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 June 30, 1999
-------------

[_] 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.
-------------
(Exact Name of Registrant as Specified in its Charter)

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

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

Registrant's Telephone Number, Including Area Code (610) 344-2000
--------------
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 August 9, 1999
--------------------------- --------------------------------
Common Stock, par value $.01 30,768,870 Shares

This Report Includes a Total of 30 Pages

CEPHALON, INC. and SUBSIDIARIES
-------------------------------

INDEX
-----

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

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

Consolidated Balance Sheets - 3
June 30, 1999 and December 31, 1998

Consolidated Statements of Operations - 4
Three and six months ended June 30, 1999 and 1998

Consolidated Statements of Cash Flows - 5
Six months ended June 30, 1999 and 1998

Notes to Consolidated Financial Statements 6

Item 2. Management's Discussion and Analysis of 11
Financial Condition and Results of Operations

PART II - OTHER INFORMATION

Item 4. Submission of Matters to a Vote of Security Holders 28

Item 6. Exhibits and Reports on Form 8-K 28

SIGNATURES 30

CEPHALON, INC. AND SUBSIDIARIES

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

June 30, December 31,
1999 1998
-------------------- --------------------

ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 15,189,000 $ 3,975,000
Short-term investments 70,366,000 63,371,000
Receivables, net 3,794,000 3,887,000
Inventory (Note 2) 3,680,000 38,000
Other 1,311,000 1,323,000
-------------------- --------------------
Total current assets 94,340,000 72,594,000

PROPERTY AND EQUIPMENT, net of accumulated
depreciation and amortization of $14,376,000 and $13,439,000 19,745,000 20,505,000
OTHER 3,269,000 1,574,000
-------------------- --------------------
$ 117,354,000 $ 94,673,000
==================== ====================

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

CURRENT LIABILITIES:
Accounts payable $ 6,384,000 $ 3,558,000
Accrued expenses (Note 4) 18,318,000 13,298,000
Current portion of long-term debt 1,677,000 1,624,000
-------------------- --------------------
Total current liabilities 26,379,000 18,480,000

LONG-TERM DEBT (Note 3) 38,685,000 15,096,000
OTHER 3,851,000 3,495,000
-------------------- --------------------
Total liabilities 68,915,000 37,071,000
-------------------- --------------------

COMMITMENTS AND CONTINGENCIES (Note 5)

STOCKHOLDERS' EQUITY: (Note 6)
Preferred stock, $.01 par value,
5,000,000 shares authorized, none issued -- --
Common stock, $.01 par value, 100,000,000 shares authorized,
30,201,466 and 28,802,323 shares issued and outstanding 302,000 288,000
Additional paid-in capital 353,372,000 331,107,000
Accumulated deficit (305,235,000) (273,793,000)
-------------------- --------------------
Total stockholders' equity 48,439,000 57,602,000
-------------------- --------------------
$ 117,354,000 $ 94,673,000
==================== ====================

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

CEPHALON, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

Three Months Ended, Six Months Ended,
June 30, June 30,
-------------------------------- -------------------------------
1999 1998 1999 1998
---------------- -------------- ---------------- --------------

REVENUES:
Product sales - PROVIGIL (Note 7) $ 5,522,000 $ 172,000 $ 7,252,000 $ 231,000
Other revenues (Note 7) 5,227,000 3,240,000 7,727,000 6,749,000
---------------- -------------- ---------------- --------------
10,749,000 3,412,000 14,979,000 6,980,000
---------------- -------------- ---------------- --------------

COSTS AND EXPENSES:
Cost of product sales - PROVIGIL (Note 2) 651,000 -- 839,000 --
Research and development (Note 7) 10,180,000 10,353,000 20,152,000 22,327,000
Selling, general and administrative (Note 4) 10,166,000 6,727,000 23,780,000 13,896,000
---------------- -------------- ---------------- --------------
20,997,000 17,080,000 44,771,000 36,223,000
---------------- -------------- ---------------- --------------

LOSS FROM OPERATIONS (10,248,000) (13,668,000) (29,792,000) (29,243,000)
---------------- -------------- ---------------- --------------

OTHER:
Interest income 862,000 1,509,000 1,740,000 2,980,000
Interest expense (Note 3) (2,115,000) (456,000) (3,390,000) (1,011,000)
---------------- -------------- ---------------- --------------
(1,253,000) 1,053,000 (1,650,000) 1,969,000

---------------- -------------- ---------------- --------------
LOSS $ (11,501,000) $ (12,615,000) $ (31,442,000) $ (27,274,000)
================ ============== ================ ==============

BASIC AND DILUTED LOSS PER SHARE $ (0.40) $ (0.44) $ (1.09) $ (0.97)
================ ============== ================ ==============

WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 28,998,290 28,514,180 28,879,804 28,159,262
================ ============== ================ ==============

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

CEPHALON, INC. AND SUBSIDIARIES

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

Six Months Ended
June 30,
-------------------------------
1999 1998
-------------- ------------

CASH FLOWS FROM OPERATING ACTIVITIES:
Loss $ (31,442,000) $(27,274,000)
Adjustments to reconcile loss to net cash
used for operating activities:
Depreciation and amortization 2,106,000 1,023,000
Non-cash compensation expense 595,000 936,000
Other 743,000 47,000
(Increase) decrease in operating assets:
Accounts and contracts receivable (135,000) 348,000
Inventory (3,642,000) --
Other current assets 201,000 504,000
Other long-term assets (1,959,000) (55,000)
Increase(decrease) in operating liabilities:
Accounts payable 2,826,000 (654,000)
Accrued expenses 4,573,000 (2,198,000)
Other long-term liabilities 356,000 401,000
-------------- ------------

Net cash used for operating activities (25,778,000) (26,922,000)
-------------- ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (43,000) (504,000)
Sales and maturities (purchases) of investments, net (10,504,000) 37,208,000
-------------- ------------

Net cash (used for) provided by investing activities (10,547,000) 36,704,000
-------------- ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sales of common stock and warrants 12,000,000 --
Proceeds from exercises of common stock options and warrants 2,906,000 391,000
Proceeds from issuance of long-term debt 30,000,000 --
Principal payments on long-term debt (876,000) (699,000)
-------------- ------------

Net cash provided by (used for) financing activities 44,030,000 (308,000)
-------------- ------------

NET INCREASE IN CASH AND CASH EQUIVALENTS 7,705,000 9,474,000

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 7,484,000 10,271,000
-------------- ------------

CASH AND CASH EQUIVALENTS, END OF PERIOD $ 15,189,000 $ 19,745,000
============== ============

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

CEPHALON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business

Cephalon, Inc., headquartered in West Chester, PA, is a biopharmaceutical
company dedicated to the discovery, development and marketing of products to
treat neurological disorders and cancer. We have had negative cash flow from
operations since inception and have funded our operations primarily from the
proceeds of public and private placements of our securities. We initiated sales
of PROVIGIL(R) (modafinil) Tablets [C-IV] in the United Kingdom in March 1998
and in the United States and the Republic of Ireland in February 1999. PROVIGIL
is approved in those countries for use by those suffering from excessive daytime
sleepiness associated with narcolepsy.

Our business is subject to a number of significant risks, including the risks
inherent in pharmaceutical research and development activities. We are highly
dependent upon the successful commercialization of PROVIGIL and there is no
assurance that we will achieve profitability solely on sales of PROVIGIL.

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 and for each of
the three years in the period ended December 31, 1998. 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.

