ENDO HEALTH SOLUTIONS INC. – 10-Q – Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 The following Management's Discussion and Analysis of Financial Condition and Results of Operations describes the principal factors affecting the results of operations, liquidity and capital resources, and critical accounting estimates of Endo. This discussion should be read in conjunction with the accompanying quarterly unaudited Condensed Consolidated Financial Statements and our Annual Report on Form 10-K, for the year ended December 31, 2011 (Annual Report). Our Annual Report includes additional information about our significant accounting policies, practices and the transactions that underlie our financial results, as well as a detailed discussion of the most significant risks and uncertainties associated with our financial and operating results. Except for the historical information contained in this Report, this Report, including the following discussion, contains forward-looking statements that involve risks and uncertainties. See "Forward-Looking Statements" beginning on page i of this Report. EXECUTIVE SUMMARY About the Company At our Annual Meeting of Stockholders on May 23, 2012, our stockholders approved the proposal to amend and restate our Amended and Restated Certificate of Incorporation to change our name from Endo Pharmaceuticals Holdings Inc. to Endo Health Solutions Inc, which we refer to herein as "Endo", "we", "us", or the "Company". This change became effective on May 23, 2012. Concurrently with this change, the Company also changed the names of its business segments. Effective May 23, 2012, the names of our business segments are Endo Pharmaceuticals (formerly Branded Pharmaceuticals), Qualitest (formerly Generics), AMS (formerly Devices) and HealthTronics (formerly Services). Endo Health Solutions Inc. is a U.S. based, specialty healthcare solutions company with a diversified business model, operating in four key business segments-Endo Pharmaceuticals, Qualitest, AMS and HealthTronics. Our Endo Pharmaceuticals and Qualitest segments offer a variety of branded and generic pharmaceutical products in multiple therapeutic areas. AMS provides technology solutions to physicians treating men's and women's pelvic health conditions. Finally, HealthTronics provides urological services, products and support systems to urologists, hospitals, surgery centers and clinics. As a combined entity, we deliver comprehensive healthcare solutions across our diversified businesses in key therapeutic areas, including pain and urology, and believe we are positioned to address the changing economics that are driving the continued transformation of the U.S. healthcare environment. We believe our diversified business model enables us to strengthen our partnerships with providers, payers and patients by offering multiple products and platforms to deliver healthcare solutions. We have a portfolio of branded pharmaceuticals that includes established brand names such as Lidoderm®, Opana® ER, Voltaren® Gel, Percocet®, Frova®, Supprelin® LA, Vantas®, Valstar® and Fortesta® Gel. Endo Pharmaceuticals comprised approximately 56% and 55% of our revenues for the three and nine months ended September 30, 2012, respectively, compared to 56% and 62%, respectively, in the comparable 2011 periods. Lidoderm® comprised approximately 32% and 30% of our revenues for the three and nine months ended September 30, 2012, respectively, compared to 27% and 31%, respectively, for the three and nine months ended September 30, 2011. Our non-branded Qualitest portfolio, which accounted for 22% and 21%, respectively, of our revenues for the three and nine months ended September 30, 2012 and 19% and 22%, respectively, of our revenues for the three and nine months ended September 30, 2011, currently consists of products primarily focused on pain management. We generally focus on selective generics that have one or more barriers to market entry, such as complex formulation, regulatory or legal challenges or difficulty in raw material sourcing. AMS accounted for 15% and 17% of our revenues for the three and nine months ended September 30, 2012, respectively, compared to 17% and 8%, respectively, for the three and nine months ended September 30, 2011. HealthTronics accounted for the remaining revenue for the three and nine months ended September 30, 2012 and 2011. As of September 30, 2012, we have a dedicated pharmaceutical products sales force consisting of 481 sales representatives and 228 contracted sales representatives (subsequently reduced to 170 effective October 5, 2012 pursuant to a September 2012 amendment to our agreement with our partner, Ventiv Commercial Services, LLC) focusing primarily on pain products, 78 Endo sales representatives focusing primarily on bladder and prostate cancer products, 35 Endo medical center representatives focusing on the treatment of central precocious puberty and 17 Endo account executives focusing on managed markets customers. We also have 324 sales representatives focusing primarily on devices and 54 on services. We market our products and services to primary care physicians and specialty physicians, including those specializing in pain management, orthopedics, neurology, rheumatology, surgery, anesthesiology, urology and pediatric endocrinology. Our sales force also targets retail pharmacies and other healthcare professionals throughout the United States. Watson Litigation Settlement On May 28, 2012, Endo Pharmaceuticals Inc. (EPI) entered into a Settlement and License Agreement (the Watson Settlement Agreement) among EPI and Teikoku, on the one hand, and Watson, on the other hand. The Watson Settlement Agreement settled all ongoing patent litigation among the parties relating to Watson's generic version of Lidoderm®.                                         63

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  On August 23, 2012, Watson announced it received FDA approval on its Abbreviated New Drug Application (ANDA) for its lidocaine patch 5%, a generic version of Lidoderm®. The Company anticipates Watson will launch its generic version of Lidoderm® on September 15, 2013 pursuant to the terms of the Watson Settlement Agreement. For further details, see Note 12. Commitments and Contingencies of the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. Litigation-Related Contingencies During the third quarter of 2012, we recorded an accrual in the amount of <money>$82.6 million for certain of our legal proceedings, with respect to certain pricing litigation matters and the ongoing investigation by the United States Department of Health and Human Services, Office of Inspector General and the United States Department of Justice relating primarily to the sale, marketing and promotion of Lidoderm®. These matters are described in more detail in Note 12. Commitments and Contingencies of the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. Impax Pursuant to the June 2010 Settlement and License Agreement (the Impax Settlement Agreement), with Impax Laboratories Inc. (Impax), the Company agreed to provide a payment to Impax should prescription sales of the non-crush resistant formulation of Opana® ER, as defined in the Impax Settlement Agreement, fall below a predetermined contractual threshold in the quarter immediately prior to Impax launching a generic version of Opana® ER, expected to be in January 2013. During the first quarter of 2012, the Novartis shut-down of its Lincoln, Nebraska manufacturing facility and resulting lack of 2012 oxymorphone active pharmaceutical ingredient (API) quota granted by the Drug Enforcement Agency (DEA) caused EPI to attempt an accelerated launch of the crush-resistant formulation of Opana® ER. While significant uncertainties existed throughout the first quarter of 2012 about our ability to rapidly ramp up production of the formulation designed to be crush-resistant and produce finished goods at a new, untested manufacturing facility in a very short period of time, we were able to do so in March 2012, triggering a $110.0 million liability under the Impax Settlement Agreement, which was subsequently reduced to $104.0 million based on a third quarter 2012 change in estimate with respect to this liability. Pipeline Developments BEMA® Buprenorphine In January 2012, the Company signed a worldwide license and development agreement with BioDelivery Sciences International, Inc. (BioDelivery) for the exclusive rights to develop and commercialize BEMA® Buprenorphine, a transmucosal form of buprenorphine which incorporates a bioerodible mucoadhesive (BEMA®) technology and is currently in phase III trials for the treatment of moderate to severe chronic pain. At this time, the Company made an upfront payment to BioDelivery for $30.0 million, which was expensed as Research and development in the first quarter of 2012. An additional $15.0 million payment related to the achievement of certain regulatory milestones was triggered and recorded as Research and development expense during the first quarter of 2012. We paid this amount in the second quarter of 2012. In August 2012, the Company and BioDelivery announced the initiation of the Phase 3 clinical program for BEMA® Buprenorphine for the treatment of moderate to severe chronic pain. Both studies are anticipated to be completed by late 2013 or early 2014. JetTouchTM / Botox® Co-Development Program In June 2012, our AMS business announced a co-development agreement with Allergan, Inc. to jointly develop and seek regulatory approval for the delivery of Botox® (onabotulinumtoxinA) using the JetTouchTM system for treatment of overactive bladder. Recent Business Activity Lidoderm® In August 2012, the Company received a letter from the FDA, noting that it had denied our Citizen Petition (CP) related to the approval requirements for generic versions of Lidoderm®. Also on August 23, 2012, Watson announced it received FDA approval on its ANDA for its lidocaine patch 5%, a generic version of Lidoderm®. We anticipate Watson will launch its generic version of Lidoderm® in September of 2013 pursuant to the terms of the Company's settlement agreement with Watson. Opana® ER In December 2011, the FDA approved a formulation of Opana® ER designed to be crush-resistant, which will continue to be called Opana® ER with the same dosage strengths, color and packaging and similar tablet size. Endo transitioned to the crush-resistant formulation in March 2012 upon successfully accelerating production of this formulation. In June 2012, we announced the FDA had moved the old formulation of Opana® ER to the Orange Book Discontinued List in connection with our transition to the crush-                                         64

