OTHER INFORMATION

PAR PHARMACEUTICAL COMPANIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share Data)

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

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PAR PHARMACEUTICAL COMPANIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands, Except Per Share Data)

(Unaudited)

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

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PAR PHARMACEUTICAL COMPANIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

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

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PAR PHARMACEUTICAL COMPANIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2010

 (Unaudited)

Par Pharmaceutical Companies, Inc. operates primarily through its wholly owned subsidiary, Par Pharmaceutical, Inc. (collectively referred to herein as “the Company,” “we,” “our,” or “us”), in two business segments.  Our generic products division, Par Pharmaceutical (“Par”) develops (including through third party development arrangements and product acquisitions), manufactures and distributes generic pharmaceuticals in the United States.  Our proprietary products division, Strativa Pharmaceuticals (“Strativa”) acquires (generally through third party development arrangements), manufactures and distributes branded pharmaceuticals in the United States.  The products we market are principally in the solid oral dosage form (tablet, caplet and two-piece hard-shell capsule), although we also distribute several oral suspension products, nasal spray products, products delivered by injection, products in the semi-solid form of a cream and a transdermal patch.   

Note 1 - Basis of Presentation:

The accompanying condensed consolidated financial statements at June 30, 2010 and for the three-month and six-month periods ended June 30, 2010 and June 27, 2009 are unaudited; in the opinion of management, however, such statements include all normal recurring adjustments necessary to present fairly the information presented therein.  The condensed consolidated balance sheet at December 31, 2009 was derived from the Company’s audited consolidated financial statements included in the 2009 Annual Report on Form 10-K.  

Beginning in 2010, our fiscal quarters end on each calendar quarter end (March 31st, June 30th, and September 30th).  Historically our fiscal quarters ended on the Saturday closest to each calendar quarter end.  This fiscal calendar change does not affect the Company’s fiscal year end, which remains December 31st.  

Pursuant to accounting requirements of the SEC applicable to Quarterly Reports on Form 10-Q, the accompanying condensed consolidated financial statements and these Notes do not include all disclosures required by U.S. GAAP for audited financial statements.  Accordingly, these statements should be read in conjunction with the Company’s 2009 Annual Report on Form 10-K.  Results of operations for interim periods are not necessarily indicative of those that may be achieved for full fiscal years.

Note 2 - Share-Based Compensation:

We account for share-based compensation as required by FASB ASC 718-10 Compensation – Stock Compensation.  FASB ASC 718-10 requires companies to recognize compensation expense in the amount equal to the fair value of all share-based payments granted to employees.  Under FASB ASC 718-10, we recognize share-based compensation ratably over the service period applicable to the award.  FASB ASC 718-10 also requires that excess tax benefits that have been reflected as operating cash flows be reflected as financing cash flows.    

We grant share-based awards under our various plans, which provide for the granting of non-qualified stock options, restricted stock (including restricted stock with market performance vesting conditions) and restricted stock units to members of our Board of Directors and to our employees.  Stock options, restricted stock and restricted stock units generally vest ratably over four years or sooner and stock options have a maximum term of ten years.   

As of June 30, 2010, there were approximately 4.5 million shares of common stock available for future stock option grants.  We issue new shares of common stock when stock option awards are exercised.  Stock option awards outstanding under our current plans were granted at exercise prices that were equal to the market value of our common stock on the date of grant.  At June 30, 2010, approximately 0.6 million shares remain available under such plans for restricted stock (including restricted stock with market conditions described below) and restricted stock unit grants.

During the second quarter of 2010, we accelerated the vesting of 86 thousand stock options and 19 thousand non-vested restricted shares in connection with the termination of our former chief financial officer.  The effect of this termination resulted in additional compensation expense of approximately $0.8 million for the second quarter of 2010.  

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Stock Options

We use the Black-Scholes stock option pricing model to estimate the fair value of stock option awards with the following weighted average assumptions:

Set forth below is the impact on our results of operations of recording share-based compensation from our stock options for the three-month and six-month periods ended June 30, 2010 and June 27, 2009 ($ amounts in thousands):

The following is a summary of our stock option activity (shares and aggregate intrinsic value in thousands):

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The total fair value of shares vested during the three-month period ended June 30, 2010 was $0.3 million and $0.5 million for the three-month period ended June 27, 2009.  The total fair value of shares vested during the six-month period ended June 30, 2010 was $2.8 million and $2.5 million for the six-month period ended June 27, 2009.  As of June 30, 2010, the total compensation cost related to all non-vested stock options granted to employees but not yet recognized was approximately $10.7 million, net of estimated forfeitures.  This cost will be amortized on a straight-line basis over the remaining weighted average vesting period of 2.4 years.   

Restricted Stock/Restricted Stock Units

Outstanding restricted stock and restricted stock units generally vest ratably over four years.  We granted 0.2 million shares of restricted stock to five senior executives in November 2008 that will be 100% vested after three years.  The related share-based compensation expense is recorded over the requisite service period, which is the vesting period.  The fair value of restricted stock is based on the market value of our common stock on the date of grant.  

The impact on our results of operations of recording share-based compensation from restricted stock for the three-month and six-month periods ended June 30, 2010 and June 27, 2009 was as follows ($ amounts in thousands):

The following is a summary of our restricted stock activity (shares and aggregate intrinsic value in thousands):

The following is a summary of our restricted stock unit activity (shares and aggregate intrinsic value in thousands):

 As of June 30, 2010, the total compensation cost related to all non-vested restricted stock and restricted stock units (excluding restricted stock grants with market conditions described below) granted to employees but not yet recognized was approximately $8.8 million, net of estimated forfeitures; this cost will be amortized on a straight-line basis over the remaining weighted average vesting period of approximately 2.2 years.  

