STATE SETTLEMENT AGREEMENT AND RELEASE

Cephalon pursuant to Paragraph 1 below for the Covered Conduct described in Paragraph D below.

D.             The State contends that it has certain civil and administrative claims against Cephalon for engaging in the following alleged conduct (“the Covered Conduct”):

(i)             Between January 1, 2001 and December 31, 2006 for Actiq and Provigil and between January 1, 2001 and February 18, 2005 for Gabitril, Cephalon knowingly and willfully promoted the sale and use of Actiq, Gabitril and Provigil for certain uses which the Food and Drug Administration had not approved (i.e. “unapproved uses”). The promotion of Actiq, Gabitril and Provigil for these unapproved uses violated the Food Drug and Cosmetic Act 21 U.S.C. § 331(a), 21 U.S.C. § 352(f). In addition, certain of these unapproved uses were not medically accepted indications for which the United States and State Medicaid programs approved reimbursement. As a result of Cephalon’s conduct, Cephalon knowingly caused false and/or fraudulent claims to be submitted to the United States and the State Medicaid programs.

(ii)            Cephalon has entered into a plea agreement with the United States Attorney for the Eastern District of Pennsylvania and has agreed to plead guilty, pursuant to Fed. R. Crim. P. 11, to a one Count Information to be filed in United States v. Cephalon, Inc . (the “Federal Criminal Action”) that will allege that between January 2001 through October 1, 2001, Cephalon introduced into interstate commerce and caused the introduction into interstate commerce of drugs (Actiq, Gabitril, and Provigil) that were misbranded

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through off-label promotion, a misdemeanor, in violation of 21 U.S. C. §§ 331(a), 333(a)(1) and 352(f)(1).

E.      Cephalon has cooperated fully and completely with the State throughout the course of its investigation and continues to do so.

F.      This Agreement is made in compromise of disputed claims.  This Agreement is neither an admission of facts or liability by Cephalon nor a concession by the State that its claims are not well founded.  Neither this Settlement, its execution, nor the performance of any obligation under it, including any payment, nor the fact of the settlement, is intended to be or shall be understood as an admission of liability or wrongdoing or other expression reflecting upon the merits of the dispute by Cephalon.

G.     To avoid the delay, expense, inconvenience, and uncertainty of protracted litigation of these claims, the Parties mutually desire to reach a full and final settlement as set forth below.

III. TERMS AND CONDITIONS

NOW, THEREFORE, in reliance on the representations contained herein and in consideration of the mutual promises, covenants, and obligations set forth below in this Agreement, and for good and valuable consideration as stated herein, the Parties agree as follows:

1.              Cephalon agrees to pay to the United States and the States that will be receiving settlement funds pursuant to this paragraph (the “Medicaid Participating States”) collectively the sum of three hundred seventy-five million dollars ($375,000.000.00) plus interest in an amount

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of 4.0% per annum from January 1, 2008, and continuing until and including the day before complete payment is made (the “Settlement Amount”).  Of this sum,                                                                                     ($                            ) represents payment to Medicaid, which shall constitute a debt immediately due and owing to the United States and the Medicaid Participating States on the Effective Date of this Agreement subject to the terms of the Federal Settlement Agreement and Release and this Agreement.  This debt is to be discharged by payments to the United States and the Medicaid Participating States under the following conditions:

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A.             Cephalon  and the United States separately have agreed that the sum of                                                           ($                                ), plus interest in an amount of 4.0% per annum from January 1, 2008, and continuing until and including the day before complete payment is made represents the federal share (the “Federal Settlement Amount”).  The Federal Settlement Amount shall be paid pursuant to the terms of the Federal Settlement Agreement and Release.

B.             Cephalon and the Medicaid Participating States agree that the sum of                                                              ($                          ), plus interest in an amount of 4.0% per annum  from January 1, 2008, until and including the day before complete payment is made represents the States’ share (the “Medicaid State Settlement Amount”).    This Medicaid State Settlement Amount shall be paid into an interest bearing account no later than thirty (30) business days after the Federal Settlement Agreement and Release’s Effective Date pursuant to written payment instructions from the National Association of Medicaid Fraud Control Units’ Negotiating Team (“NAMFCU”) for the Medicaid Participating States.

C.             The total portion of the Settlement Amount paid by Cephalon in settlement for the Covered Conduct to the State is $                        , consisting of a portion paid to the State under this Agreement and another portion paid to the Federal government as part of the Federal Settlement Agreement and Release.  The individual portion of the Medicaid State Settlement Amount allocable to the State under this Agreement is the sum of $                    , plus applicable interest.  NAMFCU shall disburse to the State the individual portion of the Medicaid State Settlement Amount allocable to the State after the Effective Date of this Agreement.  If the State does not

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execute this Agreement within 180 days of the Effective Date of the Federal Settlement Agreement and Release, the total portion of the Settlement Amount paid by Cephalon in settlement for the Covered Conduct to the State plus the interest accrued on that amount shall revert to Cephalon.

2.              Contingent upon the Medicaid Participating States receiving the Medicaid State Settlement Amount, the Medicaid Participating States agree to pay, as soon as feasible after receipt, the agreed upon amounts with Relators.

3.              Subject to the exceptions in Paragraph 4 below, and in consideration of the obligations of Cephalon set forth in this Agreement, conditioned upon Cephalon’s payment in full of the Settlement Amount, and subject to Paragraph 13 below (concerning bankruptcy proceedings commenced within 91 days of the Effective Date of this Agreement or any payment under this Agreement), the State, on behalf of itself, and its officers, agents, agencies, political subdivisions and departments, agrees to release Cephalon, its predecessors, and its current and former parents, affiliates, divisions, subsidiaries, successors and assigns, and their current and former directors, officers, and employees (collectively, “Cephalon Released Entities”), from any civil or administrative liability or monetary claim that the State or any of its political subdivisions has or may have for any claims submitted or caused to be submitted to the State Medicaid Program for the Covered Conduct.  The payment of the Settlement Amount fully discharges the Cephalon Released Entities from any obligations to pay Medicaid related restitution, damages, and/or any civil fine or civil penalty to the State for the Covered Conduct.

4.              Notwithstanding any term of this Agreement, the State specifically does not release any person or entity from any of the following claims or liabilities:  (a) any criminal, civil, or administrative claims arising under state revenue codes; (b) any criminal liability not

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specifically released by this Agreement; (c) any civil liability that Cephalon has or may have under any state stat