EARNINGS PER SHARE (“EPS”)

6 Months Ended

Jun. 30, 2011

EARNINGS PER SHARE ("EPS")

EARNINGS PER SHARE ("EPS")

17.  EARNINGS PER SHARE (“EPS”)

Basic income per common share is computed based on the weighted average number of common shares outstanding during the period. Diluted income per common share is computed based on the weighted average number of common shares outstanding and, if there is net income during the period, the dilutive impact of common stock equivalents outstanding during the period.  Common stock equivalents are measured under the treasury stock method.

We have entered into convertible note hedge and warrant agreements that, in combination, have the economic effect of reducing the dilutive impact of the 2.0% Notes, 2.5% Notes and the 2010 Zero Coupon Notes. However, we are required to analyze separately the impact of the convertible note hedge and warrant agreements on diluted EPS. As a result, the purchases of the convertible note hedges are excluded because their impact will be anti-dilutive.  The impact of the warrants is computed using the treasury stock method.

The number of shares included in the diluted EPS calculation for the convertible subordinated notes and warrants is as follows:

	Three months ended				Six months ended
	June 30,				June 30,
	2011		2010		2011		2010
Average market price per share of Cephalon stock	$	78.67	$	61.73	$	68.89	$	64.53
Shares included in diluted EPS calculation (in thousands):
2.0% Notes	7,136		4,275		5,656		4,852
2.5% Notes	891		—		—		—
2010 Notes	—		296		—		438
Warrants related to 2.0% Notes	2,399		—		247		—
Warrants related to 2.5% Notes	—		—		—		—
Warrants related to New Zero Coupon Notes	—		—		—		—
Other	—		1		—		1
Total	10,426		4,572		5,903		5,291

The following is a reconciliation of net income and weighted average common shares outstanding for purposes of calculating basic and diluted income per common share:

	Three months ended				Six months ended
	June 30,				June 30,
	2011		2010		2011		2010
Basic income per common share computation:
Numerator:
Net income used for basic income per common share	$	118,175	$	89,064	$	329,263	$	199,629
Denominator (in thousands):
Weighted average shares used for basic income per common share	76,679		75,192		76,213		75,092
Basic income per common share	$	1.54	$	1.18	$	4.32	$	2.66

	Three months ended				Six months ended
	June 30,				June 30,
	2011		2010		2011		2010
Diluted income per common share computation:
Numerator:
Net income used for basic income per common share	$	118,175	$	89,064	$	329,263	$	199,629
Denominator (in thousands):
Weighted average shares used for diluted income per common share	76,679		75,192		76,213		75,092
Effect of dilutive securities:
Convertible subordinated notes and warrants	10,426		4,572		5,903		5,291
Employee stock options and restricted stock units	1,198		743		755		840
Weighted average shares used for diluted income per common share	88,303		80,507		82,871		81,223
Diluted income per common share	$	1.34	$	1.11	$	3.97	$	2.46

The following reconciliation shows the shares excluded from the calculation of diluted income per common share as the inclusion of such shares would be anti-dilutive:

	Three months ended		Six months ended
	June 30,		June 30,
	2011	2010	2011	2010
Weighted average shares excluded (in thousands):
Convertible subordinated notes and warrants	24,805	28,218	24,805	28,277
Employee stock options	1,049	4,799	3,786	4,825
	25,854	33,017	28,591	33,102