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Restricted Stock Grants With Market Vesting Conditions

In 2008, we issued restricted stock grants with market vesting conditions.  The vesting of restricted stock grants issued to certain of our employees is contingent upon multiple market conditions that are factored into the fair value of the restricted stock at grant date with cliff vesting after three years if the market conditions have been met.  Vesting will occur if the applicable continued employment condition is satisfied and the Total Stockholder Return (“TSR”) on our common stock exceeds a minimum TSR relative to the Company’s stock price at the beginning of the three-year vesting period, the TSR meets or exceeds the median of a defined peer group of approximately 15 companies, and/or the TSR exceeds the Standard and Poor’s 400 Mid Cap Index (“S&P 400”) over the three-year measurement period beginning on January 1 in the year of grant and ending after three years on December 31.  A maximum number of approximately 463 thousand shares of common stock could be issued after the three-year vesting period depending on the achievement of the TSR goals.  No shares of common stock will be issued if the Company’s TSR is below 6% annualized return over the three-year vesting period, except by operation of the provisions of six employment contracts for senior executives under specific termination conditions.  Any shares earned will be distributed after the end of the three-year period, other than those that vest by operation of the provisions of six employment contracts under specific termination conditions, if any.  In all circumstances, restricted stock granted does not entitle the holder the right, or obligate the Company, to settle the restricted stock in cash.  

        The effect of the market conditions on the restricted stock issued to certain employees is reflected in the fair value on the grant date.  The restricted stock grants with market conditions were valued using a Monte Carlo simulation.  The Monte Carlo simulation estimates the fair value based on the expected term of the award, risk-free interest rate, expected dividends, and the expected volatility for the Company, our peer group, and the S&P 400.  The expected term was estimated based on the vesting period of the awards (3 years), the risk-free interest rate was based on the yield on the Federal Reserve treasury rate with a maturity matching the vesting period (2.6%).  The expected dividends were assumed to be zero.  Volatility was based on historical volatility over the expected term (40%).  Restricted stock that included multiple market conditions had a grant date fair value per restricted share of $24.78.  

        The following table summarizes the components of our stock-based compensation related to our restricted stock grants with market conditions recognized in our financial statements for the three-month and six-month periods ended June 30, 2010 and June 27, 2009 ($ amounts in thousands):

         As of June 30, 2010, $0.9 million of total unrecognized compensation cost, net of estimated forfeitures, related to restricted stock grants with market condition vesting, is expected to be recognized over a weighted average period of approximately 0.5 year.

The following is a summary of our restricted stock grants with market condition vesting (shares and aggregate intrinsic value in thousands):

The total grant date fair value of restricted stock grants with market condition vesting granted in January 2008 was $8.9 million.

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Cash-settled Restricted Stock Unit Awards

In January 2010, we granted cash-settled restricted stock unit awards that vest ratably over four years to employees.  The cash-settled restricted stock unit awards are classified as liability awards and are reported within accrued expenses and other current liabilities and other long-term liabilities on the condensed consolidated balance sheet.  Cash settled restricted stock units entitle employees to receive a cash amount determined by the fair value of our common stock on the vesting date.  The fair values of these awards are remeasured at each reporting period (marked to market) until the awards vest and are paid.  Fair value fluctuations are recognized as cumulative adjustments to share-based compensation expense and the related liabilities.  Cash-settled restricted stock unit awards are subject to forfeiture if employment terminates prior to vesting.  Share-based compensation expense for cash-settled restricted stock unit awards are recognized ratably over the service period.  Cash-settled restricted stock unit awards do not decrease shares available for future share-based compensation grants.

The impact on our results of operations of recording share-based compensation from cash-settled restricted stock units for the three-month and six-month periods ended June 30, 2010 and June 27, 2009 was as follows ($ amounts in thousands):

Information regarding activity for cash-settled restricted stock units outstanding is as follows (number of awards in thousands):

The total grant-date fair value of cash-settled restricted stock unit awards granted in 2010 was approximately $2.0 million.  As of June 30, 2010, the aggregate intrinsic value of the outstanding cash-settled restricted stock unit awards was approximately $1.8 million.  As of June 30, 2010, unrecognized compensation costs related to non-vested cash-settled restricted stock units was approximately $1.5 million, net of estimated forfeitures.  This cost will be amortized on a straight-line basis over the remaining vesting period of approximately 3.5 years.

Employee Stock Purchase Program:

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Note 3 - Available for Sale Marketable Debt and Equity Securities:

At June 30, 2010 and December 31, 2009, all of our investments in debt and marketable equity securities were classified as available for sale and, as a result, were reported at their estimated fair values on the condensed consolidated balance sheets.  Refer to Note 4 - “Fair Value Measurements.”  The following is a summary of amortized cost and estimated fair value of our marketable debt and equity securities available for sale at June 30, 2010 ($ amounts in thousands):

All available for sale debt securities are classified as current on our condensed consolidated balance sheet as of June 30, 2010.

We classified our investment in Hana as a non-current asset on our condensed consolidated balance sheet.   As of June 30, 2010 the total amount of unrealized gain that is reflected as part of stockholder’s equity totaled $0.1 million .

The following is a summary of amortized cost and estimated fair value of our investments in debt and marketable equity securities available for sale at December 31, 2009 ($ amounts in thousands):

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Note 4 – Fair Value Measurements:

FASB ASC 820-10 defines fair value as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  FASB ASC 820 requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:

Level 1: Quoted market prices in active markets for identical assets and liabilities.  Active market means a market in which transactions for assets or liabilities occur with “sufficient frequency” and volume to provide pricing information on an ongoing unadjusted basis.  Our Level 1 assets include our investment in Hana Biosciences, Inc that is traded in an active exchange market.  

