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UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549





FORM 10-K


(Mark One)




| |   |                                                                                         
| | - | ----------------------------------------------------------------------------------------
| | þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934

For
the fiscal year ended December 31, 2005


OR




| |   |                                                                                       
| | - | --------------------------------------------------------------------------------------
| | o | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-15875


King Pharmaceuticals, Inc.




|                                                                                |  |                                         
|------------------------------------------------------------------------------- |  | ----------------------------------------
|Tennessee                                                                       |  | 54-1684963                              
|(State or other jurisdiction of
    incorporation or organization)              |  | (I.R.S. Employer
    Identification No.)
|                                                                               
|501 Fifth Street
    Bristol, Tennessee(Address of Principal Executive Offices) |  | 37620(Zip Code)                         

(423) 989-8000




|                                                                |  |                                            
|--------------------------------------------------------------- |  | -------------------------------------------
|(Title of each class)                                           |  | (Name of each exchange on which registered)
|                                                                |  |                                            
|Common Stock and Associated
    Preferred Stock Purchase Rights |  | New York Stock Exchange                    



None


þ o


o þ


þ o


S-K 10-K 10-K. þ


12b-2


þ o o


12b-2 o þ




Documents Incorporated by Reference:


Certain information required in Part III of this Annual
Report on Form 10-K is incorporated


by reference from the registrants Proxy Statement for
its 2006 annual meeting of shareholders.










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TABLE OF CONTENTS



|                                                                 |                                                                                                          |  |  |  |  |  |  | 
|---------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                                          
|                                                                 | Item 1. Business                                                                                        
|                                                                 | Item 2. Properties                                                                                      
|                                                                 | Item 3. Legal Proceedings                                                                               
|                                                                 | Item 4. Submission of Matters to a Vote of Security Holders                                             
|PART II                                                         
|                                                                 | Item 5. Market for Common Equity and Related Stockholder Matters                                        
|                                                                 | Item 6. Selected Financial Data                                                                         
|                                                                 | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations           
|                                                                 | Item 7A. Quantitative and Qualitative Disclosures About Market Risk                                     
|                                                                 | Item 8. Financial Statements and Supplementary Data                                                     
|                                                                 | Item 9. Changes in Accountants and Disagreements with Accountants on Accounting and Financial Disclosure
|                                                                 | Item 9A. Controls and Procedures                                                                        
|PART IV                                                         
|                                                                 | Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K                               
|EX-10.33 WAIVER AGREEMENT - JOHN A. A. BELLAMY                  
|EX-10.34 ADDENDUM TO THE WAIVER AGREEMENT                       
|EX-10.35 COLLABORATION AGREEMENT - PAIN THERAPEUTICS, INC.      
|EX-10.36 LICENSE AGREEMENT - PAIN THERAPEUTICS, INC.            
|EX-10.37 LICENSE AGREEMENT - MUTUAL PHARMACEUTICAL COMPANY, INC.
|EX-10.38 JOHN A.A.BELLAMY SEVERANCE LETTER                      
|EX-21.1 LIST OF SUBSIDIARIES                                    
|EX-23.1 CONSENT OF PRICEWATERHOUSECOOPERS LLP                   
|EX-31.1 SECTION 302 CERTIFICATION OF THE CEO                    
|EX-31.2 SECTION 302 CERTIFICATION OF THE CFO                    
|EX-32.1 SECTION 906 CERTIFICATION OF THE CEO                    
|EX-32.2 SECTION 906 CERTIFICATION OF THE CFO                    



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PART I







|        |         
|------- | --------
|Item 1. | Business



10-K, 10-Q, 8-K 1-800-SEC-0330






| |   |                                   
| | - | ----------------------------------
| |  | sales and marketing,              
|
| |  | research and development,         
|
| |  | business development,             
|
| |  | manufacturing,                    
|
| |  | packaging,                        
|
| |  | distribution,                     
|
| |  | quality control and assurance, and
|
| |  | regulatory management.            









| |   |                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------
| |  | securing U.S. Food and Drug Administration, which we refer
    to as the FDA, approved new label indications;
|
| |  | developing and producing different strengths;                                                                  
|
| |  | producing different package sizes;                                                                             

1



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| |   |                                     
| | - | ------------------------------------
| |  | developing new dosage forms; and    
|
| |  | developing new product formulations.







| |   |                          
| | - | -------------------------
| |  | cardiovascular/metabolic;
|
| |  | neuroscience;            
|
| |  | hospital/acute care; and 
|
| |  | other.                   

® ®




|                              |       |                                  |           |           |      |   |           |           |  |   |           |           | 
|----------------------------- | ----- | -------------------------------- | --------- | --------- | ---- | - | --------- | --------- |  | - | --------- | --------- | 
|                              |       | For the Years Ended December 31, |          
|                              |       |                                  |          
|                              |       | 2005                             |           |           | 2004 |   |           | 2003      | 
|                              |       |                                  |           |           |      |   |           |           | 
|Branded pharmaceuticals       |       | $                                | 1,542,124 |           |      | $ | 1,076,517 |           |  | $ | 1,272,350 |          
|Meridian Medical Technologies |       |                                  | 129,261   |           |      |   | 123,329   |           |  |   | 124,157   |          
|Royalties                     |       |                                  | 78,128    |           |      |   | 78,474    |           |  |   | 68,365    |          
|Contract manufacturing        |       |                                  | 22,167    |           |      |   | 26,045    |           |  |   | 27,289    |          
|Other                         |       |                                  | 1,201     |           |      |   | (1        | )         |  |   | 628       |          
|                              |       |                                  |           |           |      |   |           |           | 
|                              | Total |                                  | $         | 1,772,881 |      |   | $         | 1,304,364 |  |   | $         | 1,492,789 | 
|                              |       |                                  |           |           |      |   |           |           | 



Recent Milestones


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PT-141


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® ®




| |   |                                                                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | AtroPen®
    and
    ComboPen®,
    nerve agent antidotes;                                                                                                                                                                 
|
| |  | the Antidote Treatment Nerve Agent Auto-injector, a nerve gas
    antidote utilizing Meridians patented dual chambered
    auto-injector and injection process; and                                                       
|
| |  | auto-injectors filled with diazepam for treatment of seizures
    and morphine for pain management that are primarily sold to the
    U.S. Department of Defense (DoD) under an
    Industrial Base Maintenance Contract.



Industry




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| |   |                                                                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the aging of the patient population, including diseases specific
    to the aging process and demographic factors, including obesity,
    diabetes, cardiovascular disease, and patient and physician
    demand for products that meet chronic or unmet medical needs;
|
| |  | technological innovation, both in drug discovery and corporate
    processes;                                                                                                                                                                                          
|
| |  | merger and acquisition activity whereby pharmaceutical companies
    are acquiring one another or smaller biotechnology companies and
    divestitures of products deemed non-strategic;                                                                             
|
| |  | cost containment and downward price pressure from managed care
    organizations and governmental entities, both in the United
    States and overseas;                                                                                                                
|
| |  | increased drug development, manufacturing and compliance costs
    for pharmaceutical producers;                                                                                                                                                                       
|
| |  | the rise of generic companies and challenges to patent
    protection and exclusivity;                                                                                                                                                                                 
|
| |  | more frequent product liability litigation;                                                                                                                                                                                                                            
|
| |  | increased governmental scrutiny of the healthcare sector,
    including issues of patient safety, cost, efficacy and
    reimbursement/insurance matters; and                                                                                                          
|
| |  | the cost of advertising and marketing, including
    direct-to-consumer
    advertising on television and in print.                                                                                                                                                    

Branded Pharmaceuticals






| |   |                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------
| |  | cardiovascular/ metabolic (including
    Altace®,
    Corgard®,
    Levoxyl®
    and
    Cytomel®),     
|
| |  | neuroscience (including
    Sonata®
    and
    Skelaxin®),                                             
|
| |  | hospital/ acute care (including
    Thrombin-JMI®,
    Bicillin®,
    Synercid®
    and
    Intal®), and
|
| |  | other.                                                                                                  

® ® ® ®


Cardiovascular/ Metabolic. ® ® ® ® ® ® ® ® ®


Neuroscience. ® ® ®


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®


Hospital/ Acute Care. ® ® ® ® ® ® ® ®


Other.




|                          |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Product                   |  | Product Description and Indication                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                          |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Cardiovascular/ Metabolic |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Altace®(1)                |  | A hard-shell capsule for oral administration indicated for the
    treatment of hypertension and reduction of the risk of stroke,
    myocardial infarction (heart attack) and death from
    cardiovascular causes in patients 55 and over with either a
    history of coronary artery disease, stroke or peripheral
    vascular disease or with diabetes and one other cardiovascular
    risk factor (such as elevated cholesterol levels or cigarette
    smoking).
    Altace®
    is also indicated in stable patients who have demonstrated
    clinical signs of congestive heart failure after sustaining
    acute myocardial infarction.
|Corgard®(2)               |  | A beta-blocker tablet, indicated for the management of
    hypertension as well as long-term management of patients with
    angina pectoris.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|Levoxyl®                  |  | Color-coded, potency marked tablets indicated for thyroid
    hormone replacement or supplemental therapy for hypothyroidism.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|Cytomel®                  |  | A tablet indicated in the medical treatment of hypothyroidism.
    The only commercially available thyroid hormone tablet
    containing T(3) as a single entity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|Neuroscience              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Sonata®                   |  | A nonbenzodiazepine capsule treatment for insomnia.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|Skelaxin®                 |  | A muscle relaxant tablet indicated for the relief of discomforts
    associated with acute, painful musculoskeletal conditions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

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|                     |  |                                                                                                                                                                                                                                                                                                                                                                                
|-------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Product              |  | Product Description and Indication                                                                                                                                                                                                                                                                                                                                             
|                     |  |                                                                                                                                                                                                                                                                                                                                                                                
|Hospital/ Acute Care |  |                                                                                                                                                                                                                                                                                                                                                                                
|Thrombin-JMI®        |  | A chromatographically purified topical (bovine) thrombin
    solution indicated as an aid to hemostasis whenever oozing blood
    and minor bleeding from capillaries and small venules is
    accessible.                                                                                                                                                                     
|Synercid®            |  | An injectable antibiotic indicated for treatment of certain
    complicated skin and skin structure infections.                                                                                                                                                                                                                                                                
|Bicillin®            |  | A penicillin-based antibiotic suspension for deep muscular
    injection indicated for the treatment of infections due to
    penicillin-G-susceptible microorganisms that are susceptible to
    serum levels common to this particular dosage form.                                                                                                                          
|Intal®               |  | An oral multi-dose inhaler of a non-steroidal anti-inflammatory
    agent for the preventive management of asthma.                                                                                                                                                                                                                                                             
|Tilade®              |  | An oral multi-dose inhaler of a non-steroidal anti-inflammatory
    agent for the preventive management of asthma.                                                                                                                                                                                                                                                             
|Other                |  |                                                                                                                                                                                                                                                                                                                                                                                
|Menest®              |  | A film-coated esterified estrogen tablet for the treatment of
    vasomotor symptoms of menopause, atrophic vaginitis, kraurosis
    valvae, female hypogonadism, female castration, primary ovarian
    failure, breast cancer and prostatic carcinoma.                                                                                                                       
|Delestrogen®         |  | An injectable estrogen replacement therapy.                                                                                                                                                                                                                                                                                                                                    
|Aplisol®             |  | Aids in the detection of infections with mycobacterium
    tuberculosis.                                                                                                                                                                                                                                                                                                       
|Neosporin®(3)        |  | A prescription strength ophthalmic ointment and solution
    indicated for the topical treatment of ocular infections. It is
    also formulated as a prescription strength genito-urinary
    concentrated sterile irrigant indicated for short-term use as a
    continuous irrigant or rinse to help prevent infections
    associated with the use of indwelling catheters.






|    |                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------
|(1) | We acquired licenses for the exclusive rights in the United
    States under various patents to the active ingredient in
    Altace®.
|   
|(2) | We acquired a fully paid license to
    Corgard®
    in the United States.                                                           
|   
|(3) | We have exclusive licenses, free of royalty obligations, to
    manufacture and market prescription formulations of
    Neosporin®.  

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|                         |  |               |       | 
|------------------------ |  | ------------- | ----- | 
|                         |  | Net sales     |      
|                         |  |               |      
|                         |  | (in millions) |      
|Cardiovascular/Metabolic |  |               |       | 
|Altace®                  |  | $             | 554.4 | 
|Levoxyl®                 |  |               | 139.5 | 
|Cytomel®                 |  |               | 36.2  | 
|Corgard®                 |  |               | 6.6   | 
|Neuroscience             |  |               |       | 
|Skelaxin®                |  | $             | 344.6 | 
|Sonata®                  |  |               | 83.2  | 
|Hospital/Acute Care      |  |               |       | 
|Thrombin-JMI®            |  | $             | 220.6 | 
|Bicillin®                |  |               | 54.0  | 
|Synercid®                |  |               | 12.4  | 
|Intal®                   |  |               | 12.2  | 
|Other                    |  |               |       | 
|Aplisol®                 |  | $             | 16.4  | 
|Neosporin®               |  |               | 9.6   | 
|Menest®                  |  |               | 7.3   | 
|Delestrogen®             |  |               | 6.2   | 

Meridian Medical Technologies




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Royalties


® ® ® ® ® ® ® ® ®


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Contract Manufacturing




Sales and Marketing


co-promotion Scott-Levin,




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Manufacturing




(freeze-dried) ® ® ® ® ® ® ® ®






Research and Development








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| |   |                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Remoxytm,
    an investigational drug for the treatment of severe to chronic
    pain, which is currently in Phase III clinical trials;                            
|
| |  | Binodenoson, our next generation cardiac pharmacologic
    stress-imaging agent, which is currently in Phase III
    clinical trials;                              
|
| |  | Vanquixtm,
    a diazepam-filled auto-injector for the treatment of acute,
    repetitive epileptic seizures, which is currently in
    Phase III clinical trials; 
|
| |  | PT-141, an investigational drug for the treatment of ED and FSD,
    which is currently in late Phase II clinical trials;                                          
|
| |  | MRE0094, an investigational drug for the topical treatment of
    chronic diabetic neuropathic foot ulcers, which is currently in
    Phase II clinical trials; and
|
| |  | T-62, an investigational drug for the treatment of neuropathic
    pain, for which we have completed Phase I clinical trials.                                      





| |   |                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a novel formulation involving ramipril for which an NDA is
    pending;                                                                                                                                                       
|
| |  | an
    Altace®/diuretic
    combination product;                                                                                                                                                                              
|
| |  | a large multinational study (DREAM) to evaluate the ability
    of
    Altace®
    to prevent diabetes;                                                                                                                       
|
| |  | a program to evaluate whether
    Altace®
    slows the progression of chronic kidney disease, for which an
    sNDA was submitted to the FDA last year;                                                                      
|
| |  | a program to evaluate the safety and efficacy of
    Altace®
    in children, for which an sNDA was submitted to the FDA last
    year, and for which we expect to receive an additional six
    months of patent exclusivity;
|
| |  | a new formulation of
    Intal®,
    for the long-term management of asthma, utilizing the
    environmentally friendly propellant hydrofluoroalkane
    (HFA); and                                                         
|
| |  | a potential new formulation of
    metaxalone®.                                                                                                                                                                               



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Government Regulation














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Environmental Matters




Competition




| |        
| | -------
| | General



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| |                    
| | -------------------
| | Generic Substitutes



30-month 30-month Therapeutic Equivalence Evaluations 30-month


30-month 30-month


Intellectual Property




| |                                         
| | ----------------------------------------
| | Patents, Licenses and Proprietary Rights



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moderate-to ® ®




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| |           
| | ----------
| | Trademarks



Backlog




Employees




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|         |             
|-------- | ------------
|Item 1A. | Risk Factors

You should carefully consider the risks described below and
the other information contained in this report, including our
audited consolidated financial statements and related notes. The
risks described below are not the only ones facing our company.
Additional risks not presently known to us or that we currently
deem immaterial may also impair our business operations. If any
of the adverse events described in this Risk Factors
section or other sections of this report actually occurs, our
business, results of operations and financial condition could be
materially adversely affected, the trading price, if any, of our
securities could decline and you might lose all or part of your
investment.


Risks Related to our Business




| |                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------
| | The securities and derivative litigation or the continuing
    SEC investigation could have a material adverse effect on our
    business.









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| |                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we cannot successfully enforce our rights under the
    patents relating to three of our largest products,
    Altace®,
    Skelaxin®
    and
    Sonata®,
    and the patent relating to
    Adenoscan®,
    or if we are unable to secure or enforce our rights under other
    patents, trademarks, trade secrets or other intellectual
    property, our results of operations could be materially
    adversely affected.

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| |                                                                                                                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We have entered into agreements with manufacturers and/or
    distributors of generic pharmaceutical products with whom we are
    presently engaged, or have been previously engaged in
    litigation, and these activities could subject us to claims that
    we have violated federal and/or state anti-trust laws.





| |                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We cannot assure you that we will be able to comply with
    the terms and conditions of our corporate integrity agreement
    with the Office of Inspector General of the United States
    Department of Health and Human Services.





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| |                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We are subject to the risk of additional litigation and
    regulatory proceedings or actions in connection with the
    restatement of prior period financial statements.





| |                                                                                                               
| | --------------------------------------------------------------------------------------------------------------
| | We cannot assure you that we will be able to maintain
    effective internal control over financial reporting.

10-K










| |                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------
| | If sales of our major products or royalty payments to us
    decrease, our results of operations could be materially
    adversely affected.

® ® ® ® ®


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| |                                                                                                                                                                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Although we have an obligation to indemnify our officers
    and directors, we may not have sufficient insurance coverage
    available for this purpose and may be forced to pay these
    indemnification costs directly. We may not be able to maintain
    existing levels of coverage, which could make it difficult to
    attract or retain qualified directors and officers.





| |                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We are required annually, or on an interim basis as
    needed, to review the carrying value of our intangible assets
    and goodwill for impairment. If events such as generic
    competition or inability to manufacture or obtain sufficient
    supply of product occur that cause the sales of our products to
    decline, the intangible asset value of any declining product
    could become impaired.





| |                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we cannot implement our strategy to grow our business
    through increased sales, acquisitions, development and
    in-licensing, our business or competitive position in the
    pharmaceutical industry may suffer.







| |   |                                                                                       
| | - | --------------------------------------------------------------------------------------
| |  | Remoxytm,
    an investigational drug for the treatment of severe to chronic
    pain;
|
| |  | binodenoson, a myocardial pharmacologic stress imaging agent;                         

23



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| |   |                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------
| |  | PT-141, an investigational new drug for the treatment of
    erectile dysfunction and female sexual dysfunction;            
|
| |  | T-62, an investigational drug for the treatment of neuropathic
    pain;                                                    
|
| |  | MRE0094, an investigational drug for the topical treatment of
    chronic diabetic foot ulcers;                             
|
| |  | a new inhaler for
    Intal®
    using the alternative propellant HFA for which the FDA has
    issued an approvable letter;
|
| |  | a potential new formulation of metaxalone;                                                                                  
|
| |  | a novel formulation of ramipril for which an NDA is pending;                                                                
|
| |  | an
    Altace®/diuretic
    combination product; and                                                                        
|
| |  | Vanquixtm,
    a diazepam-filled auto-injector.                                                                             





| |   |                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------
| |  | engage in product life-cycle management to develop new
    indications and line extensions for existing and acquired
    products,
|
| |  | successfully develop, license or commercialize new products on a
    timely basis or at all,                                      
|
| |  | continue to develop products already in development in a cost
    effective manner, or                                            
|
| |  | obtain any FDA approvals necessary to successfully implement the
    strategies described above.                                  







| |   |                                                                                      
| | - | -------------------------------------------------------------------------------------
| |  | develop or license their products more rapidly than we can,                          
|
| |  | complete any applicable regulatory approval process sooner than
    we can,          
|
| |  | market or license their products before we can market or license
    our products, or
|
| |  | offer their newly developed or licensed products at prices lower
    than our prices,

FDA-approved




| |                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we cannot integrate the business of companies or
    products we acquire, or appropriately and successfully manage
    and coordinate third-party collaborative development activities,
    our business may suffer.



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| |                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We do not have proprietary protection for most of our
    branded pharmaceutical products, and our sales could suffer from
    competition by generic substitutes.





| |                                                                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we cannot sell our products in amounts greater than our
    minimum purchase requirements under some of our supply
    agreements or sell our products in accordance with our
    forecasts, our results of operations and cash flows may be
    adversely affected.

® ®






| |                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Any significant delays or difficulties in the manufacture
    of, or supply of materials for, our products may reduce our
    profit margins and revenues, limit the sales of our products, or
    harm our products reputations.

® ® ®


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| |                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If third-party developers of some of our new product
    candidates and reformulated products fail to devote sufficient
    time and resources to our concerns, or if their performance is
    substandard or otherwise fails to comply with the terms of their
    agreements with us, or if we mismanage the development process,
    the introduction of new or reformulated products may not be
    successful.





| |   |                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------
| |  | may not be successful in developing the products or product line
    extensions for us,                                                             
|
| |  | may face financial or business related difficulties which could
    make it difficult or impossible for them to continue business
    operations, or
|
| |  | may otherwise breach or terminate their agreements with us.                                                                                         





| |                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------
| | We are near maximum capacity at our Middleton, Wisconsin
    facility, which limits our ability to increase production of
    Thrombin-JMI®.

® ® ® ®




| |                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Wholesaler and distributor buying patterns and other
    factors may cause our quarterly results to fluctuate, and these
    fluctuations may adversely affect our short-term
    profitability.





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| |                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The insolvency of any of our principal customers, who are
    wholesale pharmaceutical distributors, could have a material
    adverse effect on our business, financial condition, results of
    operations and cash flows.





| |                                                                                                                                                                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our wholly owned subsidiary, King Research and
    Development, successor to Jones Pharma Incorporated, is a
    defendant in litigation which is currently being handled by its
    insurance carriers. Should this coverage be inadequate or
    subsequently denied or were we to lose some of these lawsuits,
    our results of operations could be adversely affected.

®




| |                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Sales of
    Thrombin-JMI®
    may be affected by the perception of risks associated with
    some of the raw materials used in its manufacture; if we are
    unable to successfully develop purification procedures at our
    facilities that are in accordance with the FDAs
    expectations for biological products generally, the FDA could
    limit our ability to manufacture biological products at those
    facilities.

® ® FDA-approved ® ®


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® ® ® ® ®


® ®




| |                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On November 15, 2006, we may be required to
    repurchase our
    23/4% Convertible
    Debentures due November 15, 2021, or we may elect to
    repurchase them sooner.

3 4




| |                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | A failure by Dey, L.P. to successfully market the
    EpiPen®
    auto-injector, or an increase in competition, could have a
    material adverse effect on our results of operations.

® ® ® ® ® ® ®


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| |                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our relationships with the U.S. Department of Defense
    and other government entities are subject to risks associated
    with doing business with the government.









| |                                                                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we fail to comply with our reporting and payment
    obligations under the Medicaid rebate program or other
    governmental pricing programs, we could be subject to additional
    reimbursements, penalties, sanctions and fines which could have
    a material adverse effect on our business.







| |                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------
| | If our operations were disrupted by a natural disaster or
    other catastrophic event, our business could be harmed.



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| |                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we are unable to obtain approval of new HFA propellants
    for
    Intal®
    and
    Tilade®,
    our sales of these products could be adversely affected.

® ® ® ® ® ®




| |                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------
| | There are risks associated with either the continuation or
    termination of our agreement with Wyeth to
    co-promote Altace®.

® ®




| |   |                                                                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Wyeth may pursue alternative technologies or develop alternative
    products, either on its own or in collaboration with others,
    that may compete with
    Altace®
    or which could affect Wyeths commitment to the
    collaboration;
|
| |  | Wyeth may pursue higher-priority programs or change the focus of
    its marketing programs, which could also affect its commitment
    to the collaboration; and                                                                             
|
| |  | Wyeth may choose to devote fewer resources to the marketing of
    Altace®.                                                                                                                                                                   

® ®


® Co-Promotion ® ® ®




| |                                                                                                    
| | ---------------------------------------------------------------------------------------------------
| | The loss of our key personnel or an inability to attract
    new personnel could harm our business.



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| |                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our shareholder rights plan, charter and bylaws discourage
    unsolicited takeover proposals and could prevent shareholders
    from realizing a premium on their common stock.





| |   |                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------
| |  | a classified Board of Directors;                                                                            
|
| |  | the ability of our Board of Directors to designate the terms of
    and issue new series of preferred stock;
|
| |  | advance notice requirements for nominations for election to our
    Board of Directors; and                 
|
| |  | special voting requirements for the amendment of our charter and
    bylaws.                                





| |                                                                                             
| | --------------------------------------------------------------------------------------------
| | Our stock price is volatile, which could result in
    substantial losses for our investors.





| |   |                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------
| |  | variations in our results of operations;                                                                                               
|
| |  | perceived risks and uncertainties concerning our business;                                                                             
|
| |  | announcements of earnings;                                                                                                             
|
| |  | developments in the governmental investigations or securities
    litigation;                                                          
|
| |  | the commencement of, or adverse developments in, any material
    litigation;                                                          
|
| |  | failure to meet or exceed our own projections for revenue,
    product sales and earnings per share;                                   
|
| |  | failure to meet timelines for product development or other
    projections or forward-looking statements we may make to the
    public;
|
| |  | failure to meet or exceed security analysts financial
    projections for our company;                                                
|
| |  | comments or recommendations made by securities analysts;                                                                               
|
| |  | general market conditions;                                                                                                             
|
| |  | perceptions about market conditions in the pharmaceutical
    industry;                                                                
|
| |  | announcements of technological innovations or the results of
    clinical trials or studies;                                           
|
| |  | changes in marketing, product pricing and sales strategies or
    development of new products by us or our competitors;                
|
| |  | changes in domestic or foreign governmental regulations or
    regulatory approval processes; and                                      
|
| |  | announcements concerning regulatory compliance and government
    agency reviews.                                                      

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Risks Related to Our Industry




| |                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------
| | Failure to comply with laws and government regulations
    could adversely affect our ability to operate our
    business.













33



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| |                                                                                        
| | ---------------------------------------------------------------------------------------
| | An increase in product liability claims or product recalls
    could harm our business.

® ® ®




34



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| |                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------
| | Any reduction in reimbursement levels by managed care
    organizations or other third-party payors may have an adverse
    effect on our revenues.









| |                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------
| | If we fail to comply with the safe harbors provided under
    various federal and state laws, our business could be adversely
    affected.



35



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| |                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------
| | In the future, the publication of negative results of
    studies or clinical trials may adversely impact our
    products.





| |                                                                               
| | ------------------------------------------------------------------------------
| | New legislation or regulatory proposals may adversely
    affect our revenues.





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| |                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------
| | The pharmaceutical industry is highly competitive, and
    other companies in our industry have much greater resources than
    we do.





| |   |                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | we will be able to continue to acquire commercially attractive
    pharmaceutical products, companies or technologies;                                                                                                             
|
| |  | additional competitors will not enter the market; or                                                                                                                                                                               
|
| |  | competition for acquisition of products in development,
    currently marketed products, companies and technologies will not
    have a material adverse effect on our business, financial
    condition and results of operations.



Competition for Acquisitions and In-License
Opportunities.




| |   |                                                                                                                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | we will be successful in the acquisition, or in-license of
    commercially attractive pharmaceutical opportunities, compounds,
    products, companies or technologies,                                                                                                                                                
|
| |  | additional competitors will not enter the market,                                                                                                                                                                                                                                                                       
|
| |  | competition for acquisition and in-license of pharmaceutical
    opportunities, compounds or products, including products in
    development, currently marketed products, companies and
    technologies will not have a material adverse effect on our
    business, financial condition and results of operations, or
|
| |  | we will be successful in bringing compounds, products in
    development or other opportunities to commercial success.                                                                                                                                                                                                  

Product Competition.


®


®


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®


®


®






| |   |                                                                                    
| | - | -----------------------------------------------------------------------------------
| |  | detailing and sampling to the primary prescribing physician
    groups, and        
|
| |  | sponsoring physician symposia, including continuing medical
    education seminars.





A WARNING ABOUT FORWARD-LOOKING STATEMENTS










| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the future potential of, including anticipated net sales and
    prescription trends for our branded pharmaceutical products,
    particularly
    Altace®,
    Skelaxin®,
    Thrombin-JMI®,
    Sonata®
    and
    Levoxyl®;                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | expectations regarding the enforceability and effectiveness of
    product-related patents, including in particular patents related
    to
    Altace®,
    Skelaxin®,
    Sonata®
    and
    Adenoscan®;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | expected trends and projections with respect to particular
    products, reportable segment and income and expense line items;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | the timeliness and accuracy of wholesale inventory data provided
    by our customers;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | the adequacy of our liquidity and capital resources;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | anticipated capital expenditures;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | the development, approval and successful commercialization of
    Remoxytm,
    an investigational drug for the treatment of
    moderate-to-severe
    chronic pain; binodenoson, our next generation cardiac
    pharmacologic stress-imaging agent; PT-141, an investigational
    new drug for the treatment of erectile dysfunction and female
    sexual dysfunction; T-62, an investigational drug for the
    treatment of neuropathic pain; MRE0094, an investigational drug
    for the topical treatment of chronic diabetic foot ulcers; the
    development of a new formulation of
    Skelaxin®;
    pre-clinical programs; and product life-cycle development
    projects;

38



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| |   |                                                                                                                                                                                                                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the development, approval and successful commercialization of a
    diazepam-filled auto-injector, new inhaler for
    Intal®
    and
    Tilade®
    using the alternative propellant HFA, and an
    Altace®/diuretic
    combination product;                                                                                                   
|
| |  | our successful execution of our growth strategies;                                                                                                                                                                                                                                                                                                 
|
| |  | anticipated developments and expansions of our business;                                                                                                                                                                                                                                                                                           
|
| |  | our plans for the manufacture of some of our products, including
    but not limited to, the anticipated expansion of our
    manufacturing capacity for
    Thrombin-JMI®;                                                                                                                                                                        
|
| |  | anticipated increases in sales of acquired products or royalty
    revenues;                                                                                                                                                                                                                                                                       
|
| |  | the success of our Co-Promotion Agreement with Wyeth;                                                                                                                                                                                                                                                                                              
|
| |  | the high cost and uncertainty of research, clinical trials and
    other development activities involving pharmaceutical products;                                                                                                                                                                                                                 
|
| |  | the development of product line extensions;                                                                                                                                                                                                                                                                                                        
|
| |  | the unpredictability of the duration or future findings and
    determinations of the FDA, including the pending applications
    related to our diazepam-filled auto-injector and a new
    Intal®
    inhaler formulation utilizing HFA, and other regulatory agencies
    worldwide;                                                            
|
| |  | products developed, acquired or in-licensed that may be
    commercialized;                                                                                                                                                                                                                                                                        
|
| |  | the intent, belief or current expectations, primarily with
    respect to our future operating performance;                                                                                                                                                                                                                                        
|
| |  | expectations regarding sales growth, gross margins,
    manufacturing productivity, capital expenditures and effective
    tax rates;                                                                                                                                                                                                              
|
| |  | expectations regarding the outcome of various pending legal
    proceedings including the
    Altace®
    and
    Skelaxin®
    patent challenges, the SEC and Office of Inspector General
    investigations, other possible governmental investigations,
    securities litigation, and other legal proceedings described in
    this report; and
|
| |  | expectations regarding our financial condition and liquidity as
    well as future cash flows and earnings.                                                                                                                                                                                                                                        





|         |                          
|-------- | -------------------------
|Item 1B. | Unresolved Staff Comments








|        |           
|------- | ----------
|Item 2. | Properties



|                        |  |                                                   
|----------------------- |  | --------------------------------------------------
|Location                |  | Business Segment(s)                               
|                        |  |                                                   
|Bristol, Tennessee      |  | Branded Pharmaceuticals                           
|Rochester, Michigan     |  | Branded Pharmaceuticals and Contract Manufacturing
|St. Louis, Missouri     |  | Meridian Medical Technologies                     
|St. Petersburg, Florida |  | Branded Pharmaceuticals                           
|Middleton, Wisconsin    |  | Branded Pharmaceuticals                           

39



---



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|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings



| |                                                 
| | ------------------------------------------------
| | Settlement of Governmental Pricing Investigation











40



---



##### Table of Contents









8-K




| |                  
| | -----------------
| | SEC Investigation







| |                                
| | -------------------------------
| | Securities and ERISA Litigation



41



---



##### Table of Contents

















42



---



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| |                             
| | ----------------------------
| | Altace®
    Patent Challenge

® ® Approved Drug Products with Therapeutic
Equivalence Evaluations, ® method-of ® ®


® ®


® ®




| |                               
| | ------------------------------
| | Skelaxin®
    Patent Challenge

® ® method-of ®


43



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®




® ® ® ®




| |                             
| | ----------------------------
| | Sonata®
    Patent Challenge

® ® ®


44



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##### Table of Contents



Adenoscan®
Patent Challenge


® ® ® ®


Prefest®
Patent Challenge


® ®


Thimerosal/ Vaccine
Related Litigation










| |                            
| | ---------------------------
| | Hormone Replacement Therapy



45



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| |                                     
| | ------------------------------------
| | Average Wholesale Pricing Litigation









| |                     
| | --------------------
| | Fen/ Phen Litigation





®


46



---



##### Table of Contents





®






| |                        
| | -----------------------
| | Other Legal Proceedings










