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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549




---

FORM 10-K

(Mark One)



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

For the fiscal year ended December 31,
2003

OR



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

Commission File Number 0-24425

King Pharmaceuticals, Inc.

(Exact name of registrant as specified in its
charter)


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

Registrants telephone number, including
area code: (423) 989-8000

Securities registered under Section 12(b) of
the Exchange Act:

|                      |  |                                            
|--------------------- |  | -------------------------------------------
|(Title of each class) |  | (Name of each exchange on which registered)
|                      |  |                                            
|Common Stock          |  | New York Stock Exchange                    

Securities registered under Section 12(g) of
the Exchange Act:

None


Indicate by check mark whether the registrant
(1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days.  Yes x  No o

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K. o

Indicate by check mark whether the registrant is
an accelerated filer (as defined in Rule 12b-2 of the
Act). x

The aggregate market value of the voting and
non-voting common equity held by non-affiliates computed by
reference to the price at which the common equity was last sold,
or the average bid and asked price of such common equity as of
June 30, 2003 was $3,143,503,811. The number of shares of
Common Stock, no par value, outstanding at March 9, 2004
was 241,354,416.

Documents Incorporated by Reference:
None



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PART I



|        |                        
|------- | -----------------------
|Item 1. | Description of Business

King Pharmaceuticals, Inc. was incorporated in
the State of Tennessee in 1993. Our wholly owned subsidiaries
are Monarch Pharmaceuticals, Inc.; Jones Pharma Incorporated;
King Pharmaceuticals Research and Development, Inc.; Meridian
Medical Technologies, Inc.; Parkedale Pharmaceuticals, Inc.;
King Pharmaceuticals of Nevada, Inc.; and Monarch
Pharmaceuticals Ireland Limited.

Our principal executive offices are located at
501 Fifth Street, Bristol, Tennessee 37620. Our telephone number
is (423) 989-8000 and our facsimile number is
(423) 274-8677. Our website is www.kingpharm.com. We have,
since November 15, 2002, made available through our website
our annual reports on Form 10-K, our quarterly reports on
Form 10-Q, our current reports on Form 8-K and any
amendments as soon as reasonably practical. These filings are
also available to the public over the Internet at the website of
the Securities and Exchange Commission, which we refer to as the
SEC, at http://www.sec.gov. You may also read and
copy any document that we file at the SECs Public
Reference Room located at 450 Fifth Street, NW, Washington, DC
20549. Please call the SEC at 
 1-800-SEC-0330 for further information on the Public Reference
Room.

King is a vertically integrated pharmaceutical
company that develops, manufactures, markets and sells branded
prescription pharmaceutical products. By vertically
integrated, we mean that we have the capabilities of a
major pharmaceutical company, including



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

Through a national sales force consisting of
approximately 1,300 approved positions, and through marketing
alliances, we market our branded pharmaceutical products to
general/family practitioners, internal medicine physicians,
cardiologists, endocrinologists, psychiatrists, neurologists,
obstetricians/gynecologists, and hospitals across the United
States and in Puerto Rico.

Our business strategy includes the development of
new branded prescription pharmaceutical products, including new
chemical entities, as well as the acquisition of compounds
already in development, that provide us with strategic pipeline
product opportunities.

Our business strategy also includes acquiring
currently marketed branded pharmaceutical products and
increasing their sales through focused marketing and promotion
and product life cycle management. By product life cycle
management, we mean the extension of the economic life of
a product, including seeking and gaining all necessary related
governmental approvals, by such means as:



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

1



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We acquire branded products primarily from larger
pharmaceutical companies. These companies sell products for
various reasons including limiting their operating expenses or
eliminating duplicate products.

We also seek attractive company acquisitions
which add products or products in development, technologies or
sales and marketing capabilities to our key therapeutic areas or
that otherwise complement our operations.

Unlike many of our competitors, we have a broad
therapeutic focus that provides us with opportunities to develop
or acquire a wide variety of products or late stage compounds.
In addition, we have well known products in all of our
therapeutic categories that generate high prescription volumes.
Our branded pharmaceutical products can be divided primarily
into the following therapeutic areas:



| |   |                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------
| |  | cardiovascular (including Altace®,
    Corzide®, Procanbid® and Thalitone®),                                                  
|
| |  | endocrinology/womens health (including
    Levoxyl®, Cytomel®, Triostat®, Prefest®,
    Menest®, Delestrogen® and Nordette®),
|
| |  | neuroscience (including Sonata® and
    Skelaxin®),                                                                           
|
| |  | critical care (including Thrombin-JMI®,
    Brevital® and Synercid®),                                                         
|
| |  | anti-infectives (including Bicillin®,
    Cortisporin®, Neosporin® and Coly-Mycin M®) and                                     
|
| |  | respiratory (including Intal® and
    Tilade®).                                                                               

Additionally, we manufacture pharmaceutical
products under contracts with a variety of pharmaceutical and
biotechnology companies. We have not accepted or renewed
manufacturing contracts for third parties where we perceived
insignificant volumes or revenues.

The following summarizes net revenues by
operating segment (in thousands).

|                              |       |                                  |         |         |  |      |           |           |  |   |           |           | 
|----------------------------- | ----- | -------------------------------- | ------- | ------- |  | ---- | --------- | --------- |  | - | --------- | --------- | 
|                              |       |                                 
|                              |       | For the Years Ended December 31,
|                              |       |                                 
|                              |       | 2001                             |         | 2002    |  | 2003
|                              |       |                                  |         |         |  |     
|Branded pharmaceuticals(1)    |       | $                                | 793,543 |         |  | $    | 1,032,831 |           |  | $ | 1,300,948 |          
|Meridian Medical Technologies |       |                                  |        |         |  |      |          |           |  |   | 124,157   |          
|Royalties                     |       |                                  | 46,774  |         |  |      | 58,375    |           |  |   | 68,365    |          
|Contract manufacturing        |       |                                  | 29,680  |         |  |      | 35,936    |           |  |   | 27,290    |          
|Other                         |       |                                  | 2,265   |         |  |      | 1,193     |           |  |   | 628       |          
|                              |       |                                  |         |         |  |      |           |           |  |   |           |          
|                              | Total |                                  | $       | 872,262 |  |      | $         | 1,128,335 |  |   | $         | 1,521,388 | 
|                              |       |                                  |         |         |  |      |           |           |  |   |           |          



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|    |                                                                      
|--- | ---------------------------------------------------------------------
|(1) | The branded pharmaceuticals segment net revenues
    for 2002 reflect



| |   |                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a $22,113 charge for corrections of immaterial
    errors related to underpayments of amounts due under Medicaid
    and other governmental pricing programs for the years 1998 to
    2001,                                    
|
| |  | a $12,399 charge for corrections of immaterial
    errors related to underpayments of amounts due under Medicaid
    and other governmental pricing programs related to 2002 and
    recorded in the fourth quarter of 2002, and
|
| |  | an $11,970 charge arising from changes in
    accounting estimates related to Medicaid and other governmental
    pricing programs.                                                                                             

The branded pharmaceuticals segment net revenues
for 2003 reflect an $18,000 charge for changes in accounting
estimates related to Medicaid for the years 1998 to 2002 and a
$900 charge for corrections of immaterial errors related to
Medicaid for the years 1994 to 1997. For further information,
please see the section entitled Managements
Discussion and Analysis of Financial Condition and Results of
Operations and Note 17 to our audited consolidated
financial statements.

2



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Key Historical Milestones

We acquired from Glaxo Wellcome, Inc.,
predecessor to SmithKline Beecham Corporation, a subsidiary of
GlaxoSmithKline plc, for $54.0 million, including $3.1 million
of assumed liabilities, all rights to the Cortisporin®
product line in March 1997, the Viroptic® product line in
May 1997, and six additional branded products, including
Septra®, and exclusive licenses, free of royalty
obligations, for the prescription formulations of
Neosporin® and Polysporin® in November 1997.

In February 1998, we acquired from Warner-Lambert
Company (predecessor to Pfizer, Inc.), 15 branded pharmaceutical
products, our facility located in Rochester, Michigan and some
manufacturing contracts with third parties for $127.9 million,
including $2.9 million of assumed liabilities.

In December 1998, we acquired from Hoechst Marion
Roussel, Inc. (predecessor to Aventis Pharmaceuticals, Inc.),
for $362.5 million, the United States and Puerto Rico rights to
Altace® and two other small branded pharmaceutical
products. Altace® is an Angiotensin Converting Enzyme
inhibitor, which we refer to as an ACE inhibitor. We
are currently manufacturing a portion of the finished dosage and
packaging Altace® in our facility in Bristol, Tennessee.
Aventis also remains a supplier of the active ingredient
ramipril, and a portion of the finished dosage of
Altace®. On October 4, 2000, the FDA approved new
indications for Altace® requested under a supplemental New
Drug Application, which we refer to as an sNDA. In
addition to the treatment of hypertension, this approval permits
the promotion of Altace® to reduce the risk of stroke,
myocardial infarction (heart attack) and death from
cardiovascular causes in patients 55 and over either with a
history of coronary artery disease, stroke or peripheral
vascular disease or with diabetes and one other cardiovascular
risk factor (hypertension, elevated total cholesterol levels,
low HDL levels, cigarette smoking or documented
microalbuminuria). Altace® is also indicated in stable
patients who have demonstrated clinical signs of congestive
heart failure after sustaining acute myocardial infarction.
Altace® is marketed by our subsidiary Monarch and by Wyeth
pursuant to the Co-Promotion Agreement we entered into in June
2000, described below.

In August 1999, we acquired the antibiotic
Lorabid® in the United States and Puerto Rico from
Eli Lilly and Company for $91.7 million, including
acquisition costs plus potential sales performance milestones.
As of December 31, 2003, we have not made any milestone
payments. We have a supply agreement with Eli Lilly under which
we remain obligated to purchase minimum levels of inventory of
Lorabid® through September 1, 2005. During the fourth
quarter of 2002, we decided to divest our rights to
Lorabid® and reviewed the related intangible assets for
impairment. Based on changes in prescription trends, we believe
the minimum purchase commitments under the supply agreement are
greater than inventory quantities which we will be able to sell
to our customers. For details regarding charges related to the
liability associated with the amount of the purchase commitments
in excess of expected demand and our review for impairment of
the Lorabid® intangible assets, as updated for
managements cash flow expectations for Lorabid®,
please see the section entitled Managements
Discussion and Analysis of Financial Condition and Results of
Operations and Note 8 to our audited consolidated
financial statements.

On February 25, 2000, we acquired Medco
Research, Inc. in an all stock transaction accounted for as a
pooling of interests valued at approximately
$366.0 million. We exchanged approximately
14.4 million shares of King common stock for all of the
outstanding shares of Medco. Each share of Medco was exchanged
for 1.3514 shares (post subsequent stock splits) of King
common stock. In addition, outstanding Medco stock options were
converted at the same exchange ratio to purchase approximately
1.4 million shares (post subsequent stock splits) of King
common stock. Medco is now one of our wholly owned subsidiaries
and, effective November 1, 2000, was renamed King
Pharmaceuticals Research and Development, Inc. Through
King Research and Development, we are engaged in the research
and development of chemical compounds, including new chemical
entities, which provide us with strategic pipeline opportunities
that may lead to the commercialization of new branded
prescription pharmaceutical products. Additionally, we engage in
product life cycle management to develop new indications and
line extensions for existing and acquired products and to
improve the quality and efficiency of our manufacturing
processes.

3



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On June 23, 2000, we entered into a
marketing alliance with Wyeth to market Altace® in the
United States and Puerto Rico. We refer to this agreement as the
Co-Promotion Agreement. Subject to the terms of the
Co-Promotion Agreement, we pay Wyeth a quarterly fee based on a
percentage of net sales in exchange for its marketing efforts.
Wyeth purchased $75.0 million of our common stock and paid
us $25.0 million in cash upon execution of the Co-Promotion
Agreement. Wyeth paid us an additional $50.0 million in
November 2000 as a result of the FDAs final approval on
October 4, 2000 of new indications for Altace®.

On August 31, 2000, we acquired Jones Pharma
Incorporated in an all stock transaction accounted for as a
pooling of interests valued at approximately $2.4 billion.
We exchanged approximately 98.4 million shares (post
subsequent stock splits) of King common stock for all of the
outstanding shares of Jones. Each share of Jones was exchanged
for 1.5 shares (post subsequent stock splits) of King
common stock. In addition, outstanding Jones stock options were
converted at the same exchange ratio to purchase approximately
5.4 million shares (post subsequent stock splits) of King
common stock. Jones is now one of our wholly owned subsidiaries.

On January 8, 2001, we entered into a
license agreement with Novavax, Inc. to promote, market,
distribute and sell Estrasorb, Androsorb and some
other womens health products which may be developed by
Novavax. Under the terms of this agreement, as amended by our
subsequent agreements with Novavax on June 29, 2001, we
have an exclusive license with Novavax to promote, market,
distribute and sell, following approval, these products
worldwide, except for the United States and Puerto Rico, where,
under a separate agreement, we will co-market them with Novavax.
During the term of the license, we will pay Novavax a reasonable
royalty on net sales of these products in all territories except
the United States and Puerto Rico. Novavax will pay us an amount
equal to approximately 50% of gross profit derived from the sale
of these products in the United States and Puerto Rico. We will
share equally with Novavax approved marketing expenses related
to the promotion of these products in the United States and
Puerto Rico. Estrasorb is a topical emulsion estrogen
therapy which employs Novavaxs proprietary micellar
nanoparticle technology designed to deliver 17-beta estradiol, a
naturally occurring hormone, through the skin when applied in a
lotion-like form. The New Drug Application, which we refer to as
an NDA, for Estrasorb® was approved by the FDA
on October 9, 2003. Novavax, working together with our
company, plans to launch the sales and marketing of
EstrasorbTM in the United States during the first
half of 2004. Androsorb is a topical testosterone
replacement therapy for testosterone deficient women.

On May 25, 2001, the FDA approved our NDA
for Levoxyl®, our levothyroxine sodium drug product for the
treatment of hypothyroidism. We filed the NDA as a result of the
FDAs August 14, 1997 announcement in the Federal
Register (62 FR 43535) that orally administered levothyroxine
sodium drug products are new drugs. The notice stated that
manufacturers who wish to continue to market these products must
submit applications as required by the Food, Drug and Cosmetic
Act, which we refer to as the FDC Act, by
August 14, 2000. On April 26, 2000, the FDA issued a
second Federal Register notice extending the deadline for filing
these applications until August 14, 2001.

On August 8, 2001, we acquired certain
rights to three branded pharmaceutical products and a license to
a fourth product from Bristol-Myers Squibb Company for
$285.0 million plus approximately $1.5 million of
expenses. The product rights acquired include Bristol-Myers
Squibbs rights in the United States to Corzide®,
Delestrogen® and Florinef®. We also acquired a fully
paid license to Corgard® in the United States.
Corzide®, a combination beta-blocker and thiazide diuretic,
is indicated for the management of hypertension. Corgard®,
a beta-blocker, is indicated also for the management of
hypertension, as well as long-term management of patients with
angina pectoris. Delestrogen® is an injectable estrogen
replacement therapy. Florinef® is a partial replacement
therapy for primary and secondary adrenocortical insufficiency
in Addisons disease and for the treatment of salt-losing
adrenogenital syndrome. For information regarding charges
related to Florinef®, please see the section entitled
Managements Discussion and Analysis of Financial
Condition and Results of Operations and Note 8 to our
audited consolidated financial statements.

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On December 13, 2001, the FDA approved our
NDA for Tigan® 300mg capsules. Tigan® is indicated for
the treatment of post-operative nausea and vomiting and for
nausea associated with gastroenteritis.

On May 29, 2002, we acquired all rights to
Prefest®, a branded pharmaceutical product, from
Ortho-McNeil Pharmaceutical, Inc., a Johnson & Johnson
subsidiary, for $108.0 million, plus approximately
$3.3 million of expenses. During February 2003, we paid
Ortho-McNeil an additional $7.0 million upon receipt of the
FDAs approval to change the name of the product to
Prefest® from Ortho-Prefest®.
Prefest® is a differentiated combination hormone
replacement therapy with an intermittent progestin
administration, together with a continuous administration of
estrogen.

On December 30, 2002, we licensed or
acquired the rights to three branded pharmaceutical products
from Aventis for the initial cash payment of
$197.5 million, plus $4.3 million of expenses. The
products involved include rights in the United States, Puerto
Rico, and Canada to Intal® and Tilade®, inhaled
anti-inflammatory agents for the management of asthma. We also
obtained worldwide rights, excluding Japan, to Synercid®,
an injectable antibiotic indicated for treatment of
vancomycin-resistant enterococcus faecium and treatment of some
complicated skin and skin structure infections. In addition to
the initial cash payment, we paid $10.3 million in December
2003 as a milestone payment due to the continued recognition of
Synercid® as an effective treatment for
vancomycin-resistant enterococcus faecium. As additional
consideration for Synercid®, we have agreed to remaining
potential milestone payments to Aventis totaling
$64.8 million.

On January 8, 2003, we acquired Meridian
Medical Technologies, Inc. for $253.9 million in cash paid
to its shareholders in exchange for their shares of Meridian
common stock. Meridian pioneered the development, and is the
leading manufacturer, of auto-injectors for the
self-administration of injectable drugs. An auto-injector is a
pre-filled, pen-like device that allows a patient or caregiver
to automatically inject a precise drug dosage quickly, easily,
safely and reliably. Meridians commercial pharmaceutical
products primarily include EpiPen®, an auto-injector filled
with epinephrine for the emergency treatment of anaphylaxis
resulting from severe or allergic reactions to insect stings or
bites, foods, drugs and other allergens, as well as idiopathic
or exercise-induced anaphylaxis. Meridian manufactures
EpiPen® under a supply agreement with Dey L.P., which
markets the product. Other pharmaceutical products that are
primarily sold to the U.S. Department of Defense, which we refer
to as the DoD, under an Industrial Base Maintenance
Contract include 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.

On April 29, 2003, the U.S. Patent and
Trademark Office, which we refer to as the PTO,
issued the first patent on our FDA-approved Levoxyl®,
U.S. Patent No. 6,555,581, a utility patent with
composition of matter claims. We have submitted in excess of 40
applications for additional patents to the PTO relating to our
novel quick-dissolving formulation of Levoxyl®.

On June 12, 2003, we acquired the primary
care business of Elan Corporation, plc, and that of some of its
subsidiaries, in the United States and Puerto Rico, including
the rights to Sonata® and Skelaxin® and rights
pertaining to potential new formulations of these products,
together with Elans United States primary care field sales
force. Product rights subject to the agreement include those
related to Sonata®, a nonbenzodiazepine treatment for
insomnia, and Skelaxin®, a muscle relaxant, in the United
States, its territories and possessions, and Puerto Rico. Under
the terms of the agreement, Elans sale of Skelaxin®
included related NDAs, copyrights, trademarks, patents and
rights pertaining to potential new formulations of
Skelaxin®. Elans sale of Sonata® included its
rights to the product, as well as certain related copyrights. We
also acquired certain intellectual property, regulatory, and
other assets relating to Sonata® directly from Wyeth. Under
the terms of the agreement, we secured an exclusive license to
the intellectual property rights in this territory of both Wyeth
and Elan to the extent they relate to new formulations of
Sonata®, other than for use in animals. The total estimated
purchase price of $814.4 million includes the cost of
acquisition, assumed liabilities and a portion of contingent
liabilities. The purchase price also includes the transfer of
inventory with a value of approximately $40.4 million. In
addition to the initial

5



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purchase price, we paid $25.0 million during
January 2004 as a milestone payment to Elan relating to the
ongoing exclusivity of Skelaxin® and we paid
$11.0 million during March 2004 as a milestone payment to
Elan in connection with the development of new formulations of
Sonata®. We also




| |   |                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | will pay royalties on the current formulation of
    Skelaxin® from the date of closing;                                                                       
|
| |  | will pay up to an additional $60.0 million
    if Elan achieves certain milestones in connection with the
    development of a reformulated version of Sonata®;
|
| |  | will pay $15.0 million as a milestone payment if
    annual net sales of a reformulated version of Sonata®
    exceed $100.0 million; and                      
|
| |  | will pay for costs associated with the
    development of the reformulated version of Sonata®.                                                                 

On June 19, 2003, we received FDA approval
of our sNDA, covering pediatric and adult formulations of our
nerve gas antidote AtroPen®. This is the first time that
pediatric formulations of this homeland security product have
been approved for use in the United States. AtroPen®
utilizes our auto-injector technology.

On October 30, 2003, we announced the
receipt of an approvable letter from the FDA for a new
Intal® inhaler formulation utilizing hydrofluoroalkane,
which we refer to as HFA, an environmentally
friendly propellant. The patent related to Intal® HFA
extends through September 2017.