Level 2:  Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.  Our Level 2 assets primarily include debt securities, including governmental agency and municipal securities, and corporate bonds with quoted prices that are traded less frequently than exchange-traded instruments.  All of our Level 2 asset values are determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data.  The pricing model information is provided by third party entities (e.g., banks or brokers).  In some instances, these third party entities engage external pricing services to estimate the fair value of these securities.  We have a general understanding of the methodologies employed by the pricing services in their pricing models.  We corroborate the estimates of non-binding quotes from the third party entities’ pricing services to an independent source that provides quoted market prices from broker or dealer quotations.  We investigate large differences, if any.  Based on historical differences, we have not been required to adjust quotes provided by the third party entities’ pricing services used in estimating the fair value of these securities.  

Level 3: Unobservable inputs that are not corroborated by market data.

The fair value of our financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2010 were as follows ($ amounts in thousands):

Note 5 - Accounts Receivable:

The Company recognizes revenue for product sales when title and risk of loss have transferred to its customers, when reliable estimates of rebates, chargebacks, returns and other adjustments can be made, and when collectability is reasonably assured. This is generally at the time that products are received by our customers.  Upon recognizing revenue from a sale, the Company records

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estimates for chargebacks, rebates and incentive programs, product returns, cash discounts and other sales reserves that reduce accounts receivable.

The following tables summarize the impact of accounts receivable reserves and allowance for doubtful accounts on the gross trade accounts receivable balances at each balance sheet date ($ amounts in thousands):

The following tables summarize the activity for the six months ended June 30, 2010 and the six months ended June 27, 2009,  in the accounts affected by the estimated provisions described below ($ amounts in thousands):

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(1)

Unless specific in nature, the amount of provision or reversal of reserves related to prior periods for chargebacks is not determinable on a product or customer specific basis; however, based upon historical analysis and analysis of activity in subsequent periods, we have determined that our chargeback estimates remain reasonable.

(2)

Includes amounts due to customers for which no underlying accounts receivable exists and is principally comprised of Medicaid rebates and rebates due under other U.S. Government pricing programs, such as TriCare, and the Department of Veterans Affairs.  

(3)

During the first quarter of 2010, the Company settled a dispute with a major customer and as a result recorded an additional reserve of $1.3 million.

The Company sells its products directly to wholesalers, retail drug store chains, drug distributors, mail order pharmacies and other direct purchasers as well as customers that purchase its products indirectly through the wholesalers, including independent pharmacies, non-warehousing retail drug store chains, managed health care providers and other indirect purchasers.  The Company often negotiates product pricing directly with health care providers that purchase products through the Company’s wholesale customers. In those instances, chargeback credits are issued to the wholesaler for the difference between the invoice price paid to the Company by our wholesale customer for a particular product and the negotiated contract price that the wholesaler’s customer pays for that product.  Approximately 61% of our net product sales were derived from the wholesale distribution channel for the three months ended June 30, 2010 and 44% for the three months ended June 27, 2009.  The information that the Company considers when establishing its chargeback reserves includes contract and non-contract sales trends, average historical contract pricing, actual price changes, processing time lags and customer inventory information from its three largest wholesale customers.  The Company’s chargeback provision and related reserve vary with changes in product mix, changes in customer pricing and changes to estimated wholesaler inventory.  

Customer rebates and incentive programs are generally provided to customers as an incentive for the customers to continue carrying the Company’s products or replace competing products in their distribution channels with our products.  Rebate programs are based on a customer’s dollar purchases made during an applicable monthly, quarterly or annual period.  The Company also provides indirect rebates, which are rebates paid to indirect customers that have purchased the Company’s products from a wholesaler under a contract with us.  The incentive programs include stocking or trade show promotions where additional discounts may be given on a new product or certain existing products as an added incentive to stock the Company’s products.  We may, from time to time, also provide price and/or volume incentives on new products that have multiple competitors and/or on existing products that confront new competition in order to attempt to secure or maintain a certain market share.  The information that the Company’s considers when establishing its rebate and incentive program reserves are rebate agreements with and purchases by each customer, tracking and analysis of promotional offers, projected annual sales for customers with annual incentive programs, actual rebates and incentive payments made, processing time lags, and for indirect rebates, the level of inventory in the distribution channel that will be subject to indirect rebates.  We do not provide incentives designed to increase shipments to our customers that we believe would result in out-of-the-ordinary course of business inventory for them.  The Company regularly reviews and monitors estimated or actual customer inventory information at its three largest wholesale customers for its key products to ascertain whether customer inventories are in excess of ordinary course of business levels.

Pursuant to a drug rebate agreement with the Centers for Medicare and Medicaid Services, TriCare and similar supplemental agreements with various states, the Company provides a rebate on drugs dispensed under such government programs.  The Company determines its estimate of the Medicaid rebate accrual primarily based on historical experience of claims submitted by the various states and any new information regarding changes in the Medicaid program that might impact the Company’s provision for Medicaid rebates.  In determining the appropriate accrual amount we consider historical payment rates; processing lag for outstanding claims and payments; and levels of inventory in the distribution channel.  The Company reviews the accrual and assumptions on a quarterly basis against actual claims data to help ensure that the estimates made are reliable.  On January 28, 2008, the Fiscal Year 2008 National Defense Authorization Act was enacted, which expands TriCare to include prescription drugs dispensed by TriCare retail network pharmacies.  TriCare rebate accruals reflect this program expansion and are based on actual and estimated rebates on Department of Defense eligible sales.

The Company accepts returns of product according to the following criteria: (i) the product returns must be approved by authorized personnel with the lot number and expiration date accompanying any request and (ii) we generally will accept returns of products from any customer and will provide the customer with a credit memo for such returns if such products are returned between six months prior to, and 12 months following, such products’ expiration date. The Company records a provision for product returns based on historical experience, including actual rate of expired and damaged in-transit returns, average remaining shelf-lives of products sold, which generally range from 12 to 48 months, and estimated return dates.  Additionally, we consider other factors when estimating its current period return provision, including levels of inventory in the distribution channel, significant market changes that may impact future expected returns, and actual product returns, and may record additional provisions for specific returns that it believes are not covered by the historical rates.