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  resistant formulation and in September 2012, we announced that, according to IMS Health data estimates, the crush-resistant formulation of Opana® ER now accounts for more than 90 percent of the Opana® ER total prescription volume. On August 13 2012, EPI submitted a Citizen Petition with the FDA requesting that it (1) determine that the discontinued, non-crush-resistant version of Opana® ER approved under NDA No. 021610 was discontinued for safety and can no longer serve as a Reference List Drug (RLD) for an ANDA or generic applicant; (2) refuse to approve any pending ANDA for a generic version of the non-crush resistant version of Opana® ER approved under NDA No. 021610; and (3) suspend and withdraw the approval of any ANDA referencing Opana® ER approved under NDA No. 021610 as the RLD. On August 31, 2012, EPI submitted an additional Citizen Petition requesting that the FDA (1) require that any ANDA referencing the crush-resistant formulation of Opana® ER contain data and information demonstrating that the proposed ANDA product is similarly crush-resistant; (2) classify extended-release opioid formulations incorporating crush-resistant technologies, such as the new Opana® ER, as new dosage forms in Appendix C of FDA's Orange Book; and (3) confirm that any ANDA referencing Opana® ER approved under NDA No. 021610 will not be identified in the Orange Book as therapeutically equivalent to the crush-resistant formulation of Opana® ER. From September 21, 2012 through November 1, 2012, EPI and its partner Grünenthal received Paragraph IV Notices from each of Teva Pharmaceuticals USA, Inc. (Teva), Amneal Pharmaceuticals, LLC (Amneal), Sandoz Inc. (Sandoz) and ThoRx Laboratories, Inc. (ThoRx) advising of the filing by each such company of an ANDA for a generic version of the formulation of Opana® ER designed to be crush-resistant. MoXy® Fiber In August 2012, the Company introduced the new 650kJ MoXy® fiber for our GreenLight XPS® system for photoselective vaporization of the prostate, which provides more than 50 percent more energy than the previous fiber for the same price. The new MoXy® fiber will enable physicians to treat larger glands with a single fiber, offering improved overall value and greater cost efficiency. Montelukast Sodium Tablets In August 2012, the Company announced it had launched its montelukast sodium tablets and chewable tablets, generic versions of Singulair®, following the expiration of the last patent that provides Merck U.S. market exclusivity. The Company began shipping the product immediately. Montelukast sodium tablets are labeled for use in treating symptoms of asthma and allergic rhinitis. The total combined branded and generic sales for montelukast sodium tablets and chewable tablets in the U.S. for the twelve months ending June 30, 2012 were approximately $4.9 billion, according to IMS Health. Levetiracetam In April 2012, Qualitest Pharmaceuticals announced it had received FDA approval on its ANDA for levetiracetam oral solution 100 mg/mL, a generic version of Keppra®. to begin distribution in late 2012. The total sales for levetiracetam oral solution 100 mg/mL in the U.S. for the twelve months ending December 31, 2011 were approximately $62.2 million, according to IMS Health. Subsequently, in July 2012, Qualitest Pharmaceuticals announced it had received FDA approval on its ANDA for levetiracetam extended-release 500 and 750 mg tablets, a generic version of Keppra XR®. The total sales for levetiracetam extended-release 500 and 750 mg tablets in the U.S. for the 12 months ending May 31, 2012 were approximately $124.8 million, according to IMS Health. Other In October, our Qualitest business received, through its partner Alembic Pharmaceuticals Limited, FDA approval for irbesartan tablets, a generic version of Avapro®, irbesartan/HCTZ tablets, a generic version of Avalide® and modafinil tablets, a generic version of Provigil®. Total combined branded and generic sales for irbesartan tablets, irbesartan/HCTZ tablets and modafinil tablets in the U.S. for the 12 months ended September 30, 2012 were approximately $1.7 billion, according to IMS Health. Goodwill and Indefinite-Lived Intangible Assets Impairment Testing During the three months ended September 30, 2012, we changed our annual goodwill and indefinite-lived intangible assets impairment test date from January 1 to October 1. The change in the annual date for impairment testing will necessitate completing a test as of October 1, 2012 to ensure that no more than 12 months elapse between annual tests. We will complete this test in the fourth quarter ending December 31, 2012. We will prospectively apply the changes in the annual goodwill and indefinite-lived intangible asset impairment testing dates beginning on October 1, 2012 in future filings. Changes in Directors & Officers and Other Related Matters On July 18, 2012, Endo announced the appointment of Camille Farhat as President of American Medical Systems, a wholly owned subsidiary of Endo Health Solutions Inc. Prior to joining AMS, Mr. Farhat served in a variety of senior leadership positions within the healthcare industry; most recently as General Manager of Baxter Pharmaceuticals and Technologies. As General Manager, Mr. Farhat significantly enhanced the performance and improved the operating efficiency of the business while focusing on the needs                                         65