2. INVENTORY

Inventory consists solely of PROVIGIL:

June 30, December 31,
1998 1998
---- ----

Raw material................................. $3,266,000 $ --
Work-in-process.............................. 274,000 --
Finished goods............................... 140,000 38,000
---------- ---------
$3,680,000 $38,000
========== =========

Inventory is stated at the lower of cost or market value using the first-in,
first-out method. A significant portion of the PROVIGIL sold in the United
States during the six months ended June 30, 1999 was produced prior to the
December 1998 FDA approval and, in accordance with SFAS No. 2 "Accounting for
Research and Development Costs," the costs were recorded as research and
development expense in those prior periods. As of June 30, 1999, we maintained
approximately $2,509,000 of inventory on hand that was previously charged to
research and development expense. Cost of product sales through June 30, 1999
consisted primarily of royalties due to Laboratoire L. Lafon.

CEPHALON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

3. DEBT

In February 1999, we completed a private placement of $30,000,000 of revenue-
sharing notes. The notes are repayable in cash in February 2002. The notes are
secured by our rights to PROVIGIL in the United States and bear an annual
interest rate of 11%. Holders of the notes also will receive a payment of 6% of
net sales of PROVIGIL in the United States through March 1, 2004, which will be
recorded as interest expense. We have the right to redeem the notes at a premium
prior to maturity, which would reduce the royalty period by one year.
Alternatively, we may also extend the maturity and the royalty period by one
year under certain circumstances. The notes contain a number of covenants
including a requirement to maintain a minimum level of cash, cash equivalents
and investments equal to $40,000,000 during 1999 and $30,000,000 through
February 2002 or as long as the principal remains outstanding. If we fail to
maintain such cash balances or violate the other covenants, the holders of the
notes can declare a default and increase the royalty percentage to 25% of net
PROVIGIL sales in the United States and, if the default is not cured within one
year, can accelerate the due date of the notes and foreclose on the underlying
security. The holders of the notes can also foreclose on the underlying security
if we fail to pay principal and interest when due. We incurred debt issuance
costs related to this offering of approximately $1,918,000 which we recorded in
other assets and will amortize and charge to interest expense over the life of
the notes. (See Note 6).

4. LEGAL PROCEEDINGS

Cephalon, a current director and officer, and a former officer have been named
as defendants in a number of civil actions filed in the U.S. District Court for
the Eastern District of Pennsylvania, which have been consolidated into a single
class action. The plaintiff class is comprised of those persons and entities who
purchased Cephalon common stock, or traded in options to buy or sell Cephalon
common stock, during the period June 12, 1995 through and including June 7,
1996. Plaintiffs seek to hold defendants liable for stock trading losses that
stem from alleged violations of the U.S. securities laws and alleged common law
negligent misrepresentation. More specifically, plaintiffs have alleged that
statements by Cephalon and the named defendants relating to the results of
certain clinical studies of MYOTROPHIN were misleading. We have vigorously
defended this lawsuit and believe that there are valid defenses against the
claims, but the defense of the action is expensive, and the costs of this
defense will reduce the amount of insurance coverage that might otherwise be
available to satisfy claims. Therefore, on June 4, 1999, Cephalon entered into a
Stipulation of Settlement providing that the plaintiffs would receive a total of
$17,000,000 in full settlement of this action, inclusive of attorneys fees and
expenses. Of this amount, $7,500,000 will be paid by our directors' and
officers' liability insurance carriers; the remaining $9,500,000 will be paid by
Cephalon. We have incurred charges to earnings in prior reporting periods
sufficient to cover the costs of the settlement. On July 30, 1999, the Court
entered an order approving the settlement and judgment of dismissal with
prejudice, dismissing all claims against the defendants. This order will become
final on August 30, 1999, unless one or more of the parties files an appeal. In
addition, a further complaint has been filed with the Court alleging that
Cephalon is liable under common law for misrepresentations concerning the
results of the MYOTROPHIN clinical trials, and that Cephalon and certain of its
current and former officers and directors are liable for the actions of persons
who allegedly traded in Cephalon common stock on the basis of material inside
information. We believe that we have valid defenses to all claims raised in this
action and we have filed a motion to dismiss these claims which is pending with
the Court. Moreover, even if there is a judgment against us, we do not believe
it will have a material adverse effect on our financial condition or results of
operations.

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

CEPHALON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

5. COMMITMENTS AND CONTINGENCIES

Related party

Cephalon Clinical Partners, L.P., or CCP, granted us an exclusive license to
manufacture and market MYOTROPHIN within the United States, Canada and Europe in
return for royalty payments equal to 10.1% of MYOTROPHIN sales and a milestone
payment of approximately $16,000,000 that we must make if MYOTROPHIN receives
regulatory approval in the United States or certain other countries. We have the
option to pay the milestone payment in cash, common stock, or a combination
thereof.

We have a contractual option to purchase all of the limited partnership
interests in CCP in specified circumstances following the initiation of
commercial sales, if any, of MYOTROPHIN. To exercise the purchase option, we are
required to make an advance payment of $40,275,000 in cash or, at our election,
$42,369,000 in shares of our common stock, valued at the market price at the
time we exercise the purchase option, or a combination thereof. In addition to
the advance payment, the exercise of the purchase option requires us to make
royalty payments to the former limited partners for a period of eleven years
after exercise at a royalty rate of 10.1% (subject to reduction under certain
circumstances) of MYOTROPHIN sales in the United States, Canada and Europe. If
we do not exercise the purchase option prior to its expiration date, the license
will terminate and all development and marketing rights to MYOTROPHIN in the
United States, Canada and Europe would revert to CCP, which may commercialize
MYOTROPHIN itself or license or assign its rights to a third party. We would not
receive any benefits from any such commercialization, license or assignment of
rights.

We are performing the development and clinical testing of MYOTROPHIN on behalf
of CCP and our costs incurred to develop MYOTROPHIN in the Territory were
reimbursed by CCP to the extent of its available funds. Late in 1995, CCP
depleted all of its available funding and has not provided any further funding
of MYOTROPHIN development costs. The amount of additional funding required for
further development is determined by CCP's general partner in advance of each
quarter, and each quarter, we have the right, but not the obligation, to
contribute such funds. If we decide to discontinue funding of the MYOTROPHIN
program, the purchase option and license will terminate and commercialization
rights to MYOTROPHIN will revert back to CCP.

The January 1994 collaboration between Cephalon and Chiron is subject to the
rights of CCP. We are solely responsible for making any royalty and milestone
payments owed to CCP and for funding any exercises of the purchase option.

The general partner of CCP is a wholly-owned subsidiary of Cephalon, which
owns 1% of CCP.

6. STOCKHOLDERS' EQUITY

The private placement of the revenue-sharing notes (see Note 3) includes the
issuance of warrants, expiring March 1, 2004, to purchase 1,920,000 shares of
our common stock at an exercise price of $10.08. The investors will forfeit
480,000 warrants if specified aggregate PROVIGIL sales levels are achieved in
the United States through March 1, 2002. In addition, we may, with notice, call
up to 720,000 of the warrants for redemption at a nominal price after November
24, 2001 if the market value of our common stock exceeds certain thresholds.
The investors can choose to exercise the warrants prior to redemption. The
estimated aggregate value of the warrants of $6,236,000 was recorded as a
discount to the notes and is being amortized and charged to interest expense
over the term of the notes.

In connection with the May 1999 collaboration, H. Lundbeck A/S purchased
1,000,000 shares of our common stock at a price of $12.00 per share, which was
the average market price for the five trading days prior to the closing of the
agreement. (See Note 7).

CEPHALON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

7. REVENUE RECOGNITION

Product sales

Product sales are recognized upon shipment of product and are recorded net of
reserves for returns and allowances. The reserve for product returns is derived
by utilizing reports obtained from external, independent sources, NDC Health
Information Services, IMS Health and a sample of wholesalers, which provide
prescription data, wholesaler stocking levels and wholesaler sales to retail
pharmacies. From this data, we estimate retail pharmacy stocking levels. This
data is reviewed to monitor product movement through the supply chain to
identify slow moving product that is more likely to be returned. The reserves
are reviewed at each reporting period and adjusted to reflect data available at
that time. Any changes in the reserve will result in changes in the amount of
revenue recognized in the period (i.e. a decrease in the reserve will result in
an increase in revenue).