The Company offers cash discounts to its customers, generally 2% of the sales price, as an incentive for paying within invoice terms, which generally range from 30 to 90 days.  The Company accounts for cash discounts by reducing accounts receivable by the full amount of the discounts that we expect our customers to take.  In addition to the significant gross-to-net sales adjustments

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described above, we periodically make other sales adjustments.  The Company generally accounts for these other gross-to-net adjustments by establishing an accrual in the amount equal to its estimate of the adjustments attributable to the sale.

The Company may at its discretion provide price adjustments due to various competitive factors, through shelf-stock adjustments on customers’ existing inventory levels.  There are circumstances under which we may not provide price adjustments to certain customers as a matter of business strategy, and consequently may lose future sales volume to competitors and risk a greater level of sales returns on products that remain in the customer’s existing inventory.    

As detailed above, we have the experience and access to relevant information that we believe are necessary to reasonably estimate the amounts of such deductions from gross revenues.  Some of the assumptions we use for certain of our estimates are based on information received from third parties, such as wholesale customer inventories and market data, or other market factors beyond our control.  The estimates that are most critical to the establishment of these reserves, and therefore, would have the largest impact if these estimates were not accurate, are estimates related to contract sales volumes, average contract pricing, customer inventories and return volumes.  The Company regularly reviews the information related to these estimates and adjusts its reserves accordingly, if and when actual experience differs from previous estimates.  With the exception of the product returns allowance, the ending balances of accounts receivable reserves and allowances generally are processed during a two-month to four-month period.

Use of Estimates in Reserves

We believe that our reserves, allowances and accruals for items that are deducted from gross revenues are reasonable and appropriate based on current facts and circumstances.  It is possible however, that other parties applying reasonable judgment to the same facts and circumstances could develop different allowance and accrual amounts for items that are deducted from gross revenues. Additionally, changes in actual experience or changes in other qualitative factors could cause our allowances and accruals to fluctuate, particularly with newly launched or acquired products.  We review the rates and amounts in our allowance and accrual estimates on a quarterly basis. If future estimated rates and amounts are significantly greater than those reflected in our recorded reserves, the resulting adjustments to those reserves would decrease our reported net revenues; conversely, if actual product returns, rebates and chargebacks are significantly less than those reflected in our recorded reserves, the resulting adjustments to those reserves would increase our reported net revenues. If we were to change our assumptions and estimates, our reserves would change, which would impact the net revenues that we report.  We regularly review the information related to these estimates and adjust our reserves accordingly, if and when actual experience differs from previous estimates.  

In 2009, Par launched clonidine and some other lower volume generic products.  Strativa acquired and relaunched Nascobal® Nasal Spray in the second quarter of 2009.  As is customary and in the ordinary course of business, our revenue that has been recognized for these product launches included initial trade inventory stocking that we believed was commensurate with new product introductions.  At the time of each product launch, we were able to make reasonable estimates of product returns, rebates, chargebacks and other sales reserves by using historical experience of similar product launches and significant existing demand for the products.

Major Customers – Gross Accounts Receivable

Note 6 - Inventories:

($ amounts in thousands)

Inventory write-offs (inclusive of pre-launch inventories detailed below) were $2.5 million for the three months ended June 30, 2010 and $2.2 million for the three months ended June 27, 2009.  Inventory write-offs were $4.2 million for the six months ended June 30, 2010 and $4.7 million for the six months ended June 27, 2009.

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Par capitalizes inventory costs associated with certain generic products prior to regulatory approval and product launch, based on management's judgment of reasonably certain future commercial use and net realizable value, when it is reasonably certain that the pre-launch inventories will be saleable.  The determination to capitalize is made once Par (or its third party development partners) has filed an Abbreviated New Drug Application (“ANDA”) that has been acknowledged by the FDA as containing sufficient information to allow the FDA to conduct their review in an efficient and timely manner and management is reasonably certain that all regulatory and legal hurdles will be cleared.  This determination is based on the particular facts and circumstances relating to the expected FDA approval of the generic drug product being considered, and accordingly, the time frame within which the determination is made varies from product to product.  Par could be required to write down previously capitalized costs related to pre-launch inventories upon a change in such judgment, or due to a denial or delay of approval by regulatory bodies, or a delay in commercialization, or other potential factors.  

Strativa also capitalizes inventory costs associated with in-licensed branded products subsequent to FDA approval but prior to product launch based on management’s judgment of probable future commercial use and net realizable value.  We believe that numerous factors must be considered in determining probable future commercial use and net realizable value including, but not limited to, Strativa’s limited number of historical product launches, as well as the ability of third party partners to successfully manufacture commercial quantities of product.  Strativa could be required to expense previously capitalized costs related to pre-launch inventory upon a change in such judgment, due to a delay in commercialization, product expiration dates, projected sales volume, estimated selling price or other potential factors.  

As of June 30, 2010, we had approximately $4.0 million in inventories related to products that were not yet available to be sold.  

The amounts in the table below are also included in the total inventory balances presented above.

Pre-Launch Inventories

($ amounts in thousands)

Pre-launch inventories at June 30, 2010 were mainly comprised of in-house developed generic products and in-licensed FDA approved brand products.  Write-offs of pre-launch inventories were $0.1 million for the quarter ended June 30, 2010.  There were no write-offs of pre-launch inventories for the quarter ended June 27, 2009.  Write-offs of pre-launch inventories were $0.1 million for the year-to-date period ended June 30, 2010 and $0.4 million, net of partner allocation, for the year-to-date period ended June 27, 2009.

Note 7 – Property, Plant and Equipment, net:

($ amounts in thousands)

Depreciation and amortization expense related to property, plant and equipment was $3.5 million for the three months ended June 30, 2010 and $3.0 million for the three months ended June 27, 2009.  Depreciation and amortization expense related to property,

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plant and equipment was $6.8 million for the six months ended June 30, 2010 and $5.5 million for the six months ended June 27, 2009.