On November 3, 2003, we announced that we
have completed enrollment in the ongoing Phase IV clinical
trial to determine the safety and effectiveness of Altace®
in the treatment of hypertension (high blood pressure) in
children. This trial, which we refer to as TOPHAT
(Treatment of Pediatric Hypertension with Altace Trial), is
scheduled to conclude by the end of 2004.

On December 5, 2003, we commenced the
Phase III clinical trial program involving binodenoson, our
next generation cardiac pharmacologic stress-imaging agent. The
data from the Phase II dose ranging study indicates that
binodenoson, at effective doses, is better tolerated than
adenosine, the current market leader, which we previously
developed.

During December 2003, we commenced the
Phase I clinical trial program for T-62, a new chemical
entity that we are developing as a potential treatment for
neuropathic pain. The initial Phase I trial for T-62 is a
single-center, randomized double-blind, placebo-controlled
evaluation of the safety and pharmacokinetics of escalating
single oral doses of this new chemical entity in healthy adult
subjects.

On January 13, 2004, we announced the
completion of dosing of the initial concentration of MRE0094 in
our ongoing Phase I clinical trial program evaluating the
safety of the drug in patients. MRE0094, a new chemical entity,
is an adenosine A2a receptor agonist that we are developing as a
potential topical treatment for chronic diabetic foot ulcers.

On January 27, 2004, the PTO issued a second
utility patent pertaining to our FDA-approved product
Skelaxin®. The newly issued patent extends through
December 2021.

During March 2004, we terminated our contract
with BearTown Pharma, Inc. to develop tetrac.

During March 2004, we commenced the Phase II
clinical trial program for an extended release formulation of
our Sonata® product.

Industry

The pharmaceuticals industry is a highly
competitive global business composed of a variety of
participants, including large and small branded pharmaceutical
companies, specialty and niche-market pharmaceutical houses,
biotechnology firms, large and small research and drug
development organizations, and generic drug manufacturers. These
participants compete for patient and physician loyalty to their
products based on a number of factors, including technological
innovation or novelty, clinical efficacy, safety, convenience or
ease of administration and cost-effectiveness. In order to
promote their products to physicians and consumers, industry
participants devote considerable resources to advertising,
marketing and

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sales force personnel, distribution mechanisms
and relationships with medical and research centers, physicians
and patient advocacy and support groups.


The industry is affected by the following:



| |   |                                                                                                                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 and manufacturing
    costs for pharmaceutical producers;                                                                                                                                                                                       
|
| |  | the rise of generic companies and challenges to
    patent protection and exclusivity;                                                                                                                                                                                     
|
| |  | 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

We market a variety of branded prescription
products that primarily can be divided into the following
therapeutic areas:



| |   |                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------
| |  | cardiovascular (including Altace®,
    Corzide®, Thalitone® and Procanbid®),                                                  
|
| |  | endocrinology/womens health (including
    Levoxyl®, Cytomel®, Triostat®, Prefest®,
    Menest®, Delestrogen® and Nordette®),
|
| |  | neuroscience (including Sonata® and
    Skelaxin®),                                                                           
|
| |  | critical care (including Thrombin-JMI®,
    Synercid® and Brevital®),                                                         
|
| |  | anti-infective (including Bicillin®,
    Cortisporin®, Neosporin® and Coly-MycinM®), and                                      
|
| |  | respiratory (including Intal® and
    Tilade®).                                                                               

Our branded pharmaceutical products are generally
in high volume therapeutic categories and are well known for
their indications (for example, Altace®, Skelaxin®,
Levoxyl® and Sonata®). Additionally, many of our
branded products have limited or no generic competition,
including patent protected products and products that are
difficult to formulate. Branded pharmaceutical products
represented 85.5% and 91.5% of total net revenues for each of
the years ended December 31, 2003 and 2002.

Cardiovascular.Altace®, an ACE inhibitor, is our
primary product within this category. In August 1999, the
results of the Heart Outcomes Prevention Evaluation trial, which
we refer to as the HOPE trial, were released. The
HOPE trial determined that Altace® significantly reduces
the rates of stroke, myocardial infarction (heart attack) and
death from cardiovascular causes in a broad range of high-risk
cardiovascular patients. On October 4, 2000, the FDA
approved our sNDA. This approval permits the promotion of
Altace® to reduce the risk of stroke, myocardial infarction
(heart attack) and death from cardiovascular causes in patients
55 and over either with a history of coronary artery disease,
stroke or peripheral vascular disease or with diabetes and one
other cardiovascular risk factor (hypertension, elevated

7



---



##### 



total cholesterol levels, low HDL levels,
cigarette smoking or documented microalbuminuria). Corzide®
is a combination beta blocker and thiazide diuretic indicated
for the management of hypertension. Corgard® is a
beta-blocker indicated for the management of hypertension as
well as long-term management of patients with angina pectoris.
Procanbid® is a branded pharmaceutical product used to
treat arrhythmia with a patent listed in the FDAs
Approved Drug Products With Therapeutic Equivalence
Evaluations,which we refer to as the Orange
Book that expires in August 2014. Thalitone® is a
hypertension diuretic tablet indicated for the management of
hypertension with a patent listed in the FDAs Orange Book
that expires in June 2007. These products are marketed primarily
to primary care physicians and cardiologists.


Endocrinology/Womens
Health.We have a number of leading
branded pharmaceutical products in this category including
Levoxyl®, Cytomel®, Triostat®, Prefest®,
Menest®, Delestrogen® and Nordette®.
Levoxyl®, Cytomel® and Triostat® are indicated
for the treatment of thyroid disorders. Prefest® is a
combination hormone replacement therapy. Menest® and
Delestrogen® are estrogen replacement therapies and
Nordette® is a contraceptive. These products are marketed
primarily to primary care physicians, endocrinologists and
obstetricians/gynecologists.

Neuroscience.Products in this category include Sonata® and
Skelaxin®. Sonata® is a nonbenzodiazepine treatment
for insomnia which is promoted primarily to primary care
physicians, neurologists, and psychiatrists. Skelaxin® is a
muscle relaxant indicated for the relief of discomforts
associated with acute, painful musculoskeletal conditions. This
product is marketed primarily to primary care physicians,
neurologists, orthopedic surgeons and pain specialists.

Critical Care.Products in this category are marketed primarily to hospitals.
Our largest products in this category are Thrombin-JMI®,
Synercid® and Brevital®. Thrombin-JMI® aids in
controlling minor bleeding during surgery. Synercid® is an
injectable antibiotic, primarily administered in hospitals,
indicated for treatment of vancomycin-resistant enterococcus
faecium and treatment of some complicated skin and skin
structure infections. Brevital® is an anesthetic solution
for intravenous use in adults and for rectal and intramuscular
use in pediatric patients. Brevital® is marketed as a
short-term and long-term anesthetic because of its rapid onset
of action and quick recovery time. Brevital® is used alone
and in combination with other anesthetics. Its rapid onset of
action makes it a useful induction agent prior to the
administration of other agents to maintain anesthesia.

Anti-infective.Our
anti-infective products are marketed primarily to general/family
practitioners and internal medicine physicians and are
prescribed to treat uncomplicated infections of the respiratory
tract, urinary tract, eyes, ears and skin. These products are
generally in technologically mature product segments.
Bicillin® is our largest product in the category.

Respiratory.Our
respiratory products are marketed primarily to primary care
physicians and respiratory specialists. Our primary products in
this area include Intal® and Tilade®. Intal® and
Tilade® are oral multi-dose inhalers of non-steroidal
anti-inflammatory agents indicated for the preventive management
of asthma.

8



---



##### 



Some of our branded prescription products are
described below:

|                         |  |                                            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|------------------------ |  | ------------------------------------------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                         |  | Company Acquired From                      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Product                  |  | and Date of Acquisition                    |  | Product Description and Indication                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                         |  |                                            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|CardiovascularAltace®(1) |  | Aventis
    (December 1998)                |  | 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 either with 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.
|                        
|Thalitone®(2)            |  | Horus Global HealthNet
    (December 1996) |  | A hypertension-diuretic tablet indicated for the
    management of hypertension, either alone or in combination with
    other antihypertensive drugs, and for adjunctive therapy edema
    associated with congestive heart failure and various forms of
    renal dysfunction.                                                                                                                                                                                                                                                                                                                                                             
|                        
|Procanbid®               |  | Pfizer
    (February 1998)                 |  | A procainamide extended-release tablet indicated
    for the treatment of documented ventricular arrhythmia, such as
    sustained ventricular tachycardia, that, in the judgment of a
    physician, are life-threatening.                                                                                                                                                                                                                                                                                                                                                                                                                  
|                        
|Corzide®                 |  | Bristol-Myers Squibb
    (August 2001)     |  | A combination beta blocker and thiazide diuretic
    tablet indicated for the management of hypertension.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                        
|Corgard®(3)              |  | Bristol-Myers Squibb
    (August 2001)     |  | A beta-blocker tablet, indicated for the
    management of hypertension as well as long term management of
    patients with angina pectoris.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|                        
|Adrenalin®               |  | Pfizer
    (February 1998)                 |  | A sterile solution made from the active principle
    of the adrenal medulla used to relieve respiratory distress and
    hypersensitivity reactions and restore cardiac rhythm in cardiac
    arrest due to various causes.                                                                                                                                                                                                                                                                                                                                                                                                                 

9



---



##### 



|                             |  |                                        |  |                                                                                                                                                                                                                                                             
|---------------------------- |  | -------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                             |  | Company Acquired From                  |  |                                                                                                                                                                                                                                                             
|Product                      |  | and Date of Acquisition                |  | Product Description and Indication                                                                                                                                                                                                                          
|                             |  |                                        |  |                                                                                                                                                                                                                                                             
|Endocrinology/Womens Health |  |                                        |  |                                                                                                                                                                                                                                                             
|Levoxyl®                     |  | Jones
    (August 2000)                |  | Color-coded, potency marked tablets indicated for
    thyroid hormone replacement or supplemental therapy for
    hypothyroidism.                                                                                                                           
|                            
|Cytomel®                     |  | Jones
    (August 2000)                |  | A tablet indicated in the medical treatment of
    hypothyroidism. The only commercially available thyroid hormone
    tablet containing T(3) as a single entity.                                                                                           
|                            
|Triostat®                    |  | Jones
    (August 2000)                |  | A sterile non-pyrogenic aqueous solution for
    intravenous administration indicated in the treatment of
    myxedema coma/precoma.                                                                                                                        
|                            
|Tapazole®                    |  | Jones
    (August 2000)                |  | A tablet indicated in the medical treatment of
    hyperthyroidism.                                                                                                                                                                                         
|                            
|Florinef®                    |  | Bristol-Myers Squibb
    (August 2001) |  | A partial replacement tablet therapy for primary
    and secondary adrenocortical insufficiency in Addisons
    disease and for the treatment of salt-losing adrenogenital
    syndrome.                                                                   
|                            
|Prefest®                     |  | Ortho-McNeil
    (May 2002)            |  | A single tablet combination hormone replacement
    therapy with an intermittent progestin and continuous estrogen
    administration.                                                                                                                      
|                            
|Nordette®                    |  | Wyeth
    (July 2000)                  |  | A tablet-form oral contraceptive indicated for
    the prevention of pregnancy.                                                                                                                                                                             
|                            
|Menest®                      |  | GlaxoSmithKline
    (June 1998)        |  | A film-coated esterified estrogen tablet for the
    treatment of vasomotor symptoms of menopause, atrophic
    vaginitis, kraurosis vulvae, female hypogonadism, female
    castration, primary ovarian failure, breast cancer and prostatic
    carcinoma.
|                            
|Delestrogen®                 |  | Bristol-Myers Squibb
    (August 2001) |  | An injectable estrogen replacement therapy.                                                                                                                                                                                                                 
|                            
|Pitocin®                     |  | Pfizer
    (February 1998)             |  | A sterile hormone solution used to initiate or
    improve uterine contractions during labor and to control
    bleeding or hemorrhage in the mother after childbirth.                                                                                      

10



---



##### 



|               |  |                                  |  |                                                                                                                                                                                                                                                                                                    
|-------------- |  | -------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|               |  | Company Acquired From            |  |                                                                                                                                                                                                                                                                                                    
|Product        |  | and Date of Acquisition          |  | Product Description and Indication                                                                                                                                                                                                                                                                 
|               |  |                                  |  |                                                                                                                                                                                                                                                                                                    
|Anusol-HC®     |  | Pfizer
    (February 1998)       |  | A suppository and cream indicated for the relief
    of inflammation accompanying hemorrhoids (piles),
    post-irradiation proctitis, cryptitis and other inflammatory
    conditions of the anorectum.                                                                                           
|              
|Neuroscience   |  |                                 
|Sonata®        |  | Elan
    (June 2003)             |  | A nonbenzodiazepine capsule treatment for
    insomnia.                                                                                                                                                                                                                                            
|              
|Skelaxin®      |  | Elan
    (June 2003)             |  | A muscle relaxant tablet indicated for the relief
    of discomforts associated with acute, painful musculoskeletal
    conditions.                                                                                                                                                                
|              
|Critical Care  |  |                                  |  |                                                                                                                                                                                                                                                                                                    
|Thrombin-JMI®  |  | Jones
    (August 2000)          |  | 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®      |  | Aventis
    (December 2002)      |  | An injectable antibiotic indicated for treatment
    of certain complicated skin and skin structure infections.                                                                                                                                                                                    
|              
|Brevital®      |  | Jones
    (August 2000)          |  | An anesthetic solution for intravenous use in
    adults and for rectal and intramuscular use only in pediatric
    patients.                                                                                                                                                                      
|              
|Anti-Infective |  |                                  |  |                                                                                                                                                                                                                                                                                                    
|Bicillin®      |  | Wyeth
    (July 2000)            |  | 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.                                              
|              
|Cortisporin®   |  | GlaxoSmithKline
    (March 1997) |  | A full line of prescription antibiotic and
    anti-inflammatory formulations of ophthalmic ointments and
    suspensions, otic solutions and suspensions, and topical creams
    and ointments indicated for the treatment of corticosteroid-
    responsive dermatoses with secondary infections.

11



---



##### 



|               |  |                                     |  |                                                                                                                                                                                                                                                                                                                                                                                
|-------------- |  | ----------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|               |  | Company Acquired From               |  |                                                                                                                                                                                                                                                                                                                                                                                
|Product        |  | and Date of Acquisition             |  | Product Description and Indication                                                                                                                                                                                                                                                                                                                                             
|               |  |                                     |  |                                                                                                                                                                                                                                                                                                                                                                                
|Viroptic®      |  | GlaxoSmithKline
    (May 1997)      |  | A sterile ophthalmic solution indicated for the
    treatment of ocular Herpes simplex virus, idoxuridine-resistant
    Herpes and vidarabine-resistant Herpes. Viroptic® is also
    indicated for use in pediatric patients, ages six and above.                                                                                                                             
|              
|Neosporin®(4)  |  | GlaxoSmithKline
    (November 1997) |  | 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.
|              
|Polysporin®(4) |  | GlaxoSmithKline
    (November 1997) |  | A prescription strength wide range antibacterial
    sterile ointment indicated for the topical treatment of
    superficial ocular infections.                                                                                                                                                                                                                                
|              
|Chloromycetin® |  | Pfizer
    (February 1998)          |  | A broad spectrum antibiotic for bacterial
    infections that are not responsive to other antibiotics or when
    other antibiotics are contraindicated.                                                                                                                                                                                                                       
|              
|Septra®        |  | GlaxoSmithKline
    (November 1997) |  | An antibiotic tablet, suspension and infusion
    indicated for the treatment of infectious diseases, including
    urinary tract infections, pneumonia, enteritis and ear
    infections in adults and children.                                                                                                                                                              
|              
|Coly-MycinM®   |  | Pfizer
    (February 1998)          |  | An antibiotic sterile parenteral indicated for
    the treatment of acute or chronic infections due to sensitive
    strains of certain gram-negative bacteria and a sterile aqueous
    suspension for the treatment of superficial bacterial infections
    of the external auditory canal.                                                                                  
|              
|Silvadene®     |  | Aventis
    (December 1998)         |  | A topical antimicrobial cream indicated as an
    adjunct for the prevention and treatment of wound sepsis in
    patients with second-and third-degree burns.                                                                                                                                                                                                                 
|              
|Respiratory    |  |                                     |  |                                                                                                                                                                                                                                                                                                                                                                                
|Intal®         |  | Aventis
    (December 2002)         |  | An oral multi-dose inhaler of a non- steroidal
    anti-inflammatory agent for the preventive management of asthma.                                                                                                                                                                                                                                                            

12



---



##### 



|        |  |                             |  |                                                                                                                    
|------- |  | --------------------------- |  | -------------------------------------------------------------------------------------------------------------------
|        |  | Company Acquired From       |  |                                                                                                                    
|Product |  | and Date of Acquisition     |  | Product Description and Indication                                                                                 
|        |  |                             |  |                                                                                                                    
|Tilade® |  | Aventis
    (December 2002) |  | An oral multi-dose inhaler of a non- steroidal
    anti-inflammatory agent for the preventive management of asthma.






|    |                                                                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | We acquired licenses for the exclusive rights in
    the United States under various patents to the active ingredient
    in Altace®.              
|(2) | We acquired the trademark and patents for
    Thalitone® from Boehringer Ingelheim Pharmaceuticals, Inc.                                           
|(3) | We acquired a fully paid license to Corgard®
    in the United States.                                                                             
|(4) | We have exclusive licenses, free of royalty
    obligations, to manufacture and market prescription formulations
    of Neosporin® and Polysporin®.

Net sales of many of our branded prescription
products for the year ended December 31, 2003 are set forth
in the tables below.

|               |            |               |  |             |       |               |  |         |  |               |      |  |  |  |              |  |  |   |      |  
|-------------- | ---------- | ------------- |  | ----------- | ----- | ------------- |  | ------- |  | ------------- | ---- |  |  |  | ------------ |  |  | - | ---- | -
|Cardiovascular |            | Net sales     |  | Respiratory |       | Net sales     |  | Other   |  | Net sales    
|               |            |               |  |             |       |               |  |         |  |              
|               |            | (in millions) |  |             |       | (in millions) |  |         |  | (in millions)
|               | Altace®    |               |  | $           | 527.1 |               |  | Intal®  |  | $             | 37.0 |  |  |  | Aplisol®     |  |  | $ | 7.5  |  
|               | Corzide®   |               |  |             | 15.7  |               |  | Tilade® |  |               | 5.0  |  |  |  | Tigan®       |  |  |   | 5.2  |  
|               | Corgard®   |               |  |             | 12.5  |               |  | Other   |  |               | 0.2  |  |  |  | Soloxine®(3) |  |  |   | 1.6  |  
|               | Procanbid® |               |  |             | 5.2   |               |  |         |  |               |      |  |  |  | Other        |  |  |   | (0.3 | )
|               | Adrenalin® |               |  |             | 1.6   |               |  |         |  |               |      |  |  |  |              |  |  |   |      |  
|               | Other      |               |  |             | 0.3   |               |  |         |  |               |      |  |  |  |              |  |  |   |      |  

|               |              |               |  |                 |       |               |  |  |              |  |  |   |      |   |  |  |  |  |  |  |  | 
|-------------- | ------------ | ------------- |  | --------------- | ----- | ------------- |  |  | ------------ |  |  | - | ---- | - |  |  |  |  |  |  |  | 
|Endocrinology/ |              |               |  |                 |       |               |  |  |              | 
|Womens Health |              | Net sales     |  | Anti-infectives |       | Net sales     |  |  |              | 
|               |              |               |  |                 |       |               |  |  |              | 
|               |              | (in millions) |  |                 |       | (in millions) |  |  |              | 
|               | Levoxyl®     |               |  | $               | 134.1 |               |  |  | Synercid®    |  |  | $ | 32.4 |   |  |  |  |  |  |  |  | 
|               | Cytomel®     |               |  |                 | 26.0  |               |  |  | Bicillin®    |  |  |   | 28.6 |   |  |  |  |  |  |  |  | 
|               | Delestrogen® |               |  |                 | 8.9   |               |  |  | Neosporin®   |  |  |   | 8.1  |   |  |  |  |  |  |  |  | 
|               | Prefest®     |               |  |                 | 7.2   |               |  |  | Cortisporin® |  |  |   | 6.1  |   |  |  |  |  |  |  |  | 
|               | Menest®      |               |  |                 | 5.9   |               |  |  | Coly-MycinM® |  |  |   | 5.4  |   |  |  |  |  |  |  |  | 
|               | Nordette®    |               |  |                 | 4.9   |               |  |  | Silvadene®   |  |  |   | 5.1  |   |  |  |  |  |  |  |  | 
|               | Triostat®    |               |  |                 | 3.9   |               |  |  | Viroptic®    |  |  |   | 2.0  |   |  |  |  |  |  |  |  | 
|               | Anusol-HC®   |               |  |                 | 3.2   |               |  |  | Other        |  |  |   | (1.9 | ) |  |  |  |  |  |  |  | 
|               | Tapazole®    |               |  |                 | 2.4   |               |  |  |              |  |  |   |      |   |  |  |  |  |  |  |  | 
|               | Proctocort®  |               |  |                 | 1.4   |               |  |  |              |  |  |   |      |   |  |  |  |  |  |  |  | 
|               | Other        |               |  |                 | (1.5  | )             |  |  |              |  |  |   |      |   |  |  |  |  |  |  |  | 

|             |              |               |  |               |       |               |  |  |               |  |  |   |       |  |  |  |  |  |  |  |  | 
|------------ | ------------ | ------------- |  | ------------- | ----- | ------------- |  |  | ------------- |  |  | - | ----- |  |  |  |  |  |  |  |  | 
|Neuroscience |              | Net sales     |  | Critical Care |       | Net sales     |  |  |               | 
|             |              |               |  |               |       |               |  |  |               | 
|             |              | (in millions) |  |               |       | (in millions) |  |  |               | 
|             | Skelaxin®(1) |               |  | $             | 179.1 |               |  |  | Thrombin-JMI® |  |  | $ | 141.7 |  |  |  |  |  |  |  |  | 
|             | Sonata®(2)   |               |  | $             | 72.5  |               |  |  | Brevital®     |  |  |   | 3.0   |  |  |  |  |  |  |  |  | 
|             |              |               |  |               |       |               |  |  | Ketalar®      |  |  |   | 1.8   |  |  |  |  |  |  |  |  | 
|             |              |               |  |               |       |               |  |  | Other         |  |  |   | 1.9   |  |  |  |  |  |  |  |  | 






|    |                                                                                 
|--- | --------------------------------------------------------------------------------
|(1) | Includes net sales for Skelaxin® following
    its acquisition on June 12, 2003.
|(2) | Includes net sales for Sonata® following its
    acquisition on June 12, 2003.  
|(3) | We sold the animal health product Soloxine®
    to Virbac on September 8, 2003. 

13



---



##### 



Net sales in the table above reflect an
$18.0 million charge for changes in accounting estimates
related to Medicaid for the years 1998 to 2002 and a $0.9
million charge for corrections of immaterial errors related to
Medicaid for the years 1994 to 1997. For additional information,
please see the section entitled Managements
Discussion and Analysis of Financial Condition and Results of
Operations and Note 17 to our audited consolidated
financial statements.

Meridian Medical Technologies

Our Meridian Medical Technologies segment
consists primarily of our auto-injector business. We pioneered
the development, and are a manufacturer, of auto-injectors for
the self-administration of injectable drugs. An auto-injector is
a pre-filled, pen-like device that allows a patient or caregiver
to automatically inject a precise drug dosage quickly, easily,
safely and reliably. Auto-injectors are a convenient,
disposable, one-time use drug delivery system designed to
improve the medical and economic value of injectable drug
therapies.

The commercial pharmaceutical business of our
Meridian segment primarily consists of EpiPen®, an
auto-injector filled with epinephrine for the emergency
treatment of anaphylaxis resulting from severe or allergic
reactions to insect stings or bites, foods, drugs and other
allergens, as well as idiopathic or exercise induced
anaphylaxis. Dey L.P. markets EpiPen® pursuant to a supply
agreement that expires December 31, 2010. Under the terms
of the supply agreement, we grant Dey the exclusive right and
license to market, distribute and sell EpiPen® worldwide.

Our Meridian segment also has pharmaceutical
products that are presently sold primarily to the DoD, under an
Industrial Base Maintenance Contract. These products include
AtroPen® and ComboPen® which are nerve agent
antidotes. AtroPen® is an atropine-filled auto-injector and
ComboPen® consists of an atropine-filled auto-injector and
a pralidoxime-filled auto-injector. Other products sold to the
DoD include a diazepam-filled auto-injector for the treatment of
seizures and a morphine-filled auto-injector for pain
management. Additionally, in January 2004, Meridian began
selling a new auto-injector to the DoD called the Antidote
Treatment Nerve Agent Auto-injector. This auto-injector product,
also a nerve agent antidote, utilizes a dual chambered
auto-injector and injection process to administer atropine and
pralidoxime, which provide an improved, more efficient means of
delivering these nerve agent antidotes. All U.S. Government
contracts, including our Industrial Base Maintenance Contract
provide that they may be terminated for the convenience of the
government as well as for default. A surge capability provision
allows for the coverage of defense mobilization requirements in
the event of rapid military deployment. If this surge capability
provision becomes operative, we may be required to devote more
of our Meridian Medical Technologies segment manufacturing
capacity to the production of products for the government. Our
supply contracts with the DoD are subject to post-award audit
and potential price determination. These audits may include a
review of our performance on the contract, our pricing
practices, our cost structure and our compliance with applicable
laws, regulations and standards. From time to time the DoD makes
claims for pricing adjustments with respect to completed
contracts.

Royalties

We have successfully developed two currently
marketed adenosine-based products, Adenocard® and
Adenoscan®, for which we receive royalty revenues.
Specifically, we are party to an agreement under which Fujisawa
manufactures and markets Adenocard® and Adenoscan® in
the United States and Canada in exchange for royalties. We have
licensed exclusive rights to Sanofi-Synthelabo, France, to
manufacture and market Adenocard® in countries other than
the United States, Canada and Japan in exchange for royalties.
We have licensed exclusive rights to Sanofi to manufacture and
market Adenoscan® in Austria, Belgium, Denmark, Finland,
France, Germany, Greece, Ireland, Italy, Liechtenstein,
Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden,
Switzerland, and the United Kingdom in exchange for royalties.
Sanofi has received marketing approval for Adenoscan® in a
number of these countries. We have licensed exclusive rights to
Suntory to manufacture and market Adenocard® and
Adenoscan® in Japan in exchange for royalties. We pay
one-half of all royalties received from Adenocard® sales to
the University

14



---



##### 



of Virginia Alumni Patents Foundation from which
we acquired rights to Adenocard®. Fujisawa Healthcare, Inc.
is the source of substantially all of our royalty revenues.


Royalties received by us from sales of
Adenocard® and Adenoscan® outside of the United States
and Canada are shared equally with Fujisawa. Fujisawa, on its
own behalf and ours, obtained a license to additional
intellectual property rights for intravenous adenosine in
cardiac imaging and the right to use intravenous adenosine as a
cardioprotectant in combination with thrombolytic therapy,
balloon angioplasty and coronary bypass surgery and secured
intellectual property rights to extend the exclusivity of
Adenoscan® until March 2015. For additional information on
our royalty agreements, please see the section below entitled
Intellectual Property.

Contract Manufacturing

We utilize a portion of our excess manufacturing
capacity to provide third-party contract manufacturing. We
currently provide contract manufacturing for many pharmaceutical
and biotechnology companies, including Pfizer, Centocor, Inc.,
Santen Incorporated and Hoffman-LaRoche Inc. Many of the
products that we contract manufacture are difficult to
manufacture and, therefore, do not attract significant
competition. Contract manufacturing as a percentage of total
revenues has declined from 85% in 1994 to 2% for the year ended
December 31, 2003 as we have acquired and increased the
sales of branded pharmaceutical products. We believe contract
manufacturing provides the following benefits:



| |   |                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------
| |  | a means of absorbing overhead costs and, as such,
    is an efficient utilization of excess capacity; and                                   
|
| |  | experience in manufacturing a broad line of
    formulations, which is advantageous to us in pursuing and
    integrating acquired products.

Sales and Marketing

We have a national sales force consisting of
approximately 1,300 approved positions, which includes the
primary care sales force of approximately 350 individuals
acquired as part of our acquisition of Elans primary care
business. We distribute our branded pharmaceutical products
primarily through wholesale pharmaceutical distributors. These
products are ordinarily dispensed to the public through
pharmacies by prescription. Our marketing and sales promotions
for branded pharmaceutical products principally target
general/family practitioners, internal medicine physicians,
cardiologists, endocrinologists, neurologists, psychiatrists,
obstetricians/gynecologists and hospitals through detailing and
sampling to encourage physicians to prescribe more of our
products. The sales force is supported and supplemented by
co-promotion arrangements, telemarketing and direct mail, as
well as through advertising in trade publications and
representation at regional and national medical conventions. Our
telemarketing and direct mailing efforts are performed primarily
by using a computer sampling system which we developed to
distribute samples to physicians. We identify and target
physicians through data available from IMS America, Ltd. and
Scott-Levin, suppliers of prescriber prescription data. We
intend to seek new markets in which to promote our product lines
and will continue expansion of our field sales force as product
growth, product acquisitions or product approvals warrant. We
seek new international markets for product lines for which we
have international rights. The marketing and distribution of
these products in foreign countries generally require the prior
registration of the products in those countries. We generally
seek to enter into distribution agreements with companies with
established marketing and distribution capabilities to
distribute the products in foreign countries since we do not
have a distribution mechanism in place for distribution outside
the United States and Puerto Rico.

Similar to other pharmaceutical companies, our
principal customers are wholesale pharmaceutical distributors.
The wholesale distributor network for pharmaceutical products
has in recent years been subject to increasing consolidation,
which has increased our, and other industry participants,
customer concentration. In addition, the number of independent
drug stores and small chains has decreased as retail
consolidation has occurred. For the year ended December 31,
2003, approximately 62.3% of our sales were attributable to
three wholesalers: Cardinal/Bindley (26.0%), Amerisource/Bergen
(15.5%) and McKesson Corporation (20.8%).

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Manufacturing

Our manufacturing facilities are located in
Bristol, Tennessee; Rochester, Michigan; Middleton, Wisconsin;
St. Petersburg, Florida; and St. Louis, Missouri.
These facilities have manufacturing, packaging, laboratory,
office and warehouse space. We are licensed by the Drug
Enforcement Agency, which we refer to as the DEA, a
division of the Department of Justice, to procure and produce
controlled substances. We manufacture certain of our own branded
pharmaceutical products, as well as products owned by other
pharmaceutical companies under manufacture and supply contracts.

We can produce a broad range of dosage
formulations, including sterile solutions, lyophylized
(freeze-dried) products, injectables, tablets and capsules,
creams and ointments, suppositories and powders. We believe our
manufacturing capabilities allow us to capture higher margins
and pursue product line extensions more efficiently. We
manufacture a portion of the finished dosage form of
Altace® at our Bristol facility. However, currently many of
our product lines, including Skelaxin®, Sonata®,
Bicillin®, Prefest®, Delestrogen®, Corgard®,
Intal®, Tilade®, Synercid® and Cortisporin®
are manufactured for us by third parties. As of
December 31, 2003, capacity utilization was approximately
30% at the Bristol facility, approximately 15% at the Rochester
facility, approximately 100% at the Middleton facility,
approximately 90% at the St. Petersburg facility and
approximately 70% at the St. Louis facility. With the
exception of the Middleton and St. Petersburg facilities,
we believe our facilities provide us with substantial
manufacturing capacity for future growth. Thrombin-JMI® is
the only product we manufacture at our Middleton facility. We
are currently working to expand our capacity for
Thrombin-JMI®, which should be completed in approximately
two years. These long-term strategies should expand our
manufacturing capacity for Thrombin-JMI® upon completion.
We intend to transfer, when advantageous, production of acquired
branded pharmaceutical products and their product line
extensions to our manufacturing facilities as soon as
practicable after regulatory requirements and contract
manufacturing requirements are satisfied.

In addition to manufacturing, we have fully
integrated manufacturing support systems including quality
assurance, quality control, regulatory compliance and logistics.
These support systems enable us to maintain high standards of
quality for our products and simultaneously deliver reliable
services and goods to our customers on a timely basis. Companies
that do not have such support systems in-house must outsource
these services.

We require a supply of quality raw materials and
components to manufacture and package drug products for us and
for third parties with which we have contracted. Generally we
have not had difficulty obtaining raw materials and components
from suppliers in the past. Currently, we rely on more than 500
suppliers to deliver the necessary raw materials and components.
We have no reason to believe we will be unable to procure
adequate supplies of raw materials and components on a timely
basis.

Research and Development

With our acquisition of Medco Research on
February 25, 2000, we established the foundation for our
research and development capability. Today, King Pharmaceuticals
Research and Development (formerly named Medco
Research) is engaged in the discovery and development of
chemical compounds, including new chemical entities, which
provide us with strategic pipeline opportunities for the
commercialization of new branded prescription pharmaceutical
products. In addition to discovering and developing new chemical
compounds, we pursue means of enhancing the value of existing
products through new uses and formulations that may provide
additional benefits to patients and improvements in the quality
and efficiency of our manufacturing processes.

We invest in research and development because we
believe it is important to our long-term growth. We presently
employ approximately 75 people in research and development,
which include pre-clinical and toxicology experts, medical
affairs personnel, statisticians and project managers.

In the conduct of our research and development,
we utilize a project management model that provides us with
substantial flexibility, with a goal of maximizing efficiency
and minimizing internal fixed costs. Utilizing this model, we
supplement our internal efforts by collaborating with
independent research organizations, including educational
institutions and research-based pharmaceutical and biotechnology

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companies, and contracting with others for the
performance of research in their facilities. We use the services
of physicians, hospitals, medical schools, universities, and
other research organizations worldwide to conduct clinical
trials to establish the safety and effectiveness of new
products. We seek investments in external research and
technologies that hold the promise to complement and strengthen
our own research efforts. These investments can take many forms,
including in-licensing arrangements, co-development and
co-marketing agreements, joint ventures, and the acquisition of
products in development.


Drug development is time-consuming, expensive and
risky. Only a small percentage of chemical compounds discovered
by researchers prove to be both medically effective and safe
enough to become an approved medicine. The process from
discovery to regulatory approval typically takes 10 to
15 years or longer. Drug candidates can fail at any stage
of the process, and even late-stage product candidates sometimes
fail to receive regulatory approval. Potential products for
which we currently have applications under review by the FDA are:



| |   |                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our diazepam-filled auto-injector, which is an
    adjunctive injectable therapy for the emergency treatment of
    status epilepticus and severe recurrent convulsive seizures
    associated with epilepsy; and
|
| |  | a new Intal® inhaler formulation utilizing
    HFA, an environmentally friendly propellant.                                                                                                                      

Our development projects involving currently
marketed compounds include the following:



| |   |                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------
| |  | an extended release formulation of Sonata®,
    our nonbenzodiazepine treatment for insomnia;                                      
|
| |  | a modified release formulation of Altace®,
    our ACE inhibitor; and                                                              
|
| |  | a new formulation of Intal®, for the
    long-term management of asthma, utilizing the environmentally
    friendly propellant HFA.

Other compounds in development include the
following:



| |   |                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------
| |  | binodenoson, our next generation cardiac
    pharmacologic stress-imaging agent;                           
|
| |  | T-62, an investigational drug for the treatment
    of neuropathic pain; and                               
|
| |  | MRE0094, an investigational drug for the topical
    treatment of chronic diabetic neuropathic foot ulcers.

We are party to a Development and
Commercialization Agreement with Discovery Therapeutics, Inc.
(predecessor to Aderis Pharmaceuticals) dedicated to the
discovery, development and commercialization of compounds that
stimulate the A2a subfamily of adenosine receptors, which we
call A2a-agonists. Under the terms of that
agreement, Aderis granted us an exclusive license under certain
U.S. and foreign patents and pending applications relating to
A2a-agonists. We have exclusive rights under this license to
market and sell developed compounds, either directly or through
sublicense. In exchange for these rights, we agreed to pay
Aderis licensing fees, development milestones and royalties on
future sales of A2a-agonist products utilizing these compounds.
These compounds include binodenoson and MRE0094 which we
currently have under development.

Our research and development expenses were $26.5
million in 2001, $28.2 million in 2002 and $44.1 million in
2003, excluding research and development in-process at the time
of acquisition. In-process research and development expenses
were $12.0 million for the year ended December 31, 2002 and
$194.0 million for the year ended December 31, 2003. There
were no in-process research and development expenses during 2001.

Government Regulation

Our business and our products are subject to
extensive and rigorous regulation at both the federal and state
levels. Nearly all of our products are subject to pre-market
approval requirements. New drugs are approved under, and are
subject to, the FDC Act and related regulations. Biological
drugs are subject to both the FDC Act and the Public Health
Service Act, which we refer to as the PHS Act, and
related regulations. Biological drugs are licensed under the PHS
Act.

At the federal level, we are principally
regulated by the FDA as well as by the DEA, the Consumer Product
Safety Commission, the Federal Trade Commission, the U.S.
Department of Agriculture, the

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Occupation Safety and Health Administration, and
the U.S. Environmental Protection Agency, which we refer to as
the EPA. The FDC Act, the regulations promulgated
thereunder, and other federal and state statutes and
regulations, govern, among other things, the development,
testing, manufacture, safety, effectiveness, labeling, storage,
record keeping, approval, advertising and promotion of our
products and those manufactured by and for third parties.
Product development and approval within this regulatory
framework requires a number of years and involves the
expenditure of substantial resources.


When we acquire the right to market an existing
approved pharmaceutical product, both we and the former
application holder are required to submit certain information to
the FDA. This information, if adequate, results in the transfer
to us of marketing rights to the pharmaceutical products. We are
also required to advise the FDA about any changes in certain
conditions in the approved application as set forth in the
FDAs regulations. Our business strategy includes acquiring
branded pharmaceutical products and transferring, when
advantageous, their manufacture to our manufacturing facilities
as soon as practicable after regulatory requirements are
satisfied. In order to transfer manufacturing of the acquired
branded products, we must demonstrate, by filing information
with the FDA, that we can manufacture the product in accordance
with current Good Manufacturing Practices, which we refer to as
cGMPs, and the specifications and conditions of the
approved marketing application. For changes requiring prior
approval, there can be no assurance that the FDA will grant such
approval in a timely manner, if at all.

The FDA also mandates that drugs be manufactured,
packaged and labeled in conformity with cGMPs. In complying with
cGMP regulations, manufacturers must continue to expend time,
money and effort in production, record keeping and quality
control to ensure that the products meet applicable
specifications and other requirements to ensure product safety
and efficacy.

The FDA periodically inspects drug manufacturing
facilities to ensure compliance with applicable cGMP
requirements. Failure to comply with the statutory and
regulatory requirements subjects the manufacturer to possible
legal or regulatory action, such as suspension of manufacturing,
seizure of product or recall of a product. Adverse experiences
with the use of products must be reported to the FDA and could
result in the imposition of market restrictions through labeling
changes or in product removal. Product approvals may be
withdrawn if compliance with regulatory requirements is not
maintained or if problems concerning safety or efficacy of the
product occur following approval.

The federal government has extensive enforcement
powers over the activities of pharmaceutical manufacturers
including the authority to withdraw product approvals, commence
actions to seize and prohibit the sale of unapproved or
non-complying products, to halt manufacturing operations that
are not in compliance with cGMPs, and to impose or seek
injunctions, voluntary or involuntary recalls, and civil
monetary and criminal penalties. Such a restriction or
prohibition on sales or withdrawal of approval of products
marketed by us could materially adversely affect our business,
financial condition or results of operations.

Marketing authority for our products is subject
to revocation by the applicable governmental agencies. In
addition, modifications or enhancements of approved products or
changes in manufacturing locations are in many circumstances
subject to additional FDA approvals, which may or may not be
received and which may be subject to a lengthy application
process. Our manufacturing facilities are continually subject to
inspection by such governmental agencies, and manufacturing
operations could be interrupted or halted in any such facilities
if such inspections prove unsatisfactory.

We also manufacture and sell pharmaceutical
products which are controlled substances as defined
in the Controlled Substances Act and related federal and state
laws, which establish certain security, licensing, record
keeping, reporting and personnel requirements administered by
the DEA and state authorities. The DEA has a dual mission of law
enforcement and regulation. The former deals with the illicit
aspects of the control of abusable substances and the equipment
and raw materials used in making them. The DEA shares
enforcement authority with the Federal Bureau of Investigation,
another division of the Department of Justice. The DEAs
regulatory responsibilities are concerned with the control of
licensed manufacturers, distributors and dispensers of
controlled substances, the substances themselves and the
equipment and raw materials used in their manufacture and
packaging in order to prevent such articles

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from being diverted into illicit channels of
commerce. We maintain appropriate licenses and certificates with
the applicable state authorities in order to engage in
pharmaceutical development, manufacturing and distribution of
pharmaceutical products containing controlled substances. We are
licensed by the DEA to manufacture and distribute certain
pharmaceutical products containing controlled substances.


The distribution of pharmaceutical products is
subject to the Prescription Drug Marketing Act, which we refer
to as PDMA, a part of the FDC Act, which regulates
distribution activities at both the federal and state level.
Under the PDMA and its implementing regulations, states are
permitted to require registration of manufacturers and
distributors who provide pharmaceuticals even if these
manufacturers or distributors have no place of business within
the state. States are also permitted to adopt regulations
limiting the distribution of product samples to licensed
practitioners. The PDMA also imposes extensive licensing,
personnel record keeping, packaging, quantity, labeling, product
handling and facility storage and security requirements intended
to prevent the sale of pharmaceutical product samples or other
diversions. During 2003, we implemented an automated inventory
accountability system for use by our sales force.

Our Rochester facility, manufactures both drug
and biological pharmaceutical products. Prior to our acquisition
of this facility in February 1998, it was one of six Pfizer
facilities subject to a consent decree issued by the U.S.
District Court of New Jersey in August 1993. We plan to petition
for relief from the consent decree with respect to the Rochester
facility when appropriate.

The Rochester facility was inspected by the FDA
in March 2003. During this inspection, the FDA made cGMP
observations in a written report provided to us. This written
report is known as an FDA Form 483 or simply as
a 483. The observations in a 483 are reported to the
manufacturer in order to assist the manufacturer in complying
with the FDC Act and the regulations enforced by the FDA. Often
a pharmaceutical manufacturer receives a 483 after an
inspection. While no law or regulation requires us to respond to
a 483, we provided the FDA with a written response to the 483
related to the March 2003 inspection of the Parkedale facility,
including action plans to address the observations. The 483 from
March 2003 does not require us to delay or discontinue the
production of any products made at the Rochester facility. The
FDAs Team Biologics inspected the Rochester facility in
August 2003 with no FDA Form 483 issued.

We cannot determine what effect changes in
regulations or statutes or legal interpretation, when and if
promulgated or enacted, may have on our business in the future.
New laws, regulations, standards, or interpretations could,
among other things, require changes to manufacturing methods,
expanded or different labeling, the recall, replacement or
discontinuance of certain products, additional record keeping or
expanded documentation of the properties of certain products and
scientific substantiation. These changes, or new legislation,
could have a material adverse effect on our business, financial
condition or results of operations.

Environmental Matters

Our operations are subject to numerous and
increasingly stringent federal, state and local environmental
laws and regulations concerning, among other things, the
generation, handling, storage, transportation, treatment and
disposal of toxic and hazardous substances and the discharge of
pollutants into the air and water. Environmental permits and
controls are required for some of our operations and these
permits are subject to modification, renewal and revocation by
the issuing authorities. We believe that our facilities are in
substantial compliance with our permits and environmental laws
and regulations and do not believe that future compliance with
current environmental law will have a material adverse effect on
our business, financial condition or results of operations. Our
environmental capital expenditures and costs for environmental
compliance may increase in the future as a result of changes in
environmental laws and regulations or as a result of increased
manufacturing activities at any of our facilities.

Under the Comprehensive Environmental Response,
Compensation, and Liability Act, which we refer to as
CERCLA, the EPA can impose liability for the entire
cost of cleanup of contaminated properties upon each or any of
the current and former site owners, site operators or parties
who sent waste to the site, regardless of fault or the legality
of the original disposal activity. In addition, many states,
including

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Tennessee, Michigan, Wisconsin, Florida and
Missouri, have statutes and regulatory authorities similar to
CERCLA and to the EPA. We have entered into hazardous waste
hauling agreements with licensed third parties to properly
dispose of hazardous wastes. We cannot assure you that we will
not be found liable under CERCLA or other applicable state
statutes or regulations for the costs of undertaking a clean up
at a site to which our wastes were transported.


Competition

General

We compete with other pharmaceutical companies
for products and product line acquisitions. Competitors include
Biovail Corporation, Forest Laboratories, Inc., Galen Holdings,
plc, Shire Pharmaceuticals Group plc, Medicis Pharmaceutical
Corporation, Watson Pharmaceuticals, Inc., and other companies
which also acquire branded pharmaceutical products and product
lines from other pharmaceutical companies. Additionally, since
our products are generally established and commonly sold, they
are subject to competition from products with similar qualities.
Our branded pharmaceutical products may be subject to
competition from alternate therapies during the period of patent
protection and thereafter from generic equivalents. The
manufacturers of generic products typically do not bear the
related research and development costs and consequently are able
to offer such products at considerably lower prices than the
branded equivalents. There are, however, a number of factors,
which enable products to remain profitable once patent
protection has ceased. These include the establishment of a
strong brand image with the prescriber or the consumer,
supported by the development of a broader range of alternative
formulations than the manufacturers of generic products
typically supply.

Generic
Substitutes

Many of our branded pharmaceutical products have
either a strong market niche or competitive position. Some of
our branded pharmaceutical products face competition from
generic substitutes. For a manufacturer to launch a generic
substitute, it must prove to the FDA when filing an application
to make a generic substitute that the branded pharmaceutical and
the generic substitute have bioequivalence. It typically takes
two or three years to prove bioequivalence and receive FDA
approval for many generic substitutes. By focusing our efforts
in part on products with patent protection, challenging
bioequivalence or complex manufacturing requirements, we are
better able to maintain market share and produce sustainable,
high margins and cash flows.

Due to recent statutory changes, the FDA may
approve generic substitutes of our branded pharmaceutical
products in a shorter period of time. Previously, the FDA
required that generic applicants claiming patent invalidity or
non-infringement give us notice each time either an abbreviated
new drug application, which we refer to as an ANDA,
was submitted or amended to claim invalidity or non-infringement
of newly listed patents. If we filed a patent infringement suit
against the generic applicant within 45 days of receiving such
notice, the FDA was barred (or stayed) from approving the ANDA
for 30 months unless specific events occurred sooner. To
avoid multiple 30-month stays for the same branded drug, the
recent statutory changes modified the relevant provisions of the
Hatch-Waxman Act (21 U.S.C. §§ 355(j)(2) and (5))
to indicate that a 30-month stay will only attach to patents
that are listed in the FDAs Orange Book at the time an
ANDA is originally filed. Although the ANDA filer is still
required to certify against a late-listed patent, the NDA holder
can still bring suit based upon infringement of that patent, but
such a suit will no longer trigger an additional 30-month stay
of FDA approval of the ANDA. As a result, generic substitutes of
our branded pharmaceutical products could be approved sooner.

Also, recent regulatory changes significantly
alter patent listing requirements in the FDAs Orange Book.
Only patents listed in the FDAs Orange Book are eligible
for protection by a 30-month stay. We are now required to list
all patents that claim a composition of matter relating to a
drug or a method of using a drug. Previously, this provision was
interpreted broadly, allowing the listing of many drug patents.
The FDAs new regulations prohibit listing of certain types
of patents, including patents claiming certain metabolites (the
active moiety that results from the bodys metabolism of
the drug substance), intermediates (namely, substances not
present in the finished product), certain methods of use, or
patents

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claiming certain product packaging. As such, some
patents that may issue in the future may not be eligible for
listing in the FDAs Orange Book and thus not eligible for
protection by a 30-month stay.


Intellectual Property



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

We consider the protection of discoveries in
connection with our development activities important to our
business. The patent positions of pharmaceutical companies,
including ours, are uncertain and involve legal and factual
questions, which can be difficult to resolve. We intend to seek
patent protection in the United States and selected foreign
countries where and when appropriate.

In connection with the Altace® product line,
we acquired a license for the exclusive rights in the United
States and Puerto Rico to various Aventis patents, including the
rights to the active ingredients in Altace® having patents
listed in the FDA Orange Book that expire in January 2005,
October 2008 and April 2012. Our rights include the use of the
active ingredients in Altace® generally in combination as
human therapeutic or human diagnostic products in the United
States. For a discussion of challenges to our patents by generic
drug manufacturers, please see the section entitled Risk
Factors under the heading If we cannot successfully
enforce our rights under the patents relating to three of our
largest products, Altace®, Levoxyl® and Skelaxin®
or relating to our product Prefest® against generic drug
manufacturers, our results of operations could be materially
adversely affected. We also own U.S. patents listed in the
FDAs Orange Book that expire in August 2014 for
Procanbid®. Additionally, we own a U.S. patent for
Thalitone®, which is listed in the FDAs Orange Book
and expires in June 2007.

Skelaxin® has two method-of-use patents
listed in the FDAs Orange Book, which do not expire until
December 2021. For a discussion of challenges to our patents by
generic drug manufacturers, please see the section entitled
Risk Factors under the heading If we cannot
successfully enforce our rights under the patents relating to
three of our largest products, Altace®, Levoxyl®, and
Skelaxin®, or relating to our product Prefest®,
against generic drug manufacturers, our results of operations
could be materially adversely affected.

We have filed in excess of 40 patent applications
related to Levoxyl®. The first U.S. patent on
Levoxyl®, U.S. Patent No. 6,555,581, a utility patent
with composition of matter claims, listed in the FDAs
Orange Book, was issued on April 29, 2003 and extends
through February 15, 2022. The other pending patent
applications generally cover, among other things, formulation
methodologies and equipment, formulation technologies,
biopharmaceutical characteristics, drug delivery systems and
methods-of-use. If these other applications are granted, the
resulting patents will potentially provide us with additional
patent protection on our FDA-approved novel formulation of
Levoxyl®. For a discussion of challenges to our patent by
generic drug manufacturers, please see the section entitled
Risk Factors under the heading If we cannot
successfully enforce our rights under the patents relating to
three of our largest products, Altace®, Levoxyl®, and
Skelaxin®, or relating to our product Prefest®,
against generic drug manufacturers, our results of operations
could be materially adversely affected.

Sonata® has a composition of matter patent
listed in the FDAs Orange Book that extends through June
2008.

In connection with our acquisition of the rights
to Intal®, Tilade®, and Synercid® on
December 30, 2002, we acquired associated intellectual
property rights, including patent rights in the United States
related to the HFA formulation of Intal® until September
2017, a composition of matter patent in the United States for
Tilade® until October 2006 and a formulation patent in the
United States for Synercid® until November 2017.

We have exclusive licenses expiring in June 2036
for the prescription formulations of Neosporin® and
Polysporin® and a license expiring in February 2038 for the
prescription formulation of Anusol-HC®. These licenses are
subject to early termination in the event we fail to meet
specified quality control standards, including cGMP regulations
with respect to the products, or commit a material breach of
other terms and conditions of the licenses which would have a
significant adverse effect on the uses of the

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licensed products retained by the licensor, which
would include among other things, marketing products under these
trade names outside the prescription field.


In connection with the acquisition of the rights
to Prefest® on May 29, 2002, we acquired a
pharmaceutical preparation patent listed in the FDAs
Orange Book that expires in January 2012, as well as a second
Orange Book listed patent that expires in April 2009. For a
discussion of a challenge to our patents by a generic drug
manufacturer, please see the section entitled Risk
Factors  If we cannot successfully enforce our rights
under the patents relating to three of our largest products,
Altace®, Levoxyl® and Skelaxin® or relating to
our product Prefest® against generic drug manufacturers,
our results of operations could be materially adversely
affected.

In connection with the acquisition of
Lorabid®, we acquired, among other things, all of Eli
Lillys rights in approximately 30 patents and received a
broad royalty-free non-exclusive license in the United States
and Puerto Rico to 12 other patents and associated technology.
We also received an exclusive sublicense to four other patents
for which we must pay a royalty to Eli Lilly if certain sales
thresholds are met. Lorabid® has patent protection through
2005.

We have filed with the PTO an application for a
patent covering our new Tigan® technology, including our
FDA-approved Tigan® 300mg capsules. The pending patent
application is drawn to, among other things, formulations,
dosages, dosage forms, biopharmaceutical characteristics,
methods-of-production, methods-of-use and
methods-of-instruction. If the application is granted, the
resulting patent will potentially provide us with patent
protection for our FDA-approved Tigan® 300mg capsules for
20 years from the filing date of the application.

In connection with the acquisition of Meridian on
January 8, 2003, we acquired the intellectual property
rights associated with Meridians dual-chambered
auto-injector and injection process, which has a patent that
expires in April 2010.

We receive royalties on sales of Adenoscan®
and Adenocard®, two products that we successfully
developed. Adenoscan® has patent coverage that extends to
March 2015, Adenocard® has patent coverage that extends
through June 2004.

We also rely upon trade secrets, unpatented
proprietary know-how and continuing technological innovation to
develop and sustain our competitive position. There can be no
assurance that others will not independently develop
substantially equivalent proprietary technology and techniques
or otherwise gain access to our trade secrets or disclose the
technology or that we can adequately protect our trade secrets.

Trademarks

We sell our branded products under a variety of
trademarks. We believe that we have valid proprietary interests
in all currently used trademarks, including those for our
principal branded pharmaceutical products registered in the
United States.

Backlog

As of February 26, 2004, we had no material
backlog.

Employees

As of February 26, 2004, we employed 2,997
full-time and 6 part-time persons. Approximately
230 employees of the Rochester facility are covered by a
collective bargaining agreement with the Paper, Allied
Industrial, Chemical & Energy Workers, International Union
(PACE), Local No. 60178, which expires on February 28,
2006. Approximately 320 employees of the St. Louis facility
are covered by a collective bargaining agreement with the
International Brotherhood of Teamsters, Chaffeurs, Warehousemen
and Helpers of America Union, Local No. 688, which expires
February 28, 2005. We believe our employee relations are
good.

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RISK FACTORS

Before you purchase our securities, 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



| |                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Investigations by the SEC and Office of
    Inspector General of the Department of Health and Human
    Services, other possible governmental investigations, and
    securities and ERISA litigation could have a material adverse
    effect on our business.

As previously reported, in March 2003 the SEC
initiated a formal investigation of King. We received SEC
subpoenas relating to, among other topics, sales of our products
to VitaRx and Prison Health Services, our best price
lists, the pricing of our pharmaceutical products provided to
governmental Medicaid agencies, the accrual and payment of
rebates on the product Altace®, the products Fluogen®
and Lorabid®, the King Benevolent Fund, Inc., our
calculations related to Medicaid rebates, and the Audit
Committees internal review of issues raised by the SEC
investigation. As also previously reported, on November 13,
2003, we received a subpoena duces tecum from the Office of
Inspector General at the Department of Health and Human Services
requesting the production of documents relating to some of the
matters being investigated by the SEC and to our sales,
marketing and other business practices for Altace®,
Aplisol® and Levoxyl®.

In connection with our determination that we have
underpaid amounts due to Medicaid and other governmental pricing
programs, we have continued to engage in discussions with
representatives of the Office of Inspector General of the
Department of Health and Human Services, the Department of
Justice, the Department of Veterans Affairs, the Centers for
Medicare and Medicaid Services, and the Public Health Service.
We expect that these discussions will include a detailed review
by the appropriate agencies of our calculations of our
underpayments, and it is possible that this review could result
in material changes. The SEC, the Office of Inspector General,
the Department of Justice, the Department of Veterans Affairs,
the Public Health Service, the Centers for Medicare and Medicaid
Services and other governmental agencies that might be
investigating or might commence an investigation of us could
impose, based on a claim of a violation of fraud and false
claims laws or otherwise, civil and/or criminal sanctions,
including fines, penalties and possible exclusion from federal
health care programs (including Medicaid and Medicare). Some of
these laws may impose liability even in the absence of specific
intent to defraud. We cannot predict or reasonably estimate the
likelihood or magnitude of any such sanctions at this time. For
additional information, please see the section entitled
Risk Factors under the heading 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 and the section entitled
Managements Discussion and Analysis of Financial
Condition and Results of Operations under the heading
Governmental Investigations, Medicaid Accrual Adjustment,
and Related Matters.

Subsequent to the announcement of the SEC
investigation described above, beginning in March 2003, 22
purported class action complaints were filed by holders of our
securities against us, our directors, former directors,
executive officers, former executive officers, a subsidiary, and
a former director of the subsidiary in the United States
District Court for the Eastern District of Tennessee, alleging
violations of the Securities Act of 1933 and/or the Securities
Exchange Act of 1934. These 22 complaints have been consolidated
in the United States District Court for the Eastern District of
Tennessee. In addition, holders of our securities filed two
class action complaints alleging violations of the Securities
Act of 1933 in Tennessee state court. We removed these two cases
to the United States District Court for the Eastern

23



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District of Tennessee, where these two cases were
consolidated with the other class actions. Plaintiffs in these
actions unsuccessfully moved to remand these two cases back to
Tennessee state court. These two actions therefore remain part
of the consolidated action. The district court has appointed
lead plaintiffs in the consolidated action, and those lead
plaintiffs filed a consolidated amended complaint on
October 21, 2003 alleging that we, through some of our
executive officers, former executive officers, directors and
former directors, made false or misleading statements concerning
our business, financial condition and results of operations
during periods beginning February 16, 1999 and continuing until
March 10, 2003. Plaintiffs in the consolidated action have
also named the underwriters of our November 2001 public offering
as defendants. We and other defendants have filed motions to
dismiss the consolidated amended complaint, and those motions
are currently pending.


Seven purported shareholder derivative complaints
have also been filed in federal and state courts in Tennessee
alleging a breach of fiduciary duty, among other things, by some
of our officers and directors. The derivative cases in state
court were consolidated and are currently stayed. The stay will
remain in place at least until the motions to dismiss the
consolidated federal class securities action are decided. The
derivative cases in federal court are stayed until there is a
decision on the merits in the state court derivative suits.
Additionally, a class action complaint was filed in the United
States District Court for the Eastern District of Tennessee
under the Employee Retirement Income Security Act, which we
refer to as ERISA. As amended, the complaint alleges that we and
certain of our executive officers, former executive officers,
directors, former directors and an employee violated fiduciary
duties that were allegedly owed our 401(k) Retirement Savings
Plans participants and beneficiaries under ERISA. The
allegations underlying each of these additional lawsuits are
similar in many respects to those in the class action litigation
described above. We filed a motion to dismiss the ERISA action
on March 5, 2004; this motion to dismiss is currently
pending.

We intend to defend all of these lawsuits
vigorously but are unable currently to predict the outcome or
reasonably estimate the range of potential loss, if any.

If any governmental sanctions are imposed, or if
we were not to prevail in the pending litigation, neither of
which we can predict or reasonably estimate at this time, our
business, financial condition, results of operations and cash
flows could be materially adversely affected. Responding to the
governmental investigations, resolving the amounts owed to
governmental agencies in connection with the underpayments and
defending us in the pending litigation has resulted, and is
expected to continue to result, in a significant diversion of
managements attention and resources and an increase in
professional fees.



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

Altace®, Skelaxin®, Thrombin-JMI®,
Levoxyl®, Sonata® and royalty revenues for the year
ended December 31, 2003 accounted for 34.6%, 11.8%, 9.3%,
8.8%, 4.8% and 4.5% of our total revenues, respectively, or
73.8% in total. We believe that these sources of revenue may
constitute a significant portion of our revenues for the
foreseeable future. Accordingly, any factor adversely affecting
sales of any of these products or products for which we receive
royalty payments could have a material adverse effect on our
business, financial condition, results of operations and cash
flows.

If
we cannot successfully enforce our rights under the patents
relating to three of our largest products, Altace®,
Levoxyl® and Skelaxin®, or relating to our product
Prefest®, against generic drug manufacturers, our results
of operations could be materially adversely
affected.

Cobalt Pharmaceuticals, Inc., a generic drug
manufacturer located in Mississauga, Ontario, Canada, has filed
an ANDA with the FDA seeking permission to market a generic
version of Altace®. The following U.S. patents are listed
for Altace® in the FDAs Orange Book: United States
Patent Nos. 4,587,258, the 258 patent, and
5,061,722, the 722 patent, two composition of matter
patents related to Altace®, and United States Patent
No. 5,403,856, the 856 patent, a method-of-use
patent related to Altace®, with expiration dates of January
2005, October 2008, and April 2012, respectively. Under the

24



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Hatch-Waxman Act, any generic manufacturer may
file an ANDA with a certification, known as a
Paragraph IV certification, challenging the
validity or infringement of a patent listed in the FDAs
Orange Book four years after the pioneer company obtains
approval of its NDA. Cobalt has filed a Paragraph IV
certification alleging invalidity of the 722 patent,
and we filed suit on March 14, 2003 to enforce our rights
under that patent. Pursuant to the Hatch-Waxman Act, the filing
of that suit provides us an automatic stay of FDA approval of
Cobalts ANDA for 30 months from no earlier than
February 5, 2003. Should the court find in favor of a
Cobalt summary judgment motion on the 722 patent,
however, we would not receive the full benefit of that 30 month
stay. Subsequent to filing our original complaint, we amended
our complaint to add an allegation of infringement of the
856 patent. In its answer to the amended complaint, Cobalt
denied infringement and alleged that the 856 patent is
invalid. Pursuant to FDA regulations, however, Cobalt is not
required to certify against the 856 patent. We intend
to vigorously enforce our rights under the 722 and
856 patents. Regardless of the outcome of the lawsuit
involving the 722 and 856 patents, however, Cobalt
has not challenged the validity of the 258 patent and,
therefore, cannot market a generic version of Altace® prior
to the expiration of that patent in January 2005.


Eon Labs, Inc., CorePharma, LLC and Mutual
Pharmaceutical Co., Inc. have each filed an ANDA with the FDA
seeking permission to market a generic version of Skelaxin®
400 mg tablets. United States Patent Nos. 6,407,128,
the 128 patent, and 6,683,102, the 102 patent,
two method-of-use patents relating to Skelaxin®, are listed
in the FDAs Orange Book and do not expire until
December 3, 2021. Eon Labs and CorePharma have each filed
Paragraph IV certifications alleging noninfringement and
invalidity of the 128 patent. Mutual has filed a
Paragraph IV certification alleging noninfringement and
invalidity of the 102 patent. We filed separate suits
against Eon Labs on January 2, 2003 and CorePharma on
March 7, 2003 and are currently assessing our right to
bring suit against Mutual. Pursuant to the Hatch-Waxman Act, the
filing of the suits against Core and Eon provides us with an
automatic stay of FDA approval of Eons ANDA for
30 months from no earlier than November 18, 2002 and
an automatic stay of FDA approval of Cores ANDA for
30 months from no earlier than January 24, 2003. We
intend to vigorously enforce our rights under the 128 and
102 patents to the full extent of the law. On
March 9, 2004, we received a copy of a letter from the FDA
to all ANDA applicants for Skelaxin® stating that the use
listed in the FDAs Orange Book for the 128 patent
may be deleted from the ANDA applicants product labeling.
We believe that this decision is arbitrary, capricious, and
inconsistent with the FDAs previous position on this
issue. We are currently assessing our administrative and legal
options and may request the FDA to reinstate its previous policy
on this issue and reject any ANDAs that delete such use from
their product labeling. If we are unable to persuade the FDA to
reinstate its previous policy, however, there is a substantial
likelihood that a generic version of Skelaxin® will enter
the market, and our business, financial condition, results of
operations and cash flows could be materially adversely affected.

Mylan Pharmaceuticals, Inc. and
KV Pharmaceutical Company have each filed an ANDA with the
FDA seeking permission to market a generic version of
Levoxyl®. United States Patent No. 6,555,581, the
581 patent, a utility patent with formulation claims
relating to Levoxyl®, was issued to us on April 29,
2003. The 581 patent is listed in the FDAs Orange
Book and does not expire until February 15, 2022. No
earlier than April 30, 2003, we received notice of
Mylans Paragraph IV certification, which alleges
noninfringement of the 581 patent. We filed suit
against Mylan on June 13, 2003 in the Eastern District of
Pennsylvania and on June 16, 2003 in the Northern District
of West Virginia; these suits have been consolidated in the
Northern District of West Virginia and trial is currently
scheduled for June 2005. Pursuant to the Hatch-Waxman Act, the
filing of the suits against Mylan provides us with an automatic
stay of FDA approval of Mylans ANDA for 30 months
from no earlier than April 30, 2003. On June 24, 2003,
we received notice of KVs Paragraph IV certification,
which alleges noninfringement and invalidity of the
581 patent. We filed suit against KV on
August 7, 2003 and trial is currently scheduled to begin
December 6, 2004. Pursuant to the Hatch-Waxman Act, the
filing of the suit against KV provides us with an automatic stay
of FDA approval of KVs ANDA for 30 months from no
earlier than June 24, 2003. We intend to vigorously enforce
our rights under the 581 patent to the full extent of
the law.

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Barr Laboratories Inc. has filed an ANDA, which
included a Paragraph IV certification, with the FDA seeking
permission to market a generic version of Prefest®. United
States Patent No. 5,108,995, the 995 patent, a
utility patent with method of treatment claims relating to
Prefest®, and United States Patent No. 5,382,573, the
573 patent, a utility patent with pharmaceutical
preparation claims relating to Prefest®, were issued on
April 28, 1992, and January 17, 1995, respectively.
The 995 patent and the 573 patent are both listed in
the FDAs Orange Book and do not expire until
April 28, 2009, and January 17, 2012, respectively. On
October 15, 2003, we received notice of Barrs
Paragraph IV certification, which alleges noninfringement
and invalidity of the 995 patent and the
573 patent. On November 26, 2003, we filed suit
against Barr in the Southern District of New York for
infringement of the 995 and 573 patents. Pursuant to
the Hatch-Waxman Act, the filing of that suit provides us an
automatic stay of FDA approval of Barrs ANDA for
30 months from no earlier than October 15, 2003. We
intend to vigorously enforce our rights under both patents.



| |                                                                                                                                                                                                                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 and we may not be able to
    maintain existing levels of coverage, which could make it
    difficult to attract or retain qualified directors and
    officers.

Our charter and bylaws require that we indemnify
our directors and officers to the fullest extent provided by
applicable Tennessee law. Although we have purchased liability
insurance for our directors and officers to fund such
obligations, if our insurance carrier should deny coverage, or
if the indemnification costs exceed the insurance coverage, we
would be forced to bear some or all of these indemnification
costs directly, which could be substantial and may have an
adverse effect on our business, financial condition, results of
operations and cash flows. If the cost of this insurance
continues to increase significantly, or if this insurance
becomes unavailable, we may not be able to maintain or increase
our levels of insurance coverage for our directors and officers,
which could make it difficult to attract or retain qualified
directors and officers.



| |                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------
| | We may not achieve our intended benefits
    from the Co-Promotion Agreement with Wyeth for the promotion of
    Altace®.

We entered into the Co-Promotion Agreement with
Wyeth for Altace® partially because we believed a larger
pharmaceutical company with more sales representatives and, in
our opinion, with substantial experience in the promotion of
pharmaceutical products to physicians would significantly
increase the sales revenue potential of Altace®. By
effectively co-marketing the new indications for Altace®
that were approved by the FDA on October 4, 2000, we intend
to increase the demand for the product. In the agreement, both
of us have incentives to maximize the sales of Altace® and
to optimize the marketing of the product by coordinating our
promotional activities.

It is possible that we or Wyeth or both of us
will not be successful in effectively promoting Altace® or
in optimizing its sales. The content of agreed-upon promotional
messages for Altace® may not sufficiently convey the merits
of Altace® and may not be successful in convincing
physicians to prescribe Altace® instead of other ACE
inhibitors or competing therapies. The targets for sales force
staffing, the number and frequency of details to physicians and
the physicians who are called upon may be inadequate to realize
our expectations for revenues from Altace®. If disputes
arise between Wyeth and us relating to our respective
obligations under the Co-Promotion Agreement and these disputes
are resolved against us, our business, financial condition,
results of operations and cash flows could be materially
adversely affected.

Neither we nor Wyeth may be able to overcome the
perception by physicians of a class effect, which we discuss
below. Further, developments in technologies, the introduction
of other products or new therapies may make it more attractive
for Wyeth to concentrate on the promotion of a product or
products other than Altace® or to lessen their emphasis on
the marketing of Altace®. Our strategic decisions in
dealing with managed health care organizations may not prove to
be correct and we could consequently lose sales in this market
to competing ACE inhibitor products or alternative therapies. If
any of these

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situations occurred, they could have a material
adverse effect on our business, financial condition, results of
operations and cash flows.




| |                                                                                                                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If our Bristol facility and the Aventis
    (USA) facility do not remain FDA-approved manufacturing and
    packaging sites for Altace®or if there is an interruption in the supply of raw
    material for Altace® or of the finished
    product, the distribution, marketing and subsequent sales of the
    product could be adversely affected.

Our Bristol facility is an FDA-approved
manufacturing and packaging site for Altace®. Aventis
(USA) in Kansas City, Missouri, is our alternative or
back-up FDA-approved manufacturing and packaging site for
Altace®. Aventis Pharma Deutscheland GmbH (Germany) is our
single supplier of ramipril, the active ingredient in
Altace®. Because the manufacture of ramipril is a patented
process, we cannot secure the raw material from another source.
We have entered into a long-term supply agreement with Aventis
(Germany) for ramipril and we believe that it adequately
protects our supply of raw material, but there can be no
guarantee that there will be no interruptions or delays in the
supply of the raw material. Any interruptions or delays in
manufacturing or receiving the finished product or raw material
used for the future production of Altace® or the failure to
maintain our Bristol facility and the Aventis
(USA) facility as FDA-approved manufacturing and packaging
sites for Altace® could have a material adverse effect on
our business, financial condition, results of operations and
cash flows.



| |                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Sales of
    Altace®may be affected
    by the perception of a class effect, and Altace®
    and our other products may be subject to various sources
    of competition from alternate therapies.

Although the FDA has approved indications for
Altace® that are unique among ACE inhibitors, we may be
unable to meet investors expectations regarding sales of
Altace® due to a perceived class effect or the inability to
market Altace®s differentiating uses and indications
effectively.

All prescription drugs currently marketed by
pharmaceutical companies may be grouped into existing drug
classes, but the criteria for inclusion vary from class to
class. For some classes, specific biochemical properties may be
the defining characteristic. For example, Altace®
(ramipril) is a member of a class of products known as ACE
inhibitors because ramipril is one of several chemicals that
inhibit the production of enzymes that convert angiotensin,
which could otherwise lead to hypertension.

When one drug from a class is demonstrated to
have a particularly beneficial or previously undemonstrated
effect (e.g., the benefit of Altace® as shown by the HOPE
trial), marketers of other drugs in the same class (for example,
other ACE inhibitors) will represent that their products offer
the same benefit simply by virtue of membership in the same drug
class. Consequently, other companies with ACE inhibitors that
compete with Altace® will represent that their products are
equivalent to Altace®. By doing so, these companies will
represent that their products offer the same efficacious results
demonstrated by the HOPE trial. Regulatory agencies do not
decide whether products within a class are quantitatively
equivalent in terms of efficacy or safety. Because comparative
data among products in the same drug class are rare, marketing
forces often dictate a physicians decision to use one ACE
inhibitor over another. We may not be able to overcome other
companies representations that their ACE inhibitors will
offer the same benefits as Altace® as demonstrated by the
HOPE trial. As a result, sales of Altace® may suffer from
the perception of a class effect.

Currently, no generic form of Altace® is
available, although Cobalt Pharmaceuticals has filed a
Paragraph IV certification pertaining to Altace® which
we have described above. That is, there is no product that has
the same active ingredient, ramipril, as Altace®. Although
no generic substitute for Altace® has been approved by the
FDA, there are other ACE inhibitors whose patents have expired
or will expire in the next few years and there are generic forms
of other ACE inhibitors. Also, there are different therapeutic
agents that may be used to treat certain conditions treated by
Altace®. For example, the group of products known as
angiotensin II receptor blockers, which we refer to as an
ARB, beta-blockers, calcium channel blockers and
diuretics, may be prescribed to treat certain conditions that
Altace® is used to treat. New ACE inhibitors or other
anti-hypertensive therapies, increased sales of generic forms of
other ACE inhibitors or of other therapeutic agents that compete
with Altace® may adversely affect the sales of

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Altace®. In these events, our business,
financial condition, results of operations and cash flows could
be materially adversely affected.




| |                                                                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our Co-Promotion Agreement for
    Altace®with Wyeth
    could be terminated before we realize all of the benefits of the
    agreement, it could be assigned to another company by Wyeth or
    Wyeth could market a competing product.

Our exclusive Co-Promotion Agreement for
Altace® with Wyeth could, under some circumstances, be
terminated before we realize all of the benefits of the
agreement. If the Co-Promotion Agreement is terminated for any
reason, we may not realize increased sales which we believe may
result from the expanded promotion of Altace®. If we must
unwind our marketing alliance efforts, there may be a material
adverse effect on the sales of Altace®.

If another company were to acquire, directly or
indirectly, over 50% of the combined voting power of
Wyeths voting securities or more than half of its total
assets, then Wyeth could assign its rights and obligations under
the Altace® Co-Promotion Agreement to a successor without
our prior consent. However, a successor would be required to
first assume in writing the obligations of Wyeth under the
Co-Promotion Agreement before the rights of Wyeth were assigned
to it. Another party might not market Altace® as
effectively or efficiently as Wyeth did. Also, a company that
acquires Wyeth might not place as much emphasis on the
Co-Promotion Agreement, might expend fewer marketing resources,
such as fewer sales representatives, than Wyeth did, or might
have less experience or expertise in marketing pharmaceutical
products to physicians. In any of these cases, there may be a
material adverse effect on the sales of Altace®.

When feasible, Wyeth must give us six
months written notice of its intent to sell, market or
distribute any product competitive with Altace®. Under the
Co-Promotion Agreement, a product competes with Altace® if
it is an ACE inhibitor, an ARB, or an ACE inhibitor or ARB in
combination with other cardiovascular agents in a single
product. However, an ARB alone or in combination with other
cardiovascular agents competes with Altace® only if the
level of promotional effort used by Wyeth for the ARB is greater
than 50% of that applied to Altace®. A product would not
compete with Altace® if in the last 12 months it had
net sales of less than $100.0 million or 15% of net sales of
Altace®, whichever was higher. Also, a product would not
compete with Altace® under the Co-Promotion Agreement if
the product were acquired by Wyeth through a merger with or
acquisition by a third party and the product were no longer
actively promoted by Wyeth or its successor through detailing
the product to physicians.

Once we have been notified in writing of
Wyeths intent to market, sell or distribute a competing
product, then Wyeth has 90 days to inform us as to whether
it intends to divest its interest in the competing product. If
Wyeth elects to divest the competing product, it must try to
identify a purchaser and to enter into a definitive agreement
with the purchaser as soon as practicable. If Wyeth elects not
to divest the competing product or fails to divest the product
within one year of providing notice to us of its plan to divest
the competing product, then both of us must attempt to establish
acceptable terms under which we would co-promote the competing
product for the remaining term of our Altace® Co-Promotion
Agreement. Alternatively, Wyeth and we could agree upon another
commercial relationship, such as royalties payable to us for the
sale of the competing product, or we could agree to adjust the
promotion fee we pay to Wyeth for the co-promotion of
Altace®. If Wyeth and we are unable to establish acceptable
terms under any of these options, then we have the option at our
sole discretion to reacquire all the marketing rights to
Altace® and terminate the Co-Promotion Agreement upon
180 days prior written notice to Wyeth. In the event we
decided to reacquire all the marketing rights to Altace® we
would be obligated to pay Wyeth an amount of cash equal to twice
the net sales of Altace® in the United States for the
12 month period preceding the reacquisition. The foregoing
could have a material effect on our business, financial
condition, results of operations and cash flows.

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| |                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our sales of
    Levoxyl®could be
    affected by future actions of the FDA, the possible development
    and approval of a generic substitute for Levoxyl® and our
    ability to maintain effective patent protection for
    Levoxyl®.

On August 14, 1997, the FDA announced in the
Federal Register (62 FR 43535) that orally administered
levothyroxine sodium drug products are new drugs. The notice
stated that manufacturers who wish to continue to market these
products must submit applications as required by the FDC Act by
August 14, 2000. On April 26, 2000, the FDA issued a second
Federal Register notice extending the deadline for filing these
applications until August 14, 2001.

On May 25, 2001, the FDA approved our NDA
for Levoxyl®, our levothyroxine sodium drug product. Other
manufacturers of levothyroxine sodium drug products have
received FDA approval of NDAs for their levothyroxine
sodium products. The FDA has announced that after
August 14, 2001, it will not accept NDAs for
levothyroxine sodium drug products. However, the FDA has stated
it will continue to review applications which were submitted by
August 14, 2001. Other manufacturers who wish to submit an
application for an equivalent product after August 14, 2001
must submit an ANDA seeking approval of a generic substitute for
a levothyroxine sodium product with an approved NDA. A
manufacturer could submit an ANDA demonstrating in vivo
bioequivalence (in other words, the two products produce
identical effects on the body) to Levoxyl®. If the FDA were
to determine that another levothyroxine sodium product is
bioequivalent to Levoxyl®, generic substitution for
Levoxyl® may become possible which could result in a
decrease in sales of our product Levoxyl® and have a
material adverse effect upon our results of operations and cash
flows.

During 2001 and 2002, we filed with the PTO in
excess of 40 applications for U.S. patents concerning our
FDA-approved product Levoxyl®. The first U.S. patent
on Levoxyl®, the 581 patent, a utility patent
with composition of matter claims, listed in the FDAs
Orange Book, was issued on April 29, 2003 and extends
through February 15, 2022. We cannot assure you that any or
all of the other patent applications currently under review will
issue.

As noted above, Mylan and KV have each filed an
ANDA with the FDA seeking permission to market a generic version
of Levoxyl®. The 581 patent, a utility patent with
formulation claims relating to Levoxyl®, was issued to us
on April 29, 2003. No earlier than April 30, 2003, we
received notice of Mylans Paragraph IV certification,
which alleges noninfringement of the 581 patent. On
June 24, 2003, we received notice of KVs
Paragraph IV certification, which alleges noninfringement
and invalidity of the 581 patent. We have filed separate
suits against Mylan and KV and intend to vigorously enforce our
rights under the 581 patent to the full extent of the law.
If we are not successful in enforcing our patents, our business,
financial condition, results of operations and cash flows could
be materially adversely affected.

On March 26, 2002, Jerome Stevens filed a
Petition for Stay of Action (assigned Docket No. 02P1035)
with the FDA seeking redress from the FDA for the public
disclosure on the FDAs website of alleged trade secrets
relating to the manufacturing process for Jerome Stevens
orally-administered levothyroxine sodium drug product Unithroid.
While Jerome Stevens does not specifically request that the FDA
stay any action with respect to our levothyroxine sodium drug
product Levoxyl®, Jerome Stevens does request, among other
broad remedies, that the FDA immediately and indefinitely
stay . . . all grants of drug pre-market
authority that used, relied on, or were based on Jerome
confidential and trade secret manufacturing
information . . . . We have filed a
Comment on Jerome Stevens Petition with the FDA, stating
that the NDA for Levoxyl® was filed with the FDA before the
disclosure of Jerome Stevens alleged trade secrets, and
that the approval of the Levoxyl® NDA is unrelated to such
disclosure. Based on these facts, we do not believe that Jerome
Stevens Petition applies to Levoxyl®. However, if the
FDA were to determine that there is a valid legal basis for
suspension or withdrawal of substantial FDA approval of the
Levoxyl® NDA, it could have a material adverse effect on
our business, financial condition, results of operations and
cash flows.

We filed a Citizens Petition with the FDA
on March 28, 2003 requesting that the FDA refrain from
approving or accepting for filing any ANDA or supplemental ANDA
for levothyroxine sodium drug products until adequate standards
for establishing bioequivalence for levothyroxine sodium drug
products

29



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are adopted in accordance with FDA procedures. A
manufacturer of another major levothyroxine sodium product and
professional endocrinology societies have submitted similar
and/or related comments to the FDA. If the FDA approves an ANDA
for a generic equivalent of Levoxyl® under the current
standards, our business, financial condition, results of
operations and cash flows could be materially adversely affected.




| |                                                                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Sales of certain of our womens health
    products have been and may continue to be negatively affected by
    the perception of an increase in certain health risks associated
    with the use of combination hormone therapies and oral estrogen
    therapies.

From time to time studies on various aspects of
pharmaceutical products, therapies or classes of drugs are
conducted by academics or others, including government agencies,
the results of which, when published, may have dramatic effects
on the markets for the pharmaceutical products that are the
subject of the study. For example, an ongoing clinical trial
entitled the Womens Health Initiative is being conducted
by the National Institutes of Health. Data from that trial
released in July 2002 indicated that an increase in certain
health risks may result from the long-term use of a
competitors combination hormone therapy for women. News of
this data and the perception it has created have negatively
affected the entire combination hormone replacement therapy and
oral estrogen replacement therapy markets generally, which
include our products Prefest®, Menest® and
Delestrogen® and may affect our future marketing efforts
for EstrasorbTM. We cannot assure you that sales of
our currently marketed products will not continue to be
negatively affected by the perception created by the data
released to date or any additional data that may be released in
the future. If sales of these products continue to be negatively
affected by the perception created by data associated with the
Womens Health Initiative, there may be a material adverse
effect on our business, financial condition, results of
operations and cash flows including a write-off of intangible
assets associated with these products.



| |                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.

As of December 31, 2003, we had
$1.9 billion of net intangible assets and goodwill.
Intangible assets primarily include the net book value of
various product rights, trademarks, patents and other intangible
rights. If future sales of a product decline significantly, it
could result in an impairment of the declining products
net book value, resulting in a non-cash impairment charge. For
example, during the fourth quarter of 2002, we decided to divest
our rights to Lorabid®, resulting in an impairment charge
of $66.8 million. Additionally, the FDA approved for sale
generic substitutes for our product Florinef® in
March 2002 and in January 2003. During the first
quarter of 2003, we recorded an intangible asset impairment
charge of $111.0 million related to this product due to
revised sales projections for Florinef® triggered by the
entry of a second generic product into the market. Prescriptions
for our womens health products, including Nordette®
and Prefest®, have continued to decline over the past year
due to the perception created by data associated with the
Womens Health Initiative mentioned above and the entry of
a second generic for Nordette®. During the second quarter
of 2003 a generic substitute for our product Cortisporin®
ophthalmic suspension entered the market. Prescriptions for
Tapazole® have continued to decline since the entry of a
generic substitute in August 2000. At December 31, 2003,
the Florinef® Nordette®, Prefest®,
Cortisporin®, and Tapazole® product rights have net
intangible assets associated with them of $22.6 million,
$96.0 million, $108.5 million, $18.3 million, and
$18.2 million, respectively. Management currently believes
that these assets are not presently impaired based on estimated
undiscounted future cash flows; however, if revenue declines
exceed current expectations, we may have to write-off a portion
or all of the intangible assets associated with these product
rights. For a discussion of these issues related to
Florinef®, Cortisporin®, Tapazole® and the
Rochester facility, please see the section entitled
Managements Discussion and Analysis of Financial
Condition and Results of Operations under the heading
Other Developments. Any impairment of the net book
value of any product or combination

30



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of products, depending on the size of the product
or products, could result in a material adverse effect on our
business, financial condition, results of operations and cash
flows.




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

Our current strategy is focused on increasing
sales of our existing products and enhancing our competitive
standing through acquisitions of products in development and
FDA-approved products, including through acquisitions of other
companies, that complement our business and enable us to promote
and sell new products through existing marketing and
distribution channels. Moreover, since we engage in limited
proprietary research activity with respect to the development of
new chemical entities, we rely heavily on purchasing products in
development from other companies and FDA-approved products.

Other companies, some of which have substantially
greater financial, marketing and sales resources than we do,
compete with us for the acquisition of products in development,
FDA-approved products or companies. We may not be able to
acquire rights to additional products in development,
FDA-approved products, or companies on acceptable terms, if at
all, or be able to obtain future financing for acquisitions on
acceptable terms, if at all. The inability to effect
acquisitions of additional branded products in development and
FDA-approved products could limit the overall growth of our
business. Furthermore, even if we obtain rights to a
pharmaceutical product or acquire a company, we may not be able
to generate sales sufficient to create a profit or otherwise
avoid a loss.



| |                                                                                                          
| | ---------------------------------------------------------------------------------------------------------
| | If we cannot integrate the business of
    companies or products we acquire, our business may
    suffer.

We recently completed several acquisitions
including Intal®, Tilade® and Synercid® from
Aventis in December 2002 and Meridian in January 2003.
Additionally, we acquired a primary care business in the United
States and Puerto Rico from Elan on June 12, 2003, which
includes the products Sonata® and Skelaxin® and a
dedicated primary care field sales force consisting of
approximately 350 individuals. The integration of these
acquisitions into our business requires significant management
attention and may require the further expansion of our existing
sales force or newly-acquired sales force. In order to manage
our acquisitions effectively, we must maintain adequate
operational, financial and management information systems and
motivate and effectively manage an increasing number of
employees. Our acquisitions have significantly expanded our
product offerings, operations and number of employees. Our
future success will also depend in part on our ability to retain
or hire qualified employees to operate our expanding facilities
efficiently in accordance with applicable regulatory standards.
If we cannot integrate our acquisitions successfully, these
changes and acquisitions could have a material adverse effect on
our business, financial condition, results of operations and
cash flows.



| |                                                                                    
| | -----------------------------------------------------------------------------------
| | If we are not able to develop or license
    new products, our business may suffer.

We are engaged in the development and licensing
of new products. For example, we are



| |   |                                                                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | engaged in the development of a modified-release
    formulation of Sonata®;                                                                                                                                                                                                    
|
| |  | in exclusive license agreements with Novavax to
    promote, market, distribute and sell AndrosorbTM,
    once approved, a topical testosterone replacement therapy for
    testosterone deficient women, and other womens health
    products;                                
|
| |  | engaged in the development of binodenoson, a
    myocardial pharmacologic stress imaging agent; T-62, an
    investigational drug for the treatment of neuropathic pain; and
    MRE0094, an investigational drug for the topical treatment of
    chronic diabetic foot ulcers;
|
| |  | engaged in the development of a new inhaler for
    Intal® using the alternative propellant HFA and a
    diazepam-filled auto-injector, each of which is under FDA
    review; and                                                                                             

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| |   |                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | in a licensing agreement with SkyePharma to
    develop and commercialize a modified-release formulation of
    Altace® utilizing SkyePharmas patented oral drug
    delivery technology Geomatrix®.

We compete with other pharmaceutical companies,
including large pharmaceutical companies with financial
resources and capabilities substantially greater than ours, in
the development and licensing of new products. We cannot assure
you that we will be able to



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

If we are not successful in the development or
licensing of new products already in development, including the
failure to obtain any necessary FDA approval, our business,
financial condition, and results of operations could be
materially adversely affected.

Further, other companies may license or develop
products or may acquire technologies for the development of
products that are the same as or similar to the products we have
in development or that we license. Because there is rapid
technological change in the industry and because many other
companies may have more financial resources than we do, other
companies may



| |   |                                                                                      
| | - | -------------------------------------------------------------------------------------
| |  | 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,

and thereby have a negative impact on the sales
of our newly developed or licensed products. Technological
developments or the FDAs approval of new products or of
new therapeutic indications for existing products may make our
existing products or those products we are licensing or
developing obsolete or may make them more difficult to market
successfully, which could have a material adverse effect on our
business, financial condition, results of operations and cash
flows.



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

Although most of our revenue is generated by
products not subject to competition from generic products, there
is no proprietary protection for most of our branded
pharmaceutical products, and generic substitutes for many of
these products are sold by other pharmaceutical companies. Even
our products that currently have no generic substitute could
face generic competition if generics are developed by other
companies and approved by the FDA. For example, Florinef®
is subject to competition from two generics, one approved by the
FDA in March 2002 and the other approved in
January 2003. We are also aware that an ANDA for
Cortisporin® ophthalmic suspension which was previously
inactive has been reactivated by the FDA with a new sponsor. We
understand the sponsor entered the market as of April 14,
2003 with a generic equivalent for Cortisporin® ophthalmic
suspension. The entry of the generic has negatively affected our
market share for this product. Accordingly, our business,
financial condition, results of operations and cash flows could
be materially adversely affected. In addition, governmental and
other pressure to reduce pharmaceutical costs may result in
physicians prescribing products for which there are generic
substitutes. Also, our branded products for which there is no
generic form available may face competition from different
therapeutic agents used for the same indications for which our
branded products are used. Increased competition from the sale
of generic pharmaceutical products or from different therapeutic
agents used for the same indications for which our branded
products are used may cause a decrease in

32



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revenue from our branded products and could have
a material adverse effect on our business, financial condition,
results of operations and cash flows.


Due to recent statutory changes, the FDA may
approve generic substitutes of branded pharmaceutical products
in a shorter period of time. Previously, the FDA required that
generic applicants claiming patent invalidity or
non-infringement give us notice each time either an ANDA was
submitted or amended to claim invalidity or non-infringement of
newly listed patents. If we filed a patent infringement suit
against the generic applicant within 45 days of receiving
such notice, the FDA was barred from approving the ANDA for
30 months unless specific events occurred sooner. To avoid
multiple 30-month stays for the same branded drug, the recent
statutory changes modified the relevant provisions of the
Hatch-Waxman Act (21 U.S.C. §§ 355(j)(2) and
(5)) to indicate that a 30-month stay will only attach to
patents that are listed in the FDAs Orange Book at the
time an ANDA is filed. Although the ANDA filer is still required
to certify against a late-listed patent, the NDA holder can
still bring suit based upon infringement of that patent. Such a
suit will no longer trigger an additional 30-month stay of FDA
approval of the ANDA. As a result, generic substitutes of our
branded pharmaceutical products could be approved sooner.

Also, recent regulatory changes significantly
alter patent listing requirements in the FDAs Orange Book.
Only patents listed in the FDAs Orange Book are eligible
for protection by a 30-month stay. We are now required to list
all patents that claim a composition of matter relating to a
drug or a method of using a drug. Previously, this provision was
interpreted broadly, allowing the listing of many drug patents.
The FDAs new regulations prohibit listing of certain types
of patents, including patents claiming certain metabolites (the
active moiety that results from the bodys metabolism of
the drug substance), intermediates (namely, substances not
present in the finished product), certain methods of use, or
patents claiming certain product packaging. As such, some
patents that may issue in the future may not be eligible for
listing in the FDAs Orange Book and thus not eligible for
protection by a 30-month stay.



| |                                                                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.

Some of our supply agreements, including those
related to Altace®, require us to purchase certain minimum
levels of active ingredients or finished goods, subject to some
terms and conditions of various supply agreements. If sales of
our products do not increase at the currently anticipated rates,
if we are unable to maintain market exclusivity for our
products, if our product life cycle management is not
successful, if we fail to sell our products in accordance with
the forecasts we develop as required by our supply agreements or
if we do not terminate supply agreements at optimal times for
us, we may incur losses in connection with the purchase
commitments under the supply agreement. In the event we incur
losses in connection with the purchase commitments under the
supply agreements, there may be a material adverse effect upon
our results of operations and cash flows.

Additionally we purchase raw materials and some
of our finished goods based on our forecast for sales of our
products. We also manufacture many of our finished goods on
these forecasts. If we do not meet expected forecasts for sales,
we could purchase inventory quantities in excess of expected
demand. This purchase of excess inventory could have a material
adverse effect on our results of operations and cash flows.



| |                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.

We manufacture many of our products in facilities
we own and operate. These products include Altace®,
Levoxyl® and Thrombin-JMI®, which together represent
approximately 52.8% of our revenues for the year ended
December 31, 2003. Many of our production processes are
complex and require specialized and expensive equipment. Any
unforeseen delays or interruptions in our manufacturing
operations may reduce our profit margins and revenues. If we are
unable to resume manufacturing, after interruption, we

33



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may not be able to distribute our products as
planned. Furthermore, growing demand for our products could
exceed our ability to supply the demand. If such situations
occur, it may be necessary for us to seek alternative
manufacturers which could adversely impact our ability to
produce and distribute our products. We cannot assure you that
we would be able to utilize third-party manufacturers for our
products in a timely manner or at all. In addition, our
manufacturing output may decline as a result of power outages,
supply shortages, accidents, natural disasters or other
disruptions of the manufacturing process. Even though we carry
business interruption insurance policies, we may suffer losses
as a result of business interruptions that exceed the coverage
available under our insurance policies.


A portion or all of many of our product lines,
including Altace®, Skelaxin®, Sonata®,
Bicillin®, Prefest®, Intal®, Tilade®,
Synercid® and Cortisporin®, are currently manufactured
by third parties. EstrasorbTM will be manufactured
for us by Novavax. Our dependence upon third parties for the
manufacture of our products may adversely impact our profit
margins or may result in unforeseen delays or other problems
beyond our control. For example, if any of these third parties
are not in compliance with applicable regulations, the
manufacture of our products could be adversely affected. If for
any reason we are unable to obtain or retain third-party
manufacturers on commercially acceptable terms, we may not be
able to distribute our products as planned. If we encounter
delays or difficulties with contract manufacturers in producing
or packaging our products, the distribution, marketing and
subsequent sales of these products would be adversely affected,
and we may have to seek alternative sources of supply or abandon
or sell product lines on unsatisfactory terms. We might not be
able to enter into alternative supply arrangements at
commercially acceptable rates, if at all. We also cannot assure
you that the manufacturers we utilize will be able to provide us
with sufficient quantities of our products or that the products
supplied to us will meet our specifications.

Our supply agreement for Bicillin® with
Wyeth expires on July 7, 2004. There are limitations on the
number of units over and above current estimated demand for this
product we can order under our supply agreement with Wyeth.
Furthermore, the expiration dating on this product is limited to
24 months. We do not anticipate extending our supply
agreement for Bicillin® with Wyeth. Instead, we have begun
the process of transferring the manufacture of Bicillin® to
our Rochester facility. If we are unable to transfer this
product to our Rochester facility in accordance with our plan,
our gross margins on the product may be reduced and/or demand
for Bicillin® may eventually exceed our ability to supply
the product. If we are unable to adequately supply continued
demand for Bicillin®, net sales of the product may be
significantly reduced, the market for the product may be
permanently diminished and the carrying value of our
Bicillin® assets could become impaired, any of which could
have a material adverse affect on our business, financial
condition, results of operations, and cash flows. For the year
ended December 31, 2003, net sales of Bicillin® were
$28.6 million representing 1.9% of total revenues.

We require a supply of quality raw materials and
components to manufacture and package pharmaceutical products
for us and for third parties with which we have contracted.
Currently, we rely on over 500 suppliers to deliver the
necessary raw materials and components. We have no reason to
believe that we will be unable to procure adequate supplies of
raw materials and components on a timely basis. However, if we
are unable to obtain sufficient quantities of any of the raw
materials or components required to produce and package our
products, we may not be able to distribute our products as
planned.

The occurrence of any of these events could
result in significant backorders for our products which could
have a material adverse effect on our business, financial
condition, results of operations and cash flows and could
adversely affect our market share for the products and the
reputation of our products.



| |                                                                                                                                                                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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, the introduction of new or
    reformulated products may not be successful.

We develop products and product line extensions
through research and development and through contractual
relationships with third parties that develop new products,
including new product formulations,

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on our behalf. Our reliance on third parties for
the development of some of our products exposes us to risks
which could cause delays in the development of new products or
reformulated products or could cause other problems beyond our
control. These third-party developers




| |   |                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.                                                                                     

If any of these events occur and we are unable to
successfully develop these products and new product formulations
by other means, our business, financial condition, results of
operations and cash flows could be materially and adversely
affected.



| |                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our Rochester facility has been the subject
    of FDA concerns. If we cannot adequately address the FDAs
    concerns, we may be unable to operate the Rochester facility
    and, accordingly, our business may suffer.

Our Rochester facility manufactures both drug and
biological pharmaceutical products. The Rochester facility was
one of six Pfizer facilities subject to a consent decree issued
by the U.S. District Court of New Jersey in August 1993 as
a result of FDA concerns about compliance issues within Pfizer
facilities in the period before the decree was entered. The
Rochester facility continues to be subject to the consent decree.

The Rochester facility was inspected by the FDA
in February/ March 2003 and by an FDA Team Biologics inspector
in August 2003. When an FDA inspector completes an authorized
inspection of a manufacturing facility, the inspector typically
provides the owner/operator of the facility with a written
report listing the inspectors observations of
objectionable conditions and practices. This written report is
known as an FDA Form 483 or simply as a
483. The observations in a 483 are reported to the
manufacturer in order to assist the manufacturer in complying
with the FDC Act and the regulations enforced by the FDA. Often
a pharmaceutical manufacturer receives a 483 after an inspection
and our Rochester facility received a 483 following the March
2003 inspection. While no law or regulation requires us to
respond to a 483, we have submitted a written response detailing
our plan of action with respect to each of the observations made
on the 483 and our commitment to correct any objectionable
practice or condition. The risk to us of a 483, if left
uncorrected, could include, among other things, the imposition
of civil monetary penalties, the commencement of actions to
seize or prohibit the sale of unapproved or non-complying
products, or the cessation of manufacturing operations at the
Rochester facility that are not in compliance with cGMPs. While
we believe the receipt of the 483 will not have a material
adverse effect on our business, financial condition, results of
operations and cash flows, we cannot assure you that future
inspections may not result in adverse regulatory actions which
could have a material adverse effect on our business, financial
condition, results of operations and cash flows. Our Rochester
facility did not receive a 483 following the August 2003
inspection.



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

We are currently working on long-term strategies
to expand our production capacity for Thrombin-JMI® which
should potentially be completed in approximately two years.
These long-term strategies may further expand our manufacturing
capacity for Thrombin-JMI® upon completion. We cannot
assure you that our plans to expand our production capacity for
Thrombin-JMI® will be successful and/or timely. If we
cannot successfully and timely expand our production capacity
for Thrombin-JMI®, our ability to increase production of
Thrombin-JMI® will be limited, thereby limiting our unit
sales growth for this product.

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| |                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------
| | If we are unable to secure or enforce
    patent rights, trademarks, trade secrets or other intellectual
    property, our business could be harmed.

We may not be successful in securing or
maintaining proprietary patent protection for our products or
products and technologies we develop or license. In addition,
our competitors may develop products, including generic
products, similar to ours using methods and technologies that
are beyond the scope of our intellectual property protection,
which could reduce our sales. Some of our major branded
pharmaceutical products have proprietary patent protection,
including Altace® with composition of matter patents that
do not expire until January 2005 and October 2008, and a
method-of-use patent that does not expire until April 2012. All
of these patents are listed in the FDAs Orange Book. A
challenge to these patents can be subject to expensive
litigation. As we mentioned earlier, Cobalt has filed an ANDA
seeking permission from the FDA to market a generic version of
Altace® prior to the expiration of the 722 patent,
but not before January 2005, the expiration date of the
258 patent. Additionally, as mentioned above, Mylan and KV
have each filed ANDAs seeking permission from the FDA to market
a generic version of Levoxyl® prior to the expiration of
the 581 patent. As noted above, each of Eon Labs,
CorePharma and Mutual has filed an ANDA with the FDA seeking
permission to market a generic version of Skelaxin® prior
to the expiration of the 128 and 102 patents.
Finally, as noted above, Barr has filed an ANDA with the FDA
seeking permission to market a generic version of Prefest®
prior to the expiration of the 995 patent and the
573 patent.

We also rely upon trade secrets, unpatented
proprietary know-how and continuing technological innovation in
order to maintain our competitive position. We cannot assure you
that others will not independently develop substantially
equivalent proprietary technology and techniques or otherwise
gain access to our trade secrets and technology, or that we can
adequately protect our trade secrets and technology.

If we are unable to secure or enforce patent
rights, trademarks, trade secrets or other intellectual
property, our business, financial condition, results of
operations and cash flows could be materially adversely affected.



| |                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------
| | If the implementation of our new
    information technology system is not successful, our business
    could be disrupted.

In November 2000, we began the process of
implementing a new information technology system which became
operational at our Bristol facilities in July 2003. This system
is supporting many of our business functions, including
manufacturing, warehousing, distribution, logistics, sales
reporting, accounting, inventory, quality control, budgeting and
other company functions. In connection with its implementation,
we have incurred related costs of approximately
$30.5 million. In the event we do not successfully convert
our other sites in a timely manner from their existing
information systems to the new one or in the event the new
system does not operate as expected at these other locations,
our business could be disrupted. This disruption or additional
costs, if required, could have a material adverse effect on our
business, financial condition, results of operations and cash
flows.



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

Our results of operations, including, in
particular, product sales revenue, may vary from quarter to
quarter due to many factors. Wholesalers and distributors
represent a substantial portion of our sales. Buying patterns of
our wholesalers and distributors may vary from time to time. In
the event wholesalers and distributors with whom we do business
determine to limit their purchases of our inventory, sales of
our products could be adversely affected. For example, in
advance of an anticipated price increase, many of our customers
may order pharmaceutical products in larger than normal
quantities. The ordering of excess quantities in any quarter
could cause sales of some of our branded pharmaceutical products
to be lower in subsequent quarters than they would have been
otherwise. As part of our ongoing efforts to facilitate improved
management of wholesale channel inventory levels of our branded
pharmaceutical products, we

36



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##### 



are actively engaged in negotiations with our
wholesale customers to establish inventory management
agreements. While we cannot assure you that we will successfully
negotiate mutually beneficial inventory management agreements,
we believe that sales of some of our key products during the
first half of 2004, particularly Altace®, may be
dramatically lower than prescription demand would indicate.
Other factors include expenditures related to the acquisition,
sale and promotion of pharmaceutical products, a changing
customer base, the availability and cost of raw materials,
interruptions in supply by third-party manufacturers, new
products introduced by us or our competitors, the mix of
products we sell, sales and marketing expenditures, product
recalls, competitive pricing pressures and general economic and
industry conditions that may affect customer demand. We cannot
assure you that we will be successful in maintaining or
improving our profitability or avoiding losses in any future
period.




| |                                                                                                                                                                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If the stock price of Novavax declines, our
    investment in Novavax convertible notes could result in
    additional special charges related to a valuation allowance for
    these notes. Upon implementation of Financial Accounting
    Standards Board Interpretation No. 46, we may be required
    to consolidate the financial results of Novavax,
    Inc.

During the period from December 2000 through June
2002, we provided $40.0 million in financing to Novavax in
the form of notes receivable convertible to common stock of
Novavax. The loan is impaired as defined under Statement of
Financial Accounting Standards No. 114, Accounting by
Creditors for Impairment of a Loan. We established a
valuation allowance in the second quarter of 2002 which was
adjusted in subsequent quarters during 2002 and 2003. As of
December 31, 2003, the valuation allowance for the Novavax
convertible notes equaled $17.3 million. We will adjust the
amount of the valuation allowance in future periods until the
loan is no longer considered to be impaired. We may incur
additional charges related to our investment in the convertible
notes. Accordingly, these charges may adversely impact our
earnings. This accounting treatment may change under Financial
Accounting Standards Board Interpretation No. 46,
Consolidation of Variable Interest Entities, which
we refer to as FIN 46.

We hold notes receivable convertible to common
stock of Novavax with a face value of $40.0 million at
December 31, 2003. We also have an exclusive worldwide
license to promote, market, distribute and sell
EstrasorbTM and AndrosorbTM, products
owned by Novavax, following approval, except in the United
States and Puerto Rico, where we will co-market the products
with Novavax. Once approved, we will pay Novavax a royalty based
on a percentage of net sales of the products outside of the
United States and Puerto Rico. Novavax will pay us a
co-promotion fee equal to approximately 50% of net sales less
cost of revenues of the products within the United States and
Puerto Rico. The NDA for EstrasorbTM was approved by
the FDA during October 2003. As of December 31, 2003, we
owned approximately 0.9% of Novavax common stock.

In January 2003, the Financial Accounting
Standards Board issued Interpretation No. 46,
Consolidation of Variable Interest Entities.
FIN 46 requires a variable interest entity to be
consolidated by a company if that company is required to absorb
a majority of the variable interest entitys expected
losses or entitled to receive a majority of the entitys
residual returns or both. We are in the process of assessing
what impact this pronouncement will have on our consolidated
financial statements. Based on our analysis of the impact of
FIN 46, we believe that it is reasonably possible that
Novavax could be a variable interest entity and our interest in
Novavax may require us to consolidate Novavax in the first
quarter of 2004. At September 30, 2003, Novavax reported
total assets of $61.6 million, total liabilities of
$48.7 million, revenues for the nine months ended
September 30, 2003 of $7.7 million, and a net loss of
$14.2 million for the nine months ended September 30,
2003. The consolidation of Novavax could have a material effect
on components of our reported consolidated financial condition
and components of reported consolidated results of operations.

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| |                                                                                                                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our wholly owned subsidiary, 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.

Our wholly owned subsidiary, Jones Pharma
Incorporated, is a defendant in 926 multi-defendant lawsuits
involving the manufacture and sale of dexfenfluramine,
fenfluramine and phentermine, which is usually referred to as
fen/phen. In 1996, Jones acted as a distributor of
Obenix®, a branded phentermine product. Jones also
distributed a generic phentermine product. We believe that
Jones phentermine products have been identified in less
than 100 of the foregoing cases. The plaintiffs in these cases
claim injury as a result of ingesting a combination of these
weight-loss drugs. They seek compensatory and punitive damages
as well as medical care and court-supervised medical monitoring.
The plaintiffs claim liability based on a variety of theories
including but not limited to, product liability, strict
liability, negligence, breach of warranties and
misrepresentation. These suits are filed in various
jurisdictions throughout the United States, and in each of these
suits Jones is one of many defendants, including manufacturers
and other distributors of these drugs. Jones denies any
liability incident to the distribution of its phentermine
product and intends to pursue all defenses available to it.
Jones has tendered defense of these lawsuits to its insurance
carriers for handling and they are currently defending Jones in
these suits. In the event that insurance coverage is inadequate
to satisfy any resulting liability, Jones will have to resume
defense of these lawsuits and be responsible for the damages, if
any, that are awarded against it.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.

The source material for our product
Thrombin-JMI® comes from bovine plasma and lung tissue
which has been certified by the United States Department of
Agriculture for use in the manufacture of pharmaceutical
products. Bovine-sourced materials, particularly those from
outside the United States, may be of some concern because of
potential transmission of bovine spongiform encephalopathy, or
BSE. However, we have taken precautions to minimize
the risks of contamination from BSE in our source materials. Our
principal precaution is the use of bovine materials only from
FDA-approved sources in the United States. Accordingly, all
source animals used in our production of Thrombin-JMI® are
of United States origin. Additionally, source animals used in
production of Thrombin-JMI® are generally less than
18 months of age. (BSE has not been identified in animals
less than 30 months of age).

We have two approved vendors as sources of supply
of the bovine raw materials but currently receive these
materials from a single vendor. Any interruption or delay in the
supply of these materials could adversely affect the sales of
Thrombin-JMI®. In addition to other actions taken by us and
our vendor to minimize the risk of BSE, we are developing steps
to further purify the material of other potential contaminants.
We will continue surveillance of the source and believe that the
risk of BSE contamination in the source materials for
Thrombin-JMI® is very low. While we believe that our
procedures and those of our vendor for the supply, testing and
handling of the bovine material comply with all federal, state,
and local regulations, we cannot eliminate the risk of
contamination or injury from these materials. There are high
levels of global public concern about BSE. Physicians could
determine not to administer Thrombin-JMI® because of the
perceived risk which could adversely affect our sales of the
product. Any injuries resulting from BSE contamination could
expose us to extensive liability. Also there is currently no
alternative to the bovine-sourced materials for
Thrombin-JMI®. If public concern for the risk of
BSE-infection in the United States should increase, the
manufacture and sale of Thrombin-JMI® and our business,
financial condition, results of operations and cash flows could
be materially and adversely affected.

The FDA expects manufacturers of biological
products to have validated processes capable of removing
extraneous viral contaminants to a high level of assurance. As a
result, many manufacturers of biologics are currently engaged in
developing procedures to remove potential extraneous viral
contaminants from their products. We are in the process of
developing appropriate processing steps to achieve maximum

38



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assurance for the removal of potential extraneous
viral contaminants from Thrombin-JMI®, which does not
include BSE because it is not a viral contaminant. If we are not
successful in gaining FDA approval for these processes, our
ability to manufacture Thrombin-JMI® may be adversely
affected. We cannot assure you that we will be successful in
these efforts. Failure to obtain the FDAs approval for
these procedures could have a material adverse effect on our
business, financial condition, results of operations and cash
flows.




| |                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------
| | On November 15, 2006, we may be
    required to repurchase our 2 3/4% Convertible Debentures
    due November 15, 2021.

We issued 2 3/4% Convertible Debentures due
November 15, 2021 in February 2002 in an aggregate amount
of $345.0 million. The price at which the debentures are
convertible into common stock is $50.16, subject to adjustments
spelled out in the documents governing the debentures. If the
price of our stock has not reached that amount by
November 15, 2006, we may be required to repurchase all or
a portion of the debentures representing the $345.0 million
on November 15, 2006 if some or all of the holders of the
debentures request that we repurchase their debentures. We
cannot assure you that a significant repurchase requirement at
that time would not have a material adverse effect on our
business, financial condition, results of operations or cash
flows.



| |                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.

Dey L.P. markets our EpiPen® auto-injector
through a supply agreement with us that expires on
December 31, 2010. Under the terms of the agreement, we
grant Dey the exclusive right and license to market, distribute
and sell EpiPen® worldwide. Although demand for
EpiPen® continues to be strong due to increased awareness
of the health risks associated with allergic reactions, we
expect competition to intensify. We understand that a new
competitive product manufactured by Hollister-Stier Laboratories
LLC received FDA approval approximately one year ago. The new
product, TwinJect® Auto-Injector (epinephrine) injection,
is not a therapeutically equivalent product but has the same
indications, same usage and the same route of delivery as
EpiPen®. Users of EpiPen® would have to obtain a new
prescription in order to substitute TwinJect®. The supply
agreement with Dey includes minimum purchase requirements that
are less than Deys purchases in recent years. A failure by
Dey to successfully market and distribute EpiPen® or an
increase in competition could have a material adverse effect on
our business, financial condition, results of operations and
cash flows.



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

All U.S. government contracts provide that
they may be terminated for the convenience of the government as
well as for default. The unexpected termination of one or more
of our significant government contracts could result in a
material adverse effect on our business, financial condition,
results of operations and cash flows. A surge capability
provision allows for the coverage of defense mobilization
requirements in the event of rapid military deployment. If this
surge capability provision becomes operative, we may be required
to devote more of our Meridian Medical Technologies segment
manufacturing capacity to the production of products for the
government which could result in less manufacturing capacity
being devoted to products in this segment with higher profit
margins. Our supply contracts with the Department of Defense are
subject to post-award audit and potential price determination.
These audits may include a review of our performance on the
contract, our pricing practices, our cost structure and our
compliance with applicable laws, regulations and standards. Any
costs found to be improperly allocated to a specific contract
will not be reimbursed, while costs already reimbursed must be
refunded. Therefore, a post-award audit or price redetermination
could result in an adjustment to our revenues. From time to time
the Department of Defense makes claims for pricing adjustments
with respect to completed contracts. If a government audit
uncovers improper or illegal activities, we may be subject to
civil and criminal penalties and administrative sanctions,
including

39



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termination of contracts, forfeitures of profits,
suspension of payments, fines and suspension or disqualification
from doing business with the government.


Other risks involved in government sales include
the unpredictability in funding for various government programs
and the risks associated with changes in procurement policies
and priorities. Reductions in defense budgets may result in
reductions in our revenues. We also provide our nerve agent
antidote auto-injectors to a number of state agencies and local
communities for homeland defense against chemical agent
terrorist attacks. Changes in governmental and agency
procurement policies and priorities may also result in a
reduction in government funding for programs involving our
auto-injectors. A significant loss in government funding of
these programs could have a material adverse effect on our
business, financial condition, results of operations and cash
flows.



| |                                                                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our sales depend on payment and
    reimbursement from third-party payors, and if they reduce or
    refuse payment or reimbursement, the use and sales of our
    products will suffer, we may not increase our market share, and
    our revenues and profitability will suffer.

The commercial success of some of our products is
dependent, in part, on whether third-party reimbursement is
available for the use of our products by hospitals, clinics,
doctors and patients. Third-party payors include state and
federal governments, under programs such as Medicaid and other
entitlement programs, managed care organizations, private
insurance plans and health maintenance organizations. Because of
the growing size of the patient population covered by managed
care organizations, it is important to our business that we
market our products to them and to the pharmacy benefit managers
that serve many of these organizations. Payment or reimbursement
of only a portion of the cost of our prescription products could
make our products less attractive, from a net-cost perspective,
to patients, suppliers and prescribing physicians. Managed care
organizations and other third-party payors try to negotiate the
pricing of products to control their costs. Managed care
organizations and pharmacy benefit managers typically develop
formularies to reduce their cost for medications. Formularies
can be based on the prices and therapeutic benefits of the
available products. Due to their lower costs, generics are often
favored. The breadth of the products covered by formularies
varies considerably from one managed care organization to
another, and many formularies include alternative and
competitive products or therapies for treatment of particular
medical conditions. Exclusion of a product from a formulary can
lead to its sharply reduced usage in the managed care
organization patient population. If our products are not
included within an adequate number of formularies or adequate
reimbursement levels are not provided, or if those policies
increasingly favor generic products, our market share and gross
margins could be negatively affected, as could our overall
business and financial condition.

We have expanded our contracts with managed care
organizations in an effort to increase the inclusion of our
products on formularies. To the extent that our products are
purchased by patients through a managed care group with which we
have a contract, our average selling price is lower than it
would be for a non-contracted managed care group. We take
reserves for the estimated amounts of rebates we will pay to
managed care organizations each quarter. Any increased usage of
our products through Medicaid or managed care programs will
increase the amount of rebates that we owe. We cannot assure you
that our products will be included on the formulary lists of
managed care organizations or that adverse reimbursement issues
will not have a material effect on our financial condition,
results of operations or cash flows.



| |                                                                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.

As discussed in this Risk Factors
section under the heading Investigations by the SEC and
Office of Inspector General at the Department of Health and
Human Services, other possible governmental investigations, and
securities and ERISA litigation could have a material adverse
effect on our business, in the section entitled
Managements Discussion and Analysis of Financial
Condition and Results of Operations under the heading
Governmental Investigations, Medicaid Accrual Adjustment
and Related

40



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Matters, and elsewhere in this report in
connection with our Audit Committees assessment and
internal review of issues raised by the SEC investigation, we
estimated that we had underpaid amounts due under Medicaid and
other governmental pricing programs, and recorded an adjustment
of $46.5 million to net sales and accrued expenses in the
fourth quarter of 2002. This amount represented our best
estimate as of July 2003 of the extent to which we had underpaid
amounts due under Medicaid and other governmental pricing
programs during the period from 1998 to 2002. Since that time,
our outside consultants have undertaken a comprehensive audit to
determine the actual amount of underpayments under Medicaid
during the period from 1998 to 2002. As a result of that
recently completed audit, we have determined that our accrual
for estimated amounts due under Medicaid and other governmental
pricing programs through December 31, 2002, should be
increased by $18.0 million. In addition, based on the
results of the comprehensive audit for the period from 1998
through 2002, we estimate that we underpaid amounts due Medicaid
by $0.9 million during the period from 1994 through 1997.
We are currently in the process of conducting detailed audits of
our compliance with the requirements of several other
governmental pricing programs and there could be further
adjustments to our accruals. Pending determination of the
precise amount of our obligations, we have placed a total of
$65.5 million in an interest-bearing escrow account from
which the requisite payments will be made.


Although the amounts described above constitute
our best estimate of amounts owed in respect of Medicaid and
other governmental pricing programs, our calculations are
subject to review and challenge by the applicable governmental
agencies. In connection with the pending governmental
investigations, we have continued to engage in discussions with
representatives of the Office of Inspector General of the
Department of Health and Human Services, the Department of
Justice, the Department of Veterans Affairs, the Centers for
Medicare and Medicaid Services, and the Public Health Service.
We expect that these discussions will include a detailed review
of our calculations by the appropriate agencies, and it is
possible that this review could result in material changes. In
addition, these agencies and other governmental agencies that
might be investigating or might commence an investigation of
King could impose, based on a claim of violation of fraud and
false claims laws or otherwise, civil and/or criminal sanctions,
including fines, penalties and possible exclusion from federal
health care programs (including Medicaid and Medicare). Some of
these laws may impose liability even in the absence of specific
intent to defraud. We cannot predict or reasonably estimate the
likelihood or magnitude of any such sanctions at this time.

We have implemented a new information technology
system that is intended to significantly enhance the accuracy of
our calculations for estimating amounts due under Medicaid and
other governmental pricing programs; however, our processes for
these calculations and the judgments involved in making these
calculations will continue to involve subjective decisions and
manual input, and, as a result, these calculations will remain
subject to the risk of errors.



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

Under government regulations, chlorofluorocarbon
compounds are being phased out because of environmental
concerns. Our products Intal® and Tilade® currently
use these compounds as propellants. The FDA has issued an
approvable letter with respect to the NDA covering a new inhaler
for Intal® using the alternative propellant
hydrofluoroalkane, or HFA. The approvable letter
provides that final approval of the NDA for Intal® HFA is
subject to addressing certain FDA comments solely pertaining to
the chemical, manufacturing, and controls section of the NDA
covering the product. In the event we cannot also obtain final
approval for alternative propellants for Intal® and
Tilade® before the final phase-out date of
chlorofluorocarbon compounds or if we are unable to maintain an
adequate supply of chlorofluorocarbon compounds for the
production of this product prior to this date, our ability to
market this product could be materially adversely affected,
which could have a material adverse effect on our business,
financial condition, results of operations and cash flows.

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| |                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------
| | If the operations of our centralized
    distribution facility were interrupted, our business could be
    harmed.

For efficiency purposes, we rely on one
centralized distribution facility in Bristol, Tennessee. An
interruption in this operation could have a material adverse
effect on our business, financial conditions, results of
operations and cash flows.



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

We are highly dependent on the principal members
of our management staff, the loss of whose services might impede
the achievement of our strategic objectives. We cannot assure
you that we will be able to attract and retain key personnel in
sufficient numbers, with the requisite skills or on acceptable
terms necessary or advisable to support our continued growth and
integration. The loss of the services of key personnel could
have a material adverse effect on us, especially in light of our
recent growth. We do not maintain key-person life insurance on
any of our employees. In addition, we do not have employment
agreements with any of our key employees.

On February 19, 2004, Jefferson J. Gregory
announced his plan to retire as our Chief Executive Officer. Our
Board of Directors has begun a search for a new Chief Executive
Officer and Mr. Gregory intends to continue to serve in
this capacity until a successor is appointed.



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

We have a shareholder rights plan that may have
the effect of discouraging unsolicited takeover proposals. The
rights issued under the shareholder rights plan would cause
substantial dilution to a person or group which attempts to
acquire us on terms not approved in advance by our Board of
Directors. In addition, our charter and bylaws contain
provisions that may discourage unsolicited takeover proposals
that shareholders may consider to be in their best interests.
These provisions include:



| |   |                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------
| |  | 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.                                

We are also subject to anti-takeover provisions
under Tennessee laws, each of which could delay or prevent a
change of control. Together these provisions and the rights plan
may discourage transactions that otherwise could involve payment
of a premium over prevailing market prices for common stock.



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

The trading price of our common stock is likely
to be volatile. The stock market in general and the market for
emerging growth companies, such as King in particular, have
experienced extreme volatility. Many factors contribute to this
volatility, including



| |   |                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------
| |  | variations in our results of operations;                                                                                               
|
| |  | perceived risks and uncertainties concerning our
    business;                                                                         
|
| |  | announcements of earnings;                                                                                                             
|
| |  | developments in the governmental investigations
    or securities and ERISA litigation;                                                
|
| |  | failure to meet or exceed our own specific
    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;

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| |   |                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------
| |  | 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.                                          

This volatility may have a significant impact on
the market price of our common stock. Moreover, the possibility
exists that the stock market (and in particular the securities
of emerging growth companies such as King) could experience
extreme price and volume fluctuations unrelated to operating
performance. The volatility of our common stock imposes a
greater risk of capital losses on our shareholders than would a
less volatile stock. In addition, such volatility makes it
difficult to ascribe a stable valuation to a shareholders
holdings of our common stock.

Risks Related to Our Industry



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

Virtually all aspects of our activities are
regulated by federal and state statutes and government agencies.
The manufacturing, processing, formulation, packaging, labeling,
distribution and advertising of our products, and disposal of
waste products arising from these activities, are subject to
regulation by one or more federal agencies, including the FDA,
the DEA, the Federal Trade Commission, the Consumer Product
Safety Commission, the U.S. Department of Agriculture, the
Occupational Safety and Health Administration, and the EPA, as
well as by foreign governments in countries where we distribute
some of our products.

Noncompliance with applicable FDA policies or
requirements could subject us to enforcement actions, such as
suspensions of manufacturing or distribution, seizure of
products, product recalls, fines, criminal penalties,
injunctions, failure to approve pending drug product
applications or withdrawal of product marketing approvals.
Similar civil or criminal penalties could be imposed by other
government agencies, such as the DEA, the EPA or various
agencies of the states and localities in which our products are
manufactured, sold or distributed, and could have ramifications
for our contracts with government agencies such as the
Veterans Administration or the Department of Defense.
These enforcement actions could have a material adverse effect
on our business, financial condition, results of operations and
cash flows.

All manufacturers of human pharmaceutical
products are subject to regulation by the FDA under the
authority of the FDC Act or the PHS Act or both. New drugs, as
defined in the FDC Act, and new human biological drugs, as
defined in the PHS Act, must be the subject of an FDA-approved
new drug or biologic license application before they may be
marketed in the United States. Some prescription and other drugs
are not the subject of an approved marketing application but,
rather, are marketed subject to the FDAs regulatory
discretion and/or enforcement policies. Any change in the
FDAs enforcement discretion and/or policies could have a
material adverse effect on our business, financial condition,
results of operations and cash flows.

We manufacture some pharmaceutical products
containing controlled substances and, therefore, are also
subject to statutes and regulations enforced by the DEA and
similar state agencies which impose security, record keeping,
reporting and personnel requirements on us. Additionally, we
manufacture biological drug products for human use and are
subject to regulatory burdens as a result of these aspects of

43



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our business. There are additional FDA and other
regulatory policies and requirements covering issues such as
advertising, commercially distributing, selling, sampling and
reporting adverse events associated with our products with which
we must continuously comply. Noncompliance with any of these
policies or requirements could result in enforcement actions
which could have a material adverse effect on our business,
financial condition, results of operations and cash flows.


The FDA has the authority and discretion to
withdraw existing marketing approvals and to review the
regulatory status of marketed products at any time. For example,
the FDA may require an approved marketing application for any
drug product marketed if new information reveals questions about
a drugs safety or efficacy. All drugs must be manufactured
in conformity with cGMPs, and drug products subject to an
approved application must be manufactured, processed, packaged,
held and labeled in accordance with information contained in the
approved application.

While we believe that all of our currently
marketed pharmaceutical products comply with FDA enforcement
policies, have approval pending or have received the requisite
agency approvals, our marketing is subject to challenge by the
FDA at any time. Through various enforcement mechanisms, the FDA
can ensure that noncomplying drugs are no longer marketed and
that advertising and marketing materials and campaigns are in
compliance with FDA regulations. In addition, modifications,
enhancements, or changes in manufacturing sites of approved
products are in many circumstances subject to additional FDA
approvals which may or may not be received and which may be
subject to a lengthy FDA review process. Our manufacturing
facilities and those of our third-party manufacturers are
continually subject to inspection by governmental agencies.
Manufacturing operations could be interrupted or halted in any
of those facilities if a government or regulatory authority is
unsatisfied with the results of an inspection. Any interruptions
of this type could have a material adverse effect on our
business, financial condition, results of operations and cash
flows.

We cannot determine what effect changes in
regulations, enforcement positions, statutes or legal
interpretation, when and if promulgated, adopted or enacted, may
have on our business in the future. Changes could, among other
things, require changes to manufacturing methods or facilities,
expanded or different labeling, new approvals, the recall,
replacement or discontinuance of certain products, additional
record keeping and expanded documentation of the properties of
certain products and scientific substantiation. These changes,
or new legislation, could have a material adverse effect on our
business, financial condition, results of operations and cash
flows.



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

We face an inherent business risk of exposure to
product liability claims in the event that the use of our
technologies or products are alleged to have resulted in adverse
effects. These risks will exist for those products in clinical
development and with respect to those products that receive
regulatory approval for commercial sale. While we have taken,
and will continue to take, what we believe are appropriate
precautions, we may not be able to avoid significant product
liability exposure. We currently have product liability
insurance in the amount of $80.0 million for aggregate annual
claims including a $20.0 million self-insured retention;
however, we cannot assure you that the level or breadth of any
insurance coverage will be sufficient to cover fully all
potential claims. Also, adequate insurance coverage might not be
available in the future at acceptable costs, if at all. For
example, we are not able to obtain product liability insurance
with respect to our products Prefest®, Menest®,
Delestrogen®, Pitocin® and Nordette®, each a
womens healthcare product. With respect to any product
liability claims relating to these products, we would be
responsible for any monetary damages awarded by any court or any
voluntary monetary settlements. Significant judgments against us
for product liability for which we have no insurance could have
a material adverse effect on our business, financial condition,
results of operations and cash flows.

Product recalls or product field alerts may be
issued at our discretion or at the discretion of the FDA, other
government agencies or other companies having regulatory
authority for pharmaceutical product sales. From time to time,
we may recall products for various reasons, including failure of
our products to maintain their stability through their
expiration dates. Any recall or product field alert has the
potential of

44



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##### 



damaging the reputation of the product. To date,
these recalls have not been significant and have not had a
material adverse effect on our business, financial condition,
results of operations and cash flows. However, we cannot assure
you that the number and significance of recalls will not
increase in the future. Any significant recalls could materially
affect our sales, the prescription trends for the products and
damage the reputation of the products. In these cases, our
business, financial condition, results of operations and cash
flows could be materially adversely affected.


Product returns were approximately 4.3% of gross
sales for the year ended December 31, 2003. In the event
demand for our products declines or if wholesalers decide to
carry less inventory, we cannot assure you that actual levels of
returns will not increase or significantly exceed the amounts we
have anticipated.



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

Commercial success in producing, marketing and
selling of branded prescription pharmaceutical products depends,
in part, on the availability of adequate reimbursement from
third-party health care payors, such as government and private
health insurers and managed care organizations. Third-party
payors are increasingly challenging the pricing of medical
products and services. For example, many managed health care
organizations limit the pharmaceutical products that are on
their formulary lists. The resulting competition among
pharmaceutical companies to place their products on these
formulary lists has reduced prices across the industry. In
addition, many managed care organizations are considering
formulary contracts primarily with those pharmaceutical
companies that can offer a full line of products for a given
therapy sector or disease state. We cannot assure you that our
products will be included on the formulary lists of managed care
organizations or that downward pricing pressures in the industry
generally will not negatively impact our operations.



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

We are subject to various federal and state laws
pertaining to health care fraud and abuse, including
anti-kickback laws and false claims laws. Anti-kickback laws
make it illegal for a prescription drug manufacturer to solicit,
offer, receive, or pay any remuneration in exchange for, or to
include, the referral of business, including the purchase or
prescription of a particular drug. The federal government has
published regulations that identify safe harbors or
exemptions for certain payment arrangements that do not violate
the anti-kickback statutes. We seek to comply with the safe
harbors. Due to the breadth of the statutory provisions and the
absence of guidance in the form of regulations or court
decisions addressing some of our practices, it is possible that
our practices might be challenged under anti-kickback or similar
laws. False claims laws prohibit anyone from knowingly (in the
civil context), or knowingly and willfully (in the criminal
context), presenting, or causing to be presented for payment to
third-party payors (including Medicaid and Medicare) claims for
reimbursed drugs or services that are false or fraudulent,
claims for items or services not provided as claimed, or claims
for medically unnecessary items or services. Our activities
relating to the sale and marketing of our products are currently
a subject of the Office of Inspector Generals
investigation, and as such they are likely to be subject to
scrutiny under these laws. As discussed in this Risk
Factors section under the heading The investigations
by the SEC and Office of Inspector General of the Department of
Health and Human Services, other possible governmental
investigations, and securities and ERISA litigation could have a
material adverse effect on our business and elsewhere in
this report, we are in the process of quantifying and reporting
to governmental agencies our underpayment of amounts due under
Medicaid and other governmental pricing programs.

Violations of fraud and abuse laws may be
punishable by civil and/or criminal sanctions, including fines
and civil monetary penalties, as well as the possibility of
exclusion from federal health care programs (including Medicaid
and Medicare). Any such violations could have a material adverse
effect on our business, financial condition, results of
operations and cash flows.

45



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

From time to time studies or clinical trials on
various aspects of pharmaceutical products are conducted by
academics or others, including government agencies, the results
of which, when published, may have dramatic effects on the
markets for the pharmaceutical products that are the subject of
the study. The publication of negative results of studies or
clinical trials related to our products or the therapeutic areas
in which our products compete could adversely affect our sales,
the prescription trends for our products and the reputation of
our products. One example of these types of studies is the
Womens Health Initiative, which we discuss more fully in
this Risk Factors section under the heading of
Sales of certain of our womens health products have
been and may continue to be negatively affected by the
perception of an increase in certain health risks associated
with the use of combination hormone therapies and oral estrogen
therapies. In the event of the publication of negative
results of studies or clinical trials related to our branded
pharmaceutical products or the therapeutic areas in which our
products compete, our business, financial condition, results of
operations and cash flows could be materially adversely affected.



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

A number of legislative and regulatory proposals
aimed at changing the health care system, including the cost of
prescription products, importation and reimportation of
prescription products from countries outside the United States
and changes in the levels at which pharmaceutical companies are
reimbursed for sales of their products, have been proposed.
While we cannot predict when or whether any of these proposals
will be adopted or the effect these proposals may have on our
business, the pending nature of these proposals, as well as the
adoption of any proposal, may exacerbate industry-wide pricing
pressures and could have a material adverse effect on our
business, financial condition, results of operations and cash
flows. For example, in 2000, Congress directed the FDA to adopt
regulations allowing the reimportation of approved drugs
originally manufactured in the United States back into the
United States from other countries where the drugs were sold at
a lower price. Although the Secretary of Health and Human
Services has refused to implement this directive, in July 2003
the House of Representatives passed a similar bill that does not
require the Secretary of Health and Human Services to act. The
reimportation bills have not yet resulted in any new laws or
regulations; however, these and other initiatives could decrease
the price we receive for our products. Additionally sales of our
products in the United States could be adversely affected by the
importation of products that some may deem to be equivalent to
ours that are manufactured by others and are available outside
the United States.

Changes in the Medicare, Medicaid or similar
governmental programs or the amounts paid by those programs for
our services may adversely affect our earnings. These programs
are highly regulated and subject to frequent and substantial
changes and cost containment measures. In recent years, changes
in these programs have limited and reduced reimbursement to
providers. The Medicare Prescription Drug, Improvement and
Modernization Act of 2003,creates a new, voluntary
prescription drug benefit under the Social Security Act, which
we refer to as Medicare Drug Benefit. Beginning in
2006, Medicare beneficiaries entitled to Part A or enrolled
in Part B, as well as certain other Medicare enrollees,
will be eligible for the Medicare Drug Benefit. Regulations
implementing the Medicare Drug Benefit have not yet been
published, and the Medicare Drug Act requires that the Federal
Trade Commission conduct a study and make recommendations
regarding additional legislation that may be needed concerning
the Medicare Drug Benefit. We are unable at this time to predict
or estimate the financial impact of this new legislation.

Recently enacted and proposed changes in the laws
and regulations affecting public companies, including the
provisions of the Sarbanes-Oxley Act of 2002 and related rules,
will cause us to incur increased costs as we evaluate the
implications of new rules and respond to new requirements.
Failure to comply with the new rules and regulations could
result in enforcement actions or assessment of other penalties.
The new laws and regulations could make it more difficult for us
to obtain certain types of insurance, including directors and
officers liability insurance, and we may be forced to accept
reduced policy limits and coverage or incur substantially higher
costs to obtain the same or similar coverage. The

46



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##### 



impact of these events could also make it more
difficult for us to attract and retain qualified persons to
serve on our board of directors, or as executive officers. We
may be required to hire additional personnel and utilize
additional outside legal, accounting and advisory services, all
of which could cause our general and administrative costs to
increase beyond what we currently have planned. We are presently
evaluating and monitoring developments with respect to these
rules, and we cannot predict or estimate the amount of the
additional costs we may incur or the timing of such costs.




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

In the industry, comparatively smaller
pharmaceutical companies like us compete with large, global
pharmaceutical companies with substantially greater financial
resources for the acquisition of products in development,
currently marketed products, technologies and companies. We
cannot assure you that



| |   |                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.

We also compete with pharmaceutical companies in
marketing and selling pharmaceutical products. The selling
prices of pharmaceutical products typically decline as
competition increases. Further, other products now in use,
developed or acquired by other pharmaceutical companies may be
more effective or offered at lower prices than our current or
future products. Competitors may also be able to complete the
regulatory process sooner and, therefore, may begin to market
their products in advance of ours. We believe that competition
for sales of our products will be based primarily on product
efficacy, safety, reliability, availability and price.

Competition for
Acquisitions.We compete with other
pharmaceutical companies for product and product line
acquisitions. These competitors include Biovail Corporation,
Forest Laboratories, Inc., Galen Holdings plc, Medicis
Pharmaceutical Corporation, Shire Pharmaceuticals Group plc,
Watson Pharmaceuticals, Inc., and other companies which also
acquire branded pharmaceutical products and product lines,
including those in development, from other pharmaceutical
companies. We cannot assure you that



| |   |                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.

Product Competition.Additionally, since our currently marketed products are
generally established and commonly sold, they are subject to
competition from products with similar qualities.

Our largest product Altace® competes in the
market with other cardiovascular therapies, including in
particular, the following ACE inhibitors or any generic
equivalents:



| |   |                               
| | - | ------------------------------
| |  | Zestril® (AstraZeneca plc),   
|
| |  | Acupril® (Pfizer, Inc.),      
|
| |  | Prinivil® (Merck & Co., Inc.),
|
| |  | Lotensin® (Novartis AG),      

47



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##### 





| |   |                                             
| | - | --------------------------------------------
| |  | Monopril® (Bristol-Myers Squibb Company),   
|
| |  | Vasotec® (Biovail Corporation),             
|
| |  | Capoten® (Bristol-Myers Squibb Company), and
|
| |  | Mavik® (Abbott Laboratories).               

Our product Levoxyl® competes with
levothyroxine sodium products, including in particular the
following and any generic equivalents:



| |   |                                                       
| | - | ------------------------------------------------------
| |  | Synthroid® (Abbott Laboratories),                     
|
| |  | Levothroid® (Forest Laboratories, Inc.), and          
|
| |  | Unithroid® (Jerome Stevens Pharmaceuticals,
    Inc.).

Our product Skelaxin® competes in the market
with other muscle relaxants including in particular the
following and any generic equivalents:



| |   |                               
| | - | ------------------------------
| |  | Flexeril® (Johnson & Johnson),
|
| |  | Soma® (Medpointe),            
|
| |  | Robaxin® (Schwarz Pharma), and
|
| |  | Norflex® (3M Pharmaceuticals).

Our product Sonata® competes with other
insomnia treatments, including in particular Ambien®, a
product of Sanofi-Synthelabo Inc., and Estorra®, a product
of Sepracor Inc.

We intend to market these products aggressively
by, among other things



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

Many of our branded pharmaceutical products have
either a strong market niche or competitive position. Some of
our branded pharmaceutical products face competition from
generic substitutes. For example, the FDA-approved for sale
generic substitutes for Florinef® in March 2002 and in
January 2003 and for Cortisporin® ophthalmic suspension in
April 2003. During the second half of 2004, we anticipate the
market entry of generic substitutes for Adenocard®, a
product for which we receive royalty revenues on its net sales.

The manufacturers of generic products typically
do not bear the related research and development costs and,
consequently, are able to offer such products at considerably
lower prices than the branded equivalents. There are, however, a
number of factors which enable products to remain profitable
once patent protection has ceased. For a manufacturer to launch
a generic substitute, it must prove to the FDA when filing an
application to make a generic substitute that the branded
pharmaceutical and the generic substitute have bioequivalence.
We believe it typically takes two or three years to prove
bioequivalence and receive FDA approval for many generic
substitutes. By focusing our efforts in part on patented
products, products with challenging bioequivalence or complex
manufacturing requirements and products with a strong brand
image with the prescriber or the consumer, supported by the
development of a broader range of alternative product
formulations or dosage forms, we are better able to maintain
market share, gross margins and cash flows. However, we cannot
assure you that any of our products will remain exclusive
without generic competition, or maintain their market share,
gross margins and cash flows as a result of these efforts, the
failure of which could have a material adverse effect on our
business, financial condition, results of operations and cash
flows.

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A Warning About Forward-Looking
Statements

This report includes forward-looking statements
within the meaning of the Private Securities Litigation Reform
Act of 1995. These statements relate to analyses and other
information which are based on forecasts of future results and
estimates of amounts not yet determinable. These statements also
relate to our future prospects, developments and business
strategies.

These forward-looking statements are identified
by their use of terms and phrases, such as
anticipate, believe, could,
estimate, expect, intend,
may, plan, predict,
project, will and other similar terms
and phrases, including references to assumptions. These
statements are contained in the Business, Risk
Factors, and Managements Discussion and
Analysis of Financial Condition and Results of Operations
sections, as well as other sections of this report.

Forward-looking statements in this report
include, but are not limited to:



| |   |                                                                                                                                                                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the future potential of, including anticipated
    net sales and prescription trends for our branded pharmaceutical
    products, particularly Altace®, Skelaxin®,
    Levoxyl®, Thrombin-JMI® and Sonata®;                                                                                                                                                          
|
| |  | expectations regarding the enforceability and
    effectiveness of product-related patents, including in
    particular patents related to Altace®, Levoxyl®,
    Skelaxin® and Prefest®;                                                                                                                                                                            
|
| |  | expected trends and projections with respect to
    particular products, reportable segment and income and expense
    line items;                                                                                                                                                                                                                                   
|
| |  | the adequacy of our liquidity and capital
    resources;                                                                                                                                                                                                                                                                                                             
|
| |  | anticipated capital expenditures;                                                                                                                                                                                                                                                                                                                                    
|
| |  | the development and potential commercialization
    of EstrasorbTM, AndrosorbTM and other
    products by Novavax and King;                                                                                                                                                                                                                                          
|
| |  | the development and approval of binodenoson, our
    next generation cardiac pharmacologic stress-imaging agent;
    T-62, an investigational drug for the treatment of neuropathic
    pain; MRE0094, an investigational drug for the topical treatment
    of chronic diabetic foot ulcers; pre-clinical programs; and
    product life-cycle development projects;
|
| |  | the development of a modified-release
    Altace®;                                                                                                                                                                                                                                                                                                                   
|
| |  | the development of a modified-release
    Sonata®;                                                                                                                                                                                                                                                                                                                   
|
| |  | the development and approval of a diazepam-filled
    auto-injector, and new inhaler for Intal® and Tilade®
    using the alternative propellant HFA;                                                                                                                                                                                                                
|
| |  | our continued 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;                                                                                  

49



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##### 





| |   |                                                                                                                                                                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the products which we expect to offer;                                                                                                                                                                                                                                                                                                                     
|
| |  | 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 potential patent approvals
    including those patents pending for Levoxyl® and
    Tigan® 300mg capsules and the protections to be provided by
    these patents if issued;                                                                                                                                                        
|
| |  | expectations regarding the outcome of various
    pending legal proceedings including the Altace®,
    Levoxyl®, Skelaxin® and Prefest® patent
    challenges, the SEC and Office of Inspector General
    investigations, other possible governmental investigations,
    securities litigation, and other legal proceedings described in
    this report;
|
| |  | the ongoing implementation of our new information
    technology system; and                                                                                                                                                                                                                                                                               
|
| |  | expectations regarding our financial condition
    and liquidity as well as future cash flows and earnings.                                                                                                                                                                                                                                                

These forward-looking statements involve known
and unknown risks, uncertainties and other factors that may
cause actual results to be materially different from those
contemplated by our forward-looking statements. These known and
unknown risks, uncertainties and other factors are described in
detail in the Risk Factors section and in other
sections of this annual report.

Item 2.Properties

The location and business segments served by our
primary facilities are as follows:

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

We own each of these primary facilities, with the
exception of that portion of the facilities in St. Louis,
Missouri that is associated with our acquisition of Meridian,
which is leased. For information regarding production capacity
and extent of utilization, please see Item 1,
Manufacturing, on page 14.

The Bristol, Rochester, and St. Louis owned
facilities are pledged as collateral for our senior secured
revolving credit facility dated April 23, 2002.

Our corporate headquarters and centralized
distribution center are located in Bristol, Tennessee. We
consider our properties to be generally in good condition, well
maintained, and generally suitable and adequate to carry on our
business.

Item 3.Legal
Proceedings

SEC
Investigation and Securities Litigation

As previously reported, in March 2003 the SEC
initiated a formal investigation of King. We received SEC
subpoenas relating to, among other topics, sales of our products
to VitaRx and Prison Health Services, our best price
lists, the pricing of our pharmaceutical products provided to
governmental Medicaid agencies, the accrual and payment of
rebates on the product Altace®, the products Fluogen®
and Lorabid®, the King Benevolent Fund, Inc., our
calculations related to Medicaid rebates, and the Audit
Committees internal review of issues raised by the SEC
investigation. As also previously reported, on

50



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##### 



November 13, 2003, we received a subpoena
duces tecum from the Office of Inspector General at the
Department of Health and Human Services requesting the
production of documents relating to some of the matters being
investigated by the SEC and to our sales, marketing and other
business practices for Altace®, Aplisol® and
Levoxyl®.


In connection with our determination that we have
underpaid amounts due to Medicaid and other governmental pricing
programs, we have continued to engage in discussions with
representatives of the Office of Inspector General of the
Department of Health and Human Services, the Department of
Justice, the Department of Veterans Affairs, the Centers for
Medicare and Medicaid Services, and the Public Health Service.
We expect that these discussions will include a detailed review
by the appropriate agencies of our calculations of our
underpayments, and it is possible that this review could result
in material changes. The SEC, the Office of Inspector General,
the Department of Justice, the Department of Veterans Affairs,
the Public Health Service, the Centers for Medicare and Medicaid
Services and other governmental agencies that might be
investigating or might commence an investigation of us could
impose, based on a claim of a violation of fraud and false
claims laws or otherwise, civil and/or criminal sanctions,
including fines, penalties and possible exclusion from federal
health care programs (including Medicaid and Medicