in foreign countries are set to expire between 2009
and 2010. Other issued patents and pending patent applications in the U.S. and
foreign countries that are owned or licensed by us are directed to various
processes of manufacturing the product as well as to a child-resistant disposal
container required by the FDA to be provided as part of the product. We cannot
guarantee that any of these patents will be held to be valid if challenged by a
third party. In any event, we cannot be sure that a potential competitor will
not develop a competing product or product formulation that would avoid
infringement of these patents or any patent owned or licensed by us.

In the United States, ACTIQ is considered a new formulation of fentanyl by
the FDA, and accordingly, has been granted a three-year period of marketing
exclusivity under FDA regulations, which expires in 2001. This marketing
exclusivity runs concurrently with the patent protection described above and
should also prevent other sponsors from obtaining approval of the same
formulation for the same indication unless the sponsor obtains such approval on
the basis of a full NDA.

GABITRIL

The issued U.S. composition-of-matter patent claiming tiagabine, the active
drug substance in GABITRIL, is exclusively sublicensed to us and is currently
set to expire in 2008. An extension of this patent in the United States under
the terms of the U.S. Drug Price Competition and Patent Term Restoration Act of
1984, as amended, to extend the term of this patent until 2011 is being sought.
We cannot be certain that this patent extension will be obtained or that we will
be able to take advantage of any other patent benefits of the patent restoration
act. In addition, this product is covered by another issued U. S. patent
directed to crystalline tiagabine hydrochloride monohydrate and its use as an
anti-epileptic agent, which is currently set to expire in 2012. We cannot
guarantee that any of these patents will be held to be valid if challenged by a
third party. In any event, we cannot be sure that a potential competitor will
not develop a competing product or product formulation that would avoid
infringement of these patents or any patent owned or licensed by us.

Manufacturing, supply and distribution problems may create supply disruptions
that could result in a reduction of product sales revenue, and damage commercial
prospects for PROVIGIL, ACTIQ, GABITRIL and other products.

We must comply with all applicable regulatory requirements of the FDA and
foreign authorities, including current Good Manufacturing Practice, or cGMP,
regulations. In addition, we must comply with all applicable regulatory
requirements of the DEA, and foreign authorities for PROVIGIL (Schedule IV
controlled substance) and ACTIQ (Schedule II controlled substance). The
facilities used to manufacture, store and distribute our products are subject to
inspection by regulatory authorities at any time to determine compliance with
regulations. The cGMP and controlled substance regulations are complex, and any
failure to comply with them could lead to remedial action, civil and criminal
penalties and delays in production of material.

Except for the in-house manufacture of ACTIQ for international markets, we
rely on third parties to manufacture our products. Abbott is required to supply
us with ACTIQ for the United States for up to 36 months from March 2000. After
that date, we will have to make other arrangements for supply, which could
include the manufacture of ACTIQ

in-house for the United States, or establishing supply arrangements with third
parties. We also rely on third parties to distribute, provide customer service
activities and accept and process returns. In addition, we depend upon sole
suppliers for active drug substances contained in our products, and we depend
upon single manufacturers that are qualified to manufacture finished commercial
products. Although we employ a small number of persons to coordinate and manage
the activities undertaken by these third parties, we have relatively limited
experience in this regard. We maintain inventories of active drug substances and
finished products to protect against supply disruptions, and are qualifying an
additional manufacturer of finished product for PROVIGIL. Nevertheless, any
disruption in these activities could impede our ability to sell our products and
could reduce sales revenue.

A non-active ingredient used in PROVIGIL is no longer manufactured or
commercially available. At anticipated levels of demand, we have several years
supply of this ingredient. We have prepared a new formulation of PROVIGIL that
does not include the now unavailable ingredient; however, the introduction of
any such new formulation requires regulatory approval. If we are unable to
obtain approval for our new formulation, we could face supply disruptions that
would result in significant costs and delays, undermine goodwill established
with physicians and patients, and damage commercial prospects for PROVIGIL.

The efforts of government entities and third party payors to contain or reduce
the costs of health care may adversely affect our sales and limit the commercial
success of our products.

In certain foreign markets, pricing or profitability of pharmaceutical
products is subject to various forms of direct and indirect governmental
control. In the United States, there have been, and we expect there will
continue to be, various federal and state proposals to implement similar
government controls. The commercial success of our products could be limited if
federal or state governments adopt any such proposals. In addition, in the
United States and elsewhere, sales of pharmaceutical products depend in part on
the availability of reimbursement to the consumer from third party payors, such
as government and private insurance plans. Third party payors increasingly
challenge the prices charged for products, and limit reimbursement levels
offered to consumers for such products. Third party payors could focus their
cost control efforts on our products, thereby limiting the commercial success of
the products.

We experience intense competition in our fields of interest, which may adversely
affect our business.

Large and small companies, academic institutions, governmental agencies,
and other public and private research organizations conduct research, seek
patent protection, and establish collaborative arrangements for product
development in competition with us. Products developed by any of these entities
may compete directly with those we develop or sell. Competing products may
provide greater therapeutic benefits for a specific indication, or may offer
comparable performance at a lower cost. Many of these companies and institutions
have substantially greater capital resources, research and development staffs
and facilities than we have, and substantially greater experience in conducting
clinical trials, obtaining regulatory approvals and manufacturing and marketing
pharmaceutical products. These entities represent significant competition for
us. In addition, competitors who are developing products for the treatment of
neurological or oncological disorders might succeed in developing technologies
and products that are more effective than any that we develop or sell or that
would render our technology and products obsolete or noncompetitive. Competition
and innovation from these or other sources potentially could negatively affect
sales of our products or make them obsolete. Advances in current treatment
methods also may adversely affect the market for such products. In addition, we
may be at a competitive marketing disadvantage against companies that have
broader product lines and whose sales personnel are able to offer more
complementary products than we can.

Our products contain controlled substances.

The active ingredients in PROVIGIL and ACTIQ are controlled substances
regulated by the U.S. Drug Enforcement Administration, or DEA. As controlled
substances, the manufacture, shipment, sale and use of these products is subject
to a high degree of regulation and accountability. These regulations also are
imposed on prescribing physicians and other third parties, making the use of
such products relatively complicated and expensive. Future products also may
contain substances regulated by the DEA. In some cases, products containing
controlled substances have generated public controversy which, in extreme cases,
have resulted in further restrictions on marketing or even withdrawal of
regulatory approval. In addition, negative publicity may bring about rejection
of the product by the medical community. If the DEA or FDA withdrew the approval
of, or placed additional significant restrictions on, the marketing of any of
our products, our business could be materially and adversely affected.

We face significant product liability risks, which may have a negative effect on
our financial performance.

The administration of drugs to humans, whether in clinical trials or
commercially, can result in product liability claims whether or not the drugs
are actually at fault for causing an injury. Furthermore, our products may
cause, or may appear to have caused, serious adverse side effects (including
death) or potentially dangerous drug interactions that we may not learn about or
understand fully until the drug has been administered to patients for some time.
As our products are used more widely and in patients with varying medical
conditions, the likelihood of an adverse drug reaction may increase. Product
liability claims can be expensive to defend and may result in large judgments or
settlements against us, which could have a negative effect on our financial
performance. We maintain product liability insurance in amounts we believe to be
commercially reasonable, but claims could exceed our coverage limits.
Furthermore, we cannot be certain that we will always be able to purchase
sufficient insurance at an affordable price. Even if a product liability claim
is not successful, the adverse publicity and time and expense of defending such
a claim may interfere with our business.

The results and timing of our research and development activities, including
future clinical trials are difficult to predict, subject to future setbacks and,
ultimately, may not result in any additional pharmaceutical products, which may
adversely affect our business.

We are focused on the search for new pharmaceutical products. These
activities include engaging in discovery research and process development,
conducting preclinical and clinical studies, and seeking regulatory approval in
the United States and abroad. In all of these areas, we have relatively limited
resources and compete against larger multinational pharmaceutical companies.
Moreover, even if we undertake these activities in an effective and efficient
manner, regulatory approval for the sale of new pharmaceutical products remains
highly uncertain since, in our industry, the majority of compounds discovered do
not enter clinical studies and the majority of therapeutic candidates fail to
show the human safety and efficacy necessary for regulatory approval and
successful commercialization.

Preclinical testing and clinical trials must demonstrate that a product
candidate is safe and efficacious. The results from preclinical testing and
early clinical trials may not be predictive of results obtained in subsequent
clinical trials, and we cannot be sure that these clinical trials will
demonstrate the safety and efficacy necessary to obtain regulatory approval for
any product candidates. A number of companies in the biotechnology and
pharmaceutical industries have suffered significant setbacks in advanced
clinical trials, even after obtaining promising results in earlier trials. In
addition, certain clinical trials are conducted with patients having the most
advanced stages of disease. During the course of treatment, these patients often
die or suffer other adverse medical effects for reasons that may not be related
to the pharmaceutical agent being tested. Such events can have a negative impact
on the statistical analysis of clinical trial results.

The completion of clinical trials of our product candidates may be delayed
by many factors. Once such factor is the rate of enrollment of patients. Neither
we nor our collaborators can control the rate at which patients present
themselves for enrollment, and we cannot be sure that the rate of patient
enrollment will be consistent with our expectations or be sufficient to enable
clinical trials of our product candidates to be completed in a timely manner or
at all. Any significant delays in, or termination of, clinical trials of our
product candidates may have a material adverse effect on our business.

We cannot be sure that we will be permitted by regulatory authorities to
undertake additional clinical trials for any of our product candidates, or that
if such trials are conducted, any of our product candidates will prove to be
safe and efficacious or will receive regulatory approvals. Any delays in or
termination of these clinical trial efforts may have a material adverse effect
on our business.

Our research and development and marketing efforts are often dependent on
corporate collaborators and other third parties who may not devote sufficient
time, resources and attention to our programs, which may limit our efforts to
successfully develop and market potential products.

Because we have limited resources, we have entered into a number of
collaboration agreements with other pharmaceutical companies. These agreements
call for our partner to control the supply of bulk or formulated drugs

for commercial use or for use in clinical trials; design and execution of
clinical studies; process of obtaining regulatory approval to market the
product; and/or marketing and selling of any approved product.

In each of these areas, our partners may not support fully our research and
commercial interests since our program may compete for time, attention and
resources with the internal programs of our corporate collaborators. As such, we
cannot be sure that our corporate collaborators will share our perspectives on
the relative importance of our program, that they will commit sufficient
resources to our program to move it forward effectively, or that the program
will advance as rapidly as it might if we had retained complete control of all
research, development, regulatory and commercialization decisions. We also rely
on several of these collaborators and other third parties for the production of
compounds and the manufacture and supply of pharmaceutical products.
Additionally, we may find it necessary from time to time to seek new or
additional partners to assist us in commercializing our products. It is
uncertain whether we would be successful in establishing any such new or
additional relationships.

Our product sales and related financial results will fluctuate and these
fluctuations may cause our stock price to fall, especially if they are not
anticipated by investors.

A number of analysts and investors who follow our stock have developed
models to attempt to forecast future product sales and have established earnings
expectations based upon those models. Forecasting revenue growth is difficult,
especially when there is little commercial history and when the level of market
acceptance of the product is uncertain. Forecasting is further complicated by
the difficulties in estimating stocking levels at pharmaceutical wholesalers and
at retail pharmacies and in estimating potential product returns. As a result it
is likely that there will be significant fluctuations in revenues, which may not
meet with market expectations and which also may adversely affect our stock
price. Other factors which cause our financial results to fluctuate unexpectedly
include the cost of product sales, achievement and timing of research and
development milestones, co-promotion and other collaboration revenues, cost and
timing of clinical trials, marketing and other expenses and manufacturing or
supply disruption.

We may incur additional losses.

To date, we have not been profitable and our accumulated deficit was
approximately $527 million at March 31, 2001. Our losses have resulted
principally from costs incurred in research and development, including clinical
trials, and from selling, general and administrative costs associated with our
operations. While we seek to attain profitability, we cannot be sure that we
will ever achieve product and other revenue sufficient for us to attain this
objective. We cannot be sure that we will obtain required regulatory approvals,
or successfully develop, commercialize, manufacture and market any other product
candidates.

The price of our common stock has been and may continue to be highly volatile.

The market price of our common stock is volatile, and we expect it to
continue to be volatile for the foreseeable future. For example, during the
period January 1, 2000 through May 7, 2001, our common stock traded at a high
price of $83.625 and a low price of $29.875. Negative announcements (such as
adverse regulatory decisions, disappointing clinical trial results, disputes
concerning patent or other proprietary rights, or operating results that fall
below the market's expectations) could trigger significant declines in the price
of our common stock. In addition, external events, such as news concerning our
competitors, changes in government regulations that may impact the biotechnology
or pharmaceutical industries or the movement of capital into or out of our
industry, also are likely to affect the price of our common stock.

We are involved in legal proceedings that, if adversely adjudicated or settled,
could materially impact our financial condition.

In August 1999, the U.S. District Court for the Eastern District of
Pennsylvania entered a final order approving the settlement of a class action in
which plaintiffs alleged that statements made about the results of certain
clinical studies of MYOTROPHIN were misleading. A related complaint has been
filed with the Court by a small number of plaintiffs who decided not to
participate in the settlement. This related complaint alleges that we are liable
under common law for misrepresentations concerning the results of the MYOTROPHIN
clinical trials, and that we and certain of our current and former officers and
directors are liable for the actions of persons who allegedly traded in our
common stock on the basis of material inside information. We believe that we
have valid defenses to all claims raised in this action. Even if there is a
judgment against us in this case, we do not believe it will have a material
negative effect on our financial condition or results of operations.

We may never obtain approval to market MYOTROPHIN, it may not be cost-effective
to pursue MYOTROPHIN for other indications, and therefore we may never derive
revenue from MYOTROPHIN.

We do not believe that the conditions for regulatory approval of MYOTROPHIN
imposed by the FDA can be met without conducting an additional Phase 3 study,
and we have no plans to conduct such a study at this time. However, we have had
discussions with certain physicians who are seeking to obtain governmental and
non-governmental funding to be used to conduct such a study. If this funding is
obtained and the study is undertaken, we may allow reference to our
Investigational New Drug Application (IND), and supply MYOTROPHIN in quantities
sufficient to conduct the study in exchange for the rights to use any clinical
data generated by such study in support of FDA approval of our pending New Drug
Application (NDA). Even if an additional study is undertaken, the results will
not be available for several years and may not be sufficient to obtain
regulatory approval to market the product. If MYOTROPHIN is not approved for the
treatment of Amyotrophic Lateral Sclerosis, or ALS, then it is unlikely that we
would pursue approval for the use of MYOTROPHIN to treat other indications.
Additionally, if we do not obtain approval of MYOTROPHIN for ALS or pursue
approval for other indications, rights to the product may revert back to
Cephalon Clinical Partners, L.P., or CCP.

Our dependence on key executives and scientists could impact the development and
management of our business.

We are highly dependent upon our ability to attract and retain qualified
scientific, technical and managerial personnel. There is intense competition for
qualified personnel in the pharmaceutical and biotechnology industries, and we
cannot be sure that we will be able to continue to attract and retain the
qualified personnel necessary for the development and management of our
business. Our research and development programs and our business might be harmed
by the loss of the services of existing personnel, as well as the failure to
recruit additional key scientific, technical and managerial personnel in a
timely manner. Much of the know-how we have developed resides in our scientific
and technical personnel and is not readily transferable to other personnel. We
do not maintain "key man" life insurance on any of our employees.

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

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

We believe that our safety procedures for handling and disposing of these
materials comply with federal, state and local laws and regulations, but the
risk of accidental injury or contamination from these materials cannot be
eliminated. In the event of an accident, we could be held liable for any
resulting damages, which could adversely affect our financial condition or
results of operations.

Anti-takeover provisions may deter a third party from acquiring us, limiting our
stockholders' ability to profit from such a transaction.

Our Board of Directors has the authority to issue up to 5,000,000 shares of
preferred stock, $0.01 par value, of which 1,000,000 have been reserved for
issuance in connection with our stockholder rights plan, and to determine the
price, rights, preferences and privileges of those shares without any further
vote or action by our stockholders. Our stockholder rights plan could have the
effect of making it more difficult for a third party to acquire a majority of
our outstanding voting stock.