Note 8 - Intangible Assets, net:

($ amounts in thousands)

Outstanding options of 1.9 million as of June 30, 2010 and 4.0 million as of June 27, 2009 were not included in the computation of diluted earnings per share because their exercise prices were greater than the average market price of the common stock during the respective periods and their inclusion would, therefore, have been anti-dilutive.  Similarly, outstanding warrants sold concurrently with the sale of the senior subordinated convertible notes in September 2003 and issued in conjunction with the acquisition of Kali in June 2004 were not included in the computation of diluted earnings per share as of June 30, 2010 and June 27, 2009.  The warrants related to the senior subordinated convertible notes are exercisable for an aggregate of 885 thousand shares of common stock at an exercise price of $105.20 per share and expire in September 2010.  The warrants related to the Kali acquisition are exercisable for an aggregate of 150 thousand shares of common stock at an exercise price of $47.00 per share and expire in June 2011.

Note 13 - Commitments, Contingencies and Other Matters:

Legal Proceedings

Unless otherwise indicated in the details provided below, we cannot predict with certainty the outcome or the effects of the litigations described below.  The outcome of these litigations could include substantial damages, the imposition of substantial fines, penalties, and injunctive or administrative remedies; however, unless otherwise indicated below, at this time we are not able to estimate the possible loss or range of loss, if any, associated with these legal proceedings.  From time to time, we may settle or otherwise resolve these matters on terms and conditions that we believe are in the best interests of the Company.  Resolution of any or all claims, investigations, and legal proceedings, individually or in the aggregate, could have a material adverse effect on our results of operations, cash flows or financial condition.  

Corporate Litigation

We and certain of our former executive officers have been named as defendants in consolidated class action lawsuits filed on behalf of purchasers of our common stock between July 23, 2001 and July 5, 2006. The lawsuits followed our July 5, 2006 announcement regarding the restatement of certain of our financial statements and allege that we and certain members of our then management engaged in violations of the Exchange Act, by issuing false and misleading statements concerning our financial condition

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and results of operations.  The class actions are pending in the U.S. District Court for the District of New Jersey.  On July 23, 2008, co-lead plaintiffs filed a Second Consolidated Amended complaint.  On September 30, 2009, the Court granted a motion to dismiss all claims as against Kenneth Sawyer but denied the motion as to the Company, Dennis O’Connor, and Scott Tarriff.  We and Messrs. O’Connor and Tarriff have answered the Amended complaint and intend to vigorously defend the consolidated class action.

Patent Related Matters

On April 28, 2006, CIMA Labs, Inc. (“CIMA”) and Schwarz Pharma, Inc. (“Schwarz Pharma”) filed separate lawsuits against us in the U. S. District Court for the District of New Jersey.  CIMA and Schwarz Pharma each have alleged that we infringed U.S. Patent Nos. 6,024,981 (the “’981 patent”) and 6,221,392 (the “’392 patent”) by submitting a Paragraph IV certification to the FDA for approval of alprazolam orally disintegrating tablets.  CIMA owns the ’981 and ’392 patents and Schwarz Pharma is CIMA’s exclusive licensee.  The two lawsuits were consolidated on January 29, 2007.  In response to the lawsuit, we have answered and counterclaimed denying CIMA’s and Schwarz Pharma’s infringement allegations, asserting that the ’981 and ’392 patents are not infringed and are invalid and/or unenforceable. All 40 claims in the ’981 patent were rejected in two non-final office actions in a reexamination proceeding at the United States Patent and Trademark Office (“USPTO”) on February 24, 2006 and on February 24, 2007. The ‘392 patent is also the subject of a reexamination proceeding.  On July 10, 2008, the USPTO rejected with finality all claims pending in both the ‘392 and ‘981 patents.  On September 28, 2009, the USPTO Board of Appeals affirmed the Examiner’s rejection of all claims in the ‘981 patent; however, the Board of Appeals has yet to render an opinion on the claims of the ‘392 patent.  Par intends to vigorously defend this lawsuit and pursue its counterclaims.

We entered into a licensing agreement with developer Paddock Laboratories, Inc. (“Paddock”) to market testosterone 1% gel, a generic version of Unimed Pharmaceuticals, Inc.’s (“Unimed”) product Androgel^®.  As a result of the filing of an ANDA, Unimed and Laboratories Besins Iscovesco (“Besins”), co-assignees of the patent-in-suit, filed a lawsuit against Paddock in the U. S. District Court for the Northern District of Georgia, alleging patent infringement, on August 22, 2003 (the “Paddock litigation”).  On September 13, 2006, we acquired from Paddock all rights to the ANDA for the testosterone 1% gel, and the Paddock litigation was resolved by a settlement and license agreement that terminates all on-going litigation and permits Par to launch the generic version of the product no earlier than August 31, 2015, and no later than February 28, 2016, assuring our ability to market a generic version of Androgel^® well before the expiration of the patents at issue.  On March 7, 2007, we were issued a Civil Investigative Demand seeking information and documents in connection with the court-approved settlement in 2006 of the patent dispute.  On January 30, 2009, the Bureau of Competition for the Federal Trade Commission (“FTC”) filed a lawsuit against us in the U.S. District Court for the Central District of California alleging violations of antitrust laws stemming from our court-approved settlement in the Paddock litigation, and several distributors and retailers followed suit with a number of private plaintiffs’ complaints beginning in February 2009.  On July 20, 2009, we filed a motion to dismiss the FTC’s case and on September 1, 2009, filed a motion to dismiss the private plaintiffs’ cases in the U.S. District Court for the Northern District of Georgia.  On February 23, 2010, the U.S. District Court for the Northern District of Georgia granted our motion to dismiss the FTC’s claims and granted in part and denied in part our motion to dismiss the claims of the private plaintiffs.  On June 10, 2010, the FTC appealed the District Court’s dismissal of the FTC’s claims to the U.S. Court of Appeals for the 11th Circuit.  We believe we have complied with all applicable laws in connection with the court-approved settlement and intend to continue to vigorously defend these actions.

On May 9, 2007, Purdue Pharma Products L.P. (“Purdue”), Napp Pharmaceutical Group Ltd. (“Napp”), Biovail Laboratories International SRL (“Biovail”), and Ortho-McNeil, Inc. (“Ortho-McNeil”) filed a lawsuit against us in the U. S. District Court for the District of Delaware.  The complaint alleges infringement of U.S. Patent No. 6,254,887 (the “’887 patent”) because we submitted a Paragraph IV certification to the FDA for approval of 200 mg extended release tablets containing tramadol hydrochloride.  On May 30, 2007 and October 24, 2007, the complaint was amended to include claims of infringement of the ‘887 patent by our 100 mg and 300 mg extended release tablets containing tramadol hydrochloride, respectively. On April 22, 2009, our bench trial in the U.S. District Court of Delaware concluded and we filed post-trial briefs on May 23, 2009 and replies on June 15, 2009.   On August 14, 2009, the District Court ruled in favor of us on the issue of invalidity, while ruling in favor of plaintiffs on the issues of infringement and inequitable conduct.  On September 3, 2009, plaintiffs filed their notice of appeal to the U.S. Court of Appeals for the Federal Circuit while we filed our notice of cross appeal on September 14, 2009.  On June 3, 2010, the Federal Circuit Court of Appeals ruled in our favor, affirming the Delaware court’s decision of invalidity of the patents in suit, while also affirming the Delaware court’s decision in favor of the plaintiffs on inequitable conduct.

On July 6, 2007, Sanofi-Aventis and Debiopharm, S.A. filed a lawsuit against us and our development partner, MN Pharmaceuticals ("MN"), in the U. S. District Court for the District of New Jersey.  The complaint alleges infringement of U.S. Patent Nos. 5,338,874 (the “’874 patent”) and 5,716,988 (the “’988 patent”) because we and MN submitted a Paragraph IV certification to the FDA for approval of 50 mg/10 ml, 100 mg/20 ml, and 200 mg/40 ml oxaliplatin by injection.  On January 14, 2008, following MN's amendment of its ANDA to include oxaliplatin injectable 5 mg/ml, 40 ml vial, Sanofi-Aventis filed a complaint asserting infringement of the '874 and the '988 patents.  We and MN filed our Answer and Counterclaim on February 20, 2008.  On June 18, 2009, the U.S. District Court granted summary judgment of non-infringement to several defendants including us on the ’874 patent but has not rendered a summary judgment decision regarding the ’988 patent to date.  On September 10, 2009, the U.S. Court of Appeals for the Federal Circuit reversed the New Jersey District Court and remanded the case for further proceedings.  On September 24, 2009, Sanofi-Aventis filed a motion for preliminary injunction against defendants who entered the market following the New Jersey District Court’s summary judgment ruling.  On November 19, 2009, the New Jersey District Court dismissed all pending motions for summary

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judgment with possibility of the motions being renewed upon letter request to the Court.  On January 11, 2010, the New Jersey District Court issued an order requiring all parties to complete settlement negotiations by January 29, 2010, with a hearing scheduled on February 8, 2010 for those parties that have not settled by that date.  On April 14, 2010, the U.S. District Court for the District of New Jersey entered a consent judgment and order agreed to by Par, MN, and the plaintiffs, which agreement settled the pending litigation.  In view of this agreement, Par and MN will enter the market with generic Eloxatin on August 9, 2012 or earlier depending on certain circumstances.

 On October 1, 2007, Elan Corporation, PLC (“Elan”) filed a lawsuit against us and our development partners, IntelliPharmaCeutics Corp., and IntelliPharmaCeutics Ltd. ("IPC") in the U. S. District Court for the District of Delaware.  On October 5, 2007, Celgene Corporation (“Celgene”) and Novartis filed a lawsuit against IPC in the U. S. District Court for the District of New Jersey.  The complaint in the Delaware case alleged infringement of U.S. Patent Nos. 6,228,398 and 6,730,325 because we submitted a Paragraph IV certification to the FDA for approval of 5, 10, 15, and 20 mg dexmethylphenidate hydrochloride extended release capsules.  The complaint in the New Jersey case alleged infringement of U.S. Patent Nos. 6,228,398; 6,730,325; 5,908,850; 6,355,656; 6,528,530; 5,837,284; and 6,635,284 because Par and IPC submitted a Paragraph IV certification to the FDA for approval of 5, 10, 15, and 20 mg dexmethylphenidate extended release capsules.  We and IPC filed an Answer and Counterclaims in both the Delaware case and the New Jersey case.  On February 20, 2008, the judge in the Delaware litigation consolidated four related cases pending in Delaware.  On March 5, 2010 and March 15, 2010, the U. S. District Courts for the Districts of New Jersey and Delaware, respectively, entered stays of the litigation between plaintiffs and Par/IPC in view of settlement agreements reached by the parties.  The settlement agreements are proceeding through customary government review and their terms are confidential.

On September 13, 2007, Santarus, Inc. (“Santarus”), and The Curators of the University of Missouri (“Missouri”) filed a lawsuit against us in the U. S. District Court for the District of Delaware.  The complaint alleges infringement of U.S. Patent Nos. 6,699,885; 6,489,346; and 6,645,988 because we submitted a Paragraph IV certification to the FDA for approval of 20 mg and 40 mg omeprazole/sodium bicarbonate capsules.  On December 20, 2007, Santarus, Inc. and Missouri filed a second lawsuit against us in the U. S. District Court for the District of Delaware alleging infringement of the patents because we submitted a Paragraph IV certification to the FDA for approval of 20 mg and 40 mg omeprazole/sodium bicarbonate powders for oral suspension.  We filed an Answer and Counterclaims in this action as well.  On March 4, 2008, the cases pertaining to our ANDAs for omeprazole capsules and omeprazole oral suspension were consolidated for all purposes.  The Delaware District Court conducted a bench trial from July 13-17, 2009 and found for Santarus only on the issue of infringement, while not rendering an opinion on the issues of invalidity and unenforceability.  We filed our proposed findings of fact and conclusions of law with the Delaware court on August 14, 2009.  On January 15, 2010, Santarus filed a motion for preliminary injunction with the Delaware Court.  On April 14, 2010, the U. S. District Court for the District of Delaware ruled in favor of Par, finding that plaintiffs’ patents were invalid as being obvious and without adequate written description.  On May 27, 2010, Santarus filed a notice of appeal to the U.S. Court of Appeals for the Federal Circuit appealing the Delaware District Court’s decision of invalidity of the plaintiffs’ patents.  On July 1, 2010, Par launched its generic Omeprazole/Sodium Bicarbonate product.  We will continue to vigorously defend the appeal. 

On December 11, 2007, AstraZeneca Pharmaceuticals, LP, AstraZeneca UK Ltd., IPR Pharmaceuticals, Inc. and Shionogi Seiyaku Kabushiki Kaisha filed a lawsuit against us in the U. S. District Court for the District of Delaware.  The complaint alleges patent infringement because we submitted a Paragraph IV certification to the FDA for approval of 5 mg, 10 mg, 20 mg and 40 mg rosuvastatin calcium tablets.  We filed an Answer and Counterclaims.  The eight (8) day bench trial commenced on February 22, 2010 and concluded on March 3, 2010.  On June 29, 2010, the District Court ruled in favor of the plaintiffs and against us, stating that the plaintiffs’ patents were infringed, not invalid, and not unenforceable. We intend to appeal this decision and continue to defend these actions vigorously.

On November 14, 2008, Pozen, Inc. (“Pozen”) filed a lawsuit against us in the U. S. District Court for the Eastern District of Texas.  The complaint alleges infringement of U.S. Patent Nos. 6,060,499; 6,586,458; and 7,332,183 because Par submitted a Paragraph IV certification to the FDA for approval of 500 mg/85 mg naproxen sodium/sumatriptan succinate oral tablets.  Par filed an Answer and Counterclaims on December 8, 2008.  On March 17, 2009, Par filed an Amended Answer and Counterclaim in order to join GlaxoSmithKline (“GSK”) as a counterclaim defendant in this litigation.  On April 28, 2009, GSK was dismissed from the case by the Court, but will be bound by its decision and will be required to produce witnesses and materials during discovery.  A Markman hearing was held on February 25, 2010, and a provisional Markman order was issued by the Court on March 26, 2010.  The Court has scheduled a Pre-trial conference for October 5, 2010 and a 5-day bench trial for October 12, 2010.  Par intends to defend this action vigorously and pursue its counterclaims against Pozen.  

On April 29, 2009, Pronova BioPharma ASA (“Pronova”) filed a lawsuit against us in the U. S. District Court for the District of Delaware.  The complaint alleges infringement of U.S. Patent Nos. 5,502,077 and 5,656,667 because we submitted a Paragraph IV certification to the FDA for approval of omega-3-acid ethyl esters oral capsules.  We filed an Answer May 19, 2009 and the court has scheduled a Markman hearing for October 22, 2010, a pre-trial conference for March 15, 2011, and a two-week bench trial for March 28, 2011.  On June 8, 2010, a new patent that was later listed in the Orange Book was issued to Pronova.  We intend to defend this action vigorously and pursue our defenses and counterclaims against Pronova.   

On July 1, 2009, Alcon Research Ltd. (“Alcon”) filed a lawsuit against us in the U. S. District Court for the District of Delaware.  The complaint alleges infringement of U.S. Patent Nos. 5,510,383; 5,631,287; 5,849,792; 5,889,052; 6,011,062; 6,503,497;

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and 6,849,253 because we submitted a Paragraph IV certification to the FDA for approval of 0.004% travoprost ophthalmic solutions and 0.004% travoprost ophthalmic solutions (preserved).  We filed an Answer on August 21, 2009.  The court has scheduled the end of fact discovery for September 30, 2010; the end of expert discovery for February 28, 2011; and trial for May 2 through May 19, 2011.  We intend to defend this action vigorously and pursue our defenses and counterclaims against Alcon.

Industry Related Matters

Beginning in September 2003, we, along with numerous other pharmaceutical companies, has been named as a defendant in actions brought by a number of state Attorneys General and municipal bodies within the state of New York, as well as a federal qui tam action brought on behalf of the United States by the pharmacy Ven-A-Care of the Florida Keys, Inc. ("Ven-A-Care") alleging generally that the defendants defrauded the state Medicaid systems by purportedly reporting “Average Wholesale Prices” (“AWP”) and/or “Wholesale Acquisition Costs” that exceeded the actual selling price of the defendants’ prescription drugs.  To date, we have been named as a defendant in substantially similar civil law suits filed by the Attorneys General of Alabama, Alaska, Hawaii, Idaho, Illinois, Iowa, Kentucky, Massachusetts, Mississippi, South Carolina, Texas and Utah, and also by the city of New York, 46 counties across New York State and Ven-A-Care.  These cases generally seek some combination of actual damages, and/or double damages, treble damages, compensatory damages, statutory damages, civil penalties, disgorgement of excessive profits, restitution, disbursements, counsel fees and costs, litigation expenses, investigative costs, injunctive relief, punitive damages, imposition of a constructive trust, accounting of profits or gains derived through the alleged conduct, expert fees, interest and other relief that the court deems proper. Several of these cases have been transferred to the AWP multi-district litigation proceedings pending in the U.S. District Court for the District of Massachusetts for pre-trial proceedings.  The case brought by the state of Mississippi will be litigated in the Chancery Court of Rankin County, Mississippi and the federal case brought by Ven-A-Care will be litigated in the U. S. District Court for the District of Massachusetts.  The other cases will likely be litigated in the state or federal courts in which they were filed.  To date, several of the cases in which we have been named a defendant have been scheduled for trial, including the civil law suits filed by the state Attorneys General of Massachusetts, Kentucky and Idaho, with trials commencing on January 3, 2011, May 10, 2011 and September 26, 2011 respectively.  In the Texas suit, the trial is expected to commence in the first quarter of 2011. In the Alabama suit, the Supreme Court of Alabama entered an order staying all proceedings in the State’s case against us on May 25, 2010.  On June 10, 2010, the State moved to lift the stay ordered by the Supreme Court of Alabama, and we filed an opposition to the State’s motion on June 15, 2010.  In the Utah suit, the time for responding to the complaint has not yet elapsed.  In each of the remaining matters, we have either moved to dismiss the complaints or answered the complaints denying liability.  We intend to defend each of these actions vigorously.

In the civil lawsuit brought by the City of New York and certain counties within the State of New York, on January 27, 2010, the court entered an order denying the defendants’ motion for summary judgment on plaintiffs’ claims related to the federal upper limit ("FUL") and granting the plaintiffs’ motion for partial summary judgment on FUL-based claims under New York Social Services Law § 145-b for nine drugs manufactured by thirteen defendants, including the Company.  The court has reserved judgment regarding damages until after further briefing.  On February 8, 2010, certain defendants, including the Company, filed a motion to amend the order for certification for immediate appeal, and such motion to amend was opposed by the plaintiffs on February 22, 2010.

In addition, the Attorneys General of Florida, Indiana and Virginia and the United States Office of Personnel Management (the “USOPM”) have issued subpoenas, and the Attorneys General of Michigan, Tennessee and Texas have issued civil investigative demands, to Par.  The demands generally request documents and information pertaining to allegations that certain sales and marketing practices of Par caused pharmacies to substitute ranitidine capsules for ranitidine tablets, fluoxetine tablets for fluoxetine capsules and two 7.5 mg buspirone tablets for one 15 mg buspirone tablet under circumstances in which some state Medicaid programs at various times reimbursed the new dosage form at a higher rate than the dosage form being substituted.  Par has provided, or is in the process of providing, documents in response to these subpoenas to the respective Attorneys General and the USOPM. During the second quarter of 2010 Par has engaged the respective Attorneys General, the USOPM and the Department of Justice, led by the U.S. Attorneys in the Northern District of Illinois, in discussions concerning these allegations and will continue to cooperate if called upon to do so.

Department of Justice Matter

On March 19, 2009, we were served with a subpoena by the Department of Justice requesting documents related to Strativa’s marketing of Megace^® ES.  The subpoena indicated that the Department of Justice is currently investigating promotional practices in the sales and marketing of Megace^® ES.  We have provided, or are in the process of providing, documents in response to this subpoena to the Department of Justice and will continue to cooperate with the Department of Justice in this inquiry if called upon to do so.

Other

We are, from time to time, a party to certain other litigations, including product liability litigations.  We believe that these litigations are part of the ordinary course of our business and that their ultimate resolution will not have a material adverse effect on our financial condition, results of operations or liquidity. We intend to defend or, in cases where we are the plaintiff, to prosecute these litigations vigorously.

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Contingency

Note 14 – Discontinued Operations – Related Party Transaction:

In January 2006, we divested FineTech Laboratories, Ltd (“FineTech”), effective December 31, 2005.  We transferred the business for no proceeds to Dr. Arie Gutman, president and chief executive officer of FineTech.  Dr. Gutman also resigned from our Board of Directors.  In 2010 and 2009 we recorded tax amounts to discontinued operations for interest related to contingent tax liabilities.  In addition, in the three month period ended June 30, 2010, we recognized a tax benefit of $0.4 million to discontinued operations due to the resolution of certain tax contingencies.  The results of FineTech operations are classified as discontinued for all periods presented because we have no continuing involvement in FineTech.

Note 15 - Segment Information:

We operate in two reportable business segments: generic pharmaceuticals (referred to as “Par Pharmaceutical” or “Par”) and branded pharmaceuticals (referred to as “Strativa Pharmaceuticals” or “Strativa”).  Branded products are marketed under brand names through marketing programs that are designed to generate physician and consumer loyalty.  Branded products generally are patent protected, which provides a period of market exclusivity during which they are sold with little or no competition.  Generic pharmaceutical products are the chemical and therapeutic equivalents of corresponding brand drugs.  The Drug Price Competition and Patent Term Restoration Act of 1984 provides that generic drugs may enter the market upon the approval of an ANDA and the expiration, invalidation or circumvention of any patents on corresponding brand drugs, or the expiration of any other market exclusivity periods related to the brand drugs.    

Our business segments were determined based on management’s reporting and decision-making requirements in accordance with FASB ASC 280-10 Segment Reporting.  We believe that our generic products represent a single operating segment because the demand for these products is mainly driven by consumers seeking a lower cost alternative to brand name drugs.  Par’s generic drugs are developed using similar methodologies, for the same purpose (e.g., seeking bioequivalence with a brand name drug nearing the end of its market exclusivity period for any reason discussed above).  Par’s generic products are produced using similar processes and standards mandated by the FDA, and Par’s generic products are sold to similar customers.  Based on the economic characteristics, production processes and customers of Par’s generic products, management has determined that Par’s generic pharmaceuticals are a single reportable business segment.  Our chief operating decision maker does not review the Par (generic) or Strativa (brand) segments in any more granularity, such as at the therapeutic or other classes or categories.  Certain of our expenses, such as the direct sales force and other sales and marketing expenses and specific research and development expenses, are charged directly to either of the two segments.   Other expenses, such as general and administrative expenses and non-specific research and development expenses are allocated between the two segments based on assumptions determined by management.

  The financial data for the two business segments are as follows ($ amounts in thousands):