Sales of PROVIGIL were initiated in the United Kingdom in March 1998 and the
United States and the Republic of Ireland in February 1999. For the six-months
ended June 30, 1999, shipments to customers were $12,282,000. The return and
allowance balance at June 30, 1999 was $5,030,000, resulting in product sales of
$7,252,000 for the six months ended June 30, 1999.

Our methodology described above has resulted in the recognition of revenue for
only product that we believe was prescribed, including refills. We believe this
approach is appropriate given that: (i) PROVIGIL is a new product and we have
limited sales, product return and collection history; (ii) at this time we are
not able to reasonably estimate market penetration during launch; (iii) to date,
returns have been limited, however, product may be returned for credit for up to
18 months from shipment; (iv) to date, reorders at retail pharmacies have been
modest; and, (v) customers received extended payment terms for their initial
orders. At each reporting period, we intend to continue to monitor inventory
levels at the wholesalers and retail pharmacies, as well as reorder history.
Should this information indicate a steady stream of the product moving through
the supply chain, which would indicate that returns are less likely to occur,
the product reserve balance would be reduced, resulting in the recognition of
additional revenue.

Other revenues

A significant portion of other revenues include revenue recognized under
collaborative research and development agreements as follows:

Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
1999 1998 1999 1998
---- ---- ----- ----

Lundbeck........................ $2,750,000 $ -- $2,750,000 $ --
TAP Holdings.................... 1,503,000 1,644,000 3,083,000 3,754,000

Under the terms of the collaborative agreement with Lundbeck to discover,
develop and market products to treat neurodegenerative diseases, Lundbeck will
compensate us for our research efforts and will share in joint development costs
of our product candidate, CEP-1347, and any other molecules that emerge from the
research program. Lundbeck will obtain Cephalon's commercial rights in Europe
and certain other territories, and will pay us a royalty on sales in those
territories. Cephalon will retain exclusive rights in the United States. The
revenue recognized in the three and six months ended June 30, 1999, represents a
license fee of $2,400,000 and reimbursement of research and development costs of
$350,000.

We have a research and development collaboration with TAP Holdings Inc. to
develop and commercialize certain compounds for the treatment of human cancers
and prostate disorders in the United States. Under the terms of the agreement,
we perform research and preclinical development of these compounds for which we
are compensated quarterly by TAP, based on a contract rate per individual
assigned to the program for that quarter and reimbursement of certain external
costs, all subject to annual budgetary maximums.

CEPHALON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

8. SUBSEQUENT EVENT

On August 13, 1999, Cephalon, Inc. announced that it had entered into a
purchase agreement providing for the sale, to certain initial purchasers, of
2,000,000 shares of convertible exchangeable preferred stock at $50 per share in
a private offering to certain institutional investors; this transaction is
expected to close August 18, 1999.

We have granted the initial purchasers a 45-day option to purchase up to an
additional 500,000 shares of the preferred stock. Dividends on the preferred
stock will be cumulative at the annual rate of $3.625 per share. The preferred
stock will be convertible into shares of our common stock at a conversion price
of $17.92 per share, subject to adjustment in certain circumstances. The
preferred stock will be exchangeable, at our option, into 7 1/4% convertible
debentures which will also be convertible into shares of our common stock. The
preferred stock and the debentures, if issued, will be redeemable by Cephalon at
declining redemption prices commencing in August 2001.

The securities to be offered will not be registered under the Securities Act
or any state securities laws and, unless so registered, may not be offered or
sold in the United States except pursuant to an exemption from, or in a
transaction not subject to, the registration requirements of the Securities Act
and applicable state securities laws.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Certain Risks Related to Cephalon's Business

During the next several years we will be very dependent on the commercial
success of PROVIGIL, and we may be unable to attain profitability on sales of
PROVIGIL.

At our present level of operations, we may not be able to attain profitability
if physicians prescribe PROVIGIL only for those who are diagnosed narcoleptics,
and currently we cannot promote PROVIGIL outside of this approved use. In
December 1998, the FDA approved PROVIGIL for use by those suffering from
excessive daytime sleepiness associated with narcolepsy. The market for 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 between
30,000 and 45,000 currently are seeking 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, but we do not know
whether these studies will in fact 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 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, could limit the commercial success of the
product and could even impact 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 negligible unless we are able to obtain FDA approval to
expand the authorized use of PROVIGIL to include treatment for conditions other
than excessive daytime sleepiness associated with narcolepsy. FDA regulations
restrict our ability to communicate the results of additional clinical studies
to patients and physicians without first obtaining from the FDA approval to
expand the authorized uses for this product. As a result, it may be several
years before we have significant sales revenue from PROVIGIL beyond that
attributable to prescriptions for diagnosed narcoleptics.

In addition, the following factors could limit the rate and level of market
acceptance of PROVIGIL:

. the effectiveness of our sales and marketing efforts relative to those
of our competitors;

. the availability and level of reimbursement for PROVIGIL by third-
party payors, including federal, state and foreign government
agencies;

. the occurrence of any side effects, adverse reactions or misuse (or
unfavorable publicity relating thereto) stemming from the use of
PROVIGIL.

We have described these and other factors in more detail below.

Our lack of experience selling pharmaceuticals, together with significant
competition, may impact our ability to effectively market and sell PROVIGIL in
the United States.

In the United States and elsewhere, PROVIGIL faces significant competition in
the marketplace since narcolepsy is currently treated with several drugs, all of
which have been available for a number of years and many of which are available
in inexpensive generic forms. Thus, we will need to demonstrate to physicians
and third party payors that the cost of PROVIGIL is reasonable and appropriate
in light of the safety and efficacy of the product, the price of competing
products and the related health care benefits to the patient.

During the past few years, we developed a specialty sales organization focused
on marketing, promoting and detailing the products of other companies to
neurologists. However, we have limited experience in marketing, selling or
distributing our own products in the United States, and we lack the more
substantial experience held by major pharmaceutical companies in developing,
training and managing a sales organization over an extended period of time. More
recently, we established a managed care sales force to market our products to
health maintenance organizations, prescription benefit management firms, and
other third party payors; we also lack substantial experience in this area, and
we cannot be certain that we will be successful in our efforts to market our
products to these groups.

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 PROVIGIL.

In certain foreign markets, pricing or profitability of pharmaceutical
products is subject to 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
PROVIGIL could be limited if federal or state governments adopt any such
proposals. In addition, in both 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.
If third party payors focus their cost control efforts on PROVIGIL, this could
impair the commercial success of the product.

As PROVIGIL is used commercially, unintended side effects, adverse reactions
or incidents of misuse may appear that could result in additional regulatory
controls and reduce sales of PROVIGIL.

Until recently, the usage of PROVIGIL has been limited to clinical trial
patients under controlled conditions and under the care of expert physicians. We
cannot predict whether the widespread commercial use of PROVIGIL will produce
undesirable or unintended side effects that have not been evident in our
clinical trials to date. As PROVIGIL becomes more widely utilized by significant
numbers of patients who could take multiple medications, adverse drug
interactions could occur that are difficult to predict. Additionally, incidents
of product misuse may occur. These events, among others, could result in
additional regulatory controls, including withdrawal of the product from the
market.

We may not be able to maintain market exclusivity for PROVIGIL, and
therefore potential competitors may develop competing products, which could
result in a decrease in sales and market share, could cause us to reduce
prices to compete successfully, and may prevent PROVIGIL from being a
commercial success.

We hold exclusive license rights to a composition-of-matter patent covering
modafinil as 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 run through November 18, 2001. In addition, we own a
U.S. patent covering the particle size of modafinil which issued in 1997.
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 their validity is challenged by a third party, or that these patents
(or any other patent owned or licensed by us) would prevent a potential
competitor from developing competing products or product formulations that avoid
infringement.

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 Cephalon is unable to provide or obtain
adequate supplies of PROVIGIL), it would not prevent approval of the compound
for other indications that otherwise are non-exclusive, nor approval of other
kinds of compounds for the same indication.

Manufacturing, supply and distribution problems could create supply
disruptions that would damage commercial prospects for PROVIGIL.

We depend upon Laboratoire L. Lafon as our sole supplier of bulk modafinil
compound, the active drug substance contained in PROVIGIL. Moreover, we depend
upon a single manufacturer that is qualified to manufacture finished PROVIGIL
for commercial purposes. We maintain an inventory of modafinil compound to
protect against supply disruptions.

Additionally, 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 such ingredient. We have prepared a new formulation of
PROVIGIL that would not include the now unavailable ingredient, and could enable
us to qualify additional tablet manufacturers with regulatory authorities.
However, the introduction of any such new formulation requires that we establish
that the new formulation is bioequivalent to the current one, and also requires
regulatory approval. If we are unable to develop and obtain approval for a new
formulation, or if demand for the product were to exceed expectations, 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.

We must comply with all applicable regulatory requirements of the FDA and
foreign authorities, including current Good Manufacturing Practice regulations,
or cGMP. The facilities used to manufacture, store and distribute our products
are subject to inspection by the FDA and other regulatory authorities at any
time to determine compliance with cGMP regulations and other regulatory
requirements. The cGMP regulations are complex, and failure to be in compliance
could lead to remedial action, civil and criminal penalties and delays in
production of material.

We rely on several third parties in the United States to formulate, tablet,
package, distribute, provide customer service activities and accept and process
returns. 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. Any disruption in these activities could impede our
ability to sell PROVIGIL and could reduce sales revenue.

If we are unable to maintain certain cash balances under the terms of our
revenue-sharing notes, holders of our revenue-sharing notes have the right to an
increased royalty percentage, which will increase our royalty expense, and may
have the right to accelerate the notes and foreclose on the security, which will
result in the loss of our rights to PROVIGIL.

The notes contain a number of covenants, including a requirement to maintain
cash, cash equivalent and investment balances of $40,000,000 through December
31, 1999 and $30,000,000 through February 2002 or as long as the principal
remains outstanding. This requirement to maintain cash and investment balances
may limit our flexibility to use our cash resources for other corporate
purposes. The notes are secured by our licenses, patents and FDA rights relating
to PROVIGIL. The notes also require us to pay a royalty of 6% on net United
States PROVIGIL sales for 5 years, which we may reduce to 4 years under certain
circumstances. If we fail to maintain the required cash and investment balances,
the holders of the notes can declare a default and increase the royalty
percentage to 25% of net United States PROVIGIL sales and, if the default is not
cured within one year, can accelerate the due date of the notes and foreclose on
the security. The holders of the notes can also foreclose on the security if we
fail to pay principal and interest when due or violate certain other covenants.

Our sales of PROVIGIL and financial results will fluctuate and these
fluctuations may adversely affect our stock price.

A number of the analysts and investors who follow our stock have developed
models to attempt to forecast future PROVIGIL sales and have established
expectations based upon those models. Forecasting revenue is difficult,
especially when there is little commercial history and when 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 quarterly revenues, which may not
meet with market expectations and which may adversely affect our stock price.
Other factors which may cause our quarterly financial results to fluctuate
include the level and timing of PROVIGIL sales to wholesalers and end-users,
product returns, cost of PROVIGIL sales, achievement and timing of research and
development milestones, contract and co-promotion revenues, cost and timing of
clinical trials, marketing and other expenses and manufacturing or supply
disruption.

The results and timing of future clinical trials cannot be predicted and future
setbacks may materially affect our business.

We or our collaborators must demonstrate through preclinical testing and
clinical trials that the 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 we or
our collaborators' 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 adversely affect the statistical analysis of clinical trial results.

The completion of clinical trials of our product candidates may be delayed by
many factors. One such factor is the rate of enrollment of patients and 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.
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 or our collaborators 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 our or our collaborator's clinical trial efforts may
have a material adverse effect on our business.

We anticipate we will incur continued losses for the next several years.

To date, we have not been profitable. At June 30, 1999, our accumulated
deficit was approximately $305 million. 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.
We expect to continue to incur significant losses for the next several years.

We cannot be sure that we will ever achieve product revenues from PROVIGIL or
from any of our other product candidates sufficient for us to obtain
profitability. We cannot be sure that we or our collaborators will obtain
required regulatory approvals, or successfully develop, commercialize,
manufacture and market any product candidates.

Our research and development activities may not result in any additional
pharmaceutical products, which may adversely affect our business.

We are highly focused on the research and development of potential
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 major
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 fail to enter clinical studies and the
majority of therapeutic candidates entering clinical studies fail to be
commercialized.

Our research and development and marketing efforts are highly dependent on
corporate collaborators who may not devote sufficient time, resources and
attention to our programs, which may adversely impact our efforts to develop and
market potential products.

Because we have limited resources, we have entered into a number of agreements
with other pharmaceutical companies. These agreements may call for our partner
to control:

. the supply of bulk or formulated drugs for commercial use or for use
in clinical trials;

. the design and execution of clinical studies;

. the process of obtaining regulatory approval to market the product;
and

. the 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 well 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. For example,
we rely on several of these collaborators for the production of compounds and
the manufacture and supply of pharmaceutical products. One of them, Kyowa Hakko,
has informed us that they will not be able to meet our increased requirements of
the compound used in our signal transduction modulator program beyond the year
2000. We are in discussions with alternative manufacturers and Kyowa Hakko is
working with us to transfer technology to a third party. We cannot be certain
that a new manufacturer will be able to manufacture such compounds or products
in sufficient quantities, at reasonable prices, and in accordance with cGMP
requirements established by the FDA and other regulatory authorities.

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 will continue to conduct
research, seek patent protection, and establish collaborative arrangements for
product development. Products developed by any of these entities may compete
directly with those we develop or sell. Many of these companies and institutions
have substantially greater capital resources, research and development staffs
and facilities than us, 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 materially
adversely affect any sales of products that might be developed or are currently
being sold by us or make them obsolete. Advances in current treatment methods
may also adversely affect the market for such products. The approval and
introduction of therapeutic products that compete with compounds being developed
by us could also adversely affect our ability to attract and maintain patients
in clinical studies for the same indication or otherwise successfully complete
our clinical studies.

We may not be able to obtain adequate patent protection either in the United
States or abroad, which could impact our ability to compete effectively.

We place considerable importance on obtaining patent and trade secret
protection for new technologies, products and processes. We intend to file
applications for patents covering the composition of matter or uses of our drug
candidates or our proprietary processes. 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.

In addition, we could incur substantial costs in defending any patent
infringement suits or in asserting any patent rights, including those licensed
to us by third parties, and in defending suits against us or our employees
relating to ownership of or rights to intellectual property. Such disputes could
substantially delay our drug development or commercialization. The U.S. Patent
and Trademark Office 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 are involved in a number of legal proceedings that, if adversely adjudicated
or settled, could materially impact our financial condition.

Cephalon, a current director and officer, and a former officer, have been
named as defendants in a number of civil actions filed in the U.S. District
Court for the Eastern District of Pennsylvania, all of which have been
consolidated into a single class action. The plaintiff class is comprised of
those persons and entities who purchased Cephalon common stock, or traded in
options to buy or sell Cephalon common stock, during the period June 12, 1995
through and including June 7, 1996. Plaintiffs seek to hold defendants liable
for stock trading losses that stem from alleged violations of the U.S.
securities laws and alleged common law negligent misrepresentation. More
specifically, plaintiffs have alleged that statements made by Cephalon and the
named defendants relating to the results of certain clinical studies of
MYOTROPHIN were misleading. We have vigorously defended this lawsuit and believe
that there are valid defenses against the claims, but the defense of the action
is expensive, and the costs of this defense will reduce the amount of insurance
coverage that might otherwise be available to satisfy claims. Therefore, on June
4, 1999, Cephalon entered into a Stipulation of Settlement providing that the
plaintiffs would receive a total of $17,000,000 in full settlement of this
action, inclusive of attorneys fees and expenses. Of this amount, $7,500,000
will be paid by our directors' and officers' liability insurance carriers; the
remaining $9,500,000 will be paid by Cephalon. We have incurred charges to
earnings in prior reporting periods sufficient to cover the costs of the
proposed settlement. On July 30, 1999, the Court entered an order approving the
settlement and a judgment of dismissal with prejudice, dismissing all claims
against the defendants. This order will become final on August 30, 1999, unless
one or more of the parties files an appeal. In addition, a further complaint has
been filed with the Court alleging that Cephalon is liable under common law for
misrepresentations concerning the results of the MYOTROPHIN clinical trials, and
that Cephalon and certain of its current and former officers and directors are
liable for the actions of persons who allegedly traded in Cephalon common stock
on the basis of material inside information. We believe that we have valid
defenses to all claims raised in this action and we have filed a motion to
dismiss these claims which is pending with the Court. Moreover, even if there is
a judgment against us, we do not believe it will have a material adverse effect
on our financial condition or results of operations.

Due to our involvement in co-promoting STADOL NS, a product of Bristol-Myers,
we are a co-defendant in a product liability action 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 this action will have a material
effect on our financial condition or results of operations.

We face significant product liability risks, which may result in claims being
filed against us or otherwise 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 even if our drugs or a
collaborator's drugs are not actually at fault for causing an injury.
Furthermore, our products may cause, or may appear to have caused, adverse side
effects or potentially dangerous drug interactions that we may not learn about
or understand fully until the drug is actually manufactured and sold for some
time. 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 at a relatively limited level, and as such, claims could exceed our
coverage. 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.

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.

Cephalon and Chiron have withdrawn the joint marketing authorization
application for MYOTROPHIN in Europe for the treatment of ALS. We made this
decision because of comments we received from the European reviewer of the
application concerning the results of our two pivotal ALS studies. These
comments led us to believe that the reviewer would not approve our application.
The withdrawal of our marketing authorization application for MYOTROPHIN in
Europe may negatively affect the FDA approval process for MYOTROPHIN in the
United States.

In May 1998, the FDA issued a letter stating that the NDA application
submitted jointly by Cephalon and Chiron to market MYOTROPHIN in the United
States for the treatment of ALS was "potentially approvable," contingent,
however, upon the submission of additional information from ongoing clinical
studies that demonstrates to the satisfaction of the FDA that MYOTROPHIN is
effective in the treatment of ALS. Cephalon and Chiron have had discussions with
the FDA regarding safety and efficacy data and have submitted information from
the ongoing Treatment Investigational New Drug program. The T-IND program is a
compassionate use program that is neither placebo-controlled nor blinded, and
therefore is not designed to produce evidence of efficacy. We are not planning
to submit additional data to the FDA at this time. The study of MYOTROPHIN in
ALS patients being conducted by Kyowa Hakko in Japan is not under our control.
Results from that study may be available in late 1999 but may not satisfy the
FDA's request for additional information. The prospects for regulatory approval
of MYOTROPHIN continue to be very uncertain in the United States. We will
continue to evaluate the prospects of receiving regulatory approval and, based
on communications with the FDA, may determine to withdraw the new drug
application.

If the information submitted to the FDA to date does not prove to be
sufficient for approval, a new study would be necessary, which would be
expensive and would take years to complete. We are not sure whether the
potential profits from sales of MYOTROPHIN would make an additional study cost-
effective to conduct. Even if an additional study were conducted, the results of
a new study may not be sufficient to obtain regulatory approval. If MYOTROPHIN
were not approved for ALS, we are not sure it would be cost-effective to pursue
MYOTROPHIN for any other indication.

The value of our common stock may fluctuate significantly due to the volatility
of its market price and trading volume and exercise of outstanding warrants.

The market price and trading volume of shares of our common stock are
volatile, and we expect it to continue to be volatile for the foreseeable
future. For example, during the 52 weeks prior to August 9, 1999, our common
stock traded at a high price of $19.44 and a low price of $3.88. Negative
announcements (such as adverse regulatory decisions, 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, news concerning certain external events, such as that
concerning our competitors or changes in government regulations that may impact
the biotechnology or pharmaceutical industries, also could affect the price of
our common stock.

In addition, as of June 30, 1999, warrants to purchase 2,022,690 shares of
common stock were held by investors in Cephalon Clinical Partners, L.P. These
warrants expire on August 31, 1999 and have an exercise price ranging from
$11.77 to $13.82 per share. To the extent these warrants are exercised, it may
cause increased volatility in the price of our common stock, which may have an
adverse effect on the price of our common stock.

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

The nature of our business is such that 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 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 resulting from their use, and we may be required to
incur significant costs to comply with both existing and future environmental
laws and regulations.

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

The Year 2000 issue may cause compliance failure and service interruptions in
our business or operations if certain of our suppliers or vendors are unable to
become Year 2000 compliant which may cause us to incur additional expense.

The "Year 2000 Issue" is typically the result of software and firmware being
written using two digits rather than four to define the applicable year. If our
software and firmware with date-sensitive functions are not Year 2000 compliant,
these systems may recognize a date using "00" as the year 1900 rather than the
year 2000.

We have completed minor modifications to our computer systems and at this time
we do not expect the Year 2000 Issue to pose a significant internal operational
problem. However, we cannot be sure that the systems of other companies on which
we rely will be compliant on or before January 1, 2000 and will not have an
adverse effect on our operations. We have initiated formal communication with
significant suppliers and third party vendors to determine the extent to which
our operations are vulnerable to those third parties' failure to remediate their
own Year 2000 hardware and software issues. Significant suppliers or third party
vendors that are unable to become Year 2000 compliant could adversely affect our
business or operations. We are also vulnerable to external forces that might
generally affect industry and commerce, such as utility or transportation
company Year 2000 compliance failures and related service interruptions. We have
not yet fully developed a comprehensive contingency plan addressing situations
that may result if we are unable to achieve Year 2000 readiness of our critical
operations.

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

We are subject to the anti-takeover provisions of Section 203 of the Delaware
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 acquiror 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.

You should not expect to receive dividends on our common stock.

We have not paid cash dividends on our common stock and we do not expect to do
so in the foreseeable future.

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
the use of words in the statements such as "anticipate," "estimate," "expect,"
"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 above 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 are cautioned not to place
too much reliance on any such forward-looking statements. Furthermore, we do
not intend (and we are not obligated) to update publicly any forward-looking
statements, whether as a result of new information, future events or otherwise.
This discussion is permitted by the Private Securities Litigation Reform Act of
1995.

Liquidity and Capital Resources

Cash, cash equivalents, and investments at June 30, 1999 were $85,555,000,
representing 73% of total assets, and at December 31, 1998 were $67,346,000,
representing 71% of total assets. Cash equivalents and investments consisted
primarily of short to intermediate-term corporate obligations, overnight
investments that are backed by collateral in the form of government securities
with a value equal to at least 102% of such investments and short to
intermediate-term obligations of the United States government.

The following is a summary of selected cash flow information for each of the
six months ended June 30:

1999 1998
---- -----

Net cash used for operating activities..................... $(25,778,000) $(26,922,000)
Net cash (used for) provided by investing activities....... (12,334,000) 36,704,000
Net cash provided by (used for) financing activities....... 44,030,000 (308,000)

Net Cash Used for Operating Activities

--Operating Cash Inflows

The following is a summary of the major sources of cash receipts reflected in
net cash used for operating activities:

Six Months
Ended June 30,
--------------
1999 1998
---- ----

PROVIGIL sales..................................... $9,002,000 $ --
TAP Holdings....................................... 3,727,000 4,584,000
Lundbeck........................................... 2,400,000 --
Bristol-Myers Squibb............................... 683,000 503,000
Chiron............................................. -- 1,962,000
Medtronic.......................................... 543,000 958,000
Interest........................................... 1,998,000 3,279,000

Sales of PROVIGIL commenced in the United Kingdom in March 1998 and in the
United States and the Republic of Ireland in February 1999.

In May 1999, we entered into a collaborative agreement with H. Lundbeck A/S to
discover, develop and market products to treat neurodegenerative diseases, such
as Parkinson's disease and Alzheimer's disease. Initially, the program will seek
to advance our product candidate, CEP-1347, into clinical development for the
treatment of Parkinson's disease. Lundbeck will compensate us for our research
efforts and will share in joint development costs of CEP-1347 and any other
molecules that emerge from the research program. Lundbeck will obtain Cephalon's
commercial rights in Europe and certain other territories, and will pay us a
royalty on sales in those territories. Cephalon will retain exclusive rights in
the United States. The payment received from Lundbeck in the six months ended
June 30, 1999 represents a license fee. At June 30, 1999, $1,413,000 was
receivable from Lundbeck for our research and development efforts.

We market STADOL NS(R) (butorphanol tartrate) Nasal Spray for Bristol-Myers
Squibb to neurologists in the United States. Pursuant to our agreement, we
receive quarterly payments equal to a percentage of total STADOL NS sales
attributed to prescriptions written by neurologists which exceeds a
predetermined base amount. The payment received from BMS in the six months ended
June 30, 1999, represents payment earned for fourth quarter 1998 co-promotion
activity while the payment in the six months ended June 30, 1998 represents
payment earned for first quarter 1998 co-promotion activity. At June 30, 1999,
$1,000,000 was receivable from BMS.

Cephalon has been developing MYOTROPHIN in collaboration with Chiron
Corporation for the treatment of ALS and other neurological disorders. The
amounts we received in 1998 generally represented reimbursement from Chiron for
MYOTROPHIN program costs incurred in excess of our fifty percent share of
program costs. Since June 30, 1998, the companies have been bearing their own
MYOTROPHIN costs and we have not received reimbursement of MYOTROPHIN
expenditures since that time.

Under an April 1997 agreement with Medtronic, Inc., we were co-promoting
Intrathecal Baclofen Therapy (ITB(TM)) to neurologists and physiatrists in the
United States for the treatment of intractable spasticity. The agreement with
Medtronic terminated pursuant to its terms on April 29, 1999. At June 30, 1999,
$470,000 was receivable from Medtronic.

The decrease in interest received in 1999 compared to 1998 was primarily due
to lower average investment balances.

Operating Cash Outflows

Cash used in operating activities in the six months ended June 30, 1999
increased as a result of increased expenditures associated with the commercial
launch of PROVIGIL in the United States, clinical studies of PROVIGIL and the
purchase of PROVIGIL inventory.

--Cash and Funding Requirements Outlook

As of June 30, 1999, we believe that our cash and investment balance will be
adequate to fund the then-current level of operations for at least twelve
months. We expect cash flow from operating activities to continue to be negative
for the next several years.

Although we initiated sales of PROVIGIL in the United States in February 1999,
it may be at least several years, if ever, before sales from PROVIGIL will
provide enough funds to generate cash inflows in excess of the present level of
cash outflows from operations. In addition to the uncertainty surrounding the
degree of market acceptance for a recently introduced product, factors such as
competition, the effectiveness of our sales and marketing efforts and our
ability to demonstrate the utility of PROVIGIL in disorders other than
narcolepsy will all have a significant impact on PROVIGIL sales. These factors
are not predictable at this point in time.

Cash inflows also include receipts from our collaborative research and
development agreements and from co-promotion agreements. The continuation of
funding under the agreement with TAP is subject to the achievement of certain
development milestones and periodic review by TAP and may be terminated without
cause with prior notice. In May 1999, we entered into a collaborative agreement
with H. Lundbeck A/S to discover, develop and market products to treat
neurodegenerative diseases. Under this agreement, Lundbeck will compensate us
for our research efforts and will share in joint development costs. The level of
potential payments to be received from Bristol-Myers is subject to a number of
uncertainties related to product sales, including competition from new and
existing products. After we receive payment for our outstanding receivable with
Medtronic at June 30, 1999, we will not receive any further payments due to the
termination of this agreement in April 1999. Under our June 1999 marketing and
development agreement with Abbott Laboratories, we are to receive quarterly
payments based on a percentage of sales achieved in the United States of
Gabitril(R) (tiagabine hydrochloride) which exceeds contractually established
thresholds.

We expect our cash requirements for PROVIGIL to increase for the next several
years due to efforts associated with the commercial launch of PROVIGIL in the
United States, including building PROVIGIL inventory and conducting clinical
studies of PROVIGIL in disorders other than narcolepsy. Additionally, we
expect to continue to expend substantial funds on research and development
activities for our other products in development. We may seek sources of funding
for these research programs through collaborative arrangements with third
parties. If additional funds are unavailable, we may have to reduce our present
level of spending which may involve curtailing or restructuring some of our
programs. Under our collaboration with Abbott, we are obligated to fund
marketing and clinical trial activities for GABITRIL. Additionally, in
connection with the settlement of our securities litigation, we expect to pay
the plaintiffs $9,500,000 in September 1999.

We will require additional funds to continue our operations at their current
level, continue to meet all of our minimum cash balance requirements pursuant to
our debt agreements and pay the revenue-sharing notes at maturity. On August 13,
1999, we announced that we had entered into a purchase agreement providing for
the sale, to certain initial purchasers, of 2,000,000 share of convertible
exchangeable preferred stock at $50 per share in a private offering to certain
institutional investors. If the transaction closes as expected on August 18,
1999, we believe that we will have sufficient funds to support our operations
for at least the next several years. However, we may still obtain additional
funding through debt and/or equity financings, collaborative arrangements or
through other financing vehicles.

Net Cash (Used for) Provided by Investing Activities

The following is a summary of net cash (used for) provided by investing
activities:

Six Months
Ended June 30,
--------------
1999 1998
---- ----

Purchases of property and equipment....................... $ (43,000) $ (504,000)
Sales and maturities (purchases) of investments, net...... (12,291,000) 37,208,000
------------ -----------
Net cash (used for) provided by investing activities.... $(12,334,000) $36,704,000
============ ===========

Sales and maturities of investments represent the liquidation of investments.
Purchases of investments represent the accumulation of investments.

Net Cash Provided by (Used for) Financing Activities

The following is a summary of net cash provided by (used for) financing
activities:

Six Months
Ended June 30,
1999 1998
---- ----

Proceeds from sales of common stock and warrants................ $12,000,000 $ --
Proceeds from exercises of common stock options and warrants.... 2,906,000 391,000
Proceeds from issuance of long-term debt........................ 30,000,000 --
Principal payments on long-term debt............................ (876,000) (699,000)
----------- ---------
Net cash provided by (used for) financing activities.......... $44,030,000 $(308,000)
=========== =========

In connection with the May 1999 collaborative agreement, Lundbeck purchased
1,000,000 shares of Cephalon's common stock at a price of $12.00 per share,
which was the average market price for the five trading days prior to the
closing of the agreement.

The extent and timing of future warrant and option exercises, if any, are
primarily dependent upon the market price of Cephalon's common stock and general
financial market conditions, as well as the exercise prices and expiration dates
of the warrants and options. At June 30, 1999, investors associated with
Cephalon Clinical Partners, L.P. held warrants to purchase 2,022,690 shares of
common stock. These warrants expire on August 31, 1999 and have an exercise
price ranging from $11.77 to $13.82 per share.

Proceeds from the issuance of long-term debt in the six months ended June 30,
1999 consists of a private placement of $30,000,000 of revenue-sharing notes.

For all periods presented, principal payments on long-term debt include
payments on mortgage loans and payments on capital lease obligations.

Commitments and Contingencies

--Related Party

The January 1994 collaboration between Cephalon and Chiron is subject to the
rights of the CCP. We are solely responsible for making any royalty and
milestone payments owed to CCP and for funding any exercises of the purchase
option.

The general partner of CCP is a wholly-owned subsidiary of Cephalon, which
owns 1% of CCP.

--Legal Proceedings

On June 4, 1999, Cephalon entered into an agreement to settle an action
stemming from allegations that statements made about the results of certain
clinical studies of MYOTROPHIN were misleading; a further complaint has been
filed with the Court alleging liability under common law for misrepresentations
relating to these same studies and for failing to prevent certain non-employees
from trading in Cephalon common stock on the basis of material inside
information. In a separate matter, due to our involvement in promoting STADOL
NS, a product of Bristol-Myers Squibb Company, we are a co-defendant in a
product liability action brought against BMS. See "Certain Risks Related to
Cephalon's Business."

Results of Operations

This section should be read in conjunction with the more detailed
discussion under "Liquidity and Capital Resources."

The following is a summary of revenues and expenses:

Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
% %
- -
1999 1998 change 1999 1998 change
------------ ----------- --------- ------------ ----------- ---------

Product sales - PROVIGIL......................... $ 5,522,000 $ 172,000 3110% $ 7,252,000 $ 231,000 3039%
Other revenues................................... 5,227,000 3,240,000 61 7,727,000 6,749,000 14
Cost of product sales - PROVIGIL................. 651,000 -- -- 839,000 -- --
Research and development expenses................ 10,180,000 10,353,000 (2) 20,152,000 22,327,000 (10)
Selling, general and administrative expenses..... 10,166,000 6,727,000 51 23,780,000 13,896,000 71
Interest (expense) income, net................... (1,253,000) 1,053,000 (219) (1,650,000) 1,969,000 (184)

Sales of PROVIGIL were initiated in the United Kingdom in March 1998 and
the United States and Republic of Ireland in February 1999. Product sales are
recognized upon shipment of product and are recorded net of reserves for returns
and allowances. The reserve for product returns is derived by utilizing reports
obtained from external, independent sources, NDC Health Information, IMS Health
and a sample of wholesalers, which provide prescription data, wholesaler
stocking levels and wholesaler sales to retail pharmacies. From this data, we
estimate retail pharmacy stocking levels. This data is reviewed to monitor
product movement through the supply chain to identify slow moving product that
is more likely to be returned. The reserves are reviewed at each reporting
period and adjusted to reflect data available at that time. Any changes in the
reserve will result in changes in the amount of revenue recognized in the period
(i.e. a decrease in the reserve will result in an increase in revenue).

Our methodology described above has resulted in the recognition of revenue
for only product that we believe was prescribed, including refills. We believe
this approach is appropriate given that: (i) PROVIGIL is a new product and we
have limited sales, product return and collection history; (ii) at this time we
are not able to reasonably estimate market penetration during launch; (iii) to
date, returns have been limited, however, product may be returned for credit for
up to 18 months from shipment; (iv) to date, reorders at retail pharmacies have
been modest; and, (v) customers received extended payment terms for their
initial orders. At each reporting period, we intend to continue to monitor
inventory levels at the wholesalers and retail pharmacies, as well as reorder
history. Should this information indicate a steady stream of the product moving
through the supply chain, which would indicate that returns are less likely to
occur, the product reserve balance would be reduced, resulting in the
recognition of additional revenue.

For the three and six months ended June 30, 1999, cost of product sales was
12% of sales and consisted primarily of royalties due to Lafon. This is not
indicative of future expectations. Prior to FDA approval of PROVIGIL in
December 1998, we recorded the costs of producing PROVIGIL as research and
development expense in accordance with Statement of Financial Accounting
Standards No. 2 "Accounting for Research and Development Costs." For the six
months ended June 30, 1999, approximately $1,463,000 of inventory costs were
excluded from sales. As of June 30, 1999, Cephalon maintained approximately
$2,509,000 of inventory on hand that was previously charged to research and
development expense. Once this inventory has been sold, we expect cost of
product sales to be between 21% and 26% of sales.

Three months ended June 30, 1999 compared to the three months ended June 30,
1998

For the three months ended June 30, 1999, shipments of PROVIGIL to
customers were $6,494,000. The return and allowance balance at June 30, 1999
increased by $972,000, resulting in product sales of $5,522,000 for the three
months ended June 30, 1999.

Other revenues increased in the three months ended June 30, 1999 from the
1998 period due primarily to $2,750,000 in revenue recognized under the
initiation of a collaborative agreement with Lundbeck A/S in May 1999 and from
an increase in revenue recognized from Kyowa Hakko due to the reimbursement of
clinical supplies produced for the MYOTROPHIN clinical studies being conducted
by Kyowa Hakko in Japan. These increases were partially offset by decreases in
revenue from Chiron and Medtronic.

For the three months ended June 30, 1999, research and development expenses
decreased slightly from the same 1998 period due primarily to the recording in
1998 of certain license fees and from a decrease in efforts associated with the
MYOTROPHIN program. These reductions were partially offset by an increase in
clinical trial expenditures in 1999 associated with the PROVIGIL program.

The increase in the selling, general and administrative area for the three
months ended June 30, 1999 as compared to the corresponding 1998 period was due
primarily to marketing expenses associated with the commercial launch of
PROVIGIL and an increase in the size of our sales force to fully support both
PROVIGIL and our collaboration with Abbott to market and further develop
GABITRIL.

The decrease in net interest income is primarily due to lower average
investment balances and the recognition of interest expense related to the
revenue-sharing notes, consisting of 11% of the principal of the notes, 6% of
net PROVIGIL sales in the United States payable to the holders of the notes and
amortization of warrant valuation and debt issuance costs.

Six months ended June 30, 1999 compared to six months ended June 30, 1998

For the six months ended June 30, 1999, shipments to customers were
$12,282,000. The return and allowance balance at June 30, 1999 was $5,030,000,
resulting in product sales of $7,252,000 for the six months ended June 30, 1999.

Other revenues increased in the 1999 period from the 1998 period due
primarily to $2,750,000 in revenue recognized under the initiation of a
collaborative agreement with Lundbeck A/S in May 1999 and from an increase in
revenue recognized from Kyowa Hakko due to the reimbursement of clinical
supplies produced for the MYOTROPHIN clinical studies being conducted by Kyowa
Hakko in Japan. These increases were partially offset by decreases in revenue
from TAP, Chiron and Medtronic.

For the six months ended June 30, 1999, research and development expenses
decreased from the same 1998 period because 1998 includes expenses for PROVIGIL
license fees and the purchase of bulk modafinil, the active drug substance in
PROVIGIL. These decreases were partially offset by increased PROVIGIL clinical
trial expenditures in 1999.