We are subject to the anti-takeover provisions of Section 203 of the
Delaware General Corporation Law, which prohibits us from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person becomes an
interested stockholder, unless the business combination is approved in a
prescribed manner. The application of Section 203 could have the effect of
delaying or preventing a change of control of Cephalon. We also have adopted a
"poison pill" rights plan that will dilute the stock ownership of an acquirer of
our stock upon the occurrence of certain events. Section 203, the rights plan,
and the provisions of our certificate of incorporation, our bylaws and Delaware
corporate law, may have the effect of deterring hostile takeovers or delaying or
preventing changes in control of our management, including transactions in which
stockholders might otherwise receive a premium for their shares over then
current market prices.

RESULTS OF OPERATIONS

Three months ended March 31, 2001 compared to three months ended March 31, 2000

Revenues--Total revenues increased 139% to $47,072,000 in the first quarter
of 2001 as compared to $19,655,000 in the first quarter of 2000. This increase
was primarily due to a $24,611,000, or 152%, increase in product sales, of which
$13,561,000 was attributed to a PROVIGIL sales increase, $5,674,000 was
attributed to an ACTIQ sales increase, and $5,376,000 was attributed to a
GABITRIL sales increase. In addition, other revenues increased by $2,806,000, or
81%, due primarily to $2,325,000 of revenues recognized in the current period
under our collaboration with Novartis Pharma AG.

Cost of Product Sales--The cost of product sales in the first quarter of
2001 increased to 20% of net product sales from 13% in the first quarter of 2000
due primarily to PROVIGIL. A significant portion of the PROVIGIL sold in the
United States during the first quarter of 2000 was produced prior to its
December 1998 FDA approval and the costs of producing that material were
recorded as research and development expense at the time the material was
produced.

Research and Development Expenses--For the quarter ended March 31, 2001,
research and development expenses increased 32% to $19,269,000 from $14,581,000
in the first quarter of 2000. This change primarily resulted from an increase in
expenditures associated with clinical development studies of PROVIGIL in areas
other than

narcolepsy and clinical development studies of GABITRIL, and an increase in drug
development and manufacturing costs for our compounds that have progressed into
later stages of development.

Depreciation and Amortization Expenses--The increase in depreciation and
amortization expenses from $503,000 in the first quarter of 2000 to $3,489,000
in the first quarter of 2001 is due primarily to amortization expense of
$2,861,000 for intangibles acquired during 2000 relating to contracts with
Novartis and Abbott.

Selling, General and Administrative Expenses--Selling, general and
administrative expenses increased 40% to $24,707,000 for the quarter ended March
31, 2001 from $17,656,000 for the first quarter of 2000 primarily due to an
increase in selling and marketing expenses associated with the promotion and
support of our three major products: PROVIGIL, ACTIQ and GABITRIL.

Other Income and Expense, Net--Other income and expense, net, decreased by
$3,644,000 from the first quarter of 2000 to the first quarter of 2001 due to a
decrease in interest income resulting from a lower level of cash and investments
during the first quarter of 2001 as compared to the first quarter of 2000,
offset by a decrease in interest expense associated with the revenue sharing
notes that were repaid in the first quarter of 2000. In addition, the foreign
currency exchange loss we recognized in the first quarter of 2001 increased as
compared to the first quarter of 2000 due to a decline in currency exchange
value of the pound Sterling (GBP) relative to both the U.S. dollar and to our
other foreign operations' currencies that are remeasured into the GBP for
financial reporting purposes.

Cumulative Effect of a Change in Accounting Principle--We adopted the U.S.
Securities and Exchange Commission's Staff Accounting Bulletin No. 101 (SAB 101)
on Revenue Recognition and, as a result, we recorded a charge of $7,434,000 in
the fourth quarter of 2000 to defer upfront license fees associated with our
collaborative alliances that were previously recognized in revenues. Under
guidance from SAB 101, results for the first quarter of 2000 have been restated
to give effect for the implementation of SAB 101 retroactively to January 1,
2000.

LIQUIDITY AND CAPITAL RESOURCES

Cash, cash equivalents and investments at March 31, 2001 were $94,126,000,
representing 30% of total assets, and at December 31, 2000 were $97,384,000,
representing 32% of total assets.