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  of patients. During his time at Baxter, he also held the role of General Manager for Baxter Global Infusion Systems. Before that, Mr. Farhat provided executive leadership at Medtronic, including roles in Business Development, as well as Global General Manager, Gastroenterology and Urology. In addition, he held a variety of positions at GE Healthcare, including roles as a Global General Manager of the Computed Tomography Business. He also held leadership positions in strategic planning and global sourcing at General Electric. On September 27, 2012, the Company increased the size of its Board of Directors from nine to ten and appointed Jill D. Smith to fill this new vacancy. Ms. Smith currently serves on the board of SoundBite Communications and is a member of the executive committee for the Women's Cancer Program at Dana Farber Hospital, and a member of the board of trustees for The Rashi School. Previously, Ms. Smith served as the chairman of the board of directors and chief executive officer of DigitalGlobe, Inc., and prior to DigitalGlobe, Ms. Smith was president and chief executive officer of eDial, chief executive officer of SRDS, L.P., as well as chief operating officer of Micron Electronics, Inc. Ms. Smith also has served on the corporate boards of Elster Group and Smith & Hawken. Ms. Smith's earlier professional experience includes co-founding Treacy & Company, LLC, a consulting and boutique investment business and holding executive positions at Sara Lee Corporation and Bain & Company. Government Regulations EPI and Qualitest sell products that are "controlled substances" as defined in the Controlled Substances Act of 1970 (CSA), which establishes certain security and record keeping requirements administered by the DEA. The DEA is concerned with the control of registered handlers of controlled substances, and with the equipment and raw materials used in their manufacture and packaging, in order to prevent loss and diversion into illicit channels of commerce. The DEA regulates controlled substances as Schedule I, II, III, IV or V substances, with Schedule I and II substances considered to present the highest risk of substance abuse and Schedule V substances the lowest risk. Hydrocodone is currently regulated as a Schedule III substance. Pursuant to the Food and Drug Administration Innovation Safety Act FDASIA), Congress has required the FDA to convene a meeting to solicit advice and recommendations to assist in conducting a scientific and medical evaluation on whether to reschedule combination products containing hydrocodone. Our Qualitest business sells a significant amount of hydrocodone-containing products. Congress is acting in response to continued reports of misuse, abuse and addiction of products containing hydrocodone. An advisory committee to take public comments on the proposed rescheduling was originally planned for October 29-30, 2012. It was postponed due to weather conditions and we expect will be rescheduled in the near future. A change from a Schedule III substance to a Schedule II substance could restrict patient access to needed medication. It would also require significant changes to the entire industry's supply chain from manufacturers, to wholesalers and retailers. We believe the increased burden and cost to the healthcare system would be substantial. On October 25, 2012, the FDA published a briefing document that indicates that it will likely recommend to DEA that hydrocodone products remain in Schedule III. It did, however, acknowledge that the question still remains on how to reduce levels of abuse of hydrocodone combination products. As part of our expansion of our Huntsville site, we have factored in the potential for hydrocodone being rescheduled, which we believe puts our subsidiary, Qualitest Pharmaceuticals, in a very good position to comply quickly should hydrocodone be rescheduled. Healthcare Reform On March 23, 2010, President Obama signed into law H.R. 3590, the Patient Protection and Affordable Care Act (PPACA), which will make major changes to the U.S. healthcare system. On March 30, 2010, the President signed H.R. 4872, the Health Care and Education Reconciliation Act of 2010 (Reconciliation Act), which included a package of changes to the PPACA, as well as additional elements to reform health care in the U.S. While some provisions of the new healthcare reform law have already taken effect, most of the provisions to expand access to health care coverage will not be implemented until 2014 and beyond. Since implementation is incremental to the enactment date of the law, there are still many challenges and uncertainties ahead. Such a comprehensive reform measure will require expanded implementation efforts on the part of federal and state agencies embarking on rule-making to develop the specific components of their new authority. The Company will monitor closely the implementation and any attempts to repeal, replace, or remove funding of the new health care reform law. This effort will primarily take place on two fronts: 1) in Congress through attempts to pass legislation to overturn all or specific sections of the law and 2) in the Courts through attempts to have the law declared unconstitutional. In March 2012, the U.S. Supreme Court heard oral arguments challenging the constitutionality of the health care reform law. In the following months, the Court considered the constitutionality of the individual mandate, as well as whether the overall health care law could still stand even if the individual mandate was ruled unconstitutional. On June 28, 2012, the Supreme Court upheld the individual mandate. By virtue of ruling that the individual mandate is constitutional, the entire law remains constitutional. In its ruling, the Court did address the expansion of Medicaid required under the law, a provision that requires states to expand Medicaid to approximately 17 million additional low-income individuals up to 133 percent of the federal poverty level. Under the law, the federal government would pay the additional costs for the expansion of Medicaid for the years 2014 to 2016 and then the federal share would phase down to 90 percent by 2020. The law provided that if a state did not expand its Medicaid program eligibility to 133 percent, they would risk losing the federal share for all its Medicaid funding and not just the funding for the expansion. On this matter, the                                         66

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Supreme Court upheld the constitutionality of the Medicaid expansion but ruled that the punitive aspects of the provision are unconstitutional meaning that the federal government does not have the authority to terminate existing federal funding for Medicaid if the states do not expand Medicaid. This aspect of the ruling may cause some states to refuse to expand its Medicaid eligibility thereby limiting the number of individuals with access to health insurance. The passage of the PPACA and the Reconciliation Act will result in a transformation of the delivery and payment for health care services in the U.S. The combination of these measures will expand health insurance coverage to an estimated 32 million Americans. In addition, there are significant health insurance reforms that are expected to improve patients' ability to obtain and maintain health insurance. Such measures include: the elimination of lifetime caps; no rescission of policies; and no denial of coverage due to preexisting conditions. The expansion of healthcare insurance and these additional market reforms should result in greater access to the Company's products. Our estimate of the overall impact of healthcare reform reflects a number of uncertainties. However, we believe that the impact to our business will be largely attributable to changes in the Medicare Part D Coverage Gap, the imposition of an annual fee on branded prescription pharmaceutical manufacturers, and increased rebates in the Medicaid Fee-For-Service Program and Medicaid Managed Care plans. There are a number of other provisions in the legislation that collectively are expected to have a small impact, including originator average manufacturers' price (AMP) for new formulations, and the expansion of 340B pricing to new entities. Certain elements of healthcare reform reduced total revenues by approximately $40 million in 2011 and will continue to have a similar impact in future years. In the U.S., the Medicare Prescription Drug Improvement and Modernization Act of 2003 continues to provide an effective prescription drug benefit to seniors and individuals with disabilities in the Medicare program (Medicare Part D). Uncertainty will continue to exist due to Congressional proposals that have the potential to impose new costs and increase pricing pressures on the pharmaceutical industry. In response to the U.S. debt-ceiling crisis, Congress passed the Budget Control Act of 2011 on August 2, 2011. Within the Act, Congress created the Joint Select Committee on Deficit Reduction (JSC), which was charged with issuing a formal recommendation on how to reduce the federal deficit by $1.2 trillion to $1.5 trillion over the next ten years. The Budget Control Act provided that if Congress failed to pass a deficit reduction plan by December 23, 2011, a process of sequestration would occur on January 1, 2013 which will result in across-the-board spending cuts to certain government programs, including Medicare, in order to meet the deficit reduction goal. Since the JSC failed to put forth a proposal and Congress ultimately failed to pass a deficit reduction plan, the sequestration process is scheduled to be triggered in 2013. The automatic spending cuts that would occur as a result of the sequestration process are unpalatable for many lawmakers and Congress may use the 2012 session to consider repealing the cuts by finding savings in other programs, such as Medicaid. RESULTS OF OPERATIONS Our quarterly results have fluctuated in the past, and may continue to fluctuate. These fluctuations are primarily due to (1) the timing of mergers, acquisitions and other business development activity, (2) the timing of new product launches, (3) purchasing patterns of our customers, (4) market acceptance of our products, (5) the impact of competitive products and products we recently acquired and (6) pricing. These fluctuations are also attributable to charges incurred for compensation related to stock compensation, amortization of intangible assets, asset impairment charges, and certain upfront, milestone and other payments made or accrued pursuant to acquisition or licensing agreements. Consolidated Results Review Revenues. Revenues for the three months ended September 30, 2012 decreased 1% to $750.5 million. This decrease was primarily driven by reduced revenues from our AMS and Endo Pharmaceuticals segments. This fluctuation was partially offset by revenue growth from our Qualitest segment. For the nine months ended September 30, 2012, total revenues increased 16% to $2,226.3 million from the comparable 2011 period. This increase in revenues was primarily driven by revenue growth from our Endo Pharmaceuticals, Qualitest and HealthTronics segments as well as the timing of our acquisition of AMS during the second quarter of 2011, from which we derived a full period's revenue during the nine months ended September 30, 2012 compared to less than four months during the comparable 2011 period.                                         67

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  The following table displays our revenues by category and as a percentage of total revenues for the three and nine months ended September 30, 2012 and 2011 (dollars in thousands). We have retrospectively revised the segment presentation for all periods presented reflecting a change from three to four reportable segments:                                  Three Months Ended September 30,               Nine Months Ended September 30,                                     2012                   2011                   2012                    2011                                   $           %         $          %           $            %          $           % Lidoderm®                   $    238,282       32   $ 207,364       27   $     676,302       30   $   592,929       31 Opana® ER                         62,232        8      97,753       13         236,731       11       275,221       14 Voltaren® Gel                     35,483        5      36,260        5          79,173        4       104,213        5 Percocet®                         24,209        3      28,130        4          73,413        3        82,765        4 Frova®                            15,706        2      14,815        2          45,352        2        42,186        2 Supprelin® LA                     14,534        2      12,695        2          42,777        2        36,432        2 Other brands                      26,199        3      28,494        4          69,257        3        65,546        3 Total Endo Pharmaceuticals*      416,645       56     425,511       56       1,223,005       55     1,199,292       62 Qualitest                        166,070       22     147,975       19         471,310       21       415,431       22 AMS                              113,304       15     131,519       17         371,601       17       158,331        8 HealthTronics                     54,463        7      54,073        7         160,387        7       153,661        8 Total revenues*             $    750,482      100   $ 759,078      100   $   2,226,303      100   $ 1,926,715      100    _____________

* - Percentages may not add due to rounding.

   Lidoderm®. Net sales of Lidoderm® for the three and nine months ended September 30, 2012 increased 15% to $238.3 million and 14% to $676.3 million, respectively, from the comparable 2011 periods. We were required to pay Hind royalties based on net sales of Lidoderm® until this obligation expired on November 23, 2011. Hind royalties were recorded as a reduction to net sales due to the nature of the license agreement and the characteristics of the license involvement by Hind in Lidoderm®. Due to the expiration of the Hind royalty, net sales were $22.5 million and $64.5 million higher during the three and nine months ended September 30, 2012, respectively, compared to the same periods in 2011. Lidoderm® had solid performance this year, reflected by its double-digit growth and increase in scripts from the comparable 2011 periods, and continues to generate strong cash flow that we can use to invest in our business to continue to further diversify our revenue base. Pursuant to the Watson Settlement Agreement, we expect Watson to launch its lidocaine patch 5%, a generic version of Lidoderm®, on September 15, 2013, negatively impacting future net sales of Lidoderm®. Opana® ER. Net Sales of Opana® ER for the three and nine months ended September 30, 2012 decreased 36% to $62.2 million and 14% to $236.7 million, respectively, from the comparable 2011 periods. The revenue decrease during the three months ended September 30, 2012 was primarily related to decreased volumes associated with our transition to our formulation of Opana® ER, designed to be crush-resistant, which we began selling in March 2012 after our first quarter supply disruption associated with the temporary shutdown of Novartis's Lincoln, Nebraska manufacturing facility. While we believe our ongoing commercial efforts, which include direct and indirect sales efforts, coupon programs, education and promotion within targeted customer channels, have contributed positively to the uptake of our crush-resistant formulation, revenues during the three months ended September 30, 2012 have not returned to historical pre-transition levels. The decrease during the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011, was driven by a combination of the reduced volumes associated with our previously discussed transition efforts as well as the direct impact of the first quarter 2012 supply disruption. Voltaren® Gel. Net sales of Voltaren® Gel for the three and nine months ended September 30, 2012 decreased 2% to $35.5 million and 24% to $79.2 million, respectively, from the comparable 2011 periods. Due to short-term Voltaren® Gel supply constraints resulting from the temporary shutdown of Novartis's Lincoln, Nebraska manufacturing facility, there were no sales of Voltaren® Gel during the three months ended March 31, 2012. In April 2012, production and sale of Voltaren® Gel resumed. As a result of the first quarter 2012 supply constraints, sales during the second quarter of 2012 included the effects of wholesaler restocking efforts, which did not reoccur during the third quarter of 2012. On a full-year basis, we believe the supply of Voltaren® Gel in the marketplace is returning to historical pre-shortage levels at September 30, 2012. The sales decrease during the nine months ended September 30, 2012 from the comparable 2011 period was primarily driven by the fact that we sold no Voltaren® Gel during the first quarter of 2012. This decline was partially offset by the net effect of the market's efforts to return stock of Voltaren® Gel to normal levels during the second quarter of 2012. Percocet®. Net sales of Percocet® for the three and nine months ended September 30, 2012 decreased 14% to $24.2 million and 11% to $73.4 million, respectively, from the comparable 2011 periods. These decreases were primarily attributable to reduced volumes.                                         68

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  Frova®. Net sales of Frova® for the three and nine months ended September 30, 2012 increased 6% to $15.7 million and 8% to $45.4 million from the comparable 2011 periods. These increases were primarily attributable to price increases, partially offset by reduced volumes. Supprelin® LA. Net sales of Supprelin® LA for the three and nine months ended September 30, 2012 increased 14% to $14.5 million and 17% to $42.8 million, respectively, from the comparable 2011 periods. These increases were driven by increases to both price and volume, resulting primarily from an increase in new patient starts and a growing base of continued care patients. We believe this growth is largely due to a strong base of national opinion leader support and ongoing efforts to streamline the treatment initiation process. Other brands. Net sales of our other branded products for the three and nine months ended September 30, 2012 decreased 8% to $26.2 million and increased 6% to $69.3 million, respectively, from the comparable 2011 periods. For the three months ended September 30, 2012, the decrease was primarily driven by decreased sales of Opana® as demand continues to shift to Opana® ER, partially offset by increased revenues from Valstar® and Fortesta® Gel. For the nine months ended September 30, 2012, the increase was primarily driven by sales growth of Vantas®, Valstar® and Fortesta® Gel, partially offset by decreased sales of Opana®. Qualitest. Net sales of our generic products for the three and nine months ended September 30, 2012 increased 12% to $166.1 million and 13% to $471.3 million, respectively, from the comparable 2011 periods. These increases were primarily driven by strong demand for Qualitest's diversified product portfolio and favorable pricing as a result of market opportunities, which drove gross profit of nearly 40%. During the three and nine months ended September 30, 2012, Qualitest's top 15 products represented approximately $97.2 million and $288.1 million, respectively, representing increases of 5% and 15%, respectively, from the comparable 2011 periods. These increases, which were largely driven by increased volumes and pricing upside, were partially offset by reduced revenues from products impacted by the supply disruption associated with the previously disclosed temporary shutdown of Novartis Consumer Health'sLincoln, Nebraska manufacturing facility. AMS. Revenues from our AMS segment during the three months ended September 30, 2012 decreased 14% to $113.3 million from the comparable 2011 period. This fluctuation was primarily due to revenues from AMS's women's and men's health lines, which decreased $8.8 million and $8.2 million, respectively, from the comparable 2011 period. The decrease in women's health revenues related primarily to a reduction in mesh procedural volumes, particularly as to pelvic organ prolapse (POP) repair procedures, which may be in response to a July 2011October 2008 Public Health Notification issued by the FDA to further advise the public and medical community regarding potential complications associated with transvaginal placement of surgical mesh to treat POP and SUI, as well as to the attorney advertising associated with the transvaginal mesh litigation. The decrease in the men's health revenues related primarily to unusually high sales volume of the AMS® 800 artificial urinary sphincter during the three months ended September 30, 2011 as well as the impact of fluctuations in foreign currencies. The unusually high level of third quarter 2011 sales resulted from a May 2011 recall which prevented AMS from selling the AMS® 800 leading into the third quarter of 2011 and favorably impacted third quarter 2011 sales as a result of the market's efforts to return supply of the AMS® 800 to normal levels. AMS revenues for the nine months ended September 30, 2012 increased 135% to $371.6 million from the comparable 2011 period. This increase is attributable to the timing of our acquisition of AMS, which contributed revenue during the full nine months ended September 30, 2012 compared to less than four months of revenue during the comparable 2011 period. HealthTronics. Revenues from our HealthTronics segment for the three and nine months ended September 30, 2012 increased 1% to $54.5 million and 4% to $160.4 million, respectively, from the comparable 2011 periods. These increases were primarily attributable to the revenues from the electronic medical records software companies, Intuitive Medical Software, LLC and meridianEMR, Inc. which we acquired in the second half of 2011, partially offset by the loss of sales from our IGRT business, which was sold in August 2011.                                         69