The increase in the selling, general and administrative area for the six
months ended June 30, 1999 as compared to the corresponding 1998 period was due
principally to marketing expenses associated with the commercial launch of
PROVIGIL, an increase in the size of our sales force to fully support both
PROVIGIL and our collaboration with Abbott to market and further develop
GABITRIL and the recording of a $4,300,000 provision related to our securities
litigation.

The decrease in net interest income is primarily due to lower average
investment balances and the recognition of interest expense related to the
revenue-sharing notes.

Results of operations outlook

We expect to continue to incur operating losses unless and until product
sales exceed operating expenses. We expect that sales of PROVIGIL may be limited
since we can only market the product to treat excessive daytime sleepiness
associated with narcolepsy. We may never be able to achieve profitability solely
through sales of PROVIGIL.

Other revenues include revenue recognized under 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 will not record any revenue from
Chiron in 1999 because Chiron and the Company have agreed to fund their own
MYOTROPHIN related expenses. The level of revenue to be recognized from Bristol-
Myers is subject to a number of uncertainties related to product sales,
including competition from new and existing products. We will not record any
further revenue from Medtronic due to the termination of this agreement in April
1999. Under our May 1999 collaborative agreement with Lundbeck to discover,
develop and market products to treat neurodegenerative diseases, Lundbeck will
compensate us for our research efforts and will share in joint development
costs. Under our June 1999 marketing and development agreement with Abbott, we
are to receive quarterly payments from Abbott based on a percentage of sales
achieved in the United States of GABITRIL which exceed contractually established
thresholds.

We expect to continue to incur significant expenditures associated with
marketing PROVIGIL and conducting clinical studies of PROVIGIL in disorders
other than narcolepsy. Under the agreement with Abbott, we are obligated to fund
marketing and clinical trial activities for GABITRIL. Additionally, we expect to
continue to incur substantial expenses on research and development activities
for our other products in development. We may seek sources of funding for these
research and development programs through collaborative arrangements with third
parties. We also expect interest expense to be higher in 1999 due to the
revenue-sharing notes issued in February 1999. As of June 30, 1999, Cephalon had
product returns and allowances of $5,030,000, which would result in $301,800 of
additional interest expense associated with the revenue-sharing notes if such
revenues are ultimately recognized.

We expect to have significant fluctuations in quarterly results based
primarily on the level and timing of:

. PROVIGIL sales;
. cost of PROVIGIL sales;
. contract and co-promotion revenues;
. and the occurrence of expenses.

We do not believe that inflation has had a material impact on the results
of our operations since our inception.

Subsequent Event

We intend to use the proceeds of the offering to fund the further
development and marketing of PROVIGIL, preclinical and clinical development and
other research and development activities, the settlement of legal proceedings,
working capital, and other corporate purposes. We may also use a portion for
acquisitions, although no such acquisitions are currently contemplated, or to
prepay our revenue sharing-notes.

The securities to be offered will not be registered under the Securities
Act or any state securities laws and, unless so registered, may not be offered
or sold in the United States except pursuant to an exemption from, or in a
transaction not subject to, the registration requirements of the Securities Act
and applicable state securities laws.

PART II - OTHER INFORMATION
----------------------------

Item 4. Submission of Matters to a Vote of Security-Holders:

The following was voted upon at the annual meeting of stockholders of
Cephalon, Inc. held in Frazer, Pennsylvania on May 21, 1999:

I. On the election of the following persons as directors:

NUMBER OF VOTES
-----------------------------------
FOR WITHHELD
--- --------
Dr. Frank Baldino, Jr. 26,757,934 460,076
William P. Egan 26,759,966 458,044
Dr. Robert J. Feeney 26,755,666 462,344
Martyn D. Greenacre 26,757,218 460,792
Kevin E. Moley 26,755,866 462,144
Bruce A. Peacock 26,758,870 459,140
Dr. Horst Witzel 26,756,966 461,044

II. To approve the amendment of the Company's Equity Compensation Program
to increase the number of shares of common stock subject to the annual
grants awarded under the plan from 3,500,000 to 4,700,000:

NUMBER OF VOTES
-----------------------------------------
FOR AGAINST ABSTAIN
--- ------- -------
20,101,629 6,937,922 178,187

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits:

Exhibit
-------
No. Description of Exhibit
--- ----------------------
*10.5(a) Supply Agreement, dated January 20, 1993, between
Cephalon, Inc. and Laboratoire L. Lafon (Exhibit
10.1)(1).

*10.5(b) License Agreement, dated January 20, 1993, between
Cephalon, Inc. and Laboratoire L. Lafon (Exhibit
10.2)(1).

*10.5(c) Trademark Agreement, dated January 20, 1993, between
Cephalon, Inc. and Genelco S.A. (Exhibit 10.3)(1).

*10.5(d) Amendment to License Agreement and Supply Agreement,
dated July 21, 1993, between Cephalon, Inc. and
Laboratoire L. Lafon (Exhibit 10.1)(2)(3).

*10.5(e) Amendment to Trademark Agreement, dated July 21, 1993,
between Cephalon, Inc. and Genelco S.A. (Exhibit
10.2)(3).

*10.5(g) Amendment No. 4 to License Agreement and Supply
Agreement dated August 23, 1995, between Cephalon, Inc.
and Laboratoire L. Lafon (Exhibit 10.5(g))(4).

Exhibit
-------
No. Description of Exhibit
--- ----------------------

*10.13 Marketing and Development Collaboration Agreement
between Cephalon, Inc. and Abbott Laboratories Inc.,
dated June 10, 1999 (5).

*10.14 Joint Research, Development and License Agreement
between Cephalon, Inc. and H. Lundbeck A/S, dated May
28 1999 (5).

*10.15 Amended and Restated Copromotion Agreement between
Bristol-Meyers Squibb Company and Cephalon, Inc., dated
January 1, 1999 (5).

* Filed herewith.
(1) Originally filed as an Exhibit to the Registration Statement on Form S-
3 (Registration No. 33-58006) filed on February 8, 1993.
(2) Originally filed as an Exhibit to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1993.
(3) Originally filed as an Exhibit to the Registration Statement on Form S-
3 (Registration No. 33-73896) filed on January 10, 1994.
(4) Orignally filed as an Exhibit to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1995.
(5) Portions of the Exhibit have been omitted and have been filed
separately pursuant to an application for confidential treatment filed with
the Securities and Exchange Commission pursuant to Rule 24b-2 under the
Securities Exchange Act of 1934, as amended.

(b) Reports on Form 8-K:

During the quarter ended June 30, 1999, the Registrant filed
a Current Report on Form 8-K on June 14, 1999 for the following
events:

(i) On June 1, 1999, Cephalon, Inc. announced that it has entered
into a collaborative agreement with H. Lundbeck A/S to
discover, develop and market products to treat
neurodegenerative diseases.
(ii) On June 7, 1999, Cephalon, Inc. announced that it has agreed to
the terms of a proposed settlement of securities litigation
filed in 1996 following the announcements of results of
clinical studies of MYOTROPHIN(R) (mecasermin) Injection for
the treatment of amyotrophic lateral sclerosis.
(iii) On June 10, 1999, Cephalon, Inc. announced that it has entered
into a collaborative agreement with Abbott Laboratories to
market and further develop GABITRIL(R) (tiagabine
hydrochloride), one of Abbott's anti-epileptic drugs, in the
United States.
(iv) On June 11, 1999, Cephalon, Inc. announced that Bruce A.
Peacock, executive vice president and chief operating officer
will leave the Company to become president and chief operating
officer of Orthovita Inc. in Malvern, PA.

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)

August 16, 1999 By /s/ Frank Baldino, Jr., Ph.D.
---------------------------------
Frank Baldino, Jr., Ph.D.
President, Chief Executive Officer and
Director
(Principal executive officer)

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