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



47



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PART II







|        |                                                             
|------- | ------------------------------------------------------------
|Item 5. | Market for Common Equity and Related Stockholder
    Matters



|               |  |      |       |  |     |   |       | 
|-------------- |  | ---- | ----- |  | --- | - | ----- | 
|               |  | 2005 |      
|               |  |      |      
|               |  | High |       |  | Low |  
|               |  |      |       |  |     |  
|First quarter  |  | $    | 12.58 |  |     | $ | 8.28  | 
|Second quarter |  |      | 10.60 |  |     |   | 7.50  | 
|Third quarter  |  |      | 16.39 |  |     |   | 10.11 | 
|Fourth quarter |  |      | 17.45 |  |     |   | 14.22 | 

|               |  |      |       |  |     |   |       | 
|-------------- |  | ---- | ----- |  | --- | - | ----- | 
|               |  | 2004 |      
|               |  |      |      
|               |  | High |       |  | Low |  
|               |  |      |       |  |     |  
|First quarter  |  | $    | 20.62 |  |     | $ | 15.24 | 
|Second quarter |  |      | 18.68 |  |     |   | 11.30 | 
|Third quarter  |  |      | 14.00 |  |     |   | 10.32 | 
|Fourth quarter |  |      | 12.87 |  |     |   | 10.01 | 





48



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##### Table of Contents








|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data



|                                                                                                                                                      |                                                                                                         |                                       |           |      |           |   |           |       |           |   |           |       |           |      |           |      |           |   |         |      |         | 
|----------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------- | ------------------------------------- | --------- | ---- | --------- | - | --------- | ----- | --------- | - | --------- | ----- | --------- | ---- | --------- | ---- | --------- | - | ------- | ---- | ------- | 
|                                                                                                                                                      |                                                                                                         | For the Year Ended December 31,       |          
|                                                                                                                                                      |                                                                                                         |                                       |          
|                                                                                                                                                      |                                                                                                         | 2005                                  |           |      | 2004      |   |           | 2003  |           |   | 2002      |       |           | 2001 |          
|                                                                                                                                                      |                                                                                                         |                                       |           |      |           |   |           |       |           |   |           |       |           |      |          
|                                                                                                                                                      |                                                                                                         | (in thousands, except per share data) |          
|Statement of Income Data:                                                                                                                             |                                                                                                         |                                       |           |      |           |   |           |       |           |   |           |       |           |      |           |      |           |   |         |     
|Net sales                                                                                                                                             |                                                                                                         | $                                     | 1,694,753 |      |           | $ | 1,225,890 |       |           | $ | 1,424,424 |       |           | $    | 1,029,649 |      |           | $ | 802,380 |     
|Royalty revenue                                                                                                                                       |                                                                                                         |                                       | 78,128    |      |           |   | 78,474    |       |           |   | 68,365    |       |           |      | 58,375    |      |           |   | 46,774  |     
|                                                                                                                                                      |                                                                                                         |                                       |           |      |           |   |           |       |           |   |           |       |           |      |          
|                                                                                                                                                      |                                                                                                         | Total revenues                        |           |      | 1,772,881 |   |           |       | 1,304,364 |   |           |       | 1,492,789 |      |           |      | 1,088,024 |   |         |      | 849,154 | 
|                                                                                                                                                      |                                                                                                         |                                       |           |      |           |   |           |       |           |   |           |       |           |      |          
|Operating income (loss)(3)                                                                                                                            |                                                                                                         |                                       | 180,079   |      |           |   | (41,264   | )     |           |   | 151,952   |       |           |      | 275,043   |      |           |   | 351,379 |     
|Interest income                                                                                                                                       |                                                                                                         |                                       | 18,175    |      |           |   | 5,974     |       |           |   | 6,849     |       |           |      | 22,395    |      |           |   | 10,975  |     
|Interest expense                                                                                                                                      |                                                                                                         |                                       | (11,931   | )    |           |   | (12,588   | )     |           |   | (13,396   | )     |           |      | (12,419   | )    |           |   | (12,684 | )   
|Valuation (charge) benefit  convertible notes
    receivable                                                                                         |                                                                                                         |                                       |          |      |           |   | (2,887    | )     |           |   | 18,551    |       |           |      | (35,629   | )    |           |   |        |     
|Loss on investment                                                                                                                                    |                                                                                                         |                                       | (6,182    | )    |           |   | (6,520    | )     |           |   |          |       |           |      |          |      |           |   |        |     
|Extinguishment of debt expense(2)                                                                                                                     |                                                                                                         |                                       |          |      |           |   |          |       |           |   |          |       |           |      |          |      |           |   | (22,903 | )   
|Other (expense) income, net                                                                                                                           |                                                                                                         |                                       | (2,026    | )    |           |   | (749      | )     |           |   | (629      | )     |           |      | (884      | )    |           |   | 6,313   |     
|                                                                                                                                                      |                                                                                                         |                                       |           |      |           |   |           |       |           |   |           |       |           |      |          
|Income (loss) from continuing operations before income taxes,
    discontinued operations and cumulative effect of change in
    accounting principle |                                                                                                         |                                       | 178,115   |      |           |   | (58,034   | )     |           |   | 163,327   |       |           |      | 248,506   |      |           |   | 333,080 |     
|Income tax expense (benefit)                                                                                                                          |                                                                                                         |                                       | 61,485    |      |           |   | (7,412    | )     |           |   | 65,884    |       |           |      | 78,033    |      |           |   | 123,829 |     
|                                                                                                                                                      |                                                                                                         |                                       |           |      |           |   |           |       |           |   |           |       |           |      |          
|Income (loss) from continuing operations                                                                                                              |                                                                                                         |                                       | 116,630   |      |           |   | (50,622   | )     |           |   | 97,443    |       |           |      | 170,473   |      |           |   | 209,251 |     
|Income (loss) from discontinued operations(4)                                                                                                         |                                                                                                         |                                       | 1,203     |      |           |   | (109,666  | )     |           |   | (5,489    | )     |           |      | 11,928    |      |           |   | 9,230   |     
|                                                                                                                                                      |                                                                                                         |                                       |           |      |           |   |           |       |           |   |           |       |           |      |          
|Income (loss) before cumulative effect of change in accounting
    principle                                                                          |                                                                                                         |                                       | 117,833   |      |           |   | (160,288  | )     |           |   | 91,954    |       |           |      | 182,401   |      |           |   | 218,481 |     
|Cumulative effect of change in accounting principle(1)                                                                                                |                                                                                                         |                                       |          |      |           |   |          |       |           |   |          |       |           |      |          |      |           |   | (545    | )   
|                                                                                                                                                      |                                                                                                         |                                       |           |      |           |   |           |       |           |   |           |       |           |      |          
|Net income (loss)                                                                                                                                     |                                                                                                         | $                                     | 117,833   |      |           | $ | (160,288  | )     |           | $ | 91,954    |       |           | $    | 182,401   |      |           | $ | 217,936 |     
|                                                                                                                                                      |                                                                                                         |                                       |           |      |           |   |           |       |           |   |           |       |           |      |          
|Income per common share:                                                                                                                              |                                                                                                         |                                       |           |      |           |   |           |       |           |   |           |       |           |      |           |      |           |   |         |     
|Basic:                                                                                                                                                |                                                                                                         |                                       |           |      |           |   |           |       |           |   |           |       |           |      |           |      |           |   |         |     
|                                                                                                                                                      | Income (loss) from continuing operations before cumulative
    effect of change in accounting principle |                                       | $         | 0.48 |           |   | $         | (0.21 | )         |   | $         | 0.40  |           |      | $         | 0.70 |           |   | $       | 0.90 |        
|                                                                                                                                                      | Income (loss) from discontinued operations                                                              |                                       |           | 0.01 |           |   |           | (0.45 | )         |   |           | (0.02 | )         |      |           | 0.05 |           |   |         | 0.04 |        
|                                                                                                                                                      | Cumulative effect of change in accounting principle                                                     |                                       |           |     |           |   |           |      |           |   |           |      |           |      |           |     |           |   |         |     |        
|                                                                                                                                                      |                                                                                                         |                                       |           |      |           |   |           |       |           |   |           |       |           |      |          
|                                                                                                                                                      |                                                                                                         | $                                     | 0.49      |      |           | $ | (0.66     | )     |           | $ | 0.38      |       |           | $    | 0.75      |      |           | $ | 0.94    |     
|                                                                                                                                                      |                                                                                                         |                                       |           |      |           |   |           |       |           |   |           |       |           |      |          
|Diluted:                                                                                                                                              |                                                                                                         |                                       |           |      |           |   |           |       |           |   |           |       |           |      |           |      |           |   |         |     
|                                                                                                                                                      | Income (loss) from continuing operations before cumulative
    effect of change in accounting principle |                                       | $         | 0.48 |           |   | $         | (0.21 | )         |   | $         | 0.40  |           |      | $         | 0.69 |           |   | $       | 0.89 |        
|                                                                                                                                                      | Income (loss) from discontinued operations                                                              |                                       |           | 0.01 |           |   |           | (0.45 | )         |   |           | (0.02 | )         |      |           | 0.05 |           |   |         | 0.04 |        
|                                                                                                                                                      | Cumulative effect of change in accounting principle                                                     |                                       |           |     |           |   |           |      |           |   |           |      |           |      |           |     |           |   |         |     |        
|                                                                                                                                                      |                                                                                                         |                                       |           |      |           |   |           |       |           |   |           |       |           |      |          
|                                                                                                                                                      |                                                                                                         | $                                     | 0.49      |      |           | $ | (0.66     | )     |           | $ | 0.38      |       |           | $    | 0.74      |      |           | $ | 0.93    |     
|                                                                                                                                                      |                                                                                                         |                                       |           |      |           |   |           |       |           |   |           |       |           |      |          

49



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|                     |  |                |           |  |      |   |           | 
|-------------------- |  | -------------- | --------- |  | ---- | - | --------- | 
|                     |  | December 31,   |          
|                     |  |                |          
|                     |  | 2005           |           |  | 2004 |  
|                     |  |                |           |  |      |  
|                     |  | (in thousands) |          
|Balance Sheet Data:  |  |                |           |  |      |   |           | 
|Working capital      |  | $              | 276,329   |  |      | $ | 438,133   | 
|Total assets         |  |                | 2,965,242 |  |      |   | 2,924,156 | 
|Total debt           |  |                | 345,000   |  |      |   | 345,000   | 
|Shareholders equity |  |                | 1,973,422 |  |      |   | 1,848,790 | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Reflects the cumulative effect of a change in accounting
    principle of $545 (net of taxes of $325) due to the adoption of
    SFAS No. 133, Accounting for Derivative
    Instruments and Hedging Activities, during the first
    quarter of 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|(2) | Reflects early extinguishment of debt expense in connection with
    the repayment of some of our debt instruments during 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|(3) | Results for 2003 reflect a $15,212 reduction in the co-promotion
    fees paid to our
    Altace®
    co-promotion partner as a result of charges for amounts due
    under Medicaid and other governmental pricing programs for the
    years 1998 to 2002. Specifically (a) we recovered on a
    pre-tax basis $9,514 in fees we previously accrued during the
    fourth quarter of 2002 and have reduced the accrual for these
    fees by this amount in the fourth quarter of 2003 and
    (b) fees under our Co-Promotion Agreement for
    Altace®
    in the fourth quarter of 2003 were reduced on a pre-tax basis by
    an additional $5,698 as a result of the Medicaid accrual
    adjustment recorded in that quarter.
|   
|(4) | Reflects the classification of
    Nordette®
    and
    Prefest®
    product lines as discontinued operations. See Note 27 to
    our audited consolidated financial statements included elsewhere
    in this report.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis of Financial
    Condition and Results of Operations



OVERVIEW




| |             
| | ------------
| | Our Business







50



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| |   |                                                                       
| | - | ----------------------------------------------------------------------
| |  | Cardiovascular/metabolic (including
    Altace®
    and
    Levoxyl®),
|
| |  | Neuroscience (including
    Sonata®
    and
    Skelaxin®),           
|
| |  | Hospital/acute care (including
    Thrombin-JMI®), and                
|
| |  | Other.                                                                



®


2005 Highlights




| |             
| | ------------
| | Introduction





| |   |                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | believe we normalized the level of wholesale inventories of our
    branded pharmaceutical products;                                                                                                                                     
|
| |  | entered into definitive settlement agreements to resolve the
    governmental inquiries related to our underpayments of rebates
    owed to Medicaid and other governmental pricing programs during
    the period from 1994 to 2002;    
|
| |  | enhanced the strength of our executive management team; and                                                                                                                                                                              
|
| |  | strengthened our research and development pipeline with the
    addition of
    Remoxytm
    and up to three additional opioid products, and the continued
    development of PT-141 and other investigational drugs in our
    pipeline.





| |                               
| | ------------------------------
| | Wholesale Inventory Reductions





® ® ® ® ® ®


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®




| |                                                 
| | ------------------------------------------------
| | Settlement of Governmental Pricing Investigation











| |                                    
| | -----------------------------------
| | Executive Management Team Additions





| |                           
| | --------------------------
| | RemoxyTM/
    R&D Pipeline

tm tm moderate-to




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tm tm


tm ® tm tm


tm tm ® tm






®


® ® ® ® ® ®


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OPERATING RESULTS




|                       |                               |                                  |           |           |      |   |           |           |   |   |           |           | 
|---------------------- | ----------------------------- | -------------------------------- | --------- | --------- | ---- | - | --------- | --------- | - | - | --------- | --------- | 
|                       |                               | For the Years Ended December 31, |          
|                       |                               |                                  |          
|                       |                               | 2005                             |           |           | 2004 |   |           | 2003      |  
|                       |                               |                                  |           |           |      |   |           |           |  
|                       |                               | (in thousands)                   |          
|Total Revenues         |                               |                                  |           |           |      |   |           |           |   |   |           |          
|                       | Branded pharmaceuticals       |                                  | $         | 1,542,124 |      |   | $         | 1,076,517 |   |   | $         | 1,272,350 | 
|                       | Meridian Medical Technologies |                                  |           | 129,261   |      |   |           | 123,329   |   |   |           | 124,157   | 
|                       | Royalties                     |                                  |           | 78,128    |      |   |           | 78,474    |   |   |           | 68,365    | 
|                       | Contract manufacturing        |                                  |           | 22,167    |      |   |           | 26,045    |   |   |           | 27,289    | 
|                       | Other                         |                                  |           | 1,201     |      |   |           | (1        | ) |   |           | 628       | 
|                       |                               |                                  |           |           |      |   |           |           |  
|Total revenues         |                               | $                                | 1,772,881 |           |      | $ | 1,304,364 |           |   | $ | 1,492,789 |          
|Cost of Revenues       |                               |                                  |           |           |      |   |           |           |   |   |           |          
|                       | Branded pharmaceuticals       |                                  | $         | 222,924   |      |   | $         | 251,568   |   |   | $         | 280,580   | 
|                       | Meridian Medical Technologies |                                  |           | 62,958    |      |   |           | 59,296    |   |   |           | 66,203    | 
|                       | Royalties                     |                                  |           | 9,003     |      |   |           | 10,878    |   |   |           | 11,243    | 
|                       | Contract manufacturing        |                                  |           | 27,055    |      |   |           | 31,207    |   |   |           | 27,204    | 
|                       | Other cost of revenues        |                                  |           | 1,045     |      |   |           | (11       | ) |   |           | 611       | 
|                       |                               |                                  |           |           |      |   |           |           |  
|Total cost of revenues |                               | $                                | 322,985   |           |      | $ | 352,938   |           |   | $ | 385,841   |          
|Gross Profit           |                               |                                  |           |           |      |   |           |           |   |   |           |          
|                       | Branded pharmaceuticals       |                                  | $         | 1,319,200 |      |   | $         | 824,949   |   |   | $         | 991,770   | 
|                       | Meridian Medical Technologies |                                  |           | 66,303    |      |   |           | 64,033    |   |   |           | 57,954    | 
|                       | Royalties                     |                                  |           | 69,125    |      |   |           | 67,596    |   |   |           | 57,122    | 
|                       | Contract manufacturing        |                                  |           | (4,888    | )    |   |           | (5,162    | ) |   |           | 85        | 
|                       | Other                         |                                  |           | 156       |      |   |           | 10        |   |   |           | 17        | 
|                       |                               |                                  |           |           |      |   |           |           |  
|Total gross profit     |                               | $                                | 1,449,896 |           |      | $ | 951,426   |           |   | $ | 1,106,948 |          
|                       |                               |                                  |           |           |      |   |           |           |  





|                        |  |                                  |           |  |      |   |           |      |  |   |           | 
|----------------------- |  | -------------------------------- | --------- |  | ---- | - | --------- | ---- |  | - | --------- | 
|                        |  | For the Years Ended December 31, |          
|                        |  |                                  |          
|                        |  | 2005                             |           |  | 2004 |   |           | 2003 | 
|                        |  |                                  |           |  |      |   |           |      | 
|                        |  | (in thousands)                   |          
|Gross Sales             |  | $                                | 2,240,852 |  |      | $ | 2,017,296 |      |  | $ | 2,015,710 | 
|Returns                 |  |                                  | 5,012     |  |      |   | 183,066   |      |  |   | 103,525   | 
|Chargebacks             |  |                                  | 99,057    |  |      |   | 114,995   |      |  |   | 106,964   | 
|Commercial Rebates      |  |                                  | 192,203   |  |      |   | 203,405   |      |  |   | 172,720   | 
|Medicaid Rebates        |  |                                  | 78,753    |  |      |   | 135,545   |      |  |   | 106,614   | 
|Trade Discounts/Other   |  |                                  | 91,090    |  |      |   | 62,739    |      |  |   | 19,986    | 
|                        |  |                                  |           |  |      |   |           |      | 
|                        |  | $                                | 1,774,737 |  |      | $ | 1,317,546 |      |  | $ | 1,505,901 | 
|Discontinued Operations |  |                                  | 1,856     |  |      |   | 13,182    |      |  |   | 13,112    | 
|                        |  |                                  |           |  |      |   |           |      | 
|Net Sales               |  | $                                | 1,772,881 |  |      | $ | 1,304,364 |      |  | $ | 1,492,789 | 
|                        |  |                                  |           |  |      |   |           |      | 

®


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® ®


®


® ® ®






| |                                    
| | -----------------------------------
| | Accrual for Rebates (in thousands):

|                                                          |  |      |          |   |      |   |          |  
|--------------------------------------------------------- |  | ---- | -------- | - | ---- | - | -------- | -
|                                                          |  | 2005 |          |   | 2004 |  
|                                                          |  |      |          |   |      |  
|Balance at January 1, net of prepaid amounts              |  | $    | 172,161  |   |      | $ | 213,893  |  
|Current provision related to sales made in current period |  |      | 270,605  |   |      |   | 291,365  |  
|Current provision related to sales made in prior periods  |  |      | (24,008  | ) |      |   | 20,305   |  
|Actual rebates                                            |  |      | (298,844 | ) |      |   | (353,402 | )
|                                                          |  |      |          |   |      |  
|Ending balance, net of prepaid amounts                    |  | $    | 119,914  |   |      | $ | 172,161  |  
|                                                          |  |      |          |   |      |  



| |                                    
| | -----------------------------------
| | Accrual for Returns (in thousands):

|                     |  |      |         |   |      |   |          |  
|-------------------- |  | ---- | ------- | - | ---- | - | -------- | -
|                     |  | 2005 |         |   | 2004 |  
|                     |  |      |         |   |      |  
|Balance at January 1 |  | $    | 122,863 |   |      | $ | 82,477   |  
|Current provision    |  |      | 5,012   |   |      |   | 183,066  |  
|Actual returns       |  |      | (76,973 | ) |      |   | (142,680 | )
|                     |  |      |         |   |      |  
|Ending balance       |  | $    | 50,902  |   |      | $ | 122,863  |  
|                     |  |      |         |   |      |  



| |                                        
| | ---------------------------------------
| | Accrual for Chargebacks (in thousands):

|                     |  |      |          |   |      |   |          |  
|-------------------- |  | ---- | -------- | - | ---- | - | -------- | -
|                     |  | 2005 |          |   | 2004 |  
|                     |  |      |          |   |      |  
|Balance at January 1 |  | $    | 27,953   |   |      | $ | 25,349   |  
|Current provision    |  |      | 99,057   |   |      |   | 114,995  |  
|Actual chargebacks   |  |      | (113,857 | ) |      |   | (112,391 | )
|                     |  |      |          |   |      |  
|Ending balance       |  | $    | 13,153   |   |      | $ | 27,953   |  
|                     |  |      |          |   |      |  



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®


®


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Branded Pharmaceuticals


|                                |               |                                  |           |           |               |   |         |               |  |   |         |           |  |   |         |         |   |  |       |       |  |   |          |          |   |  |       |       |   
|------------------------------- | ------------- | -------------------------------- | --------- | --------- | ------------- | - | ------- | ------------- |  | - | ------- | --------- |  | - | ------- | ------- | - |  | ----- | ----- |  | - | -------- | -------- | - |  | ----- | ----- | --
|                                |               |                                  |           |           |               |   |         | Change        | 
|                                |               |                                  |           |           |               |   |         |               | 
|                                |               | For the Years Ended December 31, |           |           | 2005 vs. 2004 |   |         | 2004 vs. 2003 | 
|                                |               |                                  |           |           |               |   |         |               | 
|                                |               | 2005                             |           |           | 2004          |   |         | 2003          |  |   | $       |           |  | % |         |         | $ |  |       | %     | 
|                                |               |                                  |           |           |               |   |         |               |  |   |         |           |  |   |         |         |   |  |       |       | 
|                                |               | (in thousands)                   |           |           |               |   |         |               |  |   |        
|Branded pharmaceutical revenue: |               |                                  |           |           |               |   |         |               |  |   |         |           |  |   |         |         |   |  |       |       |  |   |          |          |   |  |       |      
|                                | Altace®       |                                  | $         | 554,353   |               |   | $       | 347,292       |  |   | $       | 536,932   |  |   | $       | 207,061 |   |  |       | 59.6% |  |   | $        | (189,640 | ) |  |       | (35.3 | )%
|                                | Skelaxin®     |                                  |           | 344,605   |               |   |         | 238,563       |  |   |         | 175,235   |  |   |         | 106,042 |   |  |       | 44.5  |  |   |          | 63,328   |   |  |       | 36.1  |   
|                                | Thrombin-JMI® |                                  |           | 220,617   |               |   |         | 174,570       |  |   |         | 140,403   |  |   |         | 46,047  |   |  |       | 26.4  |  |   |          | 34,167   |   |  |       | 24.3  |   
|                                | Levoxyl®      |                                  |           | 139,513   |               |   |         | 104,749       |  |   |         | 125,084   |  |   |         | 34,764  |   |  |       | 33.2  |  |   |          | (20,335  | ) |  |       | (16.3 | ) 
|                                | Sonata®       |                                  |           | 83,162    |               |   |         | 60,365        |  |   |         | 71,579    |  |   |         | 22,797  |   |  |       | 37.8  |  |   |          | (11,214  | ) |  |       | (15.7 | ) 
|                                | Other         |                                  |           | 199,874   |               |   |         | 150,978       |  |   |         | 223,117   |  |   |         | 48,896  |   |  |       | 32.4  |  |   |          | (72,139  | ) |  |       | (32.3 | ) 
|                                |               |                                  |           |           |               |   |         |               |  |   |         |           |  |   |         |         |   |  |       |       | 
|                                | Total revenue |                                  | $         | 1,542,124 |               |   | $       | 1,076,517     |  |   | $       | 1,272,350 |  |   | $       | 465,607 |   |  |       | 43.3% |  |   | $        | (195,833 | ) |  |       | (15.4 | )%
|Cost of Revenues                |               |                                  | 222,924   |           |               |   | 251,568 |               |  |   | 280,580 |           |  |   | (28,644 | )       |   |  | (11.4 | )     |  |   | (29,012  | )        |   |  | (10.3 | )    
|                                |               |                                  |           |           |               |   |         |               |  |   |         |           |  |   |         |         |   |  |       |       | 
|Gross Profit Margin             |               | $                                | 1,319,200 |           |               | $ | 824,949 |               |  | $ | 991,770 |           |  | $ | 494,251 |         |   |  | 59.9% |       |  | $ | (166,821 | )        |   |  | (16.8 | )%   
|                                |               |                                  |           |           |               |   |         |               |  |   |         |           |  |   |         |         |   |  |       |       | 

® ® ® ® ® ® ® ® ® ® ® ®


Sales of Key Products




| |        
| | -------
| | Altace®

® ® ® ® ® ® ® ®


® ®


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| |              
| | -------------
| | Thrombin-JMI®

® ® ® ®




| |          
| | ---------
| | Skelaxin®

® ® ® ® ®


®


® ® ® ®




| |        
| | -------
| | Sonata®

® ® ® ® ® ®


® ® ® ®




| |         
| | --------
| | Levoxyl®

® ®


58



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##### Table of Contents



® ® ®


® ®










Cost of Revenues






| |   |                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a charge during 2004 of approximately $46.0 million for the
    write-off of excess inventory which was partially attributable
    to reduced unit sales of products during 2004 as a result of
    wholesale inventory reductions;
|
| |  | differences in special items which benefited 2005 compared to
    2004 as discussed below.                                                                                                                                         







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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | As a result of declining
    Lorabid®
    prescriptions in 2003, we determined that we would not sell all
    of the
    Lorabid®
    inventory that we were required to purchase under our supply
    agreement with Eli Lilly. Accordingly, we recorded a
    $34.0 million charge during 2003 primarily related to our
    purchase commitments for
    Lorabid®
    that were in excess of expected demand. We recorded a similar
    charge in 2004 in the amount of $8.9 million for our
    purchase commitments for
    Lorabid®
    and some other small products for which commitments exceeded
    expected demand. With the termination of some of these purchase
    commitment contracts in 2005, we had a benefit of approximately
    $6.1 million which reduced our cost of revenues from
    branded pharmaceutical product.
|
| |  | We incurred charges in the amount of $4.6 million in 2004
    and $4.3 million in 2003 primarily related to the voluntary
    recalls of certain lots of
    Levoxyl®.
    Product returned as a result of this voluntary recall was less
    than originally estimated. Accordingly, cost of revenues from
    branded pharmaceutical products in 2005 was reduced by
    approximately $2.5 million.                                                                                                                                                                                                                                                                                                                                                                                                                                        

®




| |                              
| | -----------------------------
| | Meridian Medical Technologies

|                                      |                  |                                  |         |        |           |   |         |           |  |   |         |        |  |   |       |       |   |  |      |     |  |   |       |        |   |  |      |       |  
|------------------------------------- | ---------------- | -------------------------------- | ------- | ------ | --------- | - | ------- | --------- |  | - | ------- | ------ |  | - | ----- | ----- | - |  | ---- | --- |  | - | ----- | ------ | - |  | ---- | ----- | -
|                                      |                  |                                  |         |        |           |   |         | Change    | 
|                                      |                  |                                  |         |        |           |   |         |           | 
|                                      |                  | For the Years Ended December 31, |         |        | 2005-2004 |   |         | 2004-2003 | 
|                                      |                  |                                  |         |        |           |   |         |           | 
|                                      |                  | 2005                             |         |        | 2004      |   |         | 2003      |  |   | $       |        |  | % |       |       | $ |  |      | %   | 
|                                      |                  |                                  |         |        |           |   |         |           |  |   |         |        |  |   |       |       |   |  |      |     | 
|                                      |                  | (in thousands)                   |         |        |           |   |         |           |  |   |        
|Meridian Medical Technologies revenue |                  | $                                | 129,261 |        |           | $ | 123,329 |           |  | $ | 124,157 |        |  | $ | 5,932 |       |   |  | 4.8% |     |  | $ | (828  | )      |   |  | (0.7 | )%   
|                                      | Cost of Revenues |                                  |         | 62,958 |           |   |         | 59,296    |  |   |         | 66,203 |  |   |       | 3,662 |   |  |      | 6.2 |  |   |       | (6,907 | ) |  |      | (10.4 | )
|                                      |                  |                                  |         |        |           |   |         |           |  |   |         |        |  |   |       |       |   |  |      |     | 
|Gross Profit Margin                   |                  | $                                | 66,303  |        |           | $ | 64,033  |           |  | $ | 57,954  |        |  | $ | 2,270 |       |   |  | 3.5% |     |  | $ | 6,079 |        |   |  | 10.5 | %    
|                                      |                  |                                  |         |        |           |   |         |           |  |   |         |        |  |   |       |       |   |  |      |     | 

step-up




| |          
| | ---------
| | Royalties

|                    |                  |                                  |        |       |           |   |        |           |  |   |        |        |  |   |       |        |   |  |      |       |   |   |        |      |   |  |       |      |  
|------------------- | ---------------- | -------------------------------- | ------ | ----- | --------- | - | ------ | --------- |  | - | ------ | ------ |  | - | ----- | ------ | - |  | ---- | ----- | - | - | ------ | ---- | - |  | ----- | ---- | -
|                    |                  |                                  |        |       |           |   |        | Change    | 
|                    |                  |                                  |        |       |           |   |        |           | 
|                    |                  | For the Years Ended December 31, |        |       | 2005-2004 |   |        | 2004-2003 | 
|                    |                  |                                  |        |       |           |   |        |           | 
|                    |                  | 2005                             |        |       | 2004      |   |        | 2003      |  |   | $      |        |  | % |       |        | $ |  |      | %     |  
|                    |                  |                                  |        |       |           |   |        |           |  |   |        |        |  |   |       |        |   |  |      |       |  
|                    |                  | (in thousands)                   |        |       |           |   |        |           |  |   |       
|Royalty revenue     |                  | $                                | 78,128 |       |           | $ | 78,474 |           |  | $ | 68,365 |        |  | $ | (346  | )      |   |  | (0.4 | )%    |   | $ | 10,109 |      |   |  | 14.8% |     
|                    | Cost of Revenues |                                  |        | 9,003 |           |   |        | 10,878    |  |   |        | 11,243 |  |   |       | (1,875 | ) |  |      | (17.2 | ) |   |        | (365 | ) |  |       | (3.2 | )
|                    |                  |                                  |        |       |           |   |        |           |  |   |        |        |  |   |       |        |   |  |      |       |  
|Gross Profit Margin |                  | $                                | 69,125 |       |           | $ | 67,596 |           |  | $ | 57,122 |        |  | $ | 1,529 |        |   |  | 2.3  | %     |   | $ | 10,474 |      |   |  | 18.3% |     
|                    |                  |                                  |        |       |           |   |        |           |  |   |        |        |  |   |       |        |   |  |      |       |  