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Gross Margin, Costs and Expenses. The following table sets forth costs and expenses for the three and nine months ended September 30, 2012 and 2011 (dollars in thousands):

                                      Three Months Ended September 30,                              Nine Months Ended September 30,                                     2012                          2011                           2012                           2011                              $         % of Revenue         $         % of Revenue         $         % of Revenue         $         % of Revenue Cost of revenues        $  294,267           39        $  302,172               40   $   953,657               43   $   770,427               40 Selling, general and administrative             210,446           28           244,359               32       698,522               31       581,878               30 Research and development                 48,952            7            43,884                6       183,067                8       126,854                7 Patent litigation settlement, net            (46,238 )         (6 )               -                -        85,123                4             -                - Litigation-related contingencies               82,600           11                 -                -        82,600                4             -                - Asset impairment charges                     11,163            1            22,691                3        54,163                2        22,691                1 Acquisition-related and integration items, net       5,776            1             5,818                1        16,580                1        29,517                2 Total costs and expenses*               $  606,966           81        $  618,924               82   $ 2,073,712               93   $ 1,531,367               79    _____________

* - Percentages may not add due to rounding.

   Cost of Revenues and Gross Margin. For the nine months ended September 30, 2012, Cost of revenues increased 24% to $953.7 million from the comparable 2011 period. The increase during the nine months ended September 30, 2012 was primarily driven by increased revenues and our June 2011 acquisition of AMS, which contributed approximately $122.0 million to our Cost of revenues during the nine months ended September 30, 2012 compared to $75.5 million during the nine months ended September 30, 2011. Our full year 2012 Cost of revenues amount was also impacted by the first quarter charge of $110.0 million related to the 2010 Impax Settlement Agreement and the offsetting $6.0 million of income recognized in the third quarter of 2012 resulting from a subsequent change in estimate with respect to this liability. Cost of revenues for the three months ended September 30, 2012 decreased 3% to $294.3 million when compared to the three months ended September 30, 2011. This decrease was primarily driven by the $6.0 million of income related to the change in estimate recognized with respect to the Impax Settlement Agreement liability. Gross profit margins for the three and nine months ended September 30, 2012 were 61% and 57%, respectively, compared to 60% during both the three and nine months ended September 30, 2011. The increase in gross profit margin for the three months ended September 30, 2012 was also primarily driven by the change in estimate recognized with respect to the Impax Settlement Agreement liability. The decrease in gross profit margin for the nine months ended September 30, 2012 was primarily due to changes in the mix of revenues and the corresponding margins. Selling, General and Administrative Expenses. Selling, general and administrative expenses for the three and nine months ended September 30, 2012 decreased 14% to $210.4 million and increased 20% to $698.5 million, respectively, from the comparable 2011 periods. The decrease during the three months ended September 30, 2012 was primarily driven by the results of ongoing, company-wide efforts to reduce costs. Additionally, during the three months ended September 30, 2012, we incurred expenses of $7.7 million related to certain integration costs and separation benefits incurred in connection with continued efforts to enhance the Company's operations, which was down from $12.3 million during the three months ended September 30, 2011. The increase during the nine months ended September 30, 2012 was primarily attributable to the timing of our acquisition of AMS and the inclusion, during the nine months ended September 30, 2012, of $204.0 million of AMS Selling, general and administrative expense, representing a full nine months of AMS expense, compared to $89.3 million in the comparable 2011 periods, representing less than four months of AMS Selling, general and administrative expense. Research and Development Expenses. Research and development expenses for the three and nine months ended September 30, 2012 increased 12% to $49.0 million and 44% to $183.1 million, respectively, from the comparable 2011 periods. The increase during the nine months ended September 30, 2012 relates primarily to the addition of AMS's research and development portfolio upon our June 2011 acquisition of AMS. Due to the timing of our AMS acquisition, AMS incurred Research and development expenses during the entire nine month period ended September 30, 2012, as compared to a partial period's expense during the nine months ended September 30, 2011. The remaining increases during both the three and nine months ended September 30, 2012 are primarily attributable to the inclusion of $2.5 million of certain integration costs and separation benefits, classified as Research and development expense, that were incurred during the three months ended September 30, 2012 in connection with continued efforts to enhance the Company's operations, as well as the progress of our portfolio's development and the expansion of our efforts in the pharmaceutical discovery and device research and development areas. During the three and nine months ended September 30, 2012 we incurred $3.9 million and $53.7 million, respectively, in expense related to milestones classified as Research and development expense compared to $2.4 million and $18.3 million, respectively, in the comparable 2011 periods.                                         70

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  Patent Litigation Settlement, net. On May 28, 2012, Endo Pharmaceuticals Inc. (EPI) entered into a Settlement and License Agreement (the Watson Settlement Agreement) among EPI and Teikoku, on the one hand, and Watson, on the other hand. The Watson Settlement Agreement settled all ongoing patent litigation among the parties relating to Watson's generic version of Lidoderm®. Under the terms of the Watson Settlement Agreement, the parties dismissed their respective claims and counterclaims without prejudice. As part of the settlement, Watson agreed not to challenge the validity or enforceability of Endo's and Teikoku's patents relating to Lidoderm® with respect to Watson's generic version of Lidoderm®. Watson also agreed not to sell its generic version of Lidoderm® until it received FDA approval and, in any event, no sooner than September 15, 2013, except in limited specific circumstances (such date being the Start Date). Endo and Teikoku agreed to grant Watson a license permitting the sale of generic Lidoderm® upon the Start Date in the United States. The license to Watson is exclusive as to Endo's launch of an authorized generic version of Lidoderm® until the earlier of 1) the introduction of a generic version of Lidoderm® by a company other than Watson, or 2) seven and a half months after Watson launches its generic version of Lidoderm®. Endo will receive an at market royalty equal to 25% of the gross profit generated on Watson's sales of its generic version of Lidoderm® during Watson's period of exclusivity. Additionally, the Watson Settlement Agreement provides that Endo and Teikoku will provide, at no cost, to Watson's wholesaler affiliate branded Lidoderm® product for Watson's wholesaler affiliate's distribution, subject to certain terms and conditions as follows: •        Beginning on January 1, 2013 through August 1, 2013, Endo and Teikoku          will provide branded Lidoderm® of value totaling $12.0 million each

month ($96.0 million in total for 2013) (valued at the then-prevailing

wholesale acquisition cost). The obligation of Endo and Teikoku to

provide this branded product at no cost terminates immediately upon the

launch of a third party's generic version of Lidoderm® in the United

States, including its territories, possessions and the Commonwealth of

Puerto Rico (the Territory).

• In the event Watson does not receive final FDA approval of its generic

version of Lidoderm® by January 1, 2014, then beginning on January 1,

2014 through December 1, 2014, Endo and Teikoku will provide branded

Lidoderm® product of value totaling $6.7 million each month ($80.0

million in total for 2014) (valued at the then-prevailing wholesale

         acquisition cost). The obligation of Endo and Teikoku to provide this          branded product at no cost terminates immediately upon the earlier of

(a) the final FDA approval of Watson's generic version of Lidoderm® or

         (b) the launch of a third party's generic version of Lidoderm® in the          Territory.  