Net Cash Used for Operating Activities

Net cash used for operating activities decreased to $13,712,000 in the
first quarter of 2001 as compared to $26,823,000 in the first quarter of 2000, a
decrease of $13,111,000. The decrease in the net cash used for operating
activities is due primarily to the following:

o An increase in product sales of $24,611,000, including $13,561,000
from PROVIGIL product sales, $5,674,000 from ACTIQ product sales, and
$5,376,000 from GABITRIL product sales.

o An increase in selling, general and administrative expenses of
$7,051,000 due principally to marketing expenses associated with ACTIQ
and an increase in the size of our sales force to fully support our
three major products: PROVIGIL, ACTIQ and GABITRIL.

o An increase in research and development expenses of $4,688,000
resulting primarily from an increase in expenditures associated with
clinical development studies of PROVIGIL in areas other than
narcolepsy and clinical development studies of GABITRIL, and an
increase in drug development and manufacturing costs for our compounds
that have progressed into later stages of development.

Net Cash Provided by Investing Activities

A summary of net cash provided by investing activities is as follows:

Three months ended
March 31,
2001 2000
------------ ------------
Purchases of property and equipment .......... $ (1,389,000) $ (906,000)
Acquisition of intangible assets ............. -- (5,000,000)
Sales and maturities of investments, net ..... 22,792,000 70,032,000
------------ ------------
Net cash provided by investing activities .... $ 21,583,000 $ 64,126,000
============ ============

--Purchases of property and equipment

The increase in purchases of property and equipment in 2001 is primarily
the result of the ongoing expansion and renovation of our Salt Lake City
facility.

--Acquisition of intangible assets

The acquisition of intangible assets in the three months ended March 31,
2000 represents a payment made in connection with our agreement with Abbott
Laboratories to reacquire the marketing rights to ACTIQ.

Net Cash Provided by (Used for) Financing Activities

A summary of net cash provided by (used for) financing activities is as
follows:

Three months ended
March 31,

2001 2000
------------ ------------
Proceeds from exercises of common stock options and warrants $ 13,883,000 $ 11,835,000
Payments to acquire treasury stock ......................... -- (34,000)
Preferred dividends paid ................................... (2,266,000) (2,266,000)
Principal payments on and retirement of long-term debt ..... (669,000) (30,480,000)
------------ ------------
Net cash provided by (used for) financing activities ....... $ 10,948,000 $(20,945,000)
============ ============

--Proceeds from exercises of common stock options and warrants

During the three months ended March 31, 2001, we received proceeds of
$13,883,000 from the exercise of approximately 643,000 common stock options. At
March 31, 2001, warrants to purchase 265,800 shares of our common stock at an
exercise price of $10.08 per share and options to purchase approximately
4,525,000 shares of our common stock at various exercise prices were
outstanding. The extent and timing of future warrant and option exercises, if
any, are primarily dependent upon the market price of our common stock and
general financial market conditions, as well as the exercise prices and
expiration dates of the warrants and options.

--Payments to acquire treasury stock

Under the Equity Compensation Plan, we may grant restricted stock awards to
employees. Upon vesting, shares of Cephalon common stock are withheld from the
employee's stock award and returned to the treasury for the corresponding dollar
value of payroll-related taxes.

--Principal payments on long-term debt

In the first quarter of 2000, we retired $30,000,000 of revenue sharing
notes issued in a private placement in 1999. In addition, for all periods
presented, principal payments on long-term debt include payments on mortgage and
building improvements loans and payments on capital lease obligations.

Commitments and Contingencies

--Related Party

--Legal Proceedings

Due to our past involvement in promoting STADOL NS/R/ (butorphanol
tartrate) Nasal Spray, a product of Bristol-Myers Squibb Company, we are
co-defendants in several product liability actions brought against
Bristol-Myers. Although we cannot predict with certainty the outcome of this
litigation, we believe that any expenses or damages that we may incur will be
paid by Bristol-Myers under the indemnification provisions of our co-promotion
agreement. As such, we do not believe that these actions will have a material
negative effect on our financial condition or results of operations.

Outlook

Cash, cash equivalents and investments at March 31, 2001 were $94,126,000.
Since inception, we have had negative cash flows from operations and have used
the proceeds of public and private placements of our securities to fund
operations. We currently believe that projected increases in sales of our three
marketed products, PROVIGIL, ACTIQ and GABITRIL, in combination with other
revenues, will allow us to achieve profitability in 2001. If our expectations
for product sales in 2001 are not realized, it may be difficult or impossible to
achieve profitability. At this time, we cannot accurately predict the effect of
certain developments on product sales such as the degree of market acceptance of
our products, competition, the effectiveness of our sales and marketing efforts
and our ability to demonstrate the utility of our products in indications beyond
those already included in the FDA approved labels. Other revenues include
receipts from collaborative research and development agreements and co-promotion
agreements. The continuation of any of these agreements is subject to the
achievement of certain milestones and to periodic review by the parties
involved.

We expect to continue to incur significant expenditures associated with
PROVIGIL, ACTIQ and GABITRIL. These expenditures include the costs associated
with manufacturing, selling and marketing our products and costs associated with
conducting additional clinical studies to explore the utility of these products
in treating disorders beyond those currently approved in their respective
labels. We also expect to continue to incur significant expenditures to fund
research and development activities for our other products in development. We
may seek sources of funding for a portion of these research programs through
collaborative arrangements with third parties. However, because we intend to
retain a portion of the commercial rights to these programs, we still expect to
spend significant funds on our share of the cost of these programs.

We pay dividends on our convertible exchangeable preferred stock. In May
2001, the holders of 2,344,586 shares of the 2,500,000 shares outstanding of our
convertible exchangeable preferred stock converted their preferred shares

into an aggregate of 6,541,752 shares of our common stock, in accordance with
the terms of the preferred stock. As an inducement to the holders to convert
their preferred stock prior to August 2001, when we are initially permitted to
redeem the preferred stock, we agreed to pay immediately all dividends accrued
through the date of conversion as well as all dividends that would have accrued
through the August 2001 redemption date in the aggregate amount of $4,390,000,
which will result in a charge of $3,257,000 in the second quarter of 2001. As of
May 11, 2001, 155,414 shares of preferred stock remained outstanding.

Pending any use of the net proceeds, the funds have bee invested in
accordance with our investment guidelines and interest income earned will be
used to offset, to the extent possible the interest payments on the notes.

In May 2001, we completed a private placement of $300,000,000 of 5.25%
convertible subordinated notes due 2006. In connection with this private
placement, we granted the initial purchasers a 45-day option to purchase an
additional $100,000,000 in aggregate principal amount of notes. Interest on the
notes is payable each May 1 and November 1, beginning November 1, 2001. The
annual interest payments on the notes will be $15,750,000 ($21,000,000 if the
initial purchasers' option is exercised in full). We expect to use the net
proceeds of the offering for working capital and general corporate purposes,
which may include the acquisition of businesses, products, product rights or
technologies. Additionally, we may also use the net proceeds to pay contractual
obligations including those incurred in connection with the Abbott and Novartis
transactions. Pending any use of the net proceeds, the funds have been invested
in accordance with our investment guidelines and interest income earned will be
used to offset, to the extent possible, the interest payments on the notes.

Based on our current level of operations and projected sales of our
products combined with other revenues, we believe that we will be able to meet
our anticipated debt service, capital expenditure and working capital
requirements for the next several years. However, we cannot be sure that our
anticipated revenue growth will be realized or that we will generate positive
cash flow from operations. We may need to obtain additional funding for our
operational needs, or for future significant strategic transactions, and we
cannot be certain that funding will be available on terms acceptable to us, or
at all.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

There have been no material changes in quantitative and qualitative market
risk from the disclosure included in the Annual Report on Form 10-K for the
fiscal year ended December 31, 2000.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

The information set forth in Footnote 5 to the Notes to
Consolidated Financial Statements included herein is hereby
incorporated by reference.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits:

Exhibit No. 21 Subsidiaries of Cephalon, Inc.

(b) Reports on Form 8-K:

No reports on Form 8-K were filed during the quarter ended
March 31, 2001.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

CEPHALON, INC.
(Registrant)

May 14, 2001 By /s/ Frank Baldino, Jr.
------------------------------------
Frank Baldino, Jr., Ph.D.
Chairman and Chief Executive Officer
(Principal executive officer)

By /s/ J. Kevin Buchi
------------------------------------
J. Kevin Buchi
Senior Vice President and Chief Financial Officer
(Principal financial and accounting officer)