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| |                       
| | ----------------------
| | Contract Manufacturing

|                               |                  |                                  |        |        |           |   |        |           |  |   |        |        |  |   |        |        |   |  |       |       |   |   |        |       |  |  |      |      | 
|------------------------------ | ---------------- | -------------------------------- | ------ | ------ | --------- | - | ------ | --------- |  | - | ------ | ------ |  | - | ------ | ------ | - |  | ----- | ----- | - | - | ------ | ----- |  |  | ---- | ---- | 
|                               |                  |                                  |        |        |           |   |        | Change    | 
|                               |                  |                                  |        |        |           |   |        |           | 
|                               |                  | For the Years Ended December 31, |        |        | 2005-2004 |   |        | 2004-2003 | 
|                               |                  |                                  |        |        |           |   |        |           | 
|                               |                  | 2005                             |        |        | 2004      |   |        | 2003      |  |   | $      |        |  | % |        |        | $ |  |       | %     |  
|                               |                  |                                  |        |        |           |   |        |           |  |   |        |        |  |   |        |        |   |  |       |       |  
|                               |                  | (in thousands)                   |        |        |           |   |        |           |  |   |       
|Contract manufacturing revenue |                  | $                                | 22,167 |        |           | $ | 26,045 |           |  | $ | 27,289 |        |  | $ | (3,878 | )      |   |  | (14.9 | )%    |   | $ | (1,244 | )     |  |  | (4.6 | )%  
|                               | Cost of Revenues |                                  |        | 27,055 |           |   |        | 31,207    |  |   |        | 27,204 |  |   |        | (4,152 | ) |  |       | (13.3 | ) |   |        | 4,003 |  |  |      | 14.7 | 
|                               |                  |                                  |        |        |           |   |        |           |  |   |        |        |  |   |        |        |   |  |       |       |  
|Gross Profit Margin            |                  | $                                | (4,888 | )      |           | $ | (5,162 | )         |  | $ | 85     |        |  | $ | 274    |        |   |  | 5.3   | %     |   | $ | (5,247 | )     |  |  |     |     
|                               |                  |                                  |        |        |           |   |        |           |  |   |        |        |  |   |        |        |   |  |       |       |  







| |                             
| | ----------------------------
| | Operating Costs and Expenses

|                                                      |  |                                  |           |   |           |   |         |           |  |   |           |   |  |   |         |   |   |  |       |   |  |   |          |   |  |  |       |   
|----------------------------------------------------- |  | -------------------------------- | --------- | - | --------- | - | ------- | --------- |  | - | --------- | - |  | - | ------- | - | - |  | ----- | - |  | - | -------- | - |  |  | ----- | --
|                                                      |  |                                  |           |   |           |   |         | Change    | 
|                                                      |  |                                  |           |   |           |   |         |           | 
|                                                      |  | For the Years Ended December 31, |           |   | 2005-2004 |   |         | 2004-2003 | 
|                                                      |  |                                  |           |   |           |   |         |           | 
|                                                      |  | 2005                             |           |   | 2004      |   |         | 2003      |  |   | $         |   |  | % |         |   | $ |  |       | % | 
|                                                      |  |                                  |           |   |           |   |         |           |  |   |           |   |  |   |         |   |   |  |       |   | 
|                                                      |  | (in thousands)                   |           |   |           |   |         |           |  |   |          
|Total gross profit                                    |  | $                                | 1,449,896 |   |           | $ | 951,426 |           |  | $ | 1,106,948 |   |  | $ | 498,470 |   |   |  | 52.4% |   |  | $ | (155,522 | ) |  |  | (14.0 | )%
|Selling, general and administrative                   |  |                                  | 636,483   |   |           |   | 595,441 |           |  |   | 490,582   |   |  |   | 41,042  |   |   |  | 6.9   |   |  |   | 104,859  |   |  |  | 21.4  |   
|Research and development                              |  |                                  | 262,726   |   |           |   | 84,239  |           |  |   | 238,078   |   |  |   | 178,487 |   |   |  | 211.9 |   |  |   | (153,839 | ) |  |  | (64.6 | ) 
|Depreciation and amortization                         |  |                                  | 147,049   |   |           |   | 162,115 |           |  |   | 113,745   |   |  |   | (15,066 | ) |   |  | (9.3  | ) |  |   | 48,370   |   |  |  | 42.5  |   
|Intangible asset impairment                           |  |                                  | 221,054   |   |           |   | 149,592 |           |  |   | 124,616   |   |  |   | 71,462  |   |   |  | 47.8  |   |  |   | 24,976   |   |  |  | 20.0  |   
|Merger, restructuring, and other nonrecurring charges |  |                                  | 4,180     |   |           |   | 10,827  |           |  |   |          |   |  |   | (6,647  | ) |   |  | (61.4 | ) |  |   | 10,827   |   |  |  | 100.0 |   
|Gain on sale of products                              |  |                                  | (1,675    | ) |           |   | (9,524  | )         |  |   | (12,025   | ) |  |   | 7,849   |   |   |  | 82.4  |   |  |   | 2,501    |   |  |  | 20.8  |   
|                                                      |  |                                  |           |   |           |   |         |           |  |   |           |   |  |   |         |   |   |  |       |   | 
|Operating income (loss)                               |  | $                                | 180,079   |   |           | $ | (41,264 | )         |  | $ | 151,952   |   |  | $ | 221,343 |   |   |  |      |   |  | $ | (193,216 | ) |  |  |      |   
|                                                      |  |                                  |           |   |           |   |         |           |  |   |           |   |  |   |         |   |   |  |       |   | 

Selling, General and Administrative Expenses


|                                                                        |                                           |                                  |         |         |           |   |         |           |  |   |         |         |  |   |         |        |   |  |        |     |   |   |         |         |  |  |       |      |  
|----------------------------------------------------------------------- | ----------------------------------------- | -------------------------------- | ------- | ------- | --------- | - | ------- | --------- |  | - | ------- | ------- |  | - | ------- | ------ | - |  | ------ | --- | - | - | ------- | ------- |  |  | ----- | ---- | -
|                                                                        |                                           |                                  |         |         |           |   |         | Change    | 
|                                                                        |                                           |                                  |         |         |           |   |         |           | 
|                                                                        |                                           | For the Years Ended December 31, |         |         | 2005-2004 |   |         | 2004-2003 | 
|                                                                        |                                           |                                  |         |         |           |   |         |           | 
|                                                                        |                                           | 2005                             |         |         | 2004      |   |         | 2003      |  |   | $       |         |  | % |         |        | $ |  |        | %   |  
|                                                                        |                                           |                                  |         |         |           |   |         |           |  |   |         |         |  |   |         |        |   |  |        |     |  
|                                                                        |                                           | (in thousands)                   |         |         |           |   |         |           |  |   |        
|Selling, general and administrative, exclusive of co-promotion
    fees |                                           | $                                | 409,451 |         |           | $ | 409,775 |           |  | $ | 292,084 |         |  | $ | (324    | )      |   |  | (0.1   | )%  |   | $ | 117,691 |         |  |  | 40.3  | %   
|Medicaid related charge                                                 |                                           |                                  |        |         |           |   | 65,000  |           |  |   |        |         |  |   | (65,000 | )      |   |  | (100.0 | )   |   |   | 65,000  |         |  |  | 100.0 |     
|Mylan transaction costs                                                 |                                           |                                  | 3,898   |         |           |   | 9,062   |           |  |   |        |         |  |   | (5,164  | )      |   |  | (57.0  | )   |   |   | 9,062   |         |  |  | 100.0 |     
|Co-promotion fees                                                       |                                           |                                  | 223,134 |         |           |   | 111,604 |           |  |   | 198,498 |         |  |   | 111,530 |        |   |  | 99.9   |     |   |   | (86,894 | )       |  |  | (43.8 | )   
|                                                                        |                                           |                                  |         |         |           |   |         |           |  |   |         |         |  |   |         |        |   |  |        |     |  
|                                                                        | Total selling, general and administrative |                                  | $       | 636,483 |           |   | $       | 595,441   |  |   | $       | 490,582 |  |   | $       | 41,042 |   |  |        | 6.9 | % |   | $       | 104,859 |  |  |       | 21.4 | %
|                                                                        |                                           |                                  |         |         |           |   |         |           |  |   |         |         |  |   |         |        |   |  |        |     |  

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®






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Charges of $19.8 million, $24.8 million, and
    $28.9 million during 2005, 2004 and 2003, respectively,
    primarily due to professional fees related to the now completed
    investigation of our company by the HHS/ OIG, and the partially
    completed investigation by the SEC. For additional information,
    please see Settlement of Governmental Pricing
    Investigation, SEC Investigation and
    Securities and ERISA Litigation in Item 3,
    Legal Proceedings.                                                                                                                                                                                
|
| |  | Charges in the amount of $3.9 million and $9.1 million
    in 2005 and 2004, respectively, for professional fees and
    expenses related to the terminated merger agreement with Mylan
    Laboratories, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | A charge of $65.0 million related to Medicaid in the first
    half of 2004 to cover estimated interest, costs, fines,
    penalties and all other settlement costs in addition to the
    $65.4 million charge that we accrued in 2003 for estimated
    underpayments to Medicaid and other government pricing programs.
    We believe that this accrual totaling $130.4 million is
    adequate and sufficient to cover the full cost of all sums owed
    the federal and state governments pursuant to the settlement
    agreements. For additional information, please see
    Settlement of Governmental Pricing Investigation in
    Item 3, Legal Proceedings.





Research and Development Expense


|                                                       |                                |                     |         |         |           |   |        |           |  |   |         |         |  |   |         |         |  |   |          |          |  
|------------------------------------------------------ | ------------------------------ | ------------------- | ------- | ------- | --------- | - | ------ | --------- |  | - | ------- | ------- |  | - | ------- | ------- |  | - | -------- | -------- | -
|                                                       |                                | For the Years Ended |         |         | Change    |  
|                                                       |                                | December 31,        |         |         |           |  
|                                                       |                                |                     |         |         | 2005-2004 |   |        | 2004-2003 | 
|                                                       |                                | 2005                |         |         | 2004      |   |        | 2003      |  |   | $       |         |  | $ |        
|                                                       |                                |                     |         |         |           |   |        |           |  |   |         |         |  |   |        
|                                                       |                                | (in thousands)      |         |         |           |   |       
|Research and development                               |                                | $                   | 74,015  |         |           | $ | 67,939 |           |  | $ | 44,078  |         |  | $ | 6,076   |         |  | $ | 23,861   |         
|Research and development  in process upon acquisition |                                |                     | 188,711 |         |           |   | 16,300 |           |  |   | 194,000 |         |  |   | 172,411 |         |  |   | (177,700 | )       
|                                                       |                                |                     |         |         |           |   |        |           |  |   |         |         |  |   |        
|                                                       | Total research and development |                     | $       | 262,726 |           |   | $      | 84,239    |  |   | $       | 238,078 |  |   | $       | 178,487 |  |   | $        | (153,839 | )
|                                                       |                                |                     |         |         |           |   |        |           |  |   |         |         |  |   |        



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | A charge equaling $153.7 million during 2005 for our
    acquisition of in-process research and development associated
    with our strategic alliance with Pain Therapeutics to develop
    and commercialize
    RemoxyTM
    and other abuse-resistant opiod painkillers.
    Remoxytm
    is an investigational drug in late-stage clinical development by
    Pain Therapeutics for the treatment of
    moderate-to-severe
    chronic pain. We are responsible for all research and
    development expenses related to this alliance, which could total
    $100.0 million. The value of the in-process research and
    development project was expensed on the date of acquisition as
    it had not received regulatory approval and had no alternative
    future use.
    Remoxytm
    is in a Phase III clinical trial. If this Phase III
    clinical trial is successful, we currently anticipate obtaining
    FDA approval in 2008 or 2009. We believe there is a reasonable
    probability of completing the project successfully. However, the
    success of the project depends on the outcome of the
    Phase III clinical trial and the ability to successfully
    manufacture the product. If the project is not successfully
    completed, it could have a material effect on our cash flows and
    results of operations.
|
| |  | A charge of $35.0 million during 2005 for our acquisition
    of in-process research and development due to our
    co-exclusive license
    agreement with Mutual Pharmaceutical Company whereby we obtained
    a license to certain intellectual property relating to
    metaxalone. The intellectual property licensed to us relates to
    the potential for improved dosing and administration of
    metaxalone. The value of the in-process research and development
    project was expensed on the date of acquisition as it had not
    received regulatory approval. We are in the process of
    evaluating a potential new formulation of
    Skelaxin®.
    The success of the project will depend on additional in vitro
    and in vivo work in a clinical setting. The costs and the
    time-line of the potential project are being evaluated. The
    in-process research and development is part of the branded
    pharmaceutical segment.                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | A charge of $16.3 million during 2004 for our acquisition
    of in-process research and development associated with our entry
    into a strategic alliance with Palatin to develop and
    commercialize PT-141.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | A charge of $194.0 million during 2003 for in-process
    research and development associated with our acquisition of
    Sonata®
    and
    Skelaxin®.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

Depreciation and Amortization Expense


®


® ®


Other Operating Expenses






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | An intangible asset impairment charge in 2005 of
    $221.1 million, which is primarily related to greater than
    expected decline in prescriptions for
    Sonata®
    and anticipated decline in prescriptions in
    Corzide®.
    An intangible asset impairment charge in 2004 of
    $149.6 million, which primarily related to our decision to
    discontinue the
    Sonata®
    MR development program, and a greater than expected

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | decline in prescriptions for
    Florinef®
    and
    Tapazole®
    due to availability of generics for these products. An
    intangible asset impairment charge of $124.6 million in
    2003 primarily reflecting the reduction in the fair value of the
    Florinef®
    intangible assets upon the FDAs approval of a second
    generic on January 21, 2003. The additional intangible
    asset impairment charge pertaining to
    Florinef®
    recorded in 2004 reflects a further reduction in the fair value
    of the intangible assets associated with this product due to a
    decline in prescriptions that exceeded our original estimate.
    These special items were recorded in order to adjust the
    carrying value of the intangible assets on our balance sheet
    associated with these products so as to reflect the estimated
    fair value of these assets at the relevant time.
|
| |  | Restructuring charges in the amount of $2.3 million in 2005
    due to a decision to reduce our workforce in order to improve
    efficiencies in our operations. Restructuring charges in the
    amount of $1.9 million and $10.8 million in 2005 and
    2004, respectively, primarily as a result of separation
    agreements with several of our executives, the relocation of our
    sales and marketing operations from Bristol, Tennessee to
    Princeton, New Jersey and our decision to discontinue some
    relatively insignificant products associated with Meridian
    Medical Technologies business.                                                                                                                                                                                                                                                                                             
|
| |  | Income of $1.7 million and $9.5 million in 2005 and
    2004, respectively, primarily due to a gain on our divestiture
    of our
    Anusol-HC®
    and
    Proctocort®
    product lines and a gain on the termination of our co-promotion
    and license agreements with Novavax Inc. regarding
    Estrasorbtm
    and the repurchase by Novavax of all of its convertible notes
    which we held.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | During 2003, we had income of $12.0 million due to a gain
    on the sale of our animal health products and certain non-income
    producing intangible assets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

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| |                    
| | -------------------
| | NON-OPERATING ITEMS

|                                                |  |                                  |         |   |      |   |          |      |  |   |         |  
|----------------------------------------------- |  | -------------------------------- | ------- | - | ---- | - | -------- | ---- |  | - | ------- | -
|                                                |  | For the Years Ended December 31, |        
|                                                |  |                                  |        
|                                                |  | 2005                             |         |   | 2004 |   |          | 2003 | 
|                                                |  |                                  |         |   |      |   |          |      | 
|                                                |  | (in thousands)                   |        
|Interest income                                 |  | $                                | 18,175  |   |      | $ | 5,974    |      |  | $ | 6,849   |  
|Interest expense                                |  |                                  | (11,931 | ) |      |   | (12,588  | )    |  |   | (13,396 | )
|Valuation charge  convertible notes receivable |  |                                  |        |   |      |   | (2,887   | )    |  |   | 18,551  |  
|(Loss) gain on investment                       |  |                                  | (6,182  | ) |      |   | (6,520   | )    |  |   |        |  
|Other, net                                      |  |                                  | (2,026  | ) |      |   | (749     | )    |  |   | (629    | )
|Income tax expense (benefit)                    |  |                                  | 61,485  |   |      |   | (7,412   | )    |  |   | 65,884  |  
|Discontinued operations                         |  |                                  | 1,203   |   |      |   | (109,666 | )    |  |   | (5,489  | )

Other Income (Expense)








| |   |                                                                                                                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Charges of $6.2 million and $6.5 million in 2005 and
    2004, respectively, related to our investment in Novavax. During
    2005 and 2004, we incurred charges to write down our investment
    in Novavax to fair value. During the third quarter of 2005, we
    sold our investment in Novavax.
|
| |  | A charge of $2.9 million during 2004 and income of
    $18.6 million in 2003 to reflect a change in the valuation
    allowance for the convertible notes receivable from Novavax.
    Novavax repurchased the convertible notes from us in July 2004.                                              

Income Tax Expense (Benefit)








Discontinued Operations


® ® ® ®


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Off Balance Sheet Arrangements, Contractual Obligations and
Commercial Commitments






|                                              |       |                       |         |           |          |   |         |             |  |         |            |         |           |            |        |        |  |   |       |       | 
|--------------------------------------------- | ----- | --------------------- | ------- | --------- | -------- | - | ------- | ----------- |  | ------- | ---------- | ------- | --------- | ---------- | ------ | ------ |  | - | ----- | ----- | 
|                                              |       | Payment Due by Period |        
|                                              |       |                       |        
|                                              |       |                       |         | Less Than |          |   | One to  |             |  | Four to |            |         | More Than |           
|                                              |       | Total                 |         |           | One Year |   |         | Three Years |  |         | Five Years |         |           | Five Years |       
|                                              |       |                       |         |           |          |   |         |             |  |         |            |         |           |            |       
|Contractual Obligations:                      |       |                       |         |           |          |   |         |             |  |         |            |         |           |            |        |        |  |   |       |      
|Long-term debt                                |       | $                     | 345,000 |           |          | $ | 345,000 |             |  | $       |           |         |           | $          |       |        |  | $ |      |      
|Operating leases                              |       |                       | 86,628  |           |          |   | 19,170  |             |  |         | 34,519     |         |           |            | 29,625 |        |  |   | 3,314 |      
|Unconditional purchase obligations            |       |                       | 356,492 |           |          |   | 151,495 |             |  |         | 204,751    |         |           |            | 225    |        |  |   | 21    |      
|Interest on current portion of long-term debt |       |                       | 8,275   |           |          |   | 8,275   |             |  |         |           |         |           |            |       |        |  |   |      |      
|                                              |       |                       |         |           |          |   |         |             |  |         |            |         |           |            |       
|                                              | Total |                       | $       | 796,395   |          |   | $       | 523,940     |  |         | $          | 239,270 |           |            | $      | 29,850 |  |   | $     | 3,335 | 
|                                              |       |                       |         |           |          |   |         |             |  |         |            |         |           |            |       



® ® ® ®


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Liquidity and Capital Resources




| |        
| | -------
| | General



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® ®




®


tm tm moderate-to tm tm tm




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® ®


® ® ® ®




| |                                                 
| | ------------------------------------------------
| | Settlement of Governmental Pricing Investigation











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8-K




| |                  
| | -----------------
| | SEC Investigation







| |                                
| | -------------------------------
| | Securities and ERISA Litigation



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Patent Challenges


® ® ® ® ® ® ® ® ® ® ® ®


Cash Flows




| |                     
| | --------------------
| | Operating Activities

|                                          |  |                                  |         |  |      |   |         |      |  |   |         | 
|----------------------------------------- |  | -------------------------------- | ------- |  | ---- | - | ------- | ---- |  | - | ------- | 
|                                          |  | For the Years Ended December 31, |        
|                                          |  |                                  |        
|                                          |  | 2005                             |         |  | 2004 |   |         | 2003 | 
|                                          |  |                                  |         |  |      |   |         |      | 
|Net cash provided by operating activities |  | $                                | 519,510 |  |      | $ | 260,907 |      |  | $ | 435,686 | 









|                                                                           |  |      |          |   |      |   |         |      |  |   |          |  
|-------------------------------------------------------------------------- |  | ---- | -------- | - | ---- | - | ------- | ---- |  | - | -------- | -
|                                                                           |  | 2005 |          |   | 2004 |   |         | 2003 | 
|                                                                           |  |      |          |   |      |   |         |      | 
|Accounts receivable, net of allowance                                      |  | $    | (43,407  | ) |      | $ | 57,978  |      |  | $ | (84,186  | )
|Inventories                                                                |  |      | 46,349   |   |      |   | (15,205 | )    |  |   | (52,855  | )
|Prepaid expenses and other current assets                                  |  |      | (47,544  | ) |      |   | (16,161 | )    |  |   | 27,307   |  
|Accounts payable                                                           |  |      | (7,713   | ) |      |   | 9,197   |      |  |   | 33,958   |  
|Accrued expenses and other liabilities                                     |  |      | (52,544  | ) |      |   | 43,566  |      |  |   | 92,798   |  
|Income taxes payable                                                       |  |      | 22,161   |   |      |   | (78,708 | )    |  |   | 60,554   |  
|Deferred revenue                                                           |  |      | (9,092   | ) |      |   | (9,091  | )    |  |   | (9,092   | )
|Other assets                                                               |  |      | (4,471   | ) |      |   | (3,483  | )    |  |   | (2,978   | )
|Deferred taxes                                                             |  |      | (68,047  | ) |      |   | (17,083 | )    |  |   | (139,598 | )
|                                                                           |  |      |          |   |      |   |         |      | 
|Total changes from operating assets and liabilities and deferred
    taxes |  | $    | (164,308 | ) |      | $ | (28,990 | )    |  | $ | (74,092  | )



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| |                     
| | --------------------
| | Investing Activities

|                                        |  |                                  |          |   |      |   |          |      |  |   |          |  
|--------------------------------------- |  | -------------------------------- | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                        |  | For the Years Ended December 31, |         
|                                        |  |                                  |         
|                                        |  | 2005                             |          |   | 2004 |   |          | 2003 | 
|                                        |  |                                  |          |   |      |   |          |      | 
|Net cash (used in) investing activities |  | $                                | (683,007 | ) |      | $ | (154,071 | )    |  | $ | (459,444 | )



®








| |                     
| | --------------------
| | Financing Activities

|                                          |  |      |     |  |      |   |       |      |  |   |       | 
|----------------------------------------- |  | ---- | --- |  | ---- | - | ----- | ---- |  | - | ----- | 
|                                          |  | 2005 |     |  | 2004 |   |       | 2003 | 
|                                          |  |      |     |  |      |   |       |      | 
|Net cash provided by financing activities |  | $    | 857 |  |      | $ | 4,580 |      |  | $ | 2,543 | 





| |                                       
| | --------------------------------------
| | Certain Indebtedness and Other Matters

3 4


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3 4 3 4 1 4




S-3 S-3 S-3, S-1, S-1.




| |                    
| | -------------------
| | Impact of Inflation



Critical Accounting Policies and Estimates








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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Intangible assets, goodwill, and other long-lived assets.
    When we acquire product rights in conjunction with either
    business or asset acquisitions, we allocate an appropriate
    portion of the purchase price to intangible assets, goodwill and
    other long-lived assets. The purchase price is allocated to
    product rights and trademarks, patents, acquired research and
    development, if any, and other intangibles using the assistance
    of valuation experts. We estimate the useful lives of the assets
    by factoring in the characteristics of the products such as:
    patent protection, competition by products prescribed for
    similar indications, estimated future introductions of competing
    products, and other issues. The factors that drive the estimate
    of the life of the asset are inherently uncertain. However,
    patents have specific legal lives over which they are amortized.
    Conversely, trademarks and product rights have no specific legal
    lives. Trademarks and product rights will continue to be an
    asset to us after the expiration of the patent, as their
    economic value is not tied exclusively to the patent. We believe
    that by establishing separate lives for the patent versus the
    trademark and product rights, we are in essence using an
    accelerated method of amortization for the product as a whole.
    This results in greater amortization in earlier years when the
    product is under patent protection, as we are amortizing both
    the patent and the trademark and product rights, and less
    amortization when the product faces potential generic
    competition, as the amortization on the patent is eliminated.
    Because we have no discernible evidence to show a decline in
    cash flows for trademarks and product rights, or for patents, we
    use the straight-line method of amortization for both
    intangibles.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We review our property, plant and equipment and intangible
    assets for possible impairment whenever events or circumstances
    indicate that the carrying amount of an asset may not be
    recoverable. We review our goodwill for possible impairment
    annually, or whenever events or circumstances indicate that the
    carrying amount may not be recoverable. In any event, we
    evaluate the remaining useful lives of our intangible assets
    each reporting period to determine whether events and
    circumstances warrant a revision to the remaining period of
    amortization. This evaluation is performed through our quarterly
    evaluation of intangibles for impairment. Further, on an annual
    basis, we review the life of each intangible asset and make
    adjustments as deemed appropriate. In evaluating goodwill for
    impairment, we estimate the fair value of our individual
    business reporting units on a discounted cash flow basis.
    Assumptions and estimates used in the evaluation of impairment
    may affect the carrying value of long-lived assets, which could
    result in impairment charges in future periods. Such assumptions
    include projections of future cash flows and, in some cases, the
    current fair value of the asset. In addition, our depreciation
    and amortization policies reflect judgments on the estimated
    useful lives of assets.
|
| | We may incur impairment charges in the future if prescriptions
    for, or sales of, our products are less than current
    expectations and result in a reduction of our estimated
    undiscounted future cash flows. This may be caused by many
    factors, including competition from generic substitutes,
    significant delays in the manufacture or supply of materials,
    the publication of negative results of studies or clinical
    trials, new legislation or regulatory proposals.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

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##### Table of Contents





|                              |                                    |                          |               |                |              |           |          |         |         |         |         |         |         |         | 
|----------------------------- | ---------------------------------- | ------------------------ | ------------- | -------------- | ------------ | --------- | -------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | 
|                              |                                    |                          |               | Accumulated    |              |           | Net Book |        
|                              |                                    | Cost                     |               |                | Amortization |           |          | Value   |        
|                              |                                    |                          |               |                |              |           |          |         |        
|                              |                                    |                          |               | (In thousands) |              |           |         
|Branded                       |                                    |                          |               |                |              |           |          |         |         |         |         |        
|                              | Altace®                            |                          | $             | 276,150        |              |           | $        | 70,214  |         |         | $       | 205,936 |        
|                              | Other Cardiovascular/metabolic     |                          |               | 80,770         |              |           |          | 38,130  |         |         |         | 42,640  |        
|                              |                                    |                          |               |                |              |           |          |         |        
|                              |                                    | Cardiovascular/metabolic |               |                | 356,920      |           |          |         | 108,344 |         |         |         | 248,576 |        
|                              | Intal®                             |                          |               | 106,192        |              |           |          | 14,864  |         |         |         | 91,328  |        
|                              | Other Hospital/acute care          |                          |               | 191,393        |              |           |          | 44,701  |         |         |         | 146,692 |        
|                              |                                    |                          |               |                |              |           |          |         |        
|                              |                                    | Hospital/acute care      |               |                | 297,585      |           |          |         | 59,565  |         |         |         | 238,020 |        
|                              | Skelaxin®                          |                          |               | 203,015        |              |           |          | 32,631  |         |         |         | 170,384 |        
|                              | Sonata®                            |                          |               | 23,146         |              |           |          | 23,146  |         |         |         |        |        
|                              |                                    |                          |               |                |              |           |          |         |        
|                              |                                    | Neuroscience             |               |                | 226,161      |           |          |         | 55,777  |         |         |         | 170,384 |        
|                              |                                    | Other                    |               |                | 144,675      |           |          |         | 53,833  |         |         |         | 90,842  |        
|                              |                                    |                          | Total Branded |                |              | 1,025,341 |          |         |         | 277,519 |         |         |         | 747,822 | 
|Meridian Medical Technologies |                                    |                          | 146,217       |                |              |           | 17,200   |         |         |         | 129,017 |        
|Royalties                     |                                    |                          | 2,470         |                |              |           | 2,082    |         |         |         | 388     |        
|Contract manufacturing        |                                    |                          |              |                |              |           |         |         |         |         |        |        
|All other                     |                                    |                          |              |                |              |           |         |         |         |         |        |        
|                              |                                    |                          |               |                |              |           |          |         |        
|                              | Total trademark and product rights |                          | $             | 1,174,028      |              |           | $        | 296,801 |         |         | $       | 877,227 |        
|                              |                                    |                          |               |                |              |           |          |         |        



|                              |                                    |                          |               |              |         |         |                   |         |        |        |             |              |  |         |       |         |        |         |       |        |        |        | 
|----------------------------- | ---------------------------------- | ------------------------ | ------------- | ------------ | ------- | ------- | ----------------- | ------- | ------ | ------ | ----------- | ------------ |  | ------- | ----- | ------- | ------ | ------- | ----- | ------ | ------ | ------ | 
|                              |                                    | Year Ended               |               |              |         |         | Year Ended        |        
|                              |                                    | December 31, 2005        |               |              |         |         | December 31, 2004 |        
|                              |                                    |                          |               |              |         |         |                   |        
|                              |                                    |                          |               | Amortization |         |         | Life              |         |        |        |             | Amortization | 
|                              |                                    | Impairments              |               |              | Expense |         |                   | (Years) |        |        | Impairments |              |  | Expense |      
|                              |                                    |                          |               |              |         |         |                   |         |        |        |             |              |  |         |      
|                              |                                    | (In thousands)           |               |              |         |         | (In thousands)    |        
|Branded                       |                                    |                          |               |              |         |         |                   |         |        |        |             |              |  |         |       |         |        |         |       |       
|                              | Altace®                            |                          | $             |             |         |         | $                 | 13,352  |        |        |             | 21           |  |         | $     |        |        |         | $     | 10,135 |       
|                              | Other Cardiovascular/metabolic     |                          |               | 43,243       |         |         |                   | 7,672   |        |        |             |              |  |         |       | 21,193  |        |         |       | 6,587  |       
|                              |                                    |                          |               |              |         |         |                   |         |        |        |             |              |  |         |      
|                              |                                    | Cardiovascular/metabolic |               |              | 43,243  |         |                   |         | 21,024 |        |             |              |  |         |       |         | 21,193 |         |       |        | 16,722 |       
|                              | Intal®                             |                          |               |             |         |         |                   | 6,047   |        |        |             | 15           |  |         |       |        |        |         |       | 4,558  |       
|                              | Other Hospital/acute care          |                          |               | 5,970        |         |         |                   | 9,414   |        |        |             |             |  |         |       | 11,672  |        |         |       | 7,816  |       
|                              |                                    |                          |               |              |         |         |                   |         |        |        |             |              |  |         |      
|                              |                                    | Hospital/acute care      |               |              | 5,970   |         |                   |         | 15,461 |        |             |              |  |         |       |         | 11,672 |         |       |        | 12,374 |       
|                              | Skelaxin®                          |                          |               |             |         |         |                   | 15,548  |        |        |             | 13.5         |  |         |       |        |        |         |       | 11,558 |       
|                              | Sonata®                            |                          |               | 157,975      |         |         |                   | 9,117   |        |        |             | 2.5          |  |         |       | 82,081  |        |         |       | 12,635 |       
|                              |                                    |                          |               |              |         |         |                   |         |        |        |             |              |  |         |      
|                              |                                    | Neuroscience             |               |              | 157,975 |         |                   |         | 24,665 |        |             |              |  |         |       |         | 82,081 |         |       |        | 24,193 |       
|                              |                                    | Other                    |               |              |        |         |                   |         | 7,823  |        |             |              |  |         |       |         | 29,980 |         |       |        | 8,715  |       
|                              |                                    |                          |               |              |         |         |                   |         |        |        |             |              |  |         |      
|                              |                                    |                          | Total Branded |              |         | 207,188 |                   |         |        | 68,973 |             |              |  |         |       |         |        | 144,926 |       |        |        | 62,004 | 
|Meridian Medical Technologies |                                    |                          |              |              |         |         | 5,165             |         |        |        |             |              |  |         | 3,120 |         |        |         | 5,885 |       
|Royalties                     |                                    |                          |              |              |         |         | 42                |         |        |        |             |              |  |         |      |         |        |         | 42    |       
|Contract manufacturing        |                                    |                          |              |              |         |         |                  |         |        |        |             |              |  |         |      |         |        |         |      |       
|All other                     |                                    |                          |              |              |         |         |                  |         |        |        |             |              |  |         |      |         |        |         |      |       
|                              |                                    |                          |               |              |         |         |                   |         |        |        |             |              |  |         |      
|                              | Total trademark and product rights |                          | $             | 207,188      |         |         | $                 | 74,180  |        |        |             |              |  |         | $     | 148,046 |        |         | $     | 67,931 |       
|                              |                                    |                          |               |              |         |         |                   |         |        |        |             |              |  |         |      

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| |                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The remaining patent amortization period compared to the
    remaining amortization period for trademarks and product rights
    associated with significant products is as follows:

|          |  |                                     |                  |             |                |  |          | 
|--------- |  | ----------------------------------- | ---------------- | ----------- | -------------- |  | -------- | 
|          |  | Remaining Life at December 31, 2005 |                 
|          |  |                                     |                 
|          |  |                                     |                  | Trademark & |               
|          |  | Patent                              |                  |             | Product Rights | 
|          |  |                                     |                  |             |                | 
|Altace®   |  |                                     | 3 years 4 months |             |                |  | 14 years | 
|Skelaxin® |  |                                     |                 |             |                |  | 11 years | 
|Sonata®   |  |                                     | 1 year           |             |                |  |         | 
|Intal®    |  |                                     |                 |             |                |  | 12 years | 



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Inventories. Our inventories are valued at the lower of
    cost or market value. We evaluate our entire inventory for short
    dated or slow moving product and inventory commitments under
    supply agreements based on projections of future demand and
    market conditions. For those units in inventory that are so
    identified, we estimate their market value or net sales value
    based on current realization trends. If the projected net
    realizable value is less than cost, on a product basis, we make
    a provision to reflect the lower value of that inventory. This
    methodology recognizes projected inventory losses at the time
    such losses are evident rather than at the time goods are
    actually sold. We maintain supply agreements with some of our
    vendors which contain minimum purchase requirements. We estimate
    future inventory requirements based on current facts and trends.
    Should our minimum purchase requirements under supply agreements
    or if our estimated future inventory requirements exceed actual
    inventory quantities that we will be able to sell to our
    customers, we record a charge in costs of revenues.
|
| |  | Accruals for rebates, returns, and chargebacks. We
    establish accruals for returns, chargebacks and Medicaid and
    commercial rebates in the same period we recognize the related
    sales. The accruals reduce revenues and are included in accrued
    expenses. At the time a rebate or chargeback payment is made or
    a product return is received, which occurs with a delay after
    the related sale, we record a reduction to accrued expenses and,
    at the end of each quarter, adjust accrued expenses for
    differences between estimated and actual payments. Due to
    estimates and assumptions inherent in determining the amount of
    returns, chargebacks and rebates, the actual amount of product
    returns and claims for chargebacks and rebates may be different
    from our estimates.                                                                                                                                                                                                                                                                                                                                                                            



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our product returns accrual is primarily based on estimates of
    future product returns over the period during which customers
    have a right of return which is in turn based in part on
    estimates of the remaining shelf life of our products when sold
    to customers. Future product returns are estimated primarily on
    historical sales and return rates. We also consider the level of
    inventory of our products in the distribution channel. We base
    our estimate of our Medicaid rebate and commercial rebate
    accruals on estimates of usage by rebate-eligible customers,
    estimates of the level of inventory of our products in the
    distribution channel that remain potentially subject to those
    rebates, and the terms of our commercial and regulatory rebate
    obligations. We base our estimate of our chargeback accrual on
    our estimates of the level of inventory of our products in the
    distribution channel that remain subject to chargebacks, and
    specific contractual and historical chargeback rates. The
    estimate of the level of our products in the distribution
    channel is based on data provided by our three key wholesalers
    under inventory management agreements.
|
| | Our accruals for returns, chargebacks and rebates are adjusted
    as appropriate for specific known developments that may result
    in a change in our product returns or our rebate and chargeback
    obligations. In the case of product returns, we monitor demand
    levels for our products and the effects of the introduction of
    competing products and other factors on this demand. When we
    identify decreases in demand for products or experience higher
    than historical rates of returns caused by unexpected discrete
    events, we further analyze these products for potential
    additional supplemental reserves.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             



| |   |                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Revenue recognition. Revenue is recognized when title and
    risk of loss are transferred to customers, collection of sales
    is reasonably assured, and we have no further performance
    obligations.