• In the event Watson does not receive final FDA approval of its generic

version of Lidoderm® by January 1, 2015, then beginning on January 1,

2015 through September 1, 2015, Endo and Teikoku will provide branded

Lidoderm® product of value totaling $7.1 million each month ($64.0

million in total for 2015) (valued at the then-prevailing wholesale

         acquisition cost). The obligation of Endo and Teikoku to provide this          branded product at no cost terminates immediately upon the earlier of

(a) the final FDA approval of Watson's generic version of Lidoderm® or

         (b) the launch of a third party's generic version of Lidoderm® in the          Territory.   Endo will be responsible for the payment of all gross to net adjustments arising from Watson's sale of the branded Lidoderm® product. In contemplation of the Watson Settlement Agreement, Teikoku has agreed to provide a rebate to Endo equal to 50% of the cost of branded Lidoderm® product that is required to be provided to Watson's wholesaler affiliate pursuant to Section 3(b), 3(c) and 3(d) of the Watson Settlement Agreement. The Company has concluded that the Watson Settlement Agreement is a multiple-element arrangement and during the second quarter of 2012 recognized a liability and corresponding charge of $131.4 million in Patent litigation settlement, net in the Condensed Consolidated Statements of Operations representing the initial estimated fair value of the settlement component. Fair value of the settlement component was estimated using the probability adjusted expected value of branded Lidoderm® product to be provided to Watson at the anticipated wholesaler acquisition cost (WAC) expected to be in place at the time of shipment, less a reasonable estimate of Watson's selling costs. The resultant probability-weighted values were then discounted using a discount rate of 5.1%. The Company believes that the level and timing of branded Lidoderm® product to be shipped, discount rate, and probabilities used in the model appropriately reflect market participant assumptions. Because the liability is recorded at fair value using WAC, the net charge recognized in 2012 is comprised of several elements, including our cost of product to be shipped, estimated gross-to-net deductions to be paid by the Company and the estimated product profit margin. We believe this is the most appropriate measure of fair value as these components combined represent the value accruing to Watson. As a result of using a fair value measurement, the charge will be greater than the actual cost to the Company. As such, relief of the liability in subsequent periods through shipments of branded Lidoderm® product will result in income, which we expect to record as a component of Other (income) expense, net in the Company's Condensed Consolidated Statements of Operations. We intend to reclassify the portion of the settlement liability related to the gross-to-net component into our gross-to-net reserves as product is shipped to Watson, the effect of which will be to offset a portion of the income that will be recognized into Other (income) expense, net in the Company's Condensed Consolidated Statements of Operations, as the settlement liability is relieved. The rebate arrangement with Teikoku will also be accounted for prospectively as product purchased from Teikoku will be recorded into inventory at the discounted purchase price and relieved as shipments are made to Watson. The benefit associated with this rebate will be recorded as a component of Other (income) expense, net in the Company's Condensed Consolidated Statements of Operations. Future changes, if any, resulting from revisions to the timing or the amount of the                                         71

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  original estimate will be recognized as an increase or a decrease in the carrying amount of the litigation settlement liability and the related Patent litigation settlement, net during the period of change. Future changes in estimates to the settlement liability could have a material impact on our results of operations. On August 23, 2012, Watson announced it received FDA approval on its ANDA for its lidocaine patch 5%, a generic version of Lidoderm®. The Company anticipates Watson will launch its generic version of Lidoderm® on September 15, 2013 pursuant to the terms of the Watson Settlement Agreement. In light of Watson's anticipated September 2013 launch, the Company reassessed its obligation to Watson and believes it will not be obligated to provide to Watson's wholesaler affiliate branded Lidoderm® product beyond September 2013. Accordingly, in the third quarter of 2012, the Company recognized a change in estimate with respect to its obligation and reduced its liability associated with the Watson Settlement Agreement by $46.2 million to $85.1 million. The corresponding gain of $46.2 million was recorded in Patent litigation settlement, net in the Condensed Consolidated Statements of Operations. Litigation-Related Contingencies. Litigation-related contingencies for both the three and nine months ended September 30, 2012 totaled $82.6 million in expense. This amount relates to charges associated with certain of our legal proceedings as described in more detail in Note 12. Commitments and Contingencies of the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. Asset Impairment Charges. Asset impairment charges for the three and nine months ended September 30, 2012 were $11.2 million and $54.2 million, respectively, compared to $22.7 million in the each of the comparable 2011 periods. These impairment charges, as well as an assessment for an additional potential impairment charge, are further discussed below. AMS IPR&D Impairment As a result of market and potential regulatory changes affecting the commercial potential in the United States for one of the AMS IPR&D assets, the Company determined that the asset's carrying value was no longer fully recoverable. Accordingly, in the second quarter of 2012, we recorded a pre-tax non-cash impairment charge of $3.0 million, which was assigned to our AMS segment and was recorded in the Asset impairment charges line of our Condensed Consolidated Statements of Operations. The fair value of this asset was determined using a discounted cash flow model, or income approach. This fair value measurement technique is based on significant inputs not observable in the market and thus represents a Level 3 measurement within the fair value hierarchy. Changes in any of the assumptions used in determining the fair value of this asset may result in a further reduction to its estimated fair value and could result in additional and potentially full future impairment charges of up to $1.0 million. Sanctura XR® Impairment Pursuant to the Sanctura XR® Amended and Restated License, Commercialization and Supply Agreement with Allergan USA, Inc. (Allergan), the Company receives royalties based on net sales of Sanctura XR® made by Allergan. In March 2009, Watson Pharmaceutical Inc. (Watson) filed an Abbreviated New Drug Application (ANDA) seeking FDA approval to market generic versions of Sanctura XR® before the expiration of Allergan's patents listed in the Orange Book. Subsequent to Watson's ANDA filing, Sandoz Inc. and Paddock Laboratories, Inc. (acquired by Perrigo Company in August 2011) also filed ANDAs for a generic version of Sanctura XR®. In April 2012, the U.S. District Court for the District of Delaware ruled that five patents covering Allergan's Sanctura XR® (trospium chloride) extended-release capsules were invalid. The Company appealed this ruling, and subsequently in June 2012, our appeal was dismissed. As part of our first quarter 2012 Form 10-Q filing, the Company concluded that an impairment assessment was required to evaluate the recoverability of the indefinite-lived intangible asset. In accordance with the applicable accounting guidance, the Company assessed the recoverability of this asset by comparing its carrying amount to its forecasted undiscounted future cash flows and determined that its carrying value exceeded its undiscounted future cash flows, indicating an impairment existed. The Company then determined the fair value of the Sanctura XR® intangible asset to be $21.6 million at March 31, 2012. Accordingly, the Company recorded a pre-tax non-cash impairment charge of $40.0 million in March 2012, representing the difference between the carrying value of the intangible asset and its estimated fair value. To estimate fair value, we assessed the estimates of the amount and timing of future cash flows from royalties and milestones received from Allergan related to net sales of the product. To calculate the fair value of the Sanctura XR® intangible asset during the first quarter of 2012, the Company used an income approach using a discounted cash flow model considering management's current evaluation of the above mentioned factors. The Company utilized probability-weighted cash flow models using a present value discount factor commensurate with the overall risk associated with this particular product. The cash-flow models included our best estimates of future royalties from Allergan related to sales of Sanctura XR® in light of generic competition. At the time of this assessment, the Company believed that the level and timing of cash flows assumed, discount rate and probabilities used in the model appropriately reflected market participant assumptions.                                         72

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  In October 2012, Watson announced that it had received FDA approval for its generic version of Sanctura XR® and that it intended to begin shipping its product immediately. As a result of this announcement, the Company concluded that an additional impairment assessment was required. Accordingly, the Company again evaluated the recoverability of the asset and determined that an impairment existed. Using a valuation model similar to that described above, and assumptions that we presently believe reflect market participant assumptions, the fair value of the Sanctura XR® intangible asset was determined to be $5.0 million at September 30, 2012. Accordingly, the Company recorded an additional pre-tax non-cash impairment charge of $11.2 million in September 2012, representing the difference between the carrying value of the intangible asset and its estimated fair value. The remaining net book value will be amortized over a shortened useful life commensurate with the expected rate of erosion due to generic competition. The above mentioned impairment charges, which were assigned to our Endo Pharmaceuticals segment, were recognized in earnings and included in the Asset impairment charges line item in the Condensed Consolidated Statements of Operations. Changes in any of our assumptions may result in a further reduction to the estimated fair value of the Sanctura XR® intangible asset and could result in additional and potentially full future impairment charges. Opana® ER Impairment Assessment From September 21, 2012 through November 1, 2012, EPI and its partner Grünenthal received Paragraph IV Notices from each of Teva, Amneal, Sandoz and ThoRx advising of the filing by each such company of an ANDA for a generic version of the formulation of Opana® ER designed to be crush-resistant. EPI intends, and has been advised by Grünenthal that they too intend, to vigorously defend the intellectual property rights covering Opana® ER and to pursue all available legal and regulatory avenues in defense of Opana® ER, including enforcement of the product's intellectual property rights and approved labeling. However, there can be no assurance that we will be successful. If we are unsuccessful and Teva, Amneal, Sandoz or ThoRx is able to obtain FDA approval of its product, it may be able to launch a generic version of Opana® ER prior to the applicable patents' expirations in 2023, 2024, 2025 and 2029 respectively. While the original formulation of Opana® ER is safe and effective when taken as prescribed, it was nevertheless subject to abuse, misuse and diversion. Consequently, our subsidiary, EPI discontinued from sale for safety reasons all strengths of Opana® ER approved under New Drug Application (NDA) No. 021610 and notified the FDA of this discontinuation. As a result, the FDA moved Opana® ER to the Discontinued List section of the Agency's Approved Drug Products with Therapeutic Equivalence Evaluations (Orange Book). On August 13, 2012, EPI submitted a Citizen Petition with the FDA requesting that it (1) determine that the discontinued, non-crush-resistant version of Opana® ER approved under NDA No. 021610 was discontinued for safety and can no longer serve as a Reference List Drug (RLD) for an ANDA or generic applicant; (2) refuse to approve any pending ANDA for a generic version of the non-crush resistant version of Opana® ER approved under NDA No. 021610; and (3) suspend and withdraw the approval of any ANDA referencing Opana® ER approved under NDA No. 021610 as the RLD. The petition emphasizes the potential widespread availability of non-crush resistant generics of all strengths of Opana® ER in early 2013 and calls into question whether generics can properly be marketed in view of the discontinuation of Opana® ER for safety reasons. On August 31, 2012, EPI submitted an additional Citizen Petition requesting that the FDA (1) require that any ANDA referencing the crush-resistant formulation of Opana® ER contain data and information demonstrating that the proposed ANDA product is similarly crush resistant; (2) classify extended-release opioid formulations incorporating crush-resistant technologies, such as the new Opana® ER, as new dosage forms in Appendix C of the FDA's Orange Book; and (3) confirm that any ANDA referencing Opana® ER approved under NDA No. 021610 will not be identified in the Orange Book as therapeutically equivalent to the crush-resistant formulation of Opana® ER. The petition emphasizes that the abuse of prescription opioid analgesics is at the center of a major public health crisis of addiction, misuse, abuse, overdose and death and that objective criteria are required to evaluate whether a formulation is truly crush-resistant. Other than an acknowledgment of receipt, we have received no response from the FDA to either Citizen Petition. In light of the recent receipt of the Paragraph IV Notices on the crush-resistant formulation of Opana® ER, we concluded that an impairment assessment was required to evaluate the recoverability of the Opana® ER indefinite-lived intangible assets and performed this analysis in conjunction with our third quarter 2012 10-Q filing. In performing this assessment, we calculated the anticipated undiscounted cash flows related to Opana® ER on a probability-weighted basis, considering the potential outcomes that could result from the recent regulatory developments discussed in the above paragraphs, and concluded that no impairment charge was required at September 30, 2012. Changes in any of the assumptions used in determining the fair value of this asset may result in the need for future impairment testing, which could result in future impairment charges. Other Impairment Charges In July 2008, the Company made a $20 million investment in a privately-held company focused on the development of an innovative treatment for certain types of cancer. In September 2011, we impaired our investment in this privately-held company due to the negative clinical trial results related to its lead asset. Accordingly, we wrote off our investment in its entirety and recorded an impairment charge of $22.7 million.                                         73

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  Acquisition-Related and Integration Items, net. Acquisition-related and integration items, net for the three and nine months ended September 30, 2012 were $5.8 million in expense and $16.6 million in expense, respectively, compared to $5.8 million in expense and $29.5 million in expense, respectively, in the comparable 2011 periods. Acquisition-related and integration items, net for the three and nine months ended September 30, 2012 and 2011 primarily consisted of transaction fees including legal, separation, integration, and other expenses for our acquisitions as well as changes in the fair value of acquisition-related contingent consideration. Interest Expense, net. The components of interest expense, net for the three and nine months ended September 30, 2012 and 2011 are as follows (in thousands):                                    Three Months Ended September 30,        

Nine Months Ended September 30,

                                        2012                 2011              2012               2011 Interest expense                $        45,620       $        52,939     $  138,706       $       97,587 Interest income                            (115 )                (147 )         (320 )               (445 ) Interest expense, net           $        45,505       $        52,792     $  138,386       $       97,142   Interest expense during the three and nine months ended September 30, 2012 was $45.6 million and $138.7 million, respectively, compared with $52.9 million and $97.6 million, respectively, in the comparable 2011 periods. The decrease during the three months ended September 30, 2012 was primarily attributable to decreases in our average total indebtedness resulting from continued repayments of the term loan indebtedness that originated in June 2011. The increase during the nine months ended September 30, 2012 was primarily attributable to increases in our average total indebtedness resulting from our June 2011 borrowings of $900.0 million of senior notes and $2.2 billion of term loan indebtedness in connection with our June 2011 acquisition of AMS. Net Loss on Extinguishment of Debt. In February 2012, we made a prepayment of $205.0 million on our Term Loan B Facility. We made additional prepayments of $33.0 million and $39.7 million in July 2012 and September 2012, respectively. In accordance with the applicable accounting guidance for debt modifications and extinguishments, approximately $5.4 million of the remaining unamortized financing costs were written off in connection with our February 2012 prepayment and additional $1.8 million was written off in connection with the third quarter 2012 prepayments. These amounts were included in the Condensed Consolidated Statements of Operations as a Net loss on extinguishment of debt. In June 2011, upon establishing our 2011 Credit Facility, we terminated our then existing credit facility. Unamortized financing costs associated with the prior credit facility totaled approximately $14.7 million on June 17, 2011. In accordance with the applicable accounting guidance for debt modifications and extinguishments, approximately $8.5 million of this amount was written off in June 2011 and included in the Condensed Consolidated Statements of Operations as a Net loss on extinguishment of debt. Other (Income) Expense, Net. Other (income) expense, net for the three and nine months ended  was $0.3 million in income and $0.5 million in expense, respectively, which compares to $3.0 million in income and $2.8 million in income, respectively, in the comparable 2011 periods. Income Tax. The effective income tax rate was 29.3% and (142.7)% for the three and nine months ended September 30, 2012, respectively, compared to 37.7% and 34.3% for the three and nine months ended September 30, 2011, respectively. Income tax for the three months ended September 30, 2012 decreased 17% to $28.3 million of expense from $34.1 million of expense during the three months ended September 30, 2011. This decrease was due to an increase in income before income tax and a decrease in the effective tax rate. The decrease in the effective tax rate was primarily driven by the establishment of an $8.5 million valuation allowance in the comparable 2011 period against an anticipated capital loss on our cost method investment in a privately held company. A benefit of $5.8 million was also recorded during the three months ended September 30, 2012 for the release of reserves established for uncertain tax positions due to the expiration of federal and state statute of limitations for assessments. A similar benefit of $4.2 million was recorded in the comparable prior period for the release of reserves on uncertain tax positions due to the expiration of federal and state statute of limitations. Income tax for the nine months ended September 30, 2012 totaled $9.3 million of benefit compared to $100.3 million of expense during the nine months ended September 30, 2011. This fluctuation was primarily driven by a decrease in income before income tax, the establishment of an $8.5 million valuation allowance in the comparable 2011 period against an anticipated capital loss on our cost method investment in a privately held company and the recording of a $6.3 million benefit for a prior period adjustment during the second quarter of 2012 related to the reversal of a 2010 capital loss valuation allowance recorded in connection with our acquisition of HealthTronics, Inc. The valuation allowance was reversed because of a 2011 transaction that resulted in a realized ordinary loss for income tax purposes. A benefit of $5.8 million was also recorded during the nine months ended September 30, 2012 for the release of reserves established for uncertain tax positions due to the expiration of federal and state statute of limitations for                                         74

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  assessments. A similar benefit of $7.9 million was recorded in the comparable prior period for the release of reserves on uncertain tax positions due to the expiration of statute of limitations and an IRS audit settlement for the tax years 2006 through 2008. 2012 Outlook. We estimate that our 2012 total revenues will be approximately $3.05 billion. Our estimate is based on the continued growth of both our Qualitest and Endo Pharmaceuticals portfolios-driven by ongoing prescription demand for our key inline products, including Lidoderm®, Opana® ER, and Voltaren® Gel-and the full-year effect of the AMS acquisition. Cost of revenues as a percent of total revenues is expected to increase when compared to 2011. This increase is expected due to a full year of amortization expense associated with the intangible assets acquired with AMS as well as growth in lower margin generic and branded pharmaceutical products in 2012, partially offset by a full year's revenues from the AMS acquisition. Selling, general and administrative expenses as a percentage of revenues are expected to decline in 2012 relative to 2011, reflecting new approaches to customer segmentation and marketing, annualized effects of the prior year's cost reduction efforts, forecasted synergies associated with our AMS acquisition, as well as 2012 operating efficiency improvements and redeployment of flexible spending. The total amount of selling, general and administrative expenses will increase year over year, however, reflecting the full year effects of our acquisitions. Research and development expenses are expected to increase due to the addition of AMS's research and development portfolio to our existing programs, the progress of our branded pharmaceutical portfolio's development, as well as the expansion of our efforts in the pharmaceutical discovery and device research and development areas. Of course, there can be no assurance that the Company will achieve these results. Business Segment Results Review In the fourth quarter of 2011, as a result of our strategic planning process, the Company's executive leadership team reorganized the manner in which it views our various business activities. Management's intention was to enhance its level of understanding of the entity's performance, better assess its prospects and future cash flow potential and ultimately make more informed operating decisions about resource allocation and the enterprise as a whole. Based on this change, we reassessed our reporting structure under the applicable accounting guidance and determined that the Company now has four reportable segments: (1) Endo Pharmaceuticals, (2) Qualitest, (3) AMS and (4) HealthTronics. We have retrospectively revised the segment presentation for all periods presented reflecting the change from three to four reportable segments. Additionally, concurrent with the Company's May 2012 enterprise-wide rebranding initiative and corporate name change, the Company changed the names of its reportable segments to better align with these efforts. These changes to our segments have no impact on the Company's Condensed Consolidated Financial Statements for all periods presented. Each segment derives revenue from the sales or licensing of their respective products or services and is discussed below. We evaluate segment performance based on each segment's adjusted income (loss) before income tax, a financial measure not determined in accordance with GAAP. We define adjusted income (loss) before income tax as income (loss) before income tax before certain upfront and milestone payments to partners, acquisition-related and integration items, net, cost reduction and integration-related initiatives, asset impairment charges , amortization of intangible assets related to marketed products and customer relationships, inventory step-up recorded as part of our acquisitions, non-cash interest expense, and certain other items that the Company believes do not reflect its core operating performance. Certain corporate general and administrative expenses are not allocated and are therefore included within Corporate unallocated. We calculate consolidated adjusted income (loss) before income tax by adding the adjusted income (loss) before income tax of each of our reportable segments to corporate unallocated adjusted income (loss) before income tax. We refer to adjusted income (loss) before income tax in making operating decisions because we believe it provides meaningful supplemental information regarding the Company's operational performance. For instance, we believe that this measure facilitates its internal comparisons to its historical operating results and comparisons to competitors' results. The Company believes this measure is useful to investors in allowing for greater transparency related to supplemental information used by us in our financial and operational decision-making. In addition, we have historically reported similar financial measures to our investors and believe that the inclusion of comparative numbers provides consistency in our financial reporting at this time. Further, we believe that adjusted income (loss) before income tax may be useful to investors as we are aware that certain of our significant stockholders utilize adjusted income (loss) before income tax to evaluate our financial performance. Finally, adjusted income (loss) before income tax is utilized in the calculation of adjusted diluted net income per share, which is used by the Compensation Committee of Endo's Board of Directors in assessing the performance and compensation of substantially all of our employees, including our executive officers. There are limitations to using financial measures such as adjusted income (loss) before income tax. Other companies in our industry may define adjusted income (loss) before income tax differently than we do. As a result, it may be difficult to use adjusted income (loss) before income tax or similarly named adjusted financial measures that other companies may use to compare the performance of those companies to our performance. Because of these limitations, adjusted income (loss) before income tax should not be considered as a measure of the income generated by our business or discretionary cash available to us to invest in the growth of our business. The Company compensates for these limitations by providing reconciliations of our consolidated adjusted income (loss) before income tax to our consolidated income before income tax, which is determined in accordance with U.S. GAAP and included in our Condensed Consolidated Statements of Operations                                         75

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Endo Pharmaceuticals The Endo Pharmaceuticals segment includes a variety of branded prescription products related to treating and managing pain as well as our urology, endocrinology and oncology products. The marketed products that are included in this segment include Lidoderm®, Opana® ER, Percocet®, Voltaren® Gel, Frova®, Supprelin® LA, Vantas®, Valstar® and Fortesta® Gel. Qualitest The Qualitest segment is comprised of our legacy Endo non-branded generics portfolio and the portfolio from the Qualitest Pharmaceuticals business, which we acquired in 2010. Our generics business has historically focused on selective generics related to pain that have one or more barriers to market entry, such as complex formulation, regulatory or legal challenges or difficulty in raw material sourcing. With the addition of Qualitest Pharmaceuticals, the segment's product offerings now include products in the pain management, urology, central nervous system (CNS) disorders, immunosuppression, oncology, women's health and hypertension markets, among others. AMS The AMS segment currently focuses on providing technology solutions to physicians treating men's and women's pelvic health conditions and operates in the following business lines: men's health, women's health, and BPH therapy. These business lines are discussed in greater detail within Note 5. Acquisitions in the Condensed Consolidated Financial Statements. We distribute devices through our direct sales force and independent sales representatives in the U.S., Canada, Australia, and Western Europe. Additionally, we distribute devices through foreign independent distributors, primarily in Europe, Asia, and South America, who then sell the products to medical institutions. None of our devices customers or distributors accounted for ten percent or more of our total revenues during the three or nine months ended September 30, 2012 or 2011. Foreign subsidiary sales are predominantly to customers in Canada, Australia and Western Europe. HealthTronics The HealthTronics segment provides urological services, products and support systems to urologists, hospitals, surgery centers and clinics across the U.S. These services are sold through the following business lines: lithotripsy services, prostate treatment services, anatomical pathology services, medical products manufacturing, sales and maintenance and electronic medical records services. Revenues. The following table displays our revenue by reportable segment for the three and nine months ended September 30, 2012 and 2011 (dollars in thousands):