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| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | This is generally at the time products are received by the
    customer. Accruals for estimated returns, rebates and
    chargebacks, determined based on historical experience, reduce
    revenues at the time of sale and are included in accrued
    expenses. Medicaid and certain other governmental pricing
    programs involve particularly difficult interpretations of
    relevant statutes and regulatory guidance, which are complex
    and, in certain respects, ambiguous. Moreover, prevailing
    interpretations of these statutes and guidance can change over
    time. Royalty revenue is recognized based on a percentage of
    sales (namely, contractually agreed-upon royalty rates) reported
    by third parties. See Note 2, Summary of Significant
    Accounting Policies, in our Notes to Consolidated
    Financial Statements included in this report.



| |                                     
| | ------------------------------------
| | Recently Issued Accounting Standards

4-01(a)









|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures About Market
    Risk





| |                   
| | ------------------
| | Interest Rate Risk





| |                
| | ---------------
| | Investment Risk








|        |                                            
|------- | -------------------------------------------
|Item 8. | Financial Statements and Supplementary Data



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|        |                                                                                                     
|------- | ----------------------------------------------------------------------------------------------------
|Item 9. | Changes in Accountants and Disagreements with Accountants
    on Accounting and Financial Disclosure








|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures



| |                                                 
| | ------------------------------------------------
| | Evaluation of Disclosure Controls and Procedures









| |                                                                     
| | --------------------------------------------------------------------
| | Managements Report on Internal Control over
    Financial Reporting



Internal Control  Integrated
Framework,






| |                                                         
| | --------------------------------------------------------
| | Changes in Internal Control over Financial
    Reporting





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PART III


10-K


79



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##### Table of Contents






PART IV







|         |                                                                     
|-------- | --------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules, and Reports on
    Form 8-K





|                                                                                                                                                   |  |             |     | 
|-------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | --- | 
|                                                                                                                                                   |  | Page Number |    
|                                                                                                                                                   |  |             |    
|Report of Independent Registered Public Accounting Firm                                                                                            |  |             | F-1 | 
|Consolidated Balance Sheets as of December 31, 2005 and 2004                                                                                       |  |             | F-3 | 
|Consolidated Statements of Income (Loss) for the years ended
    December 31, 2005, 2004 and 2003                                                  |  |             | F-4 | 
|Consolidated Statements of Shareholders Equity and Other
    Comprehensive Income (Loss) for the years ended
    December 31, 2005, 2004 and 2003 |  |             | F-5 | 
|Consolidated Statements of Cash Flows for the years ended
    December 31, 2005, 2004 and 2003                                                     |  |             | F-6 | 
|Notes to Consolidated Financial Statements                                                                                                         |  |             | F-7 | 









|        |    |         |  |             |  |                                                                                                                                                                                                                                      
|------- | -- | ------- |  | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |         |  |            
|Number  |    |         |  | Description
|        |    |         |  |            
|        | 3  | .1(1)   |  |            |  | Second Amended and Restated Charter of King Pharmaceuticals, Inc.                                                                                                                                                                    
|       
|        | 3  | .2(1)   |  |            |  | Amended and Restated Bylaws of King Pharmaceuticals, Inc.                                                                                                                                                                            
|       
|        | 4  | .1(1)   |  |            |  | Specimen Common Stock Certificate.                                                                                                                                                                                                   
|       
|        | 4  | .2(1)   |  |            |  | Form of Rights Agreement by and between King Pharmaceuticals,
    Inc. and The Bank of New York (successor in interest to
    Union Planters National Bank).                                                                         
|       
|        | 10 | .2(2)   |  |            |  | Co-Promotion Agreement, dated as of June 22, 2000, between
    American Home Products Corporation and King Pharmaceuticals, Inc.                                                                                                     
|       
|        | 10 | .3(2)   |  |            |  | Asset Purchase Agreement, dated as of June 22, 2000,
    between American Home Products Corporation and King
    Pharmaceuticals, Inc.                                                                                               
|       
|        | 10 | .5(4)   |  |            |  | Indenture, dated as of November 1, 2001, among King
    Pharmaceuticals, Inc., certain Subsidiary Guarantors and The
    Bank of New York, as trustee, relating to Kings
    23/4% Convertible
    Debentures due November 15, 2021.
|       
|        | 10 | .6(6)*  |  |            |  | 1998 King Pharmaceuticals, Inc. Non-Employee Director Stock
    Option Plan.                                                                                                                                                         
|       
|        | 10 | .7(1)*  |  |            |  | 1997 Incentive and Nonqualified Stock Option Plan for Employees
    of King Pharmaceuticals, Inc.                                                                                                                                    
|       
|        | 10 | .8(4)*  |  |            |  | King Pharmaceuticals, Inc. 401(k) Retirement Savings Plan.                                                                                                                                                                           
|       
|        | 10 | .9(5)*  |  |            |  | The Medco Research, Inc. 1989 Stock Option and Stock
    Appreciation Rights Plan, as amended through July 29, 1998.                                                                                                                 
|       
|        | 10 | .10(6)* |  |            |  | 1989 Incentive Stock Option Plan of Jones Medical Industries,
    Inc.                                                                                                                                                               
|       
|        | 10 | .11(6)* |  |            |  | Jones Medical Industries, Inc. 1994 Incentive Stock Plan.                                                                                                                                                                            
|       
|        | 10 | .12(6)* |  |            |  | Jones Medical Industries, Inc. 1997 Incentive Stock Plan.                                                                                                                                                                            

80



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|        |    |          |  |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|------- | -- | -------- |  | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |          |  |            
|Number  |    |          |  | Description
|        |    |          |  |            
|        | 10 | .13(7)   |  |            |  | Credit Agreement dated as of April 23, 2002, among King
    Pharmaceuticals, Inc., and the Lenders therein, Credit Suisse
    First Boston, Cayman Islands Branch, as Administrative Agent, as
    Collateral Agent and as Swingline Lender, and Bank of America,
    NA, J.P. Morgan Securities Inc., and UBS Warburg LLC as
    Co-Syndication Agents, Wachovia Bank National Association, as
    Documentation Agent, Credit Suisse First Boston as Sole Lead
    Arranger and Bookrunner.
|       
|        | 10 | .14(8)   |  |            |  | Amended and Restated Asset Purchase Agreement by and among Elan
    Corporation, plc, Elan Pharma International Limited, Elan
    Pharmaceuticals, Inc., Jones Pharma Incorporated and Monarch
    Pharmaceuticals, Inc. dated as of May 19, 2003.                                                                                                                                                                                                                                           
|       
|        | 10 | .15(9)*  |  |            |  | King Pharmaceuticals, Inc. Non-Employee Directors Deferred
    Compensation Plan.                                                                                                                                                                                                                                                                                                                                                                                                           
|       
|        | 10 | .16(10)* |  |            |  | Offer Letter to Brian A. Markison, dated July 15, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                      
|       
|        | 10 | .17(10)  |  |            |  | Collaborative Development and Marketing Agreement dated
    August 12, 2004 by and between Palatin Technologies, Inc.
    and King Pharmaceuticals, Inc.                                                                                                                                                                                                                                                                                                                                     
|       
|        | 10 | .18(11)* |  |            |  | King Pharmaceuticals, Inc. Severance Pay Plan: Tier I (Effective
    March 15, 2005)                                                                                                                                                                                                                                                                                                                                                                                                         
|       
|        | 10 | .19(12)* |  |            |  | Offer letter to Joseph Squicciarino dated May 25, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                      
|       
|        | 10 | .20(12)* |  |            |  | Offer letter to Eric J. Bruce dated May 19, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                            
|       
|        | 10 | .21(12)* |  |            |  | 2005 Executive Management Incentive Award                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|       
|        | 10 | .22(18)* |  |            |  | King Pharmaceuticals, Inc. Incentive Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|       
|        | 10 | .23(19)* |  |            |  | Compensation Policy for Non-Employee Directors                                                                                                                                                                                                                                                                                                                                                                                                                                               
|       
|        | 10 | .24(12)* |  |            |  | Salary Amendments For Certain Executive Officers                                                                                                                                                                                                                                                                                                                                                                                                                                             
|       
|        | 10 | .25(12)* |  |            |  | King Pharmaceuticals, Inc. Executive Deferred Compensation Plan                                                                                                                                                                                                                                                                                                                                                                                                                              
|       
|        | 10 | .26(13)* |  |            |  | Form of Restricted Stock Certificate and Restricted Stock Grant
    Agreement                                                                                                                                                                                                                                                                                                                                                                                                                
|       
|        | 10 | .27(13)* |  |            |  | Form of Option Certificate and Nonstatutory Stock Option
    Agreement.                                                                                                                                                                                                                                                                                                                                                                                                                      
|       
|        | 10 | .28(14)  |  |            |  | Settlement Agreement, dated as of October 31, 2005, among
    the United States of America acting through the entities named
    therein, King Pharmaceuticals, Inc. and Monarch Pharmaceuticals,
    Inc.                                                                                                                                                                                                                                                                                   
|       
|        | 10 | .29(14)  |  |            |  | Settlement Agreement, dated as of October 31, 2005, among
    the state of Massachusetts, King Pharmaceuticals, Inc. and
    Monarch Pharmaceuticals, Inc. and general description of the
    other state settlement agreements.                                                                                                                                                                                                                                                             
|       
|        | 10 | .30(14)  |  |            |  | Corporate Integrity Agreement, dated as of October 31,
    2005, between the Office of Inspector General of the Department
    of Health and Human Services and King Pharmaceuticals, Inc.                                                                                                                                                                                                                                                                                                   
|       
|        | 10 | .31(15)* |  |            |  | Retirement and Consulting Agreement, dated as of April 1,
    2005, and Waiver, Release and Non-Solicitation, Noncompete and
    Nondisclosure Agreement, dated as of May 12, 2005, by and
    between King Pharmaceuticals, Inc. and James R. Lattanzi.                                                                                                                                                                                                                                     
|       
|        | 10 | .32(16)* |  |            |  | First Amendment to Retirement and Consulting Agreement, dated as
    of November 4, 2005, by and between the Company and James
    R. Lattanzi.                                                                                                                                                                                                                                                                                                                                              
|       
|        | 10 | .33*     |  |            |  | Waiver, Release and Non-Solicitation, NonCompete and
    Nondisclosure Agreement, dated as of November 1, 2005, by
    and between King Pharmaceuticals, Inc. and John A. A. Bellamy                                                                                                                                                                                                                                                                                                         
|       
|        | 10 | .34*     |  |            |  | Addendum to the Waiver, Release and Non-Solicitation, Noncompete
    and Nondisclosure Agreement, dated as of December 20, 2005,
    by and between the Company and John A. A. Bellamy                                                                                                                                                                                                                                                                                                       
|       
|        | 10 | .35     |  |            |  | Collaboration Agreement by and between the Issuer and Pain
    Therapeutics, Inc., dated as of November 9, 2005                                                                                                                                                                                                                                                                                                                                                                              
|       
|        | 10 | .36     |  |            |  | License Agreement by and between the Issuer and Pain
    Therapeutics, Inc., dated as of December 29, 2005                                                                                                                                                                                                                                                                                                                                                                                   
|       
|        | 10 | .37     |  |            |  | License Agreement, by and between the Issuer and Mutual
    Pharmaceutical Company, Inc., dated as of December 6, 2005                                                                                                                                                                                                                                                                                                                                                                       

81



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|        |    |        |  |             |  |                                                                                                      
|------- | -- | ------ |  | ----------- |  | -----------------------------------------------------------------------------------------------------
|Exhibit |    |        |  |            
|Number  |    |        |  | Description
|        |    |        |  |            
|        | 10 | .38*   |  |            |  | Severance letter to John A. A. Bellamy dated October 14,
    2005.                                   
|       
|        | 14 | .1(17) |  |            |  | Corporate Code of Conduct and Ethics.                                                                
|       
|        | 21 | .1     |  |            |  | Subsidiaries of the Registrant.                                                                      
|       
|        | 23 | .1     |  |            |  | Consent of PricewaterhouseCoopers LLP.                                                               
|       
|        | 31 | .1     |  |            |  | Certificate of Chief Executive Officer Pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002.
|       
|        | 31 | .2     |  |            |  | Certificate of Chief Financial Officer Pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002.
|       
|        | 32 | .1     |  |            |  | Certificate of Chief Executive Officer Pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.
|       
|        | 32 | .2     |  |            |  | Certificate of Chief Financial Officer Pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.






|  |                                                                 
|- | ----------------------------------------------------------------
|* | Denotes management contract or compensatory plan or arrangement.



|  |                                                                                                                                                                                                                              
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Portions of this Exhibit have been omitted and filed separately
    with the Securities and Exchange Commission as part of an
    application for confidential treatment pursuant to the
    Securities Exchange Act of 1934.



|    |                                                                                                                                            
|--- | -------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference to Kings Registration Statement
    on Form S-1
    (Registration
    No. 333-38753)
    filed October 24, 1997.
|   
|(2) | Incorporated by reference to Kings Current Report on
    Form 8-K filed
    June 30, 2000.                                                
|   
|(3) | Incorporated by reference to Kings
    Schedule 13-D
    filed December 29, 2000, as amended.                                             
|   
|(4) | Incorporated by reference to Kings Registration Statement
    on Form S-8 filed
    February 26, 1999.                                    
|   
|(5) | Incorporated by reference to Kings Registration Statement
    on Form S-8 filed
    March 9, 2000.                                        
|   
|(6) | Incorporated by reference to Kings Registration Statement
    on Form S-8 filed
    September 6, 2000.                                    
|   
|(7) | Incorporated by reference to Kings Quarterly Report on
    Form 10-Q filed
    May 14, 2002.                                              
|   
|(8) | Incorporated by reference to Kings Current Report on
    Form 8-K filed
    June 13, 2003.                                                
|   
|(9) | Incorporated by reference to Kings Annual Report on
    Form 10-K for the
    year ended December 31, 2003.                               



|     |                                                                                                                                                  
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Incorporated by reference to Kings Quarterly Report on
    Form 10-Q filed
    March 21, 2005.                                                  
|    
|(11) | Incorporated by reference to Kings Current Report on
    Form 8-K filed
    March 21, 2005.                                                     
|    
|(12) | Incorporated by reference to Kings Quarterly Report on
    Form 10-Q filed
    August 9, 2005.                                                  
|    
|(13) | Incorporated by reference to Kings Quarterly Report on
    Form 10-Q filed
    November 9, 2005.                                                
|    
|(14) | Incorporated by reference to Kings Current Report on
    Form 8-K filed
    November 4, 2005.                                                   
|    
|(15) | Incorporated by reference to Kings Amendment No. 1 to
    Quarterly Report on
    Form 10-Q filed
    February 15, 2006.                        
|    
|(16) | Incorporated by reference to Kings Amendment No. 2 to
    Current Report on
    Form 8-K/ A filed
    February 15, 2006.                        
|    
|(17) | Incorporated by reference to Kings Current Report on
    Form 8-K filed
    December 8, 2005.                                                   
|    
|(18) | Incorporated by reference to Kings definitive proxy
    statement, filed April 28, 2005, related to the 2005 annual
    meeting of shareholders.
|    
|(19) | Incorporated by reference to Kings Current Report on
    Form 8-K filed February 27, 2006.                                                      

82



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM








Consolidated financial statements and financial statement
schedule




Internal control over financial reporting


Internal Control 
Integrated Framework Internal Control  Integrated
Framework




F-1



---



##### Table of Contents





















F-2



---



##### Table of Contents



KING PHARMACEUTICALS, INC.


CONSOLIDATED BALANCE SHEETS


as of December 31, 2005 and 2004


(in thousands, except share data)


|                                                              |                                                                                                                          |                                            |         |           |           |  |           |           |           | 
|------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------ | ------- | --------- | --------- |  | --------- | --------- | --------- | 
|                                                              |                                                                                                                          | 2005                                       |         |           | 2004      | 
|                                                              |                                                                                                                          |                                            |         |           |           | 
|ASSETS                                                       
|Current assets:                                               |                                                                                                                          |                                            |         |           |           |  |           |          
|                                                              | Cash and cash equivalents                                                                                                |                                            | $       | 30,014    |           |  | $         | 192,656   |          
|                                                              | Investments in debt securities                                                                                           |                                            |         | 494,663   |           |  |           | 149,430   |          
|                                                              | Restricted cash                                                                                                          |                                            |         | 130,400   |           |  |           | 97,730    |          
|                                                              | Marketable securities                                                                                                    |                                            |         |          |           |  |           | 16,498    |          
|                                                              | Accounts receivable, net of allowance of $12,280 and $15,348                                                             |                                            |         | 223,581   |           |  |           | 180,963   |          
|                                                              | Inventories                                                                                                              |                                            |         | 228,063   |           |  |           | 274,412   |          
|                                                              | Deferred income tax assets                                                                                               |                                            |         | 81,777    |           |  |           | 153,979   |          
|                                                              | Prepaid expenses and other current assets                                                                                |                                            |         | 59,291    |           |  |           | 61,395    |          
|                                                              |                                                                                                                          |                                            |         |           |           | 
|                                                              |                                                                                                                          | Total current assets                       |         |           | 1,247,789 |  |           |           | 1,127,063 | 
|Property, plant and equipment, net                            |                                                                                                                          |                                            | 302,474 |           |           |  | 280,731   |          
|Goodwill                                                      |                                                                                                                          |                                            | 121,152 |           |           |  | 121,152   |          
|Intangible assets, net                                        |                                                                                                                          |                                            | 967,194 |           |           |  | 1,285,961 |          
|Marketable securities                                         |                                                                                                                          |                                            | 18,502  |           |           |  |          |          
|Other assets (includes restricted cash of $14,129 and $2,775) |                                                                                                                          |                                            | 77,099  |           |           |  | 16,318    |          
|Deferred income tax assets                                    |                                                                                                                          |                                            | 231,032 |           |           |  | 92,931    |          
|                                                              |                                                                                                                          |                                            |         |           |           | 
|                                                              |                                                                                                                          | Total assets                               |         | $         | 2,965,242 |  |           | $         | 2,924,156 | 
|                                                              |                                                                                                                          |                                            |         |           |           | 
|                                                             
|LIABILITIES AND SHAREHOLDERS EQUITY                         
|Current liabilities:                                          |                                                                                                                          |                                            |         |           |           |  |           |          
|                                                              | Accounts payable                                                                                                         |                                            | $       | 84,539    |           |  | $         | 92,920    |          
|                                                              | Accrued expenses                                                                                                         |                                            |         | 519,620   |           |  |           | 596,010   |          
|                                                              | Income taxes payable                                                                                                     |                                            |         | 22,301    |           |  |           |          |          
|                                                              | Current portion of long term debt                                                                                        |                                            |         | 345,000   |           |  |           |          |          
|                                                              |                                                                                                                          |                                            |         |           |           | 
|                                                              |                                                                                                                          | Total current liabilities                  |         |           | 971,460   |  |           |           | 688,930   | 
|Long-term debt                                                |                                                                                                                          |                                            |        |           |           |  | 345,000   |          
|Other liabilities                                             |                                                                                                                          |                                            | 20,360  |           |           |  | 41,436    |          
|                                                              |                                                                                                                          |                                            |         |           |           | 
|                                                              |                                                                                                                          | Total liabilities                          |         |           | 991,820   |  |           |           | 1,075,366 | 
|                                                              |                                                                                                                          |                                            |         |           |           | 
|Commitments and contingencies (Note 19)                       |                                                                                                                          |                                            |         |           |           |  |           |          
|Shareholders equity:                                         |                                                                                                                          |                                            |         |           |           |  |           |          
|                                                              | Preferred stock, 15,000,000 shares authorized, no shares
    issued or outstanding                                       |                                            |         |          |           |  |           |          |          
|                                                              | Common stock, no par value, 300,000,000 shares authorized,
    241,802,724 and 241,706,583 shares issued and outstanding |                                            |         | 1,222,246 |           |  |           | 1,210,647 |          
|                                                              | Unearned compensation                                                                                                    |                                            |         | (8,764    | )         |  |           |          |          
|                                                              | Retained earnings                                                                                                        |                                            |         | 754,953   |           |  |           | 637,120   |          
|                                                              | Accumulated other comprehensive income                                                                                   |                                            |         | 4,987     |           |  |           | 1,023     |          
|                                                              |                                                                                                                          |                                            |         |           |           | 
|                                                              |                                                                                                                          | Total shareholders equity                 |         |           | 1,973,422 |  |           |           | 1,848,790 | 
|                                                              |                                                                                                                          |                                            |         |           |           | 
|                                                              |                                                                                                                          | Total liabilities and shareholders equity |         | $         | 2,965,242 |  |           | $         | 2,924,156 | 
|                                                              |                                                                                                                          |                                            |         |           |           | 



F-3



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##### Table of Contents



KING PHARMACEUTICALS, INC.


CONSOLIDATED STATEMENTS OF INCOME (LOSS)


for the years ended December 31, 2005, 2004 and 2003


(in thousands, except share data)


|                                         |                                                                                            |                                                  |         |           |           |   |          |           |           |   |        |           |           |  
|---------------------------------------- | ------------------------------------------------------------------------------------------ | ------------------------------------------------ | ------- | --------- | --------- | - | -------- | --------- | --------- | - | ------ | --------- | --------- | -
|                                         |                                                                                            | 2005                                             |         |           | 2004      |   |          | 2003      |          
|                                         |                                                                                            |                                                  |         |           |           |   |          |           |          
|Revenues:                                |                                                                                            |                                                  |         |           |           |   |          |           |           |   |        |          
|                                         | Net sales                                                                                  |                                                  | $       | 1,694,753 |           |   | $        | 1,225,890 |           |   | $      | 1,424,424 |          
|                                         | Royalty revenue                                                                            |                                                  |         | 78,128    |           |   |          | 78,474    |           |   |        | 68,365    |          
|                                         |                                                                                            |                                                  |         |           |           |   |          |           |          
|                                         |                                                                                            | Total revenues                                   |         |           | 1,772,881 |   |          |           | 1,304,364 |   |        |           | 1,492,789 |  
|                                         |                                                                                            |                                                  |         |           |           |   |          |           |          
|Operating costs and expenses:            |                                                                                            |                                                  |         |           |           |   |          |           |           |   |        |          
|                                         | Costs of revenues, exclusive of depreciation, amortization and
    impairments shown below |                                                  |         | 322,985   |           |   |          | 352,938   |           |   |        | 385,841   |          
|                                         |                                                                                            |                                                  |         |           |           |   |          |           |          
|                                         | Selling, general and administrative, exclusive of co-promotion
    fees                    |                                                  |         | 409,451   |           |   |          | 409,775   |           |   |        | 292,084   |          
|                                         | Medicaid related charge                                                                    |                                                  |         |          |           |   |          | 65,000    |           |   |        |          |          
|                                         | Mylan transaction costs                                                                    |                                                  |         | 3,898     |           |   |          | 9,062     |           |   |        |          |          
|                                         | Co-promotion fees                                                                          |                                                  |         | 223,134   |           |   |          | 111,604   |           |   |        | 198,498   |          
|                                         |                                                                                            |                                                  |         |           |           |   |          |           |          
|                                         |                                                                                            | Total selling, general and administrative        |         |           | 636,483   |   |          |           | 595,441   |   |        |           | 490,582   |  
|                                         |                                                                                            |                                                  |         |           |           |   |          |           |          
|                                         | Research and development                                                                   |                                                  |         | 74,015    |           |   |          | 67,939    |           |   |        | 44,078    |          
|                                         | Research and development  in process upon acquisition                                     |                                                  |         | 188,711   |           |   |          | 16,300    |           |   |        | 194,000   |          
|                                         |                                                                                            |                                                  |         |           |           |   |          |           |          
|                                         |                                                                                            | Total research and development                   |         |           | 262,726   |   |          |           | 84,239    |   |        |           | 238,078   |  
|                                         |                                                                                            |                                                  |         |           |           |   |          |           |          
|                                         | Depreciation and amortization                                                              |                                                  |         | 147,049   |           |   |          | 162,115   |           |   |        | 113,745   |          
|                                         | Intangible asset impairment                                                                |                                                  |         | 221,054   |           |   |          | 149,592   |           |   |        | 124,616   |          
|                                         | Merger, restructuring, and other nonrecurring charges                                      |                                                  |         | 4,180     |           |   |          | 10,827    |           |   |        |          |          
|                                         | Gain on sale of products                                                                   |                                                  |         | (1,675    | )         |   |          | (9,524    | )         |   |        | (12,025   | )        
|                                         |                                                                                            |                                                  |         |           |           |   |          |           |          
|                                         |                                                                                            | Total operating costs and expenses               |         |           | 1,592,802 |   |          |           | 1,345,628 |   |        |           | 1,340,837 |  
|                                         |                                                                                            |                                                  |         |           |           |   |          |           |          
|                                         | Operating income (loss)                                                                    |                                                  |         | 180,079   |           |   |          | (41,264   | )         |   |        | 151,952   |          
|                                         |                                                                                            |                                                  |         |           |           |   |          |           |          
|Other income (expense):                  |                                                                                            |                                                  |         |           |           |   |          |           |           |   |        |          
|                                         | Interest income                                                                            |                                                  |         | 18,175    |           |   |          | 5,974     |           |   |        | 6,849     |          
|                                         | Interest expense                                                                           |                                                  |         | (11,931   | )         |   |          | (12,588   | )         |   |        | (13,396   | )        
|                                         | Valuation (charge) benefit  convertible notes
    receivable                              |                                                  |         |          |           |   |          | (2,887    | )         |   |        | 18,551    |          
|                                         | Loss on investment                                                                         |                                                  |         | (6,182    | )         |   |          | (6,520    | )         |   |        |          |          
|                                         | Other, net                                                                                 |                                                  |         | (2,026    | )         |   |          | (749      | )         |   |        | (629      | )        
|                                         |                                                                                            |                                                  |         |           |           |   |          |           |          
|                                         |                                                                                            | Total other (expense) income                     |         |           | (1,964    | ) |          |           | (16,770   | ) |        |           | 11,375    |  
|                                         |                                                                                            |                                                  |         |           |           |   |          |           |          
|                                         | Income (loss) from continuing operations before income taxes                               |                                                  |         | 178,115   |           |   |          | (58,034   | )         |   |        | 163,327   |          
|Income tax expense (benefit)             |                                                                                            |                                                  | 61,485  |           |           |   | (7,412   | )         |           |   | 65,884 |          
|                                         |                                                                                            |                                                  |         |           |           |   |          |           |          
|Income (loss) from continuing operations |                                                                                            |                                                  | 116,630 |           |           |   | (50,622  | )         |           |   | 97,443 |          
|Discontinued operations (Note 27):       |                                                                                            |                                                  |         |           |           |   |          |           |           |   |        |          
|                                         | Income (loss) from discontinued operations, including loss on
    impairment               |                                                  |         | 1,876     |           |   |          | (172,750  | )         |   |        | (8,771    | )        
|                                         | Income tax expense (benefit)                                                               |                                                  |         | 673       |           |   |          | (63,084   | )         |   |        | (3,282    | )        
|                                         |                                                                                            |                                                  |         |           |           |   |          |           |          
|                                         |                                                                                            | Total income (loss) from discontinued operations |         |           | 1,203     |   |          |           | (109,666  | ) |        |           | (5,489    | )
|                                         |                                                                                            |                                                  |         |           |           |   |          |           |          
|Net income (loss)                        |                                                                                            | $                                                | 117,833 |           |           | $ | (160,288 | )         |           | $ | 91,954 |          
|                                         |                                                                                            |                                                  |         |           |           |   |          |           |          
|Income per common share:                 |                                                                                            |                                                  |         |           |           |   |          |           |           |   |        |          
|                                         | Basic: Income (loss) from continuing operations                                            |                                                  | $       | 0.48      |           |   | $        | (0.21     | )         |   | $      | 0.40      |          
|                                         |                                                                                            | Income (loss) from discontinued operations       |         |           | 0.01      |   |          |           | (0.45     | ) |        |           | (0.02     | )
|                                         |                                                                                            |                                                  |         |           |           |   |          |           |          
|                                         |                                                                                            | Net income (loss)                                |         | $         | 0.49      |   |          | $         | (0.66     | ) |        | $         | 0.38      |  
|                                         |                                                                                            |                                                  |         |           |           |   |          |           |          
|                                         | Diluted: Income (loss) from continuing operations                                          |                                                  | $       | 0.48      |           |   | $        | (0.21     | )         |   | $      | 0.40      |          
|                                         |                                                                                            | Income (loss) from discontinued operations       |         |           | 0.01      |   |          |           | (0.45     | ) |        |           | (0.02     | )
|                                         |                                                                                            |                                                  |         |           |           |   |          |           |          
|                                         |                                                                                            | Net income (loss)                                |         | $         | 0.49      |   |          | $         | (0.66     | ) |        | $         | 0.38      |  
|                                         |                                                                                            |                                                  |         |           |           |   |          |           |          



F-4



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##### Table of Contents



KING PHARMACEUTICALS, INC.


CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY


AND OTHER COMPREHENSIVE INCOME (LOSS)


for the years ended December 31, 2003, 2004 and 2005


(in thousands, except share data)


|                           |                                                                        |                            |             |         |          |   |           |              |       |   |               |         |   |        |         |          |       |   |       |       |   |   |           |          |          |  
|-------------------------- | ---------------------------------------------------------------------- | -------------------------- | ----------- | ------- | -------- | - | --------- | ------------ | ----- | - | ------------- | ------- | - | ------ | ------- | -------- | ----- | - | ----- | ----- | - | - | --------- | -------- | -------- | -
|                           |                                                                        |                            |             |         |          |   |           | Accumulated  |       |   |              
|                           |                                                                        | Common Stock               |             |         |          |   |           |              | Other |   |               |        
|                           |                                                                        |                            |             |         | Unearned |   |           | Retained     |       |   | Comprehensive |         |   |       
|                           |                                                                        | Shares                     |             |         | Amount   |   |           | Compensation |       |   | Earnings      |         |   | Income |         |          | Total |  
|                           |                                                                        |                            |             |         |          |   |           |              |       |   |               |         |   |        |         |          |       |  
|Balance, January 1, 2003,  |                                                                        |                            | 240,624,751 |         |          | $ | 1,201,897 |              |       | $ |              |         |   | $      | 705,454 |          |       | $ | 45    |       |   | $ | 1,907,396 |         
|                           |                                                                        |                            |             |         |          |   |           |              |       |   |               |         |   |        |         |          |       |  
|Comprehensive income:      |                                                                        |                            |             |         |          |   |           |              |       |   |               |         |   |        |         |          |       |   |       |       |   |   |           |         
|                           | Net income                                                             |                            |             |        |          |   |           |             |       |   |               |        |   |        |         | 91,954   |       |   |       |      |   |   |           | 91,954   |         
|                           | Net unrealized gain on marketable securities, net of tax of $363       |                            |             |        |          |   |           |             |       |   |               |        |   |        |         |         |       |   |       | 674   |   |   |           | 674      |         
|                           |                                                                        |                            |             |         |          |   |           |              |       |   |               |         |   |        |         |          |       |  
|                           | Foreign currency translation, net of tax of $212                       |                            |             |         |          |   |           |              |       |   |               |        |   |        |         |          |       |   |       | 394   |   |   |           | 394      |         
|                           |                                                                        |                            |             |         |          |   |           |              |       |   |               |         |   |        |         |          |       |  
|                           |                                                                        | Total comprehensive income |             |         |          |   |           |              |       |   |               |         |  |        |         |          |       |   |       |       |   |   |           |          | 93,022   |  
|                           |                                                                        |                            |             |         |          |   |           |              |       |   |               |         |   |        |         |          |       |  
|                           | Stock option activity                                                  |                            |             | 566,101 |          |   |           | 4,073        |       |   |               |        |   |        |         |         |       |   |       |      |   |   |           | 4,073    |         
|                           |                                                                        |                            |             |         |          |   |           |              |       |   |               |         |   |        |         |          |       |  
|Balance, December 31, 2003 |                                                                        |                            | 241,190,852 |         |          |   | 1,205,970 |              |       |   |              |         |   |        | 797,408 |          |       |   | 1,113 |       |   |   | 2,004,491 |         
|                           |                                                                        |                            |             |         |          |   |           |              |       |   |               |         |   |        |         |          |       |  
|Comprehensive income:      |                                                                        |                            |             |         |          |   |           |              |       |   |               |         |   |        |         |          |       |   |       |       |   |   |           |         
|                           | Net loss                                                               |                            |             |        |          |   |           |             |       |   |               |        |   |        |         | (160,288 | )     |   |       |      |   |   |           | (160,288 | )       
|                           | Net unrealized loss on marketable securities, net of tax of $43        |                            |             |        |          |   |           |             |       |   |               |        |   |        |         |         |       |   |       | (132  | ) |   |           | (132     | )       
|                           | Foreign currency translation                                           |                            |             |         |          |   |           |              |       |   |               |        |   |        |         |          |       |   |       | 42    |   |   |           | 42       |         
|                           |                                                                        |                            |             |         |          |   |           |              |       |   |               |         |   |        |         |          |       |  
|                           |                                                                        | Total comprehensive loss   |             |         |          |   |           |              |       |   |               |         |  |        |         |          |       |   |       |       |   |   |           |          | (160,378 | )
|                           |                                                                        |                            |             |         |          |   |           |              |       |   |               |         |   |        |         |          |       |  
|                           | Stock option activity                                                  |                            |             | 515,731 |          |   |           | 4,677        |       |   |               |        |   |        |         |         |       |   |       |      |   |   |           | 4,677    |         
|                           |                                                                        |                            |             |         |          |   |           |              |       |   |               |         |   |        |         |          |       |  
|Balance, December 31, 2004 |                                                                        |                            | 241,706,583 |         |          |   | 1,210,647 |              |       |   |              |         |   |        | 637,120 |          |       |   | 1,023 |       |   |   | 1,848,790 |         
|                           |                                                                        |                            |             |         |          |   |           |              |       |   |               |         |   |        |         |          |       |  
|Comprehensive income:      |                                                                        |                            |             |         |          |   |           |              |       |   |               |         |   |        |         |          |       |   |       |       |   |   |           |         
|                           | Net income                                                             |                            |             |        |          |   |           |             |       |   |               |        |   |        |         | 117,833  |       |   |       |      |   |   |           | 117,833  |         
|                           | Net unrealized gain on marketable securities, net of tax of
    $2,148 |                            |             |        |          |   |           |             |       |   |               |        |   |        |         |         |       |   |       | 4,042 |   |   |           | 4,042    |         
|                           | Foreign currency translation                                           |                            |             |        |          |   |           |             |       |   |               |        |   |        |         |         |       |   |       | (78   | ) |   |           | (78      | )       
|                           |                                                                        |                            |             |         |          |   |           |              |       |   |               |         |   |        |         |          |       |  
|                           |                                                                        | Total comprehensive income |             |         |          |   |           |              |       |   |               |         |   |        |         |          |       |   |       |       |   |   |           |          | 121,797  |  
|                           |                                                                        |                            |             |         |          |   |           |              |       |   |               |         |   |        |         |          |       |  
|                           | Issuance of stock-based compensation                                   |                            |             |        |          |   |           | 10,742       |       |   |               | (10,742 | ) |        |         |         |       |   |       |      |   |   |           |         |         
|                           |                                                                        |                            |             |         |          |   |           |              |       |   |               |         |   |        |         |          |       |  
|                           | Unearned compensation amortization                                     |                            |             |        |          |   |           |             |       |   |               | 1,978   |   |        |         |         |       |   |       |      |   |   |           | 1,978    |         
|                           |                                                                        |                            |             |         |          |   |           |              |       |   |               |         |   |        |         |          |       |  
|                           | Stock option activity                                                  |                            |             | 96,141  |          |   |           | 857          |       |   |               |        |   |        |         |         |       |   |       |      |   |   |           | 857      |         
|                           |                                                                        |                            |             |         |          |   |           |              |       |   |               |         |   |        |         |          |       |  
|Balance, December 31, 2005 |                                                                        |                            | 241,802,724 |         |          | $ | 1,222,246 |              |       | $ | (8,764        | )       |   | $      | 754,953 |          |       | $ | 4,987 |       |   | $ | 1,973,422 |         
|                           |                                                                        |                            |             |         |          |   |           |              |       |   |               |         |   |        |         |          |       |  



F-5



---



##### Table of Contents



KING PHARMACEUTICALS, INC.


CONSOLIDATED STATEMENTS OF CASH FLOWS


for the years ended December 31, 2005, 2004 and 2003


(in thousands)


|                                                                                                        |                                                                                              |                                                  |                                                                        |            |         |         |          |            |         |         |          |            |          |         |  
|------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------- | ------------------------------------------------ | ---------------------------------------------------------------------- | ---------- | ------- | ------- | -------- | ---------- | ------- | ------- | -------- | ---------- | -------- | ------- | -
|                                                                                                        |                                                                                              | 2005                                             |                                                                        |            | 2004    |         |          | 2003       |        
|                                                                                                        |                                                                                              |                                                  |                                                                        |            |         |         |          |            |        
|Cash flows from operating activities of continuing operations:                                          |                                                                                              |                                                  |                                                                        |            |         |         |          |            |         |         |          |           
|                                                                                                        | Net income (loss)                                                                            |                                                  | $                                                                      | 117,833    |         |         | $        | (160,288   | )       |         | $        | 91,954     |         
|                                                                                                        | (Income) loss from discontinued operations                                                   |                                                  |                                                                        | (1,203     | )       |         |          | 109,666    |         |         |          | 5,489      |         
|                                                                                                        | Adjustments to reconcile net income (loss) to net cash provided
    by operating activities: |                                                  |                                                                        |            |         |         |          |            |         |         |          |            |         
|                                                                                                        |                                                                                              | Depreciation and amortization                    |                                                                        |            | 147,049 |         |          |            | 162,115 |         |          |            | 113,745  |        
|                                                                                                        |                                                                                              | Amortization of deferred financing costs         |                                                                        |            | 3,096   |         |          |            | 3,145   |         |          |            | 3,160    |        
|                                                                                                        |                                                                                              | Deferred income taxes                            |                                                                        |            | (68,047 | )       |          |            | (17,083 | )       |          |            | (139,598 | )      
|                                                                                                        |                                                                                              | Valuation charge on convertible notes receivable |                                                                        |            |        |         |          |            | 2,887   |         |          |            | (18,151  | )      
|                                                                                                        |                                                                                              | Impairment of intangible assets                  |                                                                        |            | 221,054 |         |          |            | 149,592 |         |          |            | 124,616  |        
|                                                                                                        |                                                                                              | In-process research and development charges      |                                                                        |            | 188,711 |         |          |            | 16,300  |         |          |            | 194,000  |        
|                                                                                                        |                                                                                              | Gain on sale of products                         |                                                                        |            | (1,675  | )       |          |            | (9,524  | )       |          |            | (12,025  | )      
|                                                                                                        |                                                                                              | Loss on investment                               |                                                                        |            | 6,182   |         |          |            | 6,520   |         |          |            |         |        
|                                                                                                        |                                                                                              | Other non-cash items, net                        |                                                                        |            | 791     |         |          |            | 9,484   |         |          |            | 6,990    |        
|                                                                                                        |                                                                                              | Stock based compensation                         |                                                                        |            | 1,978   |         |          |            |        |         |          |            |         |        
|                                                                                                        |                                                                                              | Changes in operating assets and liabilities:     |                                                                        |            |         |         |          |            |         |         |          |            |          |        
|                                                                                                        |                                                                                              |                                                  | Accounts receivable                                                    |            |         | (43,407 | )        |            |         | 57,978  |          |            |          | (84,186 | )
|                                                                                                        |                                                                                              |                                                  | Inventories                                                            |            |         | 46,349  |          |            |         | (15,205 | )        |            |          | (52,855 | )
|                                                                                                        |                                                                                              |                                                  | Prepaid expenses and other current assets                              |            |         | (47,544 | )        |            |         | (16,161 | )        |            |          | 27,307  |  
|                                                                                                        |                                                                                              |                                                  | Other assets                                                           |            |         | (4,471  | )        |            |         | (3,483  | )        |            |          | (2,978  | )
|                                                                                                        |                                                                                              |                                                  | Accounts payable                                                       |            |         | (7,713  | )        |            |         | 9,197   |          |            |          | 33,958  |  
|                                                                                                        |                                                                                              |                                                  | Accrued expenses and other liabilities                                 |            |         | (52,544 | )        |            |         | 43,566  |          |            |          | 92,798  |  
|                                                                                                        |                                                                                              |                                                  | Deferred revenue                                                       |            |         | (9,092  | )        |            |         | (9,091  | )        |            |          | (9,092  | )
|                                                                                                        |                                                                                              |                                                  | Income taxes                                                           |            |         | 22,161  |          |            |         | (78,708 | )        |            |          | 60,554  |  
|                                                                                                        |                                                                                              |                                                  |                                                                        |            |         |         |          |            |        
|                                                                                                        |                                                                                              |                                                  | Net cash provided by operating activities of continuing
    operations |            |         | 519,508 |          |            |         | 260,907 |          |            |          | 435,686 |  
|                                                                                                        |                                                                                              |                                                  |                                                                        |            |         |         |          |            |        
|Cash flows from investing activities of continuing operations
    (2004 and 2003 revised  see Note 4): |                                                                                              |                                                  |                                                                        |            |         |         |          |            |         |         |          |           
|                                                                                                        | Purchases of investments in debt securities                                                  |                                                  |                                                                        | (3,744,660 | )       |         |          | (1,687,684 | )       |         |          | (5,553,611 | )       
|                                                                                                        | Proceeds from maturity and sale of investments in debt securities                            |                                                  |                                                                        | 3,399,427  |         |         |          | 1,641,179  |         |         |          | 5,969,186  |         
|                                                                                                        | Transfer (to)/from restricted cash                                                           |                                                  |                                                                        | (73,629    | )       |         |          | (2,331     | )       |         |          | (67,743    | )       
|                                                                                                        | Purchases of property, plant and equipment                                                   |                                                  |                                                                        | (53,290    | )       |         |          | (55,141    | )       |         |          | (51,201    | )       
|                                                                                                        | Acquisition of primary care business of Elan                                                 |                                                  |                                                                        |           |         |         |          | (36,000    | )       |         |          | (761,745   | )       
|                                                                                                        | Acquisition of Meridian                                                                      |                                                  |                                                                        |           |         |         |          |           |         |         |          | (238,498   | )       
|                                                                                                        | Palatin collaboration agreement                                                              |                                                  |                                                                        | (10,000    | )       |         |          | (20,000    | )       |         |          |           |         
|                                                                                                        | Purchases of intangible assets                                                               |                                                  |                                                                        | (18,600    | )       |         |          | (22,200    | )       |         |          | (12,300    | )       
|                                                                                                        | Proceeds from sale of marketable securities                                                  |                                                  |                                                                        | 6,453      |         |         |          |           |         |         |          | 253,097    |         
|                                                                                                        | Purchases of investment securities                                                           |                                                  |                                                                        |           |         |         |          |           |         |         |          | (25,903    | )       
|                                                                                                        | Pain Therapeutic collaboration agreement                                                     |                                                  |                                                                        | (153,711   | )       |         |          |           |         |         |          |           |         
|                                                                                                        | Mutual cross-license agreement                                                               |                                                  |                                                                        | (35,000    | )       |         |          |           |         |         |          |           |         
|                                                                                                        | Proceeds from loan receivable                                                                |                                                  |                                                                        |           |         |         |          |           |         |         |          | 13,320     |         
|                                                                                                        | Proceeds from sale of intangible assets                                                      |                                                  |                                                                        |           |         |         |          | 27,458     |         |         |          | 15,659     |         
|                                                                                                        | Other investing activities                                                                   |                                                  |                                                                        | 3          |         |         |          | 648        |         |         |          | 295        |         
|                                                                                                        |                                                                                              |                                                  |                                                                        |            |         |         |          |            |        
|Net cash used in investing activities of continuing operations                                          |                                                                                              |                                                  | (683,007                                                               | )          |         |         | (154,071 | )          |         |         | (459,444 | )         
|                                                                                                        |                                                                                              |                                                  |                                                                        |            |         |         |          |            |        
|Cash flows from financing activities of continuing operations:                                          |                                                                                              |                                                  |                                                                        |            |         |         |          |            |         |         |          |           
|                                                                                                        | Proceeds from revolving credit facility                                                      |                                                  |                                                                        |           |         |         |          |           |         |         |          | 125,000    |         
|                                                                                                        | Payments on revolving credit facility                                                        |                                                  |                                                                        |           |         |         |          |           |         |         |          | (125,000   | )       
|                                                                                                        | Proceeds from issuance of common shares and exercise of stock
    options, net               |                                                  |                                                                        | 857        |         |         |          | 4,677      |         |         |          | 4,053      |         
|                                                                                                        | Payments on other long-term debt                                                             |                                                  |                                                                        |           |         |         |          | (97        | )       |         |          | (1,296     | )       
|                                                                                                        | Debt issuance costs                                                                          |                                                  |                                                                        |           |         |         |          |           |         |         |          | (214       | )       
|                                                                                                        |                                                                                              |                                                  |                                                                        |            |         |         |          |            |        
|Net cash provided by financing activities of continuing
    operations                                  |                                                                                              |                                                  | 857                                                                    |            |         |         | 4,580    |            |         |         | 2,543    |           
|                                                                                                        |                                                                                              |                                                  |                                                                        |            |         |         |          |            |        
|Cash flows from discontinued operations (Revised  see
    Note 27):                                    |                                                                                              |                                                  |                                                                        |            |         |         |          |            |         |         |          |           
|                                                                                                        | Net cash (used in) provided by operating activities of
    discontinued operations           |                                                  |                                                                        |           |         |         |          | 10,185     |         |         |          | 1,618      |         
|                                                                                                        | Net cash provided by (used in) investing activities of
    discontinued operations           |                                                  |                                                                        |           |         |         |          | 27,927     |         |         |          | (7,000     | )       
|                                                                                                        |                                                                                              |                                                  |                                                                        |            |         |         |          |            |        
|(Decrease) increase in cash and cash equivalents                                                        |                                                                                              |                                                  | (162,642                                                               | )          |         |         | 149,528  |            |         |         | (26,597  | )         
|Cash and cash equivalents, beginning of year
    (Revised  see Note 4)                                 |                                                                                              |                                                  | 192,656                                                                |            |         |         | 43,128   |            |         |         | 69,725   |           
|                                                                                                        |                                                                                              |                                                  |                                                                        |            |         |         |          |            |        
|Cash and cash equivalents, end of year (Revised  see
    Note 4)                                       |                                                                                              | $                                                | 30,014                                                                 |            |         | $       | 192,656  |            |         | $       | 43,128   |           
|                                                                                                        |                                                                                              |                                                  |                                                                        |            |         |         |          |            |        
|Supplemental disclosure of cash paid for:                                                               |                                                                                              |                                                  |                                                                        |            |         |         |          |            |         |         |          |           
|Interest                                                                                                |                                                                                              | $                                                | 10,552                                                                 |            |         | $       | 10,626   |            |         | $       | 13,396   |           
|                                                                                                        |                                                                                              |                                                  |                                                                        |            |         |         |          |            |        
|Taxes                                                                                                   |                                                                                              | $                                                | 107,178                                                                |            |         | $       | 90,365   |            |         | $       | 144,918  |           
|                                                                                                        |                                                                                              |                                                  |                                                                        |            |         |         |          |            |        



F-6



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##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(in thousands, except share data)




|   |            
|-- | -----------
|1. | The Company

®




® ®




|   |                                           
|-- | ------------------------------------------
|2. | Summary of Significant Accounting Policies

Use of Estimates.








Revenue recognition.


F-7



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##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Intangible Assets and Goodwill.


Accruals for rebates, returns, and chargebacks.






Shipping and Handling Costs.


F-8



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##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




Cash and Cash Equivalents.


Restricted Cash.


Investments in Debt Securities.


Marketable Securities.


Accounts Receivable and Allowance for Doubtful Accounts.


Inventories. first-in,


Income Taxes.


Litigation.


F-9



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##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




Financial Instruments and Derivatives.




Property, Plant and Equipment.






Research and Development Costs.


Deferred Financing Costs.


Insurance.


Advertising.


Promotional Fees to Wyeth. ®


F-10



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##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


® ® ®


® ®


Stock Compensation.


|                                 |                                                               |      |   |         |      |  |   |          |   |  |   |        | 
|-------------------------------- | ------------------------------------------------------------- | ---- | - | ------- | ---- |  | - | -------- | - |  | - | ------ | 
|                                 |                                                               | 2005 |   |         | 2004 |  |   | 2003     |  
|                                 |                                                               |      |   |         |      |  |   |          |  
|Net income (loss):               |                                                               |      |   |         |      |  |   |          |   |  |   |       
|                                 | As reported                                                   |      | $ | 117,833 |      |  | $ | (160,288 | ) |  | $ | 91,954 | 
|                                 | Add: Stock based employee compensation included in net income |      |   | 1,220   |      |  |   |         |   |  |   |       | 
|                                 |                                                               |      |   |         |      |  |   |          |  
|                                 | Less: Stock based employee compensation for all awards        |      |   | 7,942   |      |  |   | 5,943    |   |  |   | 1,506  | 
|                                 |                                                               |      |   |         |      |  |   |          |  
|                                 | Pro forma                                                     |      | $ | 111,111 |      |  | $ | (166,231 | ) |  | $ | 90,448 | 
|                                 |                                                               |      |   |         |      |  |   |          |  
|Basic income (loss) per share:   |                                                               |      |   |         |      |  |   |          |   |  |   |       
|                                 | As reported                                                   |      | $ | 0.49    |      |  | $ | (0.66    | ) |  | $ | 0.38   | 
|                                 |                                                               |      |   |         |      |  |   |          |  
|                                 | Pro forma                                                     |      | $ | 0.46    |      |  | $ | (0.69    | ) |  | $ | 0.38   | 
|                                 |                                                               |      |   |         |      |  |   |          |  
|Diluted income (loss) per share: |                                                               |      |   |         |      |  |   |          |   |  |   |       
|                                 | As reported                                                   |      | $ | 0.49    |      |  | $ | (0.66    | ) |  | $ | 0.38   | 
|                                 |                                                               |      |   |         |      |  |   |          |  
|                                 | Pro forma                                                     |      | $ | 0.46    |      |  | $ | (0.69    | ) |  | $ | 0.37   | 
|                                 |                                                               |      |   |         |      |  |   |          |  



|                        |  |      |       |   |      |  |       |      |  |  |       |  
|----------------------- |  | ---- | ----- | - | ---- |  | ----- | ---- |  |  | ----- | -
|                        |  | 2005 |       |   | 2004 |  |       | 2003 | 
|                        |  |      |       |   |      |  |       |      | 
|Expected life of option |  |      | 4.00  |   |      |  | 4.00  |      |  |  | 4.00  |  
|Risk-free interest rate |  |      | 4.24  | % |      |  | 2.83  | %    |  |  | 2.79  | %
|Expected volatility     |  |      | 46.52 | % |      |  | 47.26 | %    |  |  | 61.00 | %
|Expected dividend yield |  |      | 0.00  | % |      |  | 0.00  | %    |  |  | 0.00  | %



Reclassifications.


F-11



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##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|   |                              
|-- | -----------------------------
|3. | Concentrations of Credit Risk



|           |  |      |    |   |      |  |    |      |  |  |    |  
|---------- |  | ---- | -- | - | ---- |  | -- | ---- |  |  | -- | -
|           |  | 2005 |    |   | 2004 |  |    | 2003 | 
|           |  |      |    |   |      |  |    |      | 
|Customer A |  |      | 31 | % |      |  | 29 | %    |  |  | 28 | %
|Customer B |  |      | 21 | % |      |  | 23 | %    |  |  | 19 | %
|Customer C |  |      | 15 | % |      |  | 21 | %    |  |  | 21 | %



|           |  |      |    |   |      |  |    |      |  |  |    |  
|---------- |  | ---- | -- | - | ---- |  | -- | ---- |  |  | -- | -
|           |  | 2005 |    |   | 2004 |  |    | 2003 | 
|           |  |      |    |   |      |  |    |      | 
|Customer A |  |      | 27 | % |      |  | 25 | %    |  |  | 21 | %
|Customer B |  |      | 28 | % |      |  | 28 | %    |  |  | 30 | %
|Customer C |  |      | 14 | % |      |  | 15 | %    |  |  | 16 | %



|   |                               
|-- | ------------------------------
|4. | Investments in Debt Securities









|   |                      
|-- | ---------------------
|5. | Marketable Securities



|                     |  |            |        |       |            |   |       |            |  |      |       |  |  |        
|-------------------- |  | ---------- | ------ | ----- | ---------- | - | ----- | ---------- |  | ---- | ----- |  |  | -------
|                     |  |            |        | 2005  |            |   | 2005  |            |  |     
|                     |  |            |        | Gross |            |   | Gross |            |  | 2005
|                     |  | 2005       |        |       | Unrealized |   |       | Unrealized |  |      | Fair 
|                     |  | Cost Basis |        |       | Gains      |   |       | Losses     |  |      | Value
|                     |  |            |        |       |            |   |       |            |  |      |      
|Palatin common stock |  | $          | 12,242 |       |            | $ | 6,260 |            |  |      |      |  |  | $18,502
|                     |  |            |        |       |            |   |       |            |  |      |      



F-12



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##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|   |                   
|-- | ------------------
|6. | Change in Estimate



®


®


F-13



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##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|   |            
|-- | -----------
|7. | Receivables



|                  |  |      |         |  |      |   |         | 
|----------------- |  | ---- | ------- |  | ---- | - | ------- | 
|                  |  | 2005 |         |  | 2004 |  
|                  |  |      |         |  |      |  
|Trade             |  | $    | 204,355 |  |      | $ | 159,388 | 
|Royalty           |  |      | 18,540  |  |      |   | 20,578  | 
|Other             |  |      | 686     |  |      |   | 997     | 
|                  |  |      |         |  |      |  
|Total Receivables |  | $    | 223,581 |  |      | $ | 180,963 | 
|                  |  |      |         |  |      |  



|   |          
|-- | ---------
|8. | Inventory



|                                                                                    |  |      |         |   |      |   |         |  
|----------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                                                                    |  | 2005 |         |   | 2004 |  
|                                                                                    |  |      |         |   |      |  
|Raw materials                                                                       |  | $    | 150,979 |   |      | $ | 168,541 |  
|Work-in process                                                                     |  |      | 14,955  |   |      |   | 20,287  |  
|Finished goods (including $6,728 and $10,638 of sample
    inventory, respectively) |  |      | 91,695  |   |      |   | 133,527 |  
|                                                                                    |  |      |         |   |      |  
|                                                                                    |  |      | 257,629 |   |      |   | 322,355 |  
|Less inventory valuation allowance                                                  |  |      | (29,566 | ) |      |   | (47,943 | )
|                                                                                    |  |      |         |   |      |  
|                                                                                    |  | $    | 228,063 |   |      | $ | 274,412 |  
|                                                                                    |  |      |         |   |      |  



|   |                              
|-- | -----------------------------
|9. | Property, Plant and Equipment



|                             |                               |      |         |          |      |   |         |         |  
|---------------------------- | ----------------------------- | ---- | ------- | -------- | ---- | - | ------- | ------- | -
|                             |                               | 2005 |         |          | 2004 |  
|                             |                               |      |         |          |      |  
|Land                         |                               | $    | 15,730  |          |      | $ | 15,724  |        
|Buildings and improvements   |                               |      | 120,221 |          |      |   | 107,553 |        
|Machinery and equipment      |                               |      | 226,859 |          |      |   | 197,619 |        
|Capital projects in progress |                               |      | 62,942  |          |      |   | 53,116  |        
|                             |                               |      |         |          |      |  
|                             |                               |      | 425,752 |          |      |   | 374,012 |        
|                             | Less accumulated depreciation |      |         | (123,278 | )    |   |         | (93,281 | )
|                             |                               |      |         |          |      |  
|                             |                               | $    | 302,474 |          |      | $ | 280,731 |        
|                             |                               |      |         |          |      |  







F-14



---



##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


®




|    |                              
|--- | -----------------------------
|10. | Acquisitions and Dispositions

moderate-to






F-15



---



##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


in-process ® in-process


® ® ®






co-promotion tm tm


F-16



---



##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




® ® ® ® ® ® ® ®


® ® ® ® ®


® ®




® ®




| |   |                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------
| |  | an additional $60,000 if Elan achieves specific milestones in
    connection with the development of new formulations of
    Sonata®; and

F-17



---



##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |   |                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | $15,000 if annual net sales of
    Sonata®
    exceed $100,000 (see below for the discussion regarding the
    Companys decision to discontinue the program to develop a
    reformulation of
    Sonata®).

® ®


® ® ® 25-year


® ® ® ®




|                                                                        |                      |   |         |         | 
|----------------------------------------------------------------------- | -------------------- | - | ------- | ------- | 
|Cash consideration, including transaction fees(1)                       |                      | $ | 598,332 |        
|Liabilities acquired                                                    |                      |   | 216,036 |        
|                                                                        |                      |   |        
|                                                                        | Total purchase price |   | $       | 814,368 | 
|                                                                        |                      |   |        
|Allocation of purchase price:                                           |                      |   |         |        
|Intangible assets(2)                                                    |                      | $ | 597,000 |        
|Prepaid expenses                                                        |                      |   | 2,000   |        
|In process research and development (net of tax benefit of
    $61,250) |                      |   | 113,750 |        
|Inventory                                                               |                      |   | 40,368  |        
|Deferred tax asset                                                      |                      |   | 61,250  |        
|                                                                        |                      |   |        
|                                                                        |                      | $ | 814,368 |        
|                                                                        |                      |   |        






|    |                                                                                                                                                                                                                                                                                                                                   
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Excludes restricted cash placed in escrow.                                                                                                                                                                                                                                                                                        
|   
|(2) | The Company recorded $123,000 of the purchase price as patents
    and $474,000 of the purchase price as trademarks and product
    rights within intangible assets, including $88,000 related to
    core technology utilized for
    Sonata®
    MR. During 2004, the Company wrote off the remaining $82,081 of
    the $88,000

F-18



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##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | related to the
    Sonata®
    MR core technology. See Note 11 for further discussion. The
    Sonata®
    core technology intangible asset is part of the branded
    pharmaceutical segment.





|                                                 |  |   |         |  
|------------------------------------------------ |  | - | ------- | -
|Current assets                                   |  | $ | 37,574  |  
|Property, plant and equipment                    |  |   | 14,674  |  
|Goodwill                                         |  |   | 108,597 |  
|Intangible assets  trademark and product rights |  |   | 150,300 |  
|In process research and development              |  |   | 19,000  |  
|Other assets                                     |  |   | 662     |  
|Current liabilities                              |  |   | (14,505 | )
|Deferred income taxes                            |  |   | (61,118 | )
|Other liabilities                                |  |   | (1,275  | )
|                                                 |  |   |        
|                                                 |  | $ | 253,909 |  
|                                                 |  |   |        



TM 30-year TM


F-19



---



##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                  |  |              |           | 
|--------------------------------- |  | ------------ | --------- | 
|                                  |  | Year         |          
|                                  |  | Ended        |          
|                                  |  | December 31, |          
|                                  |  |              |          
|                                  |  | 2003         |          
|                                  |  |              |          
|Total revenues                    |  | $            | 1,609,554 | 
|                                  |  |              |          
|Net income                        |  | $            | 101,459   | 
|                                  |  |              |          
|Basic earnings per common share   |  | $            | 0.42      | 
|                                  |  |              |          
|Diluted earnings per common share |  | $            | 0.42      | 
|                                  |  |              |          

® ® ® ® ® ®




|    |                               
|--- | ------------------------------
|11. | Intangible Assets and Goodwill



|                              |                         |          |           |           |              |   |         |          |  |   |              |           |  |   |         |         | 
|----------------------------- | ----------------------- | -------- | --------- | --------- | ------------ | - | ------- | -------- |  | - | ------------ | --------- |  | - | ------- | ------- | 
|                              |                         | 2005     |           |           | 2004         |  
|                              |                         |          |           |           |              |  
|                              |                         | Gross    |           |           |              |   | Gross   |          |  |  
|                              |                         | Carrying |           |           | Accumulated  |   |         | Carrying |  |   | Accumulated  |          
|                              |                         | Amount   |           |           | Amortization |   |         | Amount   |  |   | Amortization |          
|                              |                         |          |           |           |              |   |         |          |  |   |              |          
|Trademarks and product rights |                         | $        | 1,174,028 |           |              | $ | 296,801 |          |  | $ | 1,370,711    |           |  | $ | 222,592 |        
|Patents                       |                         |          | 261,277   |           |              |   | 171,976 |          |  |   | 267,049      |           |  |   | 130,494 |        
|Other intangibles             |                         |          | 9,459     |           |              |   | 8,793   |          |  |   | 9,819        |           |  |   | 8,532   |        
|                              |                         |          |           |           |              |   |         |          |  |   |              |          
|                              | Total intangible assets |          | $         | 1,444,764 |              |   | $       | 477,570  |  |   | $            | 1,647,579 |  |   | $       | 361,618 | 
|                              |                         |          |           |           |              |   |         |          |  |   |              |          



|                               |  |        |        | 
|------------------------------ |  | ------ | ------ | 
|Fiscal Year Ended December 31, |  | Amount |       
|                               |  |        |       
|2006                           |  | $      | 98,214 | 
|2007                           |  |        | 81,807 | 
|2008                           |  |        | 79,259 | 
|2009                           |  |        | 72,322 | 
|2010                           |  |        | 68,479 | 

F-20



---



##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


® ® ® ® ® ®


® ® ® ® ® ®


® ® ® ® ®


® ® ® ® ®


® ®


® ®


F-21



---



##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


® ® ® ® ® ®


® ® ®


® ® ®




® ® ®




|                              |  |         |        |  |          |   |         |       |  |   |         |  
|----------------------------- |  | ------- | ------ |  | -------- | - | ------- | ----- |  | - | ------- | -
|                              |  | Branded |        |  | Meridian |   |         |      
|                              |  | Segment |        |  | Segment  |   |         | Total | 
|                              |  |         |        |  |          |   |         |       | 
|Goodwill at December 31, 2003 |  | $       | 12,742 |  |          | $ | 108,613 |       |  | $ | 121,355 |  
|Adjustments                   |  |         |       |  |          |   | (203    | )     |  |   | (203    | )
|                              |  |         |        |  |          |   |         |       | 
|Goodwill at December 31, 2004 |  | $       | 12,742 |  |          | $ | 108,410 |       |  | $ | 121,152 |  
|                              |  |         |        |  |          |   |         |       | 
|Goodwill at December 31, 2005 |  | $       | 12,742 |  |          | $ | 108,410 |       |  | $ | 121,152 |  
|                              |  |         |        |  |          |   |         |       | 

F-22



---



##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |                  
|--- | -----------------
|12. | Lease Obligations



|           |  |   |        | 
|---------- |  | - | ------ | 
|2006       |  | $ | 19,170 | 
|2007       |  |   | 17,177 | 
|2008       |  |   | 17,342 | 
|2009       |  |   | 14,638 | 
|2010       |  |   | 14,987 | 
|Thereafter |  |   | 3,314  | 





|    |                 
|--- | ----------------
|13. | Accrued Expenses



|                                               |  |      |         |  |      |   |         | 
|---------------------------------------------- |  | ---- | ------- |  | ---- | - | ------- | 
|                                               |  | 2005 |         |  | 2004 |  
|                                               |  |      |         |  |      |  
|Rebates (see Note 19)                          |  | $    | 172,740 |  |      | $ | 215,649 | 
|Accrued co-promotion fees                      |  |      | 78,772  |  |      |   | 38,184  | 
|Current portion of loss contract (see Note 19) |  |      | 1,658   |  |      |   | 30,029  | 
|Product returns                                |  |      | 50,902  |  |      |   | 122,863 | 
|Chargebacks                                    |  |      | 13,153  |  |      |   | 27,953  | 
|Medicaid settlement                            |  |      | 65,000  |  |      |   | 65,000  | 
|Accrued interest                               |  |      | 1,212   |  |      |   | 1,212   | 
|Product recall accrual                         |  |      | 1,516   |  |      |   | 4,238   | 
|Contingent liabilities (see Note 19)           |  |      | 879     |  |      |   | 21,969  | 
|Other                                          |  |      | 133,788 |  |      |   | 68,913  | 
|                                               |  |      |         |  |      |  
|                                               |  | $    | 519,620 |  |      | $ | 596,010 | 
|                                               |  |      |         |  |      |  



|    |               
|--- | --------------
|14. | Long-Term Debt



|                                            |                      |      |         |         |      |   |         |   | 
|------------------------------------------- | -------------------- | ---- | ------- | ------- | ---- | - | ------- | - | 
|                                            |                      | 2005 |         |         | 2004 |  
|                                            |                      |      |         |         |      |  
|Convertible debentures(a)                   |                      | $    | 345,000 |         |      | $ | 345,000 |  
|Senior secured revolving credit facility(b) |                      |      |        |         |      |   |        |  
|                                            |                      |      |         |         |      |  
|                                            |                      |      | 345,000 |         |      |   | 345,000 |  
|                                            |                      |      |         |         |      |  
|                                            | Less current portion |      |         | 345,000 |      |   |         |  | 
|                                            |                      |      |         |         |      |  
|                                            |                      | $    |        |         |      | $ | 345,000 |  
|                                            |                      |      |         |         |      |  




|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | During the fourth quarter of 2001, the Company issued $345,000
    of
    23/4% Convertible
    Debentures due November 15, 2021. The debentures are
    unsecured unsubordinated obligations, and the payment of
    principal and interest is guaranteed by the Companys
    domestic subsidiaries on a joint and several basis. The
    debentures accrue interest at an initial rate of
    23/4%,
    which will be reset (but not below

F-23



---



##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |  |                                                                                                                                                   
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 23/4%
    or above
    41/4%)
    on May 15, 2006, May 15, 2011, and May 15, 2016.
    Interest is payable on May 15 and November 15 of each year.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On or after November 20, 2006, the Company may redeem for
    cash all or part of the debentures that have not previously been
    converted or repurchased at a price equal to 100% of the
    principal amount of the debentures plus accrued interest up to
    but not including the date of redemption. Holders may require
    the Company to repurchase for cash all or part of their
    debentures on November 15, 2006, November 15, 2011 or
    November 15, 2016 at a price equal to 100% of the principal
    amount of the debentures plus accrued interest up to but not
    including the date of repurchase. In addition, upon a change of
    control, each holder may require the Company to repurchase for
    cash all or a portion of the holders debentures.
|
| | Holders may surrender their debentures for conversion into
    shares of King common stock at the conversion price (initially
    $50.16 per share and subject to certain adjustments) if any
    of the following conditions are satisfied:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        



| |   |                                                                                                                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | if the closing sale price of King common stock, for at least 20
    trading days in the 30 trading day period ending on the trading
    day prior to the date of surrender, exceeds 110% of the
    conversion price per share of King common stock on that
    preceding trading day;
|
| |  | if we have called the debentures for redemption; or                                                                                                                                                                                                                                   
|
| |  | upon the occurrence of specified corporate transactions.                                                                                                                                                                                                                              



| |                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company has reserved 6,877,990 shares of common stock
    in the event such debentures are converted into shares of the
    Companys common stock.                                                                                            
|
| | As of December 31, 2005, the Company has classified the
    debentures as a current liability in the accompanying balance
    sheet due to the right the holders have to require the Company
    to repurchase the debentures on November 15, 2006.



|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(b) |  | On April 23, 2002, the Company established a $400,000 five
    year Senior Secured Revolving Credit Facility. The facility has
    been collateralized in general by all real estate with a value
    of $5,000 or more and all personal property of the Company and
    its significant subsidiaries. The Companys obligations
    under the Senior Secured Revolving Credit Facility are
    unconditionally guaranteed on a senior basis by significant
    subsidiaries. The Senior Secured Revolving Credit Facility
    accrues interest at the Companys option, at either
    (a) the base rate (which is based on the greater of
    (1) the prime rate or (2) the federal funds rate plus
    one-half of 1%) plus an applicable spread ranging from 0.0% to
    0.75% (based on a leverage ratio) or (b) the applicable
    LIBOR rate plus an applicable spread ranging from 1.0% to 1.75%
    (based on a leverage ratio). In addition, the lenders under the
    Senior Secured Revolving Credit Facility are entitled to
    customary facility fees based on (a) unused commitments
    under the Senior Secured Revolving Credit Facility and
    (b) letters of credit outstanding. As of December 31,
    2005, the Company had $1,044 of letters of credit outstanding
    under this facility.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | To establish the Senior Secured Revolving Credit Facility, the
    Company incurred $5,067 of deferred financing costs that are
    being amortized over five years, the life of the Senior Secured
    Revolving Credit Facility.                                                                                                                                                                                                   
|
| | The Senior Secured Revolving Credit Facility requires the
    Company to maintain a minimum net worth of no less than
    $1.2 billion plus 50% of the Companys consolidated
    net income for each fiscal quarter after April 23, 2002,
    excluding any fiscal quarter for which consolidated income is
    negative; an EBITDA to interest expense ratio of no less than
    3.00 to 1.00; and a funded debt to EBITDA ratio of

F-24



---



##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | no greater than 3.50 to 1.00 prior to April 24, 2004 and of
    no greater than 3.00 to 1.00 on or after April 24, 2004. As
    of December 31, 2005, the Company has complied with these
    covenants.







|    |                  
|--- | -----------------
|15. | Other Liabilities



|                                                |  |      |        |  |      |   |        | 
|----------------------------------------------- |  | ---- | ------ |  | ---- | - | ------ | 
|                                                |  | 2005 |        |  | 2004 |  
|                                                |  |      |        |  |      |  
|Deferred revenue from co-promotion revenue fees |  | $    | 16,512 |  |      | $ | 25,603 | 
|Contingent milestone liabilities (Note 10)      |  |      |       |  |      |   | 9,605  | 
|Long-term portion of loss contract              |  |      |       |  |      |   | 3,589  | 
|Other                                           |  |      | 3,848  |  |      |   | 2,639  | 
|                                                |  |      |        |  |      |  
|                                                |  | $    | 20,360 |  |      | $ | 41,436 | 
|                                                |  |      |        |  |      |  



|    |                      
|--- | ---------------------
|16. | Financial Instruments



Cash and Cash Equivalents, Accounts Receivable and Accounts
Payable.


Marketable Securities and Investments in Debt Securities.


Long-Term Debt.


F-25



---



##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |             
|--- | ------------
|17. | Income Taxes



|                        |         |                |        |         |         |   |        |         |         |   |        |          |          |  
|----------------------- | ------- | -------------- | ------ | ------- | ------- | - | ------ | ------- | ------- | - | ------ | -------- | -------- | -
|                        |         | 2005           |        |         | 2004    |   |        | 2003    |        
|                        |         |                |        |         |         |   |        |         |        
|Current                 |         |                |        |         |         |   |        |         |         |   |        |         
|                        | Federal |                | $      | 124,799 |         |   | $      | 3,152   |         |   | $      | 192,126  |         
|                        | State   |                |        | 5,076   |         |   |        | 6,540   |         |   |        | 13,012   |         
|                        |         |                |        |         |         |   |        |         |        
|                        |         | Total current  |        | $       | 129,875 |   |        | $       | 9,692   |   |        | $        | 205,138  |  
|                        |         |                |        |         |         |   |        |         |        
|Deferred                |         |                |        |         |         |   |        |         |         |   |        |         
|                        | Federal |                | $      | (72,458 | )       |   | $      | (17,780 | )       |   | $      | (134,036 | )       
|                        | State   |                |        | 4,068   |         |   |        | 676     |         |   |        | (5,218   | )       
|                        |         |                |        |         |         |   |        |         |        
|                        |         | Total deferred |        | $       | (68,390 | ) |        | $       | (17,104 | ) |        | $        | (139,254 | )
|                        |         |                |        |         |         |   |        |         |        
|Total expense (benefit) |         | $              | 61,485 |         |         | $ | (7,412 | )       |         | $ | 65,884 |         
|                        |         |                |        |         |         |   |        |         |        



|                                           |  |      |      |   |      |  |       |      |  |  |      |  
|------------------------------------------ |  | ---- | ---- | - | ---- |  | ----- | ---- |  |  | ---- | -
|                                           |  | 2005 |      |   | 2004 |  |       | 2003 | 
|                                           |  |      |      |   |      |  |       |      | 
|Federal statutory tax rate                 |  |      | 35.0 | % |      |  | 35.0  | %    |  |  | 35.0 | %
|State income taxes, net of federal benefit |  |      | 5.1  |   |      |  | (12.4 | )    |  |  | 4.3  |  
|Charitable donations                       |  |      | (5.4 | ) |      |  | 25.4  |      |  |  | (3.8 | )
|In-process research and development        |  |      |     |   |      |  |      |      |  |  | 4.1  |  
|Fines and penalties                        |  |      |     |   |      |  | (39.3 | )    |  |  |     |  
|Other                                      |  |      | (0.2 | ) |      |  | 4.1   |      |  |  | 0.7  |  
|                                           |  |      |      |   |      |  |       |      | 
|Effective tax rate                         |  |      | 34.5 | % |      |  | 12.8  | %    |  |  | 40.3 | %
|                                           |  |      |      |   |      |  |       |      | 



|                                  |                                |      |         |         |      |   |         |         |  
|--------------------------------- | ------------------------------ | ---- | ------- | ------- | ---- | - | ------- | ------- | -
|                                  |                                | 2005 |         |         | 2004 |  
|                                  |                                |      |         |         |      |  
|Accrued expenses and reserves     |                                | $    | 82,837  |         |      | $ | 149,000 |        
|Net operating losses              |                                |      | 3,340   |         |      |   | 1,445   |        
|Intangible assets                 |                                |      | 262,227 |         |      |   | 120,544 |        
|Charitable contribution carryover |                                |      | 35,210  |         |      |   | 26,570  |        
|Other                             |                                |      | 2,701   |         |      |   | 4,831   |        
|                                  |                                |      |         |         |      |  
|                                  | Total deferred tax assets      |      |         | 386,315 |      |   |         | 302,390 |  
|Valuation allowance               |                                |      | (9,214  | )       |      |   | (3,950  | )      
|                                  |                                |      |         |         |      |  
|                                  | Net deferred tax assets        |      |         | 377,101 |      |   |         | 298,440 |  
|                                  |                                |      |         |         |      |  
|Property, plant and equipment     |                                |      | (33,538 | )       |      |   | (30,661 | )      
|Other                             |                                |      | (30,754 | )       |      |   | (20,869 | )      
|                                  |                                |      |         |         |      |  
|                                  | Total deferred tax liabilities |      |         | (64,292 | )    |   |         | (51,530 | )
|                                  |                                |      |         |         |      |  
|                                  | Net deferred tax asset         |      | $       | 312,809 |      |   | $       | 246,910 |  
|                                  |                                |      |         |         |      |  

F-26



---



##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|    |              
|--- | -------------
|18. | Benefit Plans





|    |                              
|--- | -----------------------------
|19. | Commitments and Contingencies



| |                     
| | --------------------
| | Fen/ Phen Litigation





®


F-27



---



##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




®






| |                                       
| | --------------------------------------
| | Thimerosal/ Vaccine Related Litigation









| |                            
| | ---------------------------
| | Hormone Replacement Therapy





| |                                     
| | ------------------------------------
| | Average Wholesale Pricing Litigation



F-28



---



##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)










| |                                                 
| | ------------------------------------------------
| | Settlement of Governmental Pricing Investigation





F-29



---



##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)
















| |                  
| | -----------------
| | SEC Investigation







| |                                
| | -------------------------------
| | Securities and ERISA Litigation



F-30



---



##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)














F-31



---



##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)










| |                        
| | -----------------------
| | Other Legal Proceedings



® ® Approved Drug Products With Therapeutic
Equivalence Evaluations ® method-of ®


F-32



---



##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


®


® ®


® ® ®


® ® method-of ®


®


F-33



---



##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




®


® ® ®




® ® ® ®


® ® ® ®


F-34



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##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


®


® ® ®






| |                                    
| | -----------------------------------
| | Other Commitments and Contingencies



|           |       |   |         |         | 
|---------- | ----- | - | ------- | ------- | 
|2006       |       | $ | 151,495 |        
|2007       |       |   | 107,772 |        
|2008       |       |   | 96,979  |        
|2009       |       |   | 112     |        
|2010       |       |   | 113     |        
|Thereafter |       |   | 21      |        
|           |       |   |        
|           | Total |   | $       | 356,492 | 
|           |       |   |        



® ® ® ®


F-35



---



##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


® ®


® ®




|    |                    
|--- | -------------------
|20. | Segment Information

®




F-36



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##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                |                                    |                                                     |   |            |           |  |   |           |           |   |   |           |           | 
|--------------- | ---------------------------------- | --------------------------------------------------- | - | ---------- | --------- |  | - | --------- | --------- | - | - | --------- | --------- | 
|                |                                    | For the Years Ended December 31,                    |  
|                |                                    |                                                     |  
|                |                                    | 2005                                                |   |            | 2004      |  |   | 2003      |          
|                |                                    |                                                     |   |            |           |  |   |           |          
|Total revenues: |                                    |                                                     |   |            |           |  |   |           |           |   |   |          
|                | Branded pharmaceuticals            |                                                     | $ | 1,542,124  |           |  | $ | 1,076,517 |           |   | $ | 1,272,350 |          
|                | Meridian Medical Technologies      |                                                     |   | 129,261    |           |  |   | 123,329   |           |   |   | 124,157   |          
|                | Royalties                          |                                                     |   | 78,128     |           |  |   | 78,474    |           |   |   | 68,365    |          
|                | Contract manufacturing(1)          |                                                     |   | 601,404    |           |  |   | 505,537   |           |   |   | 278,836   |          
|                | All other                          |                                                     |   | 1,201      |           |  |   | (1        | )         |   |   | 628       |          
|                | Eliminations(1)                    |                                                     |   | (579,237   | )         |  |   | (479,492  | )         |   |   | (251,547  | )        
|                |                                    |                                                     |   |            |           |  |   |           |          
|                |                                    | Consolidated total revenues                         |   | $          | 1,772,881 |  |   | $         | 1,304,364 |   |   | $         | 1,492,789 | 
|                |                                    |                                                     |   |            |           |  |   |           |          
|Segment profit: |                                    |                                                     |   |            |           |  |   |           |           |   |   |          
|                | Branded pharmaceuticals            |                                                     | $ | 1,319,200  |           |  | $ | 824,949   |           |   | $ | 991,770   |          
|                | Meridian Medical Technologies      |                                                     |   | 66,303     |           |  |   | 64,033    |           |   |   | 57,954    |          
|                | Royalties                          |                                                     |   | 69,125     |           |  |   | 67,596    |           |   |   | 57,122    |          
|                | Contract manufacturing             |                                                     |   | (4,888     | )         |  |   | (5,162    | )         |   |   | 85        |          
|                | All other                          |                                                     |   | 156        |           |  |   | 10        |           |   |   | 17        |          
|                | Other operating costs and expenses |                                                     |   | (1,269,817 | )         |  |   | (992,690  | )         |   |   | (954,996  | )        
|                | Other income (expense)             |                                                     |   | (1,964     | )         |  |   | (16,770   | )         |   |   | 11,375    |          
|                |                                    |                                                     |   |            |           |  |   |           |          
|                |                                    | Income (loss) from continuing operations before tax |   | $          | 178,115   |  |   | $         | (58,034   | ) |   | $         | 163,327   | 
|                |                                    |                                                     |   |            |           |  |   |           |          

|              |                               |                           |   |           |           |  |   |           |           | 
|------------- | ----------------------------- | ------------------------- | - | --------- | --------- |  | - | --------- | --------- | 
|              |                               | As of December 31,        |  
|              |                               |                           |  
|              |                               | 2005                      |   |           | 2004      | 
|              |                               |                           |   |           |           | 
|Total assets: |                               |                           |   |           |           |  |   |          
|              | Branded pharmaceuticals       |                           | $ | 2,654,782 |           |  | $ | 2,602,768 |          
|              | Meridian Medical Technologies |                           |   | 261,956   |           |  |   | 275,850   |          
|              | Royalties                     |                           |   | 20,444    |           |  |   | 22,430    |          
|              | Contract manufacturing        |                           |   | 26,840    |           |  |   | 23,108    |          
|              | All other                     |                           |   | 1,220     |           |  |   |          |          
|              |                               |                           |   |           |           | 
|              |                               | Consolidated total assets |   | $         | 2,965,242 |  |   | $         | 2,924,156 | 
|              |                               |                           |   |           |           | 






|    |                                                                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Contract manufacturing revenues include $579,237, $479,492 and
    $251,547 of intercompany sales for the years ended
    December 31, 2005, 2004 and 2003, respectively.

F-37



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##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                |                          |                                              |   |         |           |  |   |         |           |  |   |         |           | 
|--------------- | ------------------------ | -------------------------------------------- | - | ------- | --------- |  | - | ------- | --------- |  | - | ------- | --------- | 
|                |                          | For the Years Ended December 31,             |  
|                |                          |                                              |  
|                |                          | 2005                                         |   |         | 2004      |  |   | 2003    |          
|                |                          |                                              |   |         |           |  |   |         |          
|Total revenues: |                          |                                              |   |         |           |  |   |         |           |  |   |        
|                | Cardiovascular/metabolic |                                              | $ | 749,352 |           |  | $ | 494,785 |           |  | $ | 730,616 |          
|                | Neuroscience             |                                              |   | 427,767 |           |  |   | 298,928 |           |  |   | 246,814 |          
|                | Hospital/acute care      |                                              |   | 314,192 |           |  |   | 246,822 |           |  |   | 255,732 |          
|                | Other                    |                                              |   | 50,813  |           |  |   | 35,982  |           |  |   | 39,188  |          
|                |                          |                                              |   |         |           |  |   |         |          
|                |                          | Consolidated branded pharmaceutical revenues |   | $       | 1,542,124 |  |   | $       | 1,076,517 |  |   | $       | 1,272,350 | 
|                |                          |                                              |   |         |           |  |   |         |          





|    |                           
|--- | --------------------------
|21. | Related Party Transactions

gifts-in gifts-in


® ® ®






|    |                     
|--- | --------------------
|22. | Stockholders Equity



| |                 
| | ----------------
| | Preferred Shares



F-38



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##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                                       
| | --------------------------------------
| | Accumulated Other Comprehensive Income



|                                                          |  |      |       |  |      |   |       | 
|--------------------------------------------------------- |  | ---- | ----- |  | ---- | - | ----- | 
|                                                          |  | 2005 |       |  | 2004 |  
|                                                          |  |      |       |  |      |  
|Net unrealized gains on marketable securities, net of tax |  | $    | 4,629 |  |      | $ | 587   | 
|Foreign currency translation, net of tax                  |  |      | 358   |  |      |   | 436   | 
|                                                          |  |      |       |  |      |  
|                                                          |  | $    | 4,987 |  |      | $ | 1,023 | 
|                                                          |  |      |       |  |      |  



| |                       
| | ----------------------
| | Incentive Option Plans









|                                                           |           |      |           |           |      |   |           |            |   |   |           |          |  
|---------------------------------------------------------- | --------- | ---- | --------- | --------- | ---- | - | --------- | ---------- | - | - | --------- | -------- | -
|                                                           |           | 2005 |           |           | 2004 |   |           | 2003       |  
|                                                           |           |      |           |           |      |   |           |            |  
|Outstanding options, January 1                             |           |      | 5,979,551 |           |      |   | 3,849,864 |            |   |   | 4,908,317 |         
|                                                           | Exercised |      |           | (79,630   | )    |   |           | (530,720   | ) |   |           | (578,245 | )
|                                                           | Granted   |      |           | 2,039,400 |      |   |           | 3,883,417  |   |   |           | 101,000  |  
|                                                           | Cancelled |      |           | (865,355  | )    |   |           | (1,223,010 | ) |   |           | (581,208 | )
|                                                           |           |      |           |           |      |   |           |            |  
|Outstanding options, December 31                           |           |      | 7,073,966 |           |      |   | 5,979,551 |            |   |   | 3,849,864 |         
|                                                           |           |      |           |           |      |   |           |            |  
|Weighted average price of options outstanding, January 1   |           | $    | 20.28     |           |      | $ | 22.48     |            |   | $ | 21.27     |         
|                                                           |           |      |           |           |      |   |           |            |  
|Weighted average price of options exercised                |           | $    | 9.21      |           |      | $ | 6.55      |            |   | $ | 7.31      |         
|                                                           |           |      |           |           |      |   |           |            |  
|Weighted average price of options granted                  |           | $    | 14.99     |           |      | $ | 16.83     |            |   | $ | 13.95     |         
|                                                           |           |      |           |           |      |   |           |            |  
|Weighted average price of options cancelled                |           | $    | 20.68     |           |      | $ | 22.19     |            |   | $ | 25.90     |         
|                                                           |           |      |           |           |      |   |           |            |  
|Weighted average price of options outstanding, December 31 |           | $    | 18.83     |           |      | $ | 20.28     |            |   | $ | 22.48     |         
|                                                           |           |      |           |           |      |   |           |            |  

F-39



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##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                  |               |        |  |           |       |  |             |               |  |  |  |      | 
|----------------- | ------------- | ------ |  | --------- | ----- |  | ----------- | ------------- |  |  |  | ---- | 
|                  |               |        |  | Weighted  |       |  | Weighted    |              
|                  |               |        |  | Average   |       |  | Average     |              
|                  |               |        |  | Exercise  |       |  | Remaining   |              
|Range of Exercise |               |        |  | Price per |       |  | Contractual |              
|Prices per Share  |               | Shares |  |           | Share |  |             | Life in Years | 
|                  |               |        |  |           |       |  |             |               | 
|Outstanding:      |               |        |  |           |       |  |             |               |  |  |  |     
|                  | $ 4.67-$10.50 |        |  | 363,961   |       |  | $           | 7.68          |  |  |  | 5.38 | 
|                  | $10.51-$15.75 |        |  | 2,335,463 |       |  |             | 14.62         |  |  |  | 9.43 | 
|                  | $15.76-$23.64 |        |  | 3,404,729 |       |  |             | 18.24         |  |  |  | 7.32 | 
|                  | $24.50-$36.75 |        |  | 527,830   |       |  |             | 32.20         |  |  |  | 5.0  | 
|                  | $36.76-$40.98 |        |  | 441,983   |       |  |             | 38.94         |  |  |  | 5.81 | 
|                  |               |        |  |           |       |  |             |               | 
|                  | $ 4.67-$40.98 |        |  | 7,073,966 |       |  | $           | 18.83         |  |  |  |      | 
|                  |               |        |  |           |       |  |             |               | 

|                  |               |        |  |                  |                 |  |   |       | 
|----------------- | ------------- | ------ |  | ---------------- | --------------- |  | - | ----- | 
|                  |               |        |  | Weighted         |                
|Range of Exercise |               |        |  | Average Exercise |                
|Prices per Share  |               | Shares |  |                  | Price per Share | 
|                  |               |        |  |                  |                 | 
|Exercisable:      |               |        |  |                  |                 |  |   |      
|                  | $ 4.67-$10.50 |        |  | 230,461          |                 |  | $ | 7.14  | 
|                  | $10.51-$15.75 |        |  | 287,463          |                 |  |   | 12.42 | 
|                  | $15.76-$23.64 |        |  | 1,754,826        |                 |  |   | 18.84 | 
|                  | $24.50-$36.75 |        |  | 527,830          |                 |  |   | 32.20 | 
|                  | $36.76-$40.98 |        |  | 441,983          |                 |  |   | 38.94 | 
|                  |               |        |  |                  |                 | 
|                  | $ 4.67-$40.98 |        |  | 3,242,563        |                 |  | $ | 22.35 | 
|                  |               |        |  |                  |                 | 





|    |                        
|--- | -----------------------
|23. | Income per Common Share



|                                 |                                       |      |  |             |      |  |  |             |  |  |  |             | 
|-------------------------------- | ------------------------------------- | ---- |  | ----------- | ---- |  |  | ----------- |  |  |  | ----------- | 
|                                 |                                       | 2005 |  |             | 2004 |  |  | 2003        | 
|                                 |                                       |      |  |             |      |  |  |             | 
|Basic income per common share:   |                                       |      |  |             |      |  |  |             |  |  |  |            
|                                 | Weighted average common shares        |      |  | 241,751,128 |      |  |  | 241,475,058 |  |  |  | 240,989,093 | 
|                                 |                                       |      |  |             |      |  |  |             | 
|Diluted income per common share: |                                       |      |  |             |      |  |  |             |  |  |  |            
|                                 | Weighted average common shares        |      |  | 241,751,128 |      |  |  | 241,475,058 |  |  |  | 240,989,093 | 
|                                 | Effect of dilutive share based awards |      |  | 152,252     |      |  |  |            |  |  |  | 537,540     | 
|                                 | Convertible debentures                |      |  |            |      |  |  |            |  |  |  |            | 
|                                 |                                       |      |  |             |      |  |  |             | 
|                                 | Weighted average common shares        |      |  | 241,903,380 |      |  |  | 241,475,058 |  |  |  | 241,526,633 | 
|                                 |                                       |      |  |             |      |  |  |             | 

F-40



---



##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|    |                                     
|--- | ------------------------------------
|24. | Recently Issued Accounting Standards

4-01(a) S-X,






|    |                                                   
|--- | --------------------------------------------------
|25. | Restructuring Activities and Executive Retirements





|                             |  |              |     |  |           |   |       |          |  |   |          |              |  |      |     |  |  |   |       | 
|---------------------------- |  | ------------ | --- |  | --------- | - | ----- | -------- |  | - | -------- | ------------ |  | ---- | --- |  |  | - | ----- | 
|                             |  | Accrued      |     |  |           |   |       |          |  |   | Accrued  |             
|                             |  | Balance at   |     |  | Income    |   |       |          |  |   |          | Balance at   | 
|                             |  | December 31, |     |  | Statement |   |       |          |  |   |          | December 31, | 
|                             |  | 2004         |     |  | Impact    |   |       | Payments |  |   | Non-Cash |              |  | 2005 |    
|                             |  |              |     |  |           |   |       |          |  |   |          |              |  |      |    
|Employee separation payments |  | $            |    |  |           | $ | 2,267 |          |  | $ | 758      |              |  | $    |    |  |  | $ | 1,509 | 
|Employee relocation          |  |              |    |  |           |   | 322   |          |  |   | 322      |              |  |      |    |  |  |   |      | 
|Facility demolition costs    |  |              | 924 |  |           |   | (924  | )        |  |   |         |              |  |      |    |  |  |   |      | 
|Termination of lease         |  |              |    |  |           |   | 1,733 |          |  |   | 1,733    |              |  |      |    |  |  |   |      | 
|Other                        |  |              |    |  |           |   | 782   |          |  |   | 282      |              |  |      | 500 |  |  |   |      | 
|                             |  |              |     |  |           |   |       |          |  |   |          |              |  |      |    
|                             |  | $            | 924 |  |           | $ | 4,180 |          |  | $ | 3,095    |              |  | $    | 500 |  |  | $ | 1,509 | 
|                             |  |              |     |  |           |   |       |          |  |   |          |              |  |      |    



F-41



---



##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|    |                                            
|--- | -------------------------------------------
|26. | Quarterly Financial Information (unaudited)



|                                          |  |       |         |  |        |   |         |       |  |   |         |  |  |   |          |  
|----------------------------------------- |  | ----- | ------- |  | ------ | - | ------- | ----- |  | - | ------- |  |  | - | -------- | -
|2005 By Quarter                           |  | First |         |  | Second |   |         | Third |  |   | Fourth  | 
|                                          |  |       |         |  |        |   |         |       |  |   |         | 
|Total revenues                            |  | $     | 368,625 |  |        | $ | 462,939 |       |  | $ | 518,032 |  |  | $ | 423,285  |  
|Operating income (loss)                   |  |       | 111,553 |  |        |   | 28,835  |       |  |   | 187,347 |  |  |   | (147,656 | )
|Net income (loss)                         |  |       | 70,055  |  |        |   | 20,497  |       |  |   | 121,857 |  |  |   | (94,576  | )
|Basic income (loss) per common share(1)   |  | $     | 0.29    |  |        | $ | 0.08    |       |  | $ | 0.50    |  |  | $ | (0.39    | )
|Diluted income (loss) per common share(1) |  | $     | 0.29    |  |        | $ | 0.08    |       |  | $ | 0.50    |  |  | $ | (0.39    | )

|                                          |  |       |          |   |        |   |         |       |  |   |         |   |  |   |         | 
|----------------------------------------- |  | ----- | -------- | - | ------ | - | ------- | ----- |  | - | ------- | - |  | - | ------- | 
|2004 By Quarter                           |  | First |          |   | Second |   |         | Third |  |   | Fourth  |  
|                                          |  |       |          |   |        |   |         |       |  |   |         |  
|Total revenues                            |  | $     | 291,450  |   |        | $ | 275,611 |       |  | $ | 394,684 |   |  | $ | 342,619 | 
|Operating income (loss)                   |  |       | 7,344    |   |        |   | (59,842 | )     |  |   | (11,653 | ) |  |   | 22,888  | 
|Net (loss) income                         |  |       | (104,076 | ) |        |   | (62,924 | )     |  |   | (8,014  | ) |  |   | 14,727  | 
|Basic (loss) income per common share(1)   |  | $     | (0.43    | ) |        | $ | (0.26   | )     |  | $ | (0.03   | ) |  | $ | 0.06    | 
|Diluted (loss) income per common share(1) |  | $     | (0.43    | ) |        | $ | (0.26   | )     |  | $ | (0.03   | ) |  | $ | 0.06    | 






|    |                                                                                                          
|--- | ---------------------------------------------------------------------------------------------------------
|(1) | Quarterly amounts may not total to annual amounts due to the
    effect of rounding on a quarterly basis.



|    |                        
|--- | -----------------------
|27. | Discontinued Operations

® ®


® ® ® ®




F-42



---



##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|                                                             |  |      |       |  |      |   |          |      |  |   |        |  
|------------------------------------------------------------ |  | ---- | ----- |  | ---- | - | -------- | ---- |  | - | ------ | -
|                                                             |  | 2005 |       |  | 2004 |   |          | 2003 | 
|                                                             |  |      |       |  |      |   |          |      | 
|Total revenues                                               |  | $    | 1,856 |  |      | $ | 13,182   |      |  | $ | 13,112 |  
|Operating income (loss), including expected loss on disposal |  |      | 1,876 |  |      |   | (172,750 | )    |  |   | (8,771 | )
|Net income (loss)                                            |  |      | 1,203 |  |      |   | (109,666 | )    |  |   | (5,489 | )



|    |             
|--- | ------------
|28. | Mylan Merger





|    |                 
|--- | ----------------
|29. | Subsequent Event

® ®




®




|    |                               
|--- | ------------------------------
|30. | Guarantor Financial Statements

3 4


F-43



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##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




F-44



---



##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


GUARANTOR SUBSIDIARIES


CONDENSED CONSOLIDATING BALANCE SHEETS


|                                          |                                            |                   |           |           |              |   |               |              |   |             |         |        |      |              |            |            |   |   |           |           | 
|----------------------------------------- | ------------------------------------------ | ----------------- | --------- | --------- | ------------ | - | ------------- | ------------ | - | ----------- | ------- | ------ | ---- | ------------ | ---------- | ---------- | - | - | --------- | --------- | 
|                                          |                                            | December 31, 2005 |          
|                                          |                                            |                   |          
|                                          |                                            |                   |           | Guarantor |              |   | Non Guarantor |              |   | Eliminating |         |        | King |             
|                                          |                                            | King              |           |           | Subsidiaries |   |               | Subsidiaries |   |             | Entries |        |      | Consolidated |           
|                                          |                                            |                   |           |           |              |   |               |              |   |             |         |        |      |              |           
|ASSETS                                    |                                            |                   |           |           |              |   |               |              |   |             |         |        |      |              |            |            |   |   |           |          
|Current assets:                           |                                            |                   |           |           |              |   |               |              |   |             |         |        |      |              |            |            |   |   |           |          
|Cash and cash equivalents                 |                                            | $                 | 26,802    |           |              | $ | 1,071         |              |   | $           | 2,141   |        |      | $            |           |            |   | $ | 30,014    |          
|Investments in debt securities            |                                            |                   | 494,663   |           |              |   |              |              |   |             |        |        |      |              |           |            |   |   | 494,663   |          
|Restricted cash                           |                                            |                   | 130,400   |           |              |   |              |              |   |             |        |        |      |              |           |            |   |   | 130,400   |          
|Marketable securities                     |                                            |                   |          |           |              |   |              |              |   |             |        |        |      |              |           |            |   |   |          |          
|Accounts receivable, net                  |                                            |                   | 1,221     |           |              |   | 221,854       |              |   |             | 506     |        |      |              |           |            |   |   | 223,581   |          
|Inventories                               |                                            |                   | 195,421   |           |              |   | 31,877        |              |   |             | 765     |        |      |              |           |            |   |   | 228,063   |          
|Deferred income tax assets                |                                            |                   | 21,524    |           |              |   | 60,253        |              |   |             |        |        |      |              |           |            |   |   | 81,777    |          
|Prepaid expenses and other current assets |                                            |                   | 50,724    |           |              |   | 8,566         |              |   |             | 1       |        |      |              |           |            |   |   | 59,291    |          
|                                          |                                            |                   |           |           |              |   |               |              |   |             |         |        |      |              |           
|                                          | Total current assets                       |                   |           | 920,755   |              |   |               | 323,621      |   |             |         | 3,413  |      |              |            |           |   |   |           | 1,247,789 | 
|Property, plant, and equipment, net       |                                            |                   | 108,712   |           |              |   | 193,762       |              |   |             |        |        |      |              |           |            |   |   | 302,474   |          
|Goodwill                                  |                                            |                   |          |           |              |   | 121,152       |              |   |             |        |        |      |              |           |            |   |   | 121,152   |          
|Intangible assets, net                    |                                            |                   | 44        |           |              |   | 963,944       |              |   |             | 3,206   |        |      |              |           |            |   |   | 967,194   |          
|Marketable securities                     |                                            |                   | 18,502    |           |              |   |              |              |   |             |        |        |      |              |           |            |   |   | 18,502    |          
|Other assets                              |                                            |                   | 30,225    |           |              |   | 46,874        |              |   |             |        |        |      |              |           |            |   |   | 77,099    |          
|Deferred income tax assets                |                                            |                   | (9,483    | )         |              |   | 239,452       |              |   |             | 1,063   |        |      |              |           |            |   |   | 231,032   |          
|Investment in subsidiaries                |                                            |                   | 2,299,835 |           |              |   |              |              |   |             |        |        |      |              | (2,299,835 | )          |   |   |          |          
|                                          |                                            |                   |           |           |              |   |               |              |   |             |         |        |      |              |           
|                                          | Total assets                               |                   | $         | 3,368,590 |              |   | $             | 1,888,805    |   |             | $       | 7,682  |      |              | $          | (2,299,835 | ) |   | $         | 2,965,242 | 
|                                          |                                            |                   |           |           |              |   |               |              |   |             |         |        |      |              |           
|LIABILITIES AND SHAREHOLDERS EQUITY      |                                            |                   |           |           |              |   |               |              |   |             |         |        |      |              |            |            |   |   |           |          
|Current liabilities:                      |                                            |                   |           |           |              |   |               |              |   |             |         |        |      |              |            |            |   |   |           |          
|Accounts payable                          |                                            | $                 | 60,700    |           |              | $ | 23,762        |              |   | $           | 77      |        |      | $            |           |            |   | $ | 84,539    |          
|Accrued expenses                          |                                            |                   | 151,125   |           |              |   | 368,491       |              |   |             | 4       |        |      |              |           |            |   |   | 519,620   |          
|Income taxes payable                      |                                            |                   | 24,123    |           |              |   | (1,701        | )            |   |             | (121    | )      |      |              |           |            |   |   | 22,301    |          
|Current portion of long-term debt         |                                            |                   | 345,000   |           |              |   |              |              |   |             |        |        |      |              |           |            |   |   | 345,000   |          
|                                          |                                            |                   |           |           |              |   |               |              |   |             |         |        |      |              |           
|                                          | Total current liabilities                  |                   |           | 580,948   |              |   |               | 390,552      |   |             |         | (40    | )    |              |            |           |   |   |           | 971,460   | 
|Long-term debt                            |                                            |                   |          |           |              |   |              |              |   |             |        |        |      |              |           |            |   |   |          |          
|Other liabilities                         |                                            |                   | 17,371    |           |              |   | 2,989         |              |   |             |        |        |      |              |           |            |   |   | 20,360    |          
|Intercompany payable (receivable)         |                                            |                   | 796,849   |           |              |   | (808,256      | )            |   |             | 11,407  |        |      |              |           |            |   |   |          |          
|                                          |                                            |                   |           |           |              |   |               |              |   |             |         |        |      |              |           
|                                          | Total liabilities                          |                   |           | 1,395,168 |              |   |               | (414,715     | ) |             |         | 11,367 |      |              |            |           |   |   |           | 991,820   | 
|                                          |                                            |                   |           |           |              |   |               |              |   |             |         |        |      |              |           
|Shareholders equity                      |                                            |                   | 1,973,422 |           |              |   | 2,303,520     |              |   |             | (3,685  | )      |      |              | (2,299,835 | )          |   |   | 1,973,422 |          
|                                          |                                            |                   |           |           |              |   |               |              |   |             |         |        |      |              |           
|                                          | Total liabilities and shareholders equity |                   | $         | 3,368,590 |              |   | $             | 1,888,805    |   |             | $       | 7,682  |      |              | $          | (2,299,835 | ) |   | $         | 2,965,242 | 
|                                          |                                            |                   |           |           |              |   |               |              |   |             |         |        |      |              |           

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                          |                                            |                   |           |           |              |   |               |              |   |             |         |        |      |              |            |            |   |   |           |           | 
|----------------------------------------- | ------------------------------------------ | ----------------- | --------- | --------- | ------------ | - | ------------- | ------------ | - | ----------- | ------- | ------ | ---- | ------------ | ---------- | ---------- | - | - | --------- | --------- | 
|                                          |                                            | December 31, 2004 |          
|                                          |                                            |                   |          
|                                          |                                            |                   |           | Guarantor |              |   | Non Guarantor |              |   | Eliminating |         |        | King |             
|                                          |                                            | King              |           |           | Subsidiaries |   |               | Subsidiaries |   |             | Entries |        |      | Consolidated |           
|                                          |                                            |                   |           |           |              |   |               |              |   |             |         |        |      |              |           
|ASSETS                                    |                                            |                   |           |           |              |   |               |              |   |             |         |        |      |              |            |            |   |   |           |          
|Current assets:                           |                                            |                   |           |           |              |   |               |              |   |             |         |        |      |              |            |            |   |   |           |          
|Cash and cash equivalents                 |                                            | $                 | 164,451   |           |              | $ | 27,035        |              |   | $           | 1,170   |        |      | $            |           |            |   | $ | 192,656   |          
|Investments in debt securities            |                                            |                   | 149,430   |           |              |   |              |              |   |             |        |        |      |              |           |            |   |   | 149,430   |          
|Restricted cash                           |                                            |                   | 66,543    |           |              |   | 31,187        |              |   |             |        |        |      |              |           |            |   |   | 97,730    |          
|Marketable securities                     |                                            |                   | 16,498    |           |              |   |              |              |   |             |        |        |      |              |           |            |   |   | 16,498    |          
|Accounts receivable, net                  |                                            |                   | 3,344     |           |              |   | 174,797       |              |   |             | 2,822   |        |      |              |           |            |   |   | 180,963   |          
|Inventories                               |                                            |                   | 237,448   |           |              |   | 36,743        |              |   |             | 221     |        |      |              |           |            |   |   | 274,412   |          
|Deferred income tax assets                |                                            |                   | 32,809    |           |              |   | 121,170       |              |   |             |        |        |      |              |           |            |   |   | 153,979   |          
|Prepaid expenses and other current assets |                                            |                   | 22,846    |           |              |   | 38,481        |              |   |             | 68      |        |      |              |           |            |   |   | 61,395    |          
|                                          |                                            |                   |           |           |              |   |               |              |   |             |         |        |      |              |           
|                                          | Total current assets                       |                   |           | 693,369   |              |   |               | 429,413      |   |             |         | 4,281  |      |              |            |           |   |   |           | 1,127,063 | 
|Property, plant, and equipment, net       |                                            |                   | 112,416   |           |              |   | 168,313       |              |   |             | 2       |        |      |              |           |            |   |   | 280,731   |          
|Goodwill                                  |                                            |                   |          |           |              |   | 121,152       |              |   |             |        |        |      |              |           |            |   |   | 121,152   |          
|Intangible assets, net                    |                                            |                   | 194       |           |              |   | 1,275,474     |              |   |             | 10,293  |        |      |              |           |            |   |   | 1,285,961 |          
|Marketable securities                     |                                            |                   |          |           |              |   |              |              |   |             |        |        |      |              |           |            |   |   |          |          
|Other assets                              |                                            |                   | 16,078    |           |              |   | 240           |              |   |             |        |        |      |              |           |            |   |   | 16,318    |          
|Deferred income tax assets                |                                            |                   | 14,197    |           |              |   | 78,734        |              |   |             |        |        |      |              |           |            |   |   | 92,931    |          
|Investment in subsidiaries                |                                            |                   | 2,186,234 |           |              |   |              |              |   |             |        |        |      |              | (2,186,234 | )          |   |   |          |          
|                                          |                                            |                   |           |           |              |   |               |              |   |             |         |        |      |              |           
|                                          | Total assets                               |                   | $         | 3,022,488 |              |   | $             | 2,073,326    |   |             | $       | 14,576 |      |              | $          | (2,186,234 | ) |   | $         | 2,924,156 | 
|                                          |                                            |                   |           |           |              |   |               |              |   |             |         |        |      |              |           
|LIABILITIES AND SHAREHOLDERS EQUITY      |                                            |                   |           |           |              |   |               |              |   |             |         |        |      |              |            |            |   |   |           |          
|Current liabilities:                      |                                            |                   |           |           |              |   |               |              |   |             |         |        |      |              |            |            |   |   |           |          
|Accounts payable                          |                                            | $                 | 61,427    |           |              | $ | 31,339        |              |   | $           | 154     |        |      | $            |           |            |   | $ | 92,920    |          
|Accrued expenses                          |                                            |                   | 125,095   |           |              |   | 470,899       |              |   |             | 16      |        |      |              |           |            |   |   | 596,010   |          
|Income taxes payable                      |                                            |                   |          |           |              |   |              |              |   |             |        |        |      |              |           |            |   |   |          |          
|Current portion of long-term debt         |                                            |                   |          |           |              |   |              |              |   |             |        |        |      |              |           |            |   |   |          |          
|                                          |                                            |                   |           |           |              |   |               |              |   |             |         |        |      |              |           
|                                          | Total current liabilities                  |                   |           | 186,522   |              |   |               | 502,238      |   |             |         | 170    |      |              |            |           |   |   |           | 688,930   | 
|Long-term debt                            |                                            |                   | 345,000   |           |              |   |              |              |   |             |        |        |      |              |           |            |   |   | 345,000   |          
|Other liabilities                         |                                            |                   | 29,417    |           |              |   | 12,019        |              |   |             |        |        |      |              |           |            |   |   | 41,436    |          
|Intercompany payable (receivable)         |                                            |                   | 612,759   |           |              |   | (620,511      | )            |   |             | 7,752   |        |      |              |           |            |   |   |          |          
|                                          |                                            |                   |           |           |              |   |               |              |   |             |         |        |      |              |           
|                                          | Total liabilities                          |                   |           | 1,173,698 |              |   |               | (106,254     | ) |             |         | 7,922  |      |              |            |           |   |   |           | 1,075,366 | 
|                                          |                                            |                   |           |           |              |   |               |              |   |             |         |        |      |              |           
|Shareholders equity                      |                                            |                   | 1,848,790 |           |              |   | 2,179,580     |              |   |             | 6,654   |        |      |              | (2,186,234 | )          |   |   | 1,848,790 |          
|                                          |                                            |                   |           |           |              |   |               |              |   |             |         |        |      |              |           
|                                          | Total liabilities and shareholders equity |                   | $         | 3,022,488 |              |   | $             | 2,073,326    |   |             | $       | 14,576 |      |              | $          | (2,186,234 | ) |   | $         | 2,924,156 | 
|                                          |                                            |                   |           |           |              |   |               |              |   |             |         |        |      |              |           

F-45



---



##### Table of Contents





KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


GUARANTOR SUBSIDIARIES


CONSOLIDATING STATEMENTS OF OPERATIONS


|                                                             |                                                               |                                    |         |           |              |  |           |              |           |  |              |       |         |              |          |          |          |   |         |           |           |  
|------------------------------------------------------------ | ------------------------------------------------------------- | ---------------------------------- | ------- | --------- | ------------ |  | --------- | ------------ | --------- |  | ------------ | ----- | ------- | ------------ | -------- | -------- | -------- | - | ------- | --------- | --------- | -
|                                                             |                                                               | Twelve Months Ended 12/31/2005     |        
|                                                             |                                                               |                                    |        
|                                                             |                                                               |                                    |         | Non       |              |  |          
|                                                             |                                                               |                                    |         | Guarantor |              |  | Guarantor |              |           |  |              | King  |        
|                                                             |                                                               | King                               |         |           | Subsidiaries |  |           | Subsidiaries |           |  | Eliminations |       |         | Consolidated |         
|                                                             |                                                               |                                    |         |           |              |  |           |              |           |  |              |       |         |              |         
|Revenues:                                                    |                                                               |                                    |         |           |              |  |           |              |           |  |              |       |         |              |          |          |          |   |         |          
|                                                             | Net sales                                                     |                                    | $       | 491,613   |              |  | $         | 1,691,216    |           |  |              | 1,049 |         |              | $        | (489,125 | )        |   | $       | 1,694,753 |          
|                                                             | Royalty revenue                                               |                                    |         |          |              |  |           | 78,128       |           |  |              |      |         |              |          |         |          |   |         | 78,128    |          
|                                                             |                                                               |                                    |         |           |              |  |           |              |           |  |              |       |         |              |         
|                                                             |                                                               | Total revenues                     |         |           | 491,613      |  |           |              | 1,769,344 |  |              |       | 1,049   |              |          |          | (489,125 | ) |         |           | 1,772,881 |  
|                                                             |                                                               |                                    |         |           |              |  |           |              |           |  |              |       |         |              |         
|Operating costs and expenses:                                |                                                               |                                    |         |           |              |  |           |              |           |  |              |       |         |              |          |          |          |   |         |          
|                                                             | Cost of revenues                                              |                                    |         | 152,011   |              |  |           | 659,552      |           |  |              | 547   |         |              |          | (489,125 | )        |   |         | 322,985   |          
|                                                             | Selling, general and administrative                           |                                    |         | 218,455   |              |  |           | 416,328      |           |  |              | 1,700 |         |              |          |         |          |   |         | 636,483   |          
|                                                             | Research and development                                      |                                    |         | 35,646    |              |  |           | 227,080      |           |  |              |      |         |              |          |         |          |   |         | 262,726   |          
|                                                             | Depreciation and amortization                                 |                                    |         | 15,754    |              |  |           | 130,620      |           |  |              | 675   |         |              |          |         |          |   |         | 147,049   |          
|                                                             | Intangible asset impairment                                   |                                    |         |          |              |  |           | 212,747      |           |  |              | 8,307 |         |              |          |         |          |   |         | 221,054   |          
|                                                             | Restructuring charges                                         |                                    |         | 1,730     |              |  |           | 2,450        |           |  |              |      |         |              |          |         |          |   |         | 4,180     |          
|                                                             | Gain on sale of intangible assets                             |                                    |         | (64       | )            |  |           | (1,611       | )         |  |              |      |         |              |          |         |          |   |         | (1,675    | )        
|                                                             |                                                               |                                    |         |           |              |  |           |              |           |  |              |       |         |              |         
|                                                             |                                                               | Total operating costs and expenses |         |           | 423,532      |  |           |              | 1,647,166 |  |              |       | 11,229  |              |          |          | (489,125 | ) |         |           | 1,592,802 |  
|                                                             |                                                               |                                    |         |           |              |  |           |              |           |  |              |       |         |              |         
|Operating income                                             |                                                               |                                    | 68,081  |           |              |  | 122,178   |              |           |  | (10,180      | )     |         |              |         |          |          |   | 180,079 |          
|Other income (expense):                                      |                                                               |                                    |         |           |              |  |           |              |           |  |              |       |         |              |          |          |          |   |         |          
|                                                             | Interest income                                               |                                    |         | 17,659    |              |  |           | 516          |           |  |              |      |         |              |          |         |          |   |         | 18,175    |          
|                                                             | Interest expense                                              |                                    |         | (11,865   | )            |  |           | (66          | )         |  |              |      |         |              |          |         |          |   |         | (11,931   | )        
|                                                             | Valuation (charge) benefit  convertible notes
    receivable |                                    |         |          |              |  |           |             |           |  |              |      |         |              |          |         |          |   |         |          |          
|                                                             | Loss on investment                                            |                                    |         | (6,182    | )            |  |           |             |           |  |              |      |         |              |          |         |          |   |         | (6,182    | )        
|                                                             | Other, net                                                    |                                    |         | (579      | )            |  |           | (1,016       | )         |  |              | (431  | )       |              |          |         |          |   |         | (2,026    | )        
|                                                             | Equity in earnings (loss) of subsidiaries                     |                                    |         | 113,679   |              |  |           |             |           |  |              |      |         |              |          | (113,679 | )        |   |         |          |          
|                                                             | Intercompany interest (expense) income                        |                                    |         | (57,355   | )            |  |           | 58,088       |           |  |              | (733  | )       |              |          |         |          |   |         |          |          
|                                                             |                                                               |                                    |         |           |              |  |           |              |           |  |              |       |         |              |         
|                                                             |                                                               | Total other income (expenses)      |         |           | 55,357       |  |           |              | 57,522    |  |              |       | (1,164  | )            |          |          | (113,679 | ) |         |           | (1,964    | )
|                                                             |                                                               |                                    |         |           |              |  |           |              |           |  |              |       |         |              |         
|Income (loss) from continuing operations before income taxes |                                                               |                                    | 123,438 |           |              |  | 179,700   |              |           |  | (11,344      | )     |         |              | (113,679 | )        |          |   | 178,115 |          
|                                                             |                                                               |                                    |         |           |              |  |           |              |           |  |              |       |         |              |         
|Income tax expense (benefit)                                 |                                                               |                                    | 5,616   |           |              |  | 56,874    |              |           |  | (1,005       | )     |         |              |         |          |          |   | 61,485  |          
|                                                             |                                                               |                                    |         |           |              |  |           |              |           |  |              |       |         |              |         
|Income (loss) from continuing operations                     |                                                               |                                    | 117,822 |           |              |  | 122,826   |              |           |  | (10,339      | )     |         |              | (113,679 | )        |          |   | 116,630 |          
|Discontinued operations:                                     |                                                               |                                    |         |           |              |  |           |              |           |  |              |       |         |              |          |          |          |   |         |          
|                                                             | Income (loss) from discontinued operations                    |                                    |         | 18        |              |  |           | 1,858        |           |  |              |      |         |              |          |         |          |   |         | 1,876     |          
|                                                             | Income tax expense (benefit)                                  |                                    |         | 7         |              |  |           | 666          |           |  |              |      |         |              |          |         |          |   |         | 673       |          
|                                                             |                                                               |                                    |         |           |              |  |           |              |           |  |              |       |         |              |         
|                                                             | Total income (loss) from discontinued operations              |                                    |         | 11        |              |  |           | 1,192        |           |  |              |      |         |              |          |         |          |   |         | 1,203     |          
|                                                             |                                                               |                                    |         |           |              |  |           |              |           |  |              |       |         |              |         
|                                                             |                                                               | Net income (loss)                  |         | $         | 117,833      |  |           | $            | 124,018   |  |              | $     | (10,339 | )            |          | $        | (113,679 | ) |         | $         | 117,833   |  
|                                                             |                                                               |                                    |         |           |              |  |           |              |           |  |              |       |         |              |         

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                                             |                                                               |                                    |          |           |              |   |           |              |           |   |              |       |       |              |        |          |          |   |         |           |           |  
|------------------------------------------------------------ | ------------------------------------------------------------- | ---------------------------------- | -------- | --------- | ------------ | - | --------- | ------------ | --------- | - | ------------ | ----- | ----- | ------------ | ------ | -------- | -------- | - | ------- | --------- | --------- | -
|                                                             |                                                               | Twelve Months Ended 12/31/2004     |         
|                                                             |                                                               |                                    |         
|                                                             |                                                               |                                    |          | Non       |              |   |          
|                                                             |                                                               |                                    |          | Guarantor |              |   | Guarantor |              |           |   |              | King  |      
|                                                             |                                                               | King                               |          |           | Subsidiaries |   |           | Subsidiaries |           |   | Eliminations |       |       | Consolidated |       
|                                                             |                                                               |                                    |          |           |              |   |           |              |           |   |              |       |       |              |       
|Revenues:                                                    |                                                               |                                    |          |           |              |   |           |              |           |   |              |       |       |              |        |          |          |   |         |          
|                                                             | Net sales                                                     |                                    | $        | 374,833   |              |   | $         | 1,222,515    |           |   | $            | 2,030 |       |              | $      | (373,488 | )        |   | $       | 1,225,890 |          
|                                                             | Royalty revenue                                               |                                    |          |          |              |   |           | 78,474       |           |   |              |      |       |              |        |         |          |   |         | 78,474    |          
|                                                             |                                                               |                                    |          |           |              |   |           |              |           |   |              |       |       |              |       
|                                                             |                                                               | Total revenues                     |          |           | 374,833      |   |           |              | 1,300,989 |   |              |       | 2,030 |              |        |          | (373,488 | ) |         |           | 1,304,364 |  
|                                                             |                                                               |                                    |          |           |              |   |           |              |           |   |              |       |       |              |       
|Operating costs and expenses:                                |                                                               |                                    |          |           |              |   |           |              |           |   |              |       |       |              |        |          |          |   |         |          
|                                                             | Cost of revenues                                              |                                    |          | 135,430   |              |   |           | 590,388      |           |   |              | 608   |       |              |        | (373,488 | )        |   |         | 352,938   |          
|                                                             | Selling, general and administrative                           |                                    |          | 264,024   |              |   |           | 330,434      |           |   |              | 983   |       |              |        |         |          |   |         | 595,441   |          
|                                                             | Research and development                                      |                                    |          | 509       |              |   |           | 83,730       |           |   |              |      |       |              |        |         |          |   |         | 84,239    |          
|                                                             | Depreciation and amortization                                 |                                    |          | 16,925    |              |   |           | 144,722      |           |   |              | 468   |       |              |        |         |          |   |         | 162,115   |          
|                                                             | Intangible asset impairment                                   |                                    |          | 4,399     |              |   |           | 145,193      |           |   |              |      |       |              |        |         |          |   |         | 149,592   |          
|                                                             | Restructuring charges                                         |                                    |          | 7,646     |              |   |           | 3,181        |           |   |              |      |       |              |        |         |          |   |         | 10,827    |          
|                                                             | Gain on sale of intangible assets                             |                                    |          | (4,022    | )            |   |           | (5,502       | )         |   |              |      |       |              |        |         |          |   |         | (9,524    | )        
|                                                             |                                                               |                                    |          |           |              |   |           |              |           |   |              |       |       |              |       
|                                                             |                                                               | Total operating costs and expenses |          |           | 424,911      |   |           |              | 1,292,146 |   |              |       | 2,059 |              |        |          | (373,488 | ) |         |           | 1,345,628 |  
|                                                             |                                                               |                                    |          |           |              |   |           |              |           |   |              |       |       |              |       
|Operating income                                             |                                                               |                                    | (50,078  | )         |              |   | 8,843     |              |           |   | (29          | )     |       |              |       |          |          |   | (41,264 | )        
|Other income (expense):                                      |                                                               |                                    |          |           |              |   |           |              |           |   |              |       |       |              |        |          |          |   |         |          
|                                                             | Interest income                                               |                                    |          | 5,101     |              |   |           | 873          |           |   |              |      |       |              |        |         |          |   |         | 5,974     |          
|                                                             | Interest expense                                              |                                    |          | (12,492   | )            |   |           | (96          | )         |   |              |      |       |              |        |         |          |   |         | (12,588   | )        
|                                                             | Valuation (charge) benefit  convertible notes
    receivable |                                    |          | (2,887    | )            |   |           |             |           |   |              |      |       |              |        |         |          |   |         | (2,887    | )        
|                                                             | Loss on investment                                            |                                    |          | (6,520    | )            |   |           |             |           |   |              |      |       |              |        |         |          |   |         | (6,520    | )        
|                                                             | Other, net                                                    |                                    |          | (820      | )            |   |           | (82          | )         |   |              | 153   |       |              |        |         |          |   |         | (749      | )        
|                                                             | Equity in earnings (loss) of subsidiaries                     |                                    |          | (84,284   | )            |   |           |             |           |   |              |      |       |              |        | 84,284   |          |   |         |          |          
|                                                             | Intercompany interest (expense) income                        |                                    |          | (33,648   | )            |   |           | 33,937       |           |   |              | (289  | )     |              |        |         |          |   |         |          |          
|                                                             |                                                               |                                    |          |           |              |   |           |              |           |   |              |       |       |              |       
|                                                             |                                                               | Total other income (expenses)      |          |           | (135,550     | ) |           |              | 34,632    |   |              |       | (136  | )            |        |          | 84,284   |   |         |           | (16,770   | )
|                                                             |                                                               |                                    |          |           |              |   |           |              |           |   |              |       |       |              |       
|Income (loss) from continuing operations before income taxes |                                                               |                                    | (185,628 | )         |              |   | 43,475    |              |           |   | (165         | )     |       |              | 84,284 |          |          |   | (58,034 | )        
|                                                             |                                                               |                                    |          |           |              |   |           |              |           |   |              |       |       |              |       
|Income tax expense (benefit)                                 |                                                               |                                    | (25,315  | )         |              |   | 18,026    |              |           |   | (123         | )     |       |              |       |          |          |   | (7,412  | )        
|                                                             |                                                               |                                    |          |           |              |   |           |              |           |   |              |       |       |              |       
|Income (loss) from continuing operations                     |                                                               |                                    | (160,313 | )         |              |   | 25,449    |              |           |   | (42          | )     |       |              | 84,284 |          |          |   | (50,622 | )        
|Discontinued operations:                                     |                                                               |                                    |          |           |              |   |           |              |           |   |              |       |       |              |        |          |          |   |         |          
|                                                             | Income (loss) from discontinued operations                    |                                    |          | 40        |              |   |           | (172,790     | )         |   |              |      |       |              |        |         |          |   |         | (172,750  | )        
|                                                             | Income tax expense (benefit)                                  |                                    |          | 15        |              |   |           | (63,099      | )         |   |              |      |       |              |        |         |          |   |         | (63,084   | )        
|                                                             |                                                               |                                    |          |           |              |   |           |              |           |   |              |       |       |              |       
|                                                             | Total income (loss) from discontinued operations              |                                    |          | 25        |              |   |           | (109,691     | )         |   |              |      |       |              |        |         |          |   |         | (109,666  | )        
|                                                             |                                                               |                                    |          |           |              |   |           |              |           |   |              |       |       |              |       
|                                                             |                                                               | Net income (loss)                  |          | $         | (160,288     | ) |           | $            | (84,242   | ) |              | $     | (42   | )            |        | $        | 84,284   |   |         | $         | (160,288  | )
|                                                             |                                                               |                                    |          |           |              |   |           |              |           |   |              |       |       |              |       

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                                             |                                                               |                                    |         |           |              |  |           |              |           |  |              |       |       |              |         |          |          |   |         |           |           | 
|------------------------------------------------------------ | ------------------------------------------------------------- | ---------------------------------- | ------- | --------- | ------------ |  | --------- | ------------ | --------- |  | ------------ | ----- | ----- | ------------ | ------- | -------- | -------- | - | ------- | --------- | --------- | 
|                                                             |                                                               | Twelve Months Ended 12/31/2003     |        
|                                                             |                                                               |                                    |        
|                                                             |                                                               |                                    |         | Non       |              |  |          
|                                                             |                                                               |                                    |         | Guarantor |              |  | Guarantor |              |           |  |              | King  |      
|                                                             |                                                               | King                               |         |           | Subsidiaries |  |           | Subsidiaries |           |  | Eliminations |       |       | Consolidated |        
|                                                             |                                                               |                                    |         |           |              |  |           |              |           |  |              |       |       |              |        
|Revenues:                                                    |                                                               |                                    |         |           |              |  |           |              |           |  |              |       |       |              |         |          |          |   |         |          
|                                                             | Net sales                                                     |                                    | $       | 329,974   |              |  | $         | 1,420,875    |           |  | $            | 3,056 |       |              | $       | (329,481 | )        |   | $       | 1,424,424 |          
|                                                             | Royalty revenue                                               |                                    |         |          |              |  |           | 68,365       |           |  |              |      |       |              |         |         |          |   |         | 68,365    |          
|                                                             |                                                               |                                    |         |           |              |  |           |              |           |  |              |       |       |              |        
|                                                             |                                                               | Total revenues                     |         |           | 329,974      |  |           |              | 1,489,240 |  |              |       | 3,056 |              |         |          | (329,481 | ) |         |           | 1,492,789 | 
|                                                             |                                                               |                                    |         |           |              |  |           |              |           |  |              |       |       |              |        
|Operating costs and expenses:                                |                                                               |                                    |         |           |              |  |           |              |           |  |              |       |       |              |         |          |          |   |         |          
|                                                             | Cost of revenues                                              |                                    |         | 145,930   |              |  |           | 568,510      |           |  |              | 882   |       |              |         | (329,481 | )        |   |         | 385,841   |          
|                                                             | Selling, general and administrative                           |                                    |         | 64,489    |              |  |           | 425,987      |           |  |              | 106   |       |              |         |         |          |   |         | 490,582   |          
|                                                             | Research and development                                      |                                    |         | 900       |              |  |           | 237,178      |           |  |              |      |       |              |         |         |          |   |         | 238,078   |          
|                                                             | Depreciation and amortization                                 |                                    |         | 8,013     |              |  |           | 105,308      |           |  |              | 424   |       |              |         |         |          |   |         | 113,745   |          
|                                                             | Intangible asset impairment                                   |                                    |         | 7,425     |              |  |           | 117,191      |           |  |              |      |       |              |         |         |          |   |         | 124,616   |          
|                                                             | Restructuring charges                                         |                                    |         |          |              |  |           |             |           |  |              |      |       |              |         |         |          |   |         |          |          
|                                                             | Gain on sale of intangible assets                             |                                    |         |          |              |  |           | (12,025      | )         |  |              |      |       |              |         |         |          |   |         | (12,025   | )        
|                                                             |                                                               |                                    |         |           |              |  |           |              |           |  |              |       |       |              |        
|                                                             |                                                               | Total operating costs and expenses |         |           | 226,757      |  |           |              | 1,442,149 |  |              |       | 1,412 |              |         |          | (329,481 | ) |         |           | 1,340,837 | 
|                                                             |                                                               |                                    |         |           |              |  |           |              |           |  |              |       |       |              |        
|Operating income                                             |                                                               |                                    | 103,217 |           |              |  | 47,091    |              |           |  | 1,644        |       |       |              |        |          |          |   | 151,952 |          
|Other income (expense):                                      |                                                               |                                    |         |           |              |  |           |              |           |  |              |       |       |              |         |          |          |   |         |          
|                                                             | Interest income                                               |                                    |         | 5,960     |              |  |           | 889          |           |  |              |      |       |              |         |         |          |   |         | 6,849     |          
|                                                             | Interest expense                                              |                                    |         | (13,391   | )            |  |           | (5           | )         |  |              |      |       |              |         |         |          |   |         | (13,396   | )        
|                                                             | Valuation (charge) benefit  convertible notes
    receivable |                                    |         | 18,551    |              |  |           |             |           |  |              |      |       |              |         |         |          |   |         | 18,551    |          
|                                                             | Loss on investment                                            |                                    |         |          |              |  |           |             |           |  |              |      |       |              |         |         |          |   |         |          |          
|                                                             | Other, net                                                    |                                    |         | (650      | )            |  |           | (149         | )         |  |              | 170   |       |              |         |         |          |   |         | (629      | )        
|                                                             | Equity in earnings (loss) of subsidiaries                     |                                    |         | 46,830    |              |  |           |             |           |  |              |      |       |              |         | (46,830  | )        |   |         |          |          
|                                                             | Intercompany interest (expense) income                        |                                    |         | (9,567    | )            |  |           | 9,567        |           |  |              |      |       |              |         |         |          |   |         |          |          
|                                                             |                                                               |                                    |         |           |              |  |           |              |           |  |              |       |       |              |        
|                                                             |                                                               | Total other income (expenses)      |         |           | 47,733       |  |           |              | 10,302    |  |              |       | 170   |              |         |          | (46,830  | ) |         |           | 11,375    | 
|                                                             |                                                               |                                    |         |           |              |  |           |              |           |  |              |       |       |              |        
|Income (loss) from continuing operations before income taxes |                                                               |                                    | 150,950 |           |              |  | 57,393    |              |           |  | 1,814        |       |       |              | (46,830 | )        |          |   | 163,327 |          
|                                                             |                                                               |                                    |         |           |              |  |           |              |           |  |              |       |       |              |        
|Income tax expense (benefit)                                 |                                                               |                                    | 58,996  |           |              |  | 6,253     |              |           |  | 635          |       |       |              |        |          |          |   | 65,884  |          
|                                                             |                                                               |                                    |         |           |              |  |           |              |           |  |              |       |       |              |        
|Income (loss) from continuing operations                     |                                                               |                                    | 91,954  |           |              |  | 51,140    |              |           |  | 1,179        |       |       |              | (46,830 | )        |          |   | 97,443  |          
|Discontinued operations:                                     |                                                               |                                    |         |           |              |  |           |              |           |  |              |       |       |              |         |          |          |   |         |          
|                                                             | Income (loss) from discontinued operations                    |                                    |         |          |              |  |           | (8,771       | )         |  |              |      |       |              |         |         |          |   |         | (8,771    | )        
|                                                             | Income tax expense (benefit)                                  |                                    |         |          |              |  |           | (3,282       | )         |  |              |      |       |              |         |         |          |   |         | (3,282    | )        
|                                                             |                                                               |                                    |         |           |              |  |           |              |           |  |              |       |       |              |        
|                                                             | Total income (loss) from discontinued operations              |                                    |         |          |              |  |           | (5,489       | )         |  |              |      |       |              |         |         |          |   |         | (5,489    | )        
|                                                             |                                                               |                                    |         |           |              |  |           |              |           |  |              |       |       |              |        
|                                                             |                                                               | Net income (loss)                  |         | $         | 91,954       |  |           | $            | 45,651    |  |              | $     | 1,179 |              |         | $        | (46,830  | ) |         | $         | 91,954    | 
|                                                             |                                                               |                                    |         |           |              |  |           |              |           |  |              |       |       |              |        

F-46



---



##### Table of Contents





KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


GUARANTOR SUBSIDIARIES


CONSOLIDATING STATEMENTS OF CASH FLOWS


|                                                                                                        |                                                                                    |                                           |          |            |                   |   |           |                   |         |   |              |         |       |              |         |          |           |     |          |              |         |   |              |            |         |              |          |          |              |           |        |        |           |   |              |        |   |              |          |            |              |   |          |              |         |   |          |          |         |   |       |       |        |   |        |         |        |   |          |            |         |  
|------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------- | ----------------------------------------- | -------- | ---------- | ----------------- | - | --------- | ----------------- | ------- | - | ------------ | ------- | ----- | ------------ | ------- | -------- | --------- | --- | -------- | ------------ | ------- | - | ------------ | ---------- | ------- | ------------ | -------- | -------- | ------------ | --------- | ------ | ------ | --------- | - | ------------ | ------ | - | ------------ | -------- | ---------- | ------------ | - | -------- | ------------ | ------- | - | -------- | -------- | ------- | - | ----- | ----- | ------ | - | ------ | ------- | ------ | - | -------- | ---------- | ------- | -
|                                                                                                        |                                                                                    | December 31, 2005                         |          |            | December 31, 2004 |   |           | December 31, 2003 |        
|                                                                                                        |                                                                                    |                                           |          |            |                   |   |           |                   |        
|                                                                                                        |                                                                                    |                                           |          | Non        |                   |   |           |                   |         |   | Non          |         |       |              |         |          |           | Non |          |              |        
|                                                                                                        |                                                                                    |                                           |          | Guarantor  |                   |   | Guarantor |                   |         |   |              | King    |       |              |         |          | Guarantor |     |          | Guarantor    |         |   |              |            | King    |              |          |          |              | Guarantor |        |        | Guarantor |   |              |        |   | King         |         
|                                                                                                        |                                                                                    | King                                      |          |            | Subsidiaries      |   |           | Subsidiaries      |         |   | Eliminations |         |       | Consolidated |         |          | King      |     |          | Subsidiaries |         |   | Subsidiaries |            |         | Eliminations |          |          | Consolidated |           |        | King   |           |   | Subsidiaries |        |   | Subsidiaries |          |            | Eliminations |   |          | Consolidated |        
|                                                                                                        |                                                                                    |                                           |          |            |                   |   |           |                   |         |   |              |         |       |              |         |          |           |     |          |              |         |   |              |            |         |              |          |          |              |           |        |        |           |   |              |        |   |              |          |            |              |   |          |              |        
|Cash flows from operating activities of continuing operations:                                          |                                                                                    |                                           |          |            |                   |   |           |                   |         |   |              |         |       |              |         |          |           |     |          |              |         |   |              |            |         |              |          |          |              |           |        |        |           |   |              |        |   |              |          |            |              |   |          |              |         |   |          |          |         |   |       |       |        |   |        |         |        |   |          |           
|                                                                                                        | Net income (loss)                                                                  |                                           | $        | 117,833    |                   |   | $         | 124,018           |         |   | $            | (10,339 | )     |              | $       | (113,679 | )         |     | $        | 117,833      |         |   | $            | (160,288   | )       |              | $        | (84,242  | )            |           | $      | (42    | )         |   | $            | 84,284 |   |              | $        | (160,288   | )            |   | $        | 91,954       |         |   | $        | 45,651   |         |   |       | 1,179 |        |   | $      | (46,830 | )      |   | $        | 91,954     |        
|                                                                                                        | (Income) loss from discontinued operations                                         |                                           |          | (11        | )                 |   |           | (1,192            | )       |   |              |        |       |              |         |         |           |     |          | (1,203       | )       |   |              | (25        | )       |              |          | 109,691  |              |           |        |       |           |   |              |       |   |              |          | 109,666    |              |   |          |             |         |   |          | 5,489    |         |   |       |      |        |   |        |        |        |   |          | 5,489      |        
|Equity in earnings of subsidiaries                                                                      |                                                                                    |                                           | (113,679 | )          |                   |   |          |                   |         |   |             |         |       |              | 113,679 |          |           |     |         |              |         |   | 84,284       |            |         |              |         |          |              |           |       |        |           |   | (84,284      | )      |   |              |         |            |              |   | (46,830  | )            |         |   |         |          |         |   |      |       |        |   | 46,830 |         |        |   |         |           
|                                                                                                        | Adjustments to reconcile net income to net cash provided by                        |                                           |          |            |                   |   |           |                   |         |   |              |         |       |              |         |          |           |     |          |              |         |   |              |            |         |              |          |          |              |           |        |        |           |   |              |        |   |              |          |            |              |   |          |              |         |   |          |          |         |   |       |       |        |   |        |         |        |   |          |            |        
|                                                                                                        | Operating activities:                                                              |                                           |          |            |                   |   |           |                   |         |   |              |         |       |              |         |          |           |     |          |              |         |   |              |            |         |              |          |          |              |           |        |        |           |   |              |        |   |              |          |            |              |   |          |              |         |   |          |          |         |   |       |       |        |   |        |         |        |   |          |            |        
|                                                                                                        | Depreciation and amortization                                                      |                                           |          | 15,754     |                   |   |           | 130,620           |         |   |              | 675     |       |              |         |         |           |     |          | 147,049      |         |   |              | 16,924     |         |              |          | 144,724  |              |           |        | 467    |           |   |              |       |   |              |          | 162,115    |              |   |          | 8,914        |         |   |          | 104,408  |         |   |       | 423   |        |   |        |        |        |   |          | 113,745    |        
|                                                                                                        | Amortization of deferred financing costs                                           |                                           |          | 3,096      |                   |   |           |                  |         |   |              |        |       |              |         |         |           |     |          | 3,096        |         |   |              | 3,145      |         |              |          |         |              |           |        |       |           |   |              |       |   |              |          | 3,145      |              |   |          | 3,160        |         |   |          |         |         |   |       |      |        |   |        |        |        |   |          | 3,160      |        
|                                                                                                        | Deferred income taxes                                                              |                                           |          | 32,817     |                   |   |           | (99,801           | )       |   |              | (1,063  | )     |              |         |         |           |     |          | (68,047      | )       |   |              | (16,050    | )       |              |          | (1,033   | )            |           |        |       |           |   |              |       |   |              |          | (17,083    | )            |   |          | 13,700       |         |   |          | (153,298 | )       |   |       |      |        |   |        |        |        |   |          | (139,598   | )      
|                                                                                                        | Valuation charge on convertible notes receivable                                   |                                           |          |           |                   |   |           |                  |         |   |              |        |       |              |         |         |           |     |          |             |         |   |              | 2,887      |         |              |          |         |              |           |        |       |           |   |              |       |   |              |          | 2,887      |              |   |          | (18,151      | )       |   |          |         |         |   |       |      |        |   |        |        |        |   |          | (18,151    | )      
|                                                                                                        | Impairment of intangible assets                                                    |                                           |          |           |                   |   |           | 212,747           |         |   |              | 8,307   |       |              |         |         |           |     |          | 221,054      |         |   |              | 4,400      |         |              |          | 145,192  |              |           |        |       |           |   |              |       |   |              |          | 149,592    |              |   |          | 7,425        |         |   |          | 117,191  |         |   |       |      |        |   |        |        |        |   |          | 124,616    |        
|                                                                                                        | In-process research and development charges                                        |                                           |          | 35,000     |                   |   |           | 153,711           |         |   |              |        |       |              |         |         |           |     |          | 188,711      |         |   |              | 17,145     |         |              |          | (845     | )            |           |        |       |           |   |              |       |   |              |          | 16,300     |              |   |          |             |         |   |          | 194,000  |         |   |       |      |        |   |        |        |        |   |          | 194,000    |        
|                                                                                                        | Gain on sale of products                                                           |                                           |          | (64        | )                 |   |           | (1,611            | )       |   |              |        |       |              |         |         |           |     |          | (1,675       | )       |   |              | (4,879     | )       |              |          | (4,645   | )            |           |        |       |           |   |              |       |   |              |          | (9,524     | )            |   |          | (805         | )       |   |          | (11,220  | )       |   |       |      |        |   |        |        |        |   |          | (12,025    | )      
|                                                                                                        | Loss on investment                                                                 |                                           |          | 6,182      |                   |   |           |                  |         |   |              |        |       |              |         |         |           |     |          | 6,182        |         |   |              | 6,520      |         |              |          |         |              |           |        |       |           |   |              |       |   |              |          | 6,520      |              |   |          |             |         |   |          |         |         |   |       |      |        |   |        |        |        |   |          |           |        
|                                                                                                        | Other non-cash items, net                                                          |                                           |          | 19         |                   |   |           | (544              | )       |   |              | 1,316   |       |              |         |         |           |     |          | 791          |         |   |              | 498        |         |              |          | 8,986    |              |           |        |       |           |   |              |       |   |              |          | 9,484      |              |   |          | 47           |         |   |          | 6,943    |         |   |       |      |        |   |        |        |        |   |          | 6,990      |        
|                                                                                                        | Stock based compensation                                                           |                                           |          | 1,616      |                   |   |           | 362               |         |   |              |        |       |              |         |         |           |     |          | 1,978        |         |   |              |           |         |              |          |         |              |           |        |       |           |   |              |       |   |              |          |           |              |   |          |             |         |   |          |         |         |   |       |      |        |   |        |        |        |   |          |           |        
|                                                                                                        | Changes in operating assets and liabilities:                                       |                                           |          |            |                   |   |           |                   |         |   |              |         |       |              |         |          |           |     |          |              |         |   |              |            |         |              |          |          |              |           |        |        |           |   |              |        |   |              |          |            |              |   |          |              |         |   |          |          |         |   |       |       |        |   |        |         |        |   |          |            |        
|                                                                                                        |                                                                                    | Accounts receivable                       |          |            | 2,124             |   |           |                   | (46,532 | ) |              |         | 1,001 |              |         |          |          |     |          |              | (43,407 | ) |              |            | 1,185   |              |          |          | 58,301       |           |        |        | (1,508    | ) |              |        |  |              |          |            | 57,978       |   |          |              | 12,823  |   |          |          | (86,861 | ) |       |       | (1,314 | ) |        |         | (8,834 | ) |          |            | (84,186 | )
|                                                                                                        |                                                                                    | Inventories                               |          |            | 42,026            |   |           |                   | 4,866   |   |              |         | (543  | )            |         |          |          |     |          |              | 46,349  |   |              |            | (14,325 | )            |          |          | (910         | )         |        |        | 30        |   |              |        |  |              |          |            | (15,205      | ) |          |              | (84,826 | ) |          |          | 31,560  |   |       |       | 411    |   |        |         |       |   |          |            | (52,855 | )
|                                                                                                        |                                                                                    | Prepaid expenses and other current assets |          |            | (30,933           | ) |           |                   | (16,624 | ) |              |         | 13    |              |         |          |          |     |          |              | (47,544 | ) |              |            | (20,729 | )            |          |          | 4,636        |           |        |        | (68       | ) |              |        |  |              |          |            | (16,161      | ) |          |              | 1,189   |   |          |          | 26,118  |   |       |       |       |   |        |         |       |   |          |            | 27,307  |  
|                                                                                                        |                                                                                    | Other assets                              |          |            | (4,339            | ) |           |                   | (132    | ) |              |         |      |              |         |          |          |     |          |              | (4,471  | ) |              |            | (3,243  | )            |          |          | (240         | )         |        |        |          |   |              |        |  |              |          |            | (3,483       | ) |          |              | (2,970  | ) |          |          | (8      | ) |       |       |       |   |        |         |       |   |          |            | (2,978  | )
|                                                                                                        |                                                                                    | Accounts payable                          |          |            | (897              | ) |           |                   | (6,739  | ) |              |         | (77   | )            |         |          |          |     |          |              | (7,713  | ) |              |            | 8,555   |              |          |          | 507          |           |        |        | 135       |   |              |        |  |              |          |            | 9,197        |   |          |              | (12,085 | ) |          |          | 37,190  |   |       |       | 19     |   |        |         | 8,834  |   |          |            | 33,958  |  
|                                                                                                        |                                                                                    | Accrued expenses and other liabilities    |          |            | 23,157            |   |           |                   | (75,688 | ) |              |         | (13   | )            |         |          |          |     |          |              | (52,544 | ) |              |            | 52,522  |              |          |          | (8,972       | )         |        |        | 16        |   |              |        |  |              |          |            | 43,566       |   |          |              | 11,853  |   |          |          | 80,945  |   |       |       |       |   |        |         |       |   |          |            | 92,798  |  
|                                                                                                        |                                                                                    | Deferred revenue                          |          |            | (9,092            | ) |           |                   |        |   |              |         |      |              |         |          |          |     |          |              | (9,092  | ) |              |            | (9,091  | )            |          |          |             |           |        |        |          |   |              |        |  |              |          |            | (9,091       | ) |          |              | (9,092  | ) |          |          |        |   |       |       |       |   |        |         |       |   |          |            | (9,092  | )
|                                                                                                        |                                                                                    | Income taxes                              |          |            | 27,172            |   |           |                   | (4,944  | ) |              |         | (67   | )            |         |          |          |     |          |              | 22,161  |   |              |            | (78,323 | )            |          |          | 55           |           |        |        | (440      | ) |              |        |   |              |          |            | (78,708      | ) |          |              | 97,062  |   |          |          | (36,948 | ) |       |       | 440    |   |        |         |       |   |          |            | 60,554  |  
|                                                                                                        |                                                                                    |                                           |          |            |                   |   |           |                   |         |   |              |         |       |              |         |          |           |     |          |              |         |   |              |            |         |              |          |          |              |           |        |        |           |   |              |        |   |              |          |            |              |   |          |              |        
|Net cash provided by (used in) operating activities of
    continuing operations                        |                                                                                    |                                           | 147,781  |            |                   |   | 372,517   |                   |         |   | (790         | )       |       |              |        |          |           |     | 519,508  |              |         |   | (108,888     | )          |         |              | 371,205  |          |              |           | (1,410 | )      |           |   |             |        |   |              | 260,907  |            |              |   | 73,368   |              |         |   | 361,160  |          |         |   | 1,158 |       |        |   |       |         |        |   | 435,686  |           
|                                                                                                        |                                                                                    |                                           |          |            |                   |   |           |                   |         |   |              |         |       |              |         |          |           |     |          |              |         |   |              |            |         |              |          |          |              |           |        |        |           |   |              |        |   |              |          |            |              |   |          |              |        
|Cash flows from investing activities of continuing operations
    (2004 and 2003 revised  See Note 4): |                                                                                    |                                           |          |            |                   |   |           |                   |         |   |              |         |       |              |         |          |           |     |          |              |         |   |              |            |         |              |          |          |              |           |        |        |           |   |              |        |   |              |          |            |              |   |          |              |         |   |          |          |         |   |       |       |        |   |        |         |        |   |          |           
|                                                                                                        | Purchase of investments in debt securities                                         |                                           |          | (3,744,660 | )                 |   |           |                  |         |   |              |        |       |              |         |         |           |     |          | (3,744,660   | )       |   |              | (1,687,684 | )       |              |          |         |              |           |        |       |           |   |              |       |   |              |          | (1,687,684 | )            |   |          | (5,553,611   | )       |   |          |         |         |   |       |      |        |   |        |        |        |   |          | (5,553,611 | )      
|                                                                                                        | Proceeds from maturity and sale of investments in debt securities                  |                                           |          | 3,399,427  |                   |   |           |                  |         |   |              |        |       |              |         |         |           |     |          | 3,399,427    |         |   |              | 1,641,179  |         |              |          |         |              |           |        |       |           |   |              |       |   |              |          | 1,641,179  |              |   |          | 5,969,186    |         |   |          |         |         |   |       |      |        |   |        |        |        |   |          | 5,969,186  |        
|                                                                                                        | Transfer (to)/from restricted cash                                                 |                                           |          | (75,211    | )                 |   |           | 1,582             |         |   |              |        |       |              |         |         |           |     |          | (73,629      | )       |   |              | (1,459     | )       |              |          | (872     | )            |           |        |       |           |   |              |       |   |              |          | (2,331     | )            |   |          | (67,743      | )       |   |          |         |         |   |       |      |        |   |        |        |        |   |          | (67,743    | )      
|                                                                                                        | Purchases of property, plant and equipment                                         |                                           |          | (11,749    | )                 |   |           | (41,541           | )       |   |              |        |       |              |         |         |           |     |          | (53,290      | )       |   |              | (12,034    | )       |              |          | (43,105  | )            |           |        | (2     | )         |   |              |       |   |              |          | (55,141    | )            |   |          | (7,874       | )       |   |          | (43,327  | )       |   |       |      |        |   |        |        |        |   |          | (51,201    | )      
|                                                                                                        | Acquisition of primary care business of Elan                                       |                                           |          |           |                   |   |           |                  |         |   |              |        |       |              |         |         |           |     |          |             |         |   |              |           |         |              |          | (36,000  | )            |           |        |       |           |   |              |       |   |              |          | (36,000    | )            |   |          |             |         |   |          | (761,745 | )       |   |       |      |        |   |        |        |        |   |          | (761,745   | )      
|                                                                                                        | Acquisition of Meridian                                                            |                                           |          |           |                   |   |           |                  |         |   |              |        |       |              |         |         |           |     |          |             |         |   |              |           |         |              |          |         |              |           |        |       |           |   |              |       |   |              |          |           |              |   |          | (253,908     | )       |   |          | 15,410   |         |   |       |      |        |   |        |        |        |   |          | (238,498   | )      
|                                                                                                        | Palatin collaboration agreement                                                    |                                           |          | (10,000    | )                 |   |           |                  |         |   |              |        |       |              |         |         |           |     |          | (10,000      | )       |   |              | (20,000    | )       |              |          |         |              |           |        |       |           |   |              |       |   |              |          | (20,000    | )            |   |          |             |         |   |          |         |         |   |       |      |        |   |        |        |        |   |          |           |        
|                                                                                                        | Purchases of intangible assets                                                     |                                           |          |           |                   |   |           | (16,705           | )       |   |              | (1,895  | )     |              |         |         |           |     |          | (18,600      | )       |   |              |           |         |              |          | (18,942  | )            |           |        | (3,258 | )         |   |              |       |   |              |          | (22,200    | )            |   |          | (2,000       | )       |   |          | (10,300  | )       |   |       |      |        |   |        |        |        |   |          | (12,300    | )      
|                                                                                                        | Proceeds from sale of marketable securities                                        |                                           |          | 6,453      |                   |   |           |                  |         |   |              |        |       |              |         |         |           |     |          | 6,453        |         |   |              |           |         |              |          |         |              |           |        |       |           |   |              |       |   |              |          |           |              |   |          | 253,097      |         |   |          |         |         |   |       |      |        |   |        |        |        |   |          | 253,097    |        
|                                                                                                        | Purchases of investment securities                                                 |                                           |          |           |                   |   |           |                  |         |   |              |        |       |              |         |         |           |     |          |             |         |   |              |           |         |              |          |         |              |           |        |       |           |   |              |       |   |              |          |           |              |   |          | (25,903      | )       |   |          |         |         |   |       |      |        |   |        |        |        |   |          | (25,903    | )      
|                                                                                                        | Pain Therapeutic collaboration agreement                                           |                                           |          |            |                   |   |           | (153,711          | )       |   |              |         |       |              |         |          |           |     |          | (153,711     | )       |   |              |           |         |              |          |         |              |           |        |       |           |   |              |       |   |              |          |           |              |   |          |             |         |   |          |         |         |   |       |      |        |   |        |        |        |   |          |           |        
|                                                                                                        | Mutual cross- license agreement                                                    |                                           |          | (35,000    | )                 |   |           |                   |         |   |              |         |       |              |         |          |           |     |          | (35,000      | )       |   |              |           |         |              |          |         |              |           |        |       |           |   |              |       |   |              |          |           |              |   |          |             |         |   |          |         |         |   |       |      |        |   |        |        |        |   |          |           |        
|                                                                                                        | Proceeds from loan receivable                                                      |                                           |          |           |                   |   |           |                  |         |   |              |        |       |              |         |         |           |     |          |             |         |   |              |           |         |              |          |         |              |           |        |       |           |   |              |       |   |              |          |           |              |   |          |             |         |   |          | 13,320   |         |   |       |      |        |   |        |        |        |   |          | 13,320     |        
|                                                                                                        | Proceeds from sale of intangible assets                                            |                                           |          |           |                   |   |           |                  |         |   |              |        |       |              |         |         |           |     |          |             |         |   |              | 27,715     |         |              |          | (257     | )            |           |        |       |           |   |              |       |   |              |          | 27,458     |              |   |          | 14,460       |         |   |          | 1,199    |         |   |       |      |        |   |        |        |        |   |          | 15,659     |        
|                                                                                                        | Other investing activities                                                         |                                           |          | 1          |                   |   |           | 2                 |         |   |              |        |       |              |         |         |           |     |          | 3            |         |   |              | 668        |         |              |          | (20      | )            |           |        |       |           |   |              |       |   |              |          | 648        |              |   |          | 46           |         |   |          | 249      |         |   |       |      |        |   |        |        |        |   |          | 295        |        
|                                                                                                        |                                                                                    |                                           |          |            |                   |   |           |                   |         |   |              |         |       |              |         |          |           |     |          |              |         |   |              |            |         |              |          |          |              |           |        |        |           |   |              |        |   |              |          |            |              |   |          |              |        
|Net cash used in investing activities of continuing operations                                          |                                                                                    |                                           | (470,739 | )          |                   |   | (210,373  | )                 |         |   | (1,895       | )       |       |              |        |          |           |     | (683,007 | )            |         |   | (51,615      | )          |         |              | (99,196  | )        |              |           | (3,260 | )      |           |   |             |        |   |              | (154,071 | )          |              |   | 325,750  |              |         |   | (785,194 | )        |         |   |      |       |        |   |       |         |        |   | (459,444 | )         
|                                                                                                        |                                                                                    |                                           |          |            |                   |   |           |                   |         |   |              |         |       |              |         |          |           |     |          |              |         |   |              |            |         |              |          |          |              |           |        |        |           |   |              |        |   |              |          |            |              |   |          |              |        
|Cash flows from financing activities of continuing operations:                                          |                                                                                    |                                           |          |            |                   |   |           |                   |         |   |              |         |       |              |         |          |           |     |          |              |         |   |              |            |         |              |          |          |              |           |        |        |           |   |              |        |   |              |          |            |              |   |          |              |         |   |          |          |         |   |       |       |        |   |        |         |        |   |          |           
|                                                                                                        | Proceeds from revolving credit facility                                            |                                           |          |           |                   |   |           |                  |         |   |              |        |       |              |         |         |           |     |          |             |         |   |              |           |         |              |          |         |              |           |        |       |           |   |              |       |   |              |          |           |              |   |          | 125,000      |         |   |          |         |         |   |       |      |        |   |        |        |        |   |          | 125,000    |        
|                                                                                                        | Payments on revolving credit facility                                              |                                           |          |           |                   |   |           |                  |         |   |              |        |       |              |         |         |           |     |          |             |         |   |              |           |         |              |          |         |              |           |        |       |           |   |              |       |   |              |          |           |              |   |          | (125,000     | )       |   |          |         |         |   |       |      |        |   |        |        |        |   |          | (125,000   | )      
|                                                                                                        | Proceeds from issuance of common shares and exercise of stock
    options, net     |                                           |          | 857        |                   |   |           |                  |         |   |              |        |       |              |         |         |           |     |          | 857          |         |   |              | 4,677      |         |              |          |         |              |           |        |       |           |   |              |       |   |              |          | 4,677      |              |   |          | 4,053        |         |   |          |         |         |   |       |      |        |   |        |        |        |   |          | 4,053      |        
|                                                                                                        | Payments on other long-term debt                                                   |                                           |          |           |                   |   |           |                  |         |   |              |        |       |              |         |         |           |     |          |             |         |   |              | (97        | )       |              |          |         |              |           |        |        |           |   |              |       |   |              |          | (97        | )            |   |          | (1,296       | )       |   |          |         |         |   |       |      |        |   |        |        |        |   |          | (1,296     | )      
|                                                                                                        | Debt issuance costs                                                                |                                           |          |           |                   |   |           |                  |         |   |              |        |       |              |         |         |           |     |          |             |         |   |              |           |         |              |          |         |              |           |        |       |           |   |              |       |   |              |          |           |              |   |          | (214         | )       |   |          |         |         |   |       |      |        |   |        |        |        |   |          | (214       | )      
|                                                                                                        | Intercompany                                                                       |                                           |          | 184,452    |                   |   |           | (188,108          | )       |   |              | 3,656   |       |              |         |         |           |     |          |             |         |   |              | 250,935    |         |              |          | (254,980 | )            |           |        | 4,045  |           |   |              |       |   |              |          |           |              |   |          | (432,854     | )       |   |          | 432,217  |         |   |       | 637   |        |   |        |        |        |   |          |           |        
|                                                                                                        |                                                                                    |                                           |          |            |                   |   |           |                   |         |   |              |         |       |              |         |          |           |     |          |              |         |   |              |            |         |              |          |          |              |           |        |        |           |   |              |        |   |              |          |            |              |   |          |              |        
|Net cash provided by financing activities of continuing
    operations                                  |                                                                                    |                                           | 185,309  |            |                   |   | (188,108  | )                 |         |   | 3,656        |         |       |              |        |          |           |     | 857      |              |         |   | 255,515      |            |         |              | (254,980 | )        |              |           | 4,045  |        |           |   |              |        |   |              | 4,580    |            |              |   | (430,311 | )            |         |   | 432,217  |          |         |   | 637   |       |        |   |       |         |        |   | 2,543    |           
|                                                                                                        |                                                                                    |                                           |          |            |                   |   |           |                   |         |   |              |         |       |              |         |          |           |     |          |              |         |   |              |            |         |              |          |          |              |           |        |        |           |   |              |        |   |              |          |            |              |   |          |              |        
|Cash flows from discontinued operations (Revised  See
    Note 27):                                    |                                                                                    |                                           |          |            |                   |   |           |                   |         |   |              |         |       |              |         |          |           |     |          |              |         |   |              |            |         |              |          |          |              |           |        |        |           |   |              |        |   |              |          |            |              |   |          |              |         |   |          |          |         |   |       |       |        |   |        |         |        |   |          |           
|                                                                                                        | Net cash (used in) provided by operating activities of
    discontinued operations |                                           |          |           |                   |   |           |                  |         |   |              |        |       |              |         |         |           |     |          |             |         |   |              | 3,820      |         |              |          | 6,365    |              |           |        |       |           |   |              |       |   |              |          | 10,185     |              |   |          |             |         |   |          | 1,618    |         |   |       |      |        |   |        |        |        |   |          | 1,618      |        
|                                                                                                        | Net cash provided by (used in) investing activities of
    discontinued operations |                                           |          |           |                   |   |           |                  |         |   |              |        |       |              |         |         |           |     |          |             |         |   |              | 27,927     |         |              |          |         |              |           |        |       |           |   |              |       |   |              |          | 27,927     |              |   |          | (7,000       | )       |   |          |         |         |   |       |      |        |   |        |        |        |   |          | (7,000     | )      
|                                                                                                        |                                                                                    |                                           |          |            |                   |   |           |                   |         |   |              |         |       |              |         |          |           |     |          |              |         |   |              |            |         |              |          |          |              |           |        |        |           |   |              |        |   |              |          |            |              |   |          |              |        
|                                                                                                        | (Decrease) increase in cash and cash equivalents                                   |                                           |          | (137,649   | )                 |   |           | (25,964           | )       |   |              | 971     |       |              |         |         |           |     |          | (162,642     | )       |   |              | 126,759    |         |              |          | 23,394   |              |           |        | (625   | )         |   |              |       |   |              |          | 149,528    |              |   |          | (38,193      | )       |   |          | 9,801    |         |   |       | 1,795 |        |   |        |        |        |   |          | (26,597    | )      
|                                                                                                        | Cash and cash equivalents, beginning of year
    (Revised  See Note 4)            |                                           |          | 164,451    |                   |   |           | 27,035            |         |   |              | 1,170   |       |              |         |         |           |     |          | 192,656      |         |   |              | 37,692     |         |              |          | 3,641    |              |           |        | 1,795  |           |   |              |       |   |              |          | 43,128     |              |   |          | 75,885       |         |   |          | (6,160   | )       |   |       |      |        |   |        |        |        |   |          | 69,725     |        
|                                                                                                        |                                                                                    |                                           |          |            |                   |   |           |                   |         |   |              |         |       |              |         |          |           |     |          |              |         |   |              |            |         |              |          |          |              |           |        |        |           |   |              |        |   |              |          |            |              |   |          |              |        
|Cash and cash equivalents, end of year (Revised  See
    Note 4)                                       |                                                                                    | $                                         | 26,802   |            |                   | $ | 1,071     |                   |         | $ | 2,141        |         |       |              |        |          |           | $   | 30,014   |              |         | $ | 164,451      |            |         | $            | 27,035   |          |              | $         | 1,170  |        |           | $ |             |        |   | $            | 192,656  |            |              | $ | 37,692   |              |         | $ | 3,641    |          |         |   | 1,795 |       |        | $ |       |         |        | $ | 43,128   |           
|                                                                                                        |                                                                                    |                                           |          |            |                   |   |           |                   |         |   |              |         |       |              |         |          |           |     |          |              |         |   |              |            |         |              |          |          |              |           |        |        |           |   |              |        |   |              |          |            |              |   |          |              |        

F-47



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##### Table of Contents



SIGNATURES






| |                           
| | --------------------------
| | KING PHARMACEUTICALS, INC.



| |     |                      
| | --- | ---------------------
| | By: | /s/ Brian A. Markison

| |                                      
| | -------------------------------------
| |                                      
| | Brian A. Markison                    
| | President and Chief Executive Officer





|                                                             |  |                                                                          |  |               |  | 
|------------------------------------------------------------ |  | ------------------------------------------------------------------------ |  | ------------- |  | 
|Signature                                                    |  | Capacity                                                                 |  | Date         
|                                                             |  |                                                                          |  |              
|                                                            
|/s/ Ted G. WoodTed G. Wood                                   |  | Non-Executive Chairman of the Board                                      |  | March 3, 2006
|                                                            
|/s/ Brian A. MarkisonBrian A. Markison                       |  | President, Chief Executive Officer and Director                          |  | March 3, 2006
|                                                            
|/s/ Joseph SquicciarinoJoseph Squicciarino                   |  | Chief Financial Officer (principal financial and accounting
    officer) |  | March 3, 2006
|                                                            
|/s/ Earnest W.
    Deavenport, Jr.Earnest W. Deavenport, Jr. |  | Director                                                                 |  | March 3, 2006
|                                                            
|/s/ Elizabeth M.
    GreethamElizabeth M. Greetham           |  | Director                                                                 |  | March 3, 2006
|                                                            
|/s/ Gregory D. JordanGregory D. Jordan                       |  | Director                                                                 |  | March 3, 2006
|                                                            
|/s/ R. Charles MoyerR. Charles Moyer                         |  | Director                                                                 |  | March 3, 2006
|                                                            
|/s/ Philip M. PfefferPhilip M. Pfeffer                       |  | Director                                                                 |  | March 3, 2006
|                                                            
|/s/ D. Greg RookerD. Greg Rooker                             |  | Director                                                                 |  | March 3, 2006

II-1



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##### Table of Contents



KING PHARMACEUTICALS, INC.


Schedule II. Valuation and Qualifying Accounts


(In thousands)


|                                                                                                               |  |              |        |  |                    |         |       |            |  |   |               |  |            |        |        |  |  |   |        | 
|-------------------------------------------------------------------------------------------------------------- |  | ------------ | ------ |  | ------------------ | ------- | ----- | ---------- |  | - | ------------- |  | ---------- | ------ | ------ |  |  | - | ------ | 
|Column A                                                                                                       |  | Column B     |        |  | Column C Additions |         |       | Column D   |  |   | Column E      | 
|                                                                                                               |  |              |        |  |                    |         |       |            |  |   |               | 
|                                                                                                               |  |              |        |  |                    | Charged |       |            |  |   |              
|                                                                                                               |  | Balances at  |        |  | Charged to         |         |       | (Credited) |  |   |               |  | Balance at |       
|                                                                                                               |  | Beginning of |        |  | Cost and           |         |       | to Other   |  |   |               |  | End of     |       
|Description                                                                                                    |  | Period       |        |  | Expenses           |         |       | Accounts   |  |   | Deductions(1) |  |            | Period |       
|                                                                                                               |  |              |        |  |                    |         |       |            |  |   |               |  |            |        |       
|Allowance for doubtful accounts, deducted from accounts
    receivable in the balance sheet                    |  |              |        |  |                    |         |       |            |  |   |               |  |            |        |        |  |  |   |        | 
|Year ended December 31, 2005                                                                                   |  | $            | 15,348 |  |                    | $       | 939   |            |  | $ |              |  |            | $      | 4,007  |  |  | $ | 12,280 | 
|Year ended December 31, 2004                                                                                   |  |              | 11,055 |  |                    |         | 7,476 |            |  |   |               |  |            |        | 3,183  |  |  |   | 15,348 | 
|Year ended December 31, 2003                                                                                   |  |              | 7,513  |  |                    |         | 4,176 |            |  |   | 1,063         |  |            |        | 1,697  |  |  |   | 11,055 | 
|Valuation allowance for deferred tax assets, deducted from
    deferred income tax assets in the balance sheet |  |              |        |  |                    |         |       |            |  |   |               |  |            |        |        |  |  |   |        | 
|Year ended December 31, 2005                                                                                   |  | $            | 3,950  |  |                    | $       | 5,264 |            |  | $ |              |  |            | $      |       |  |  | $ | 9,214  | 
|Year ended December 31, 2004                                                                                   |  |              | 6,525  |  |                    |         |       |            |  |   |               |  |            |        | 2,575* |  |  |   | 3,950  | 
|Year ended December 31, 2003                                                                                   |  |              |       |  |                    |         | 3,124 |            |  |   | 3,401         |  |            |        |       |  |  |   | 6,525  | 






|    |                                          
|--- | -----------------------------------------
|(1) | Amounts represent write-offs of accounts.



| |   |                                                  
| | - | -------------------------------------------------
| | * | Valuation account reduced and credited to income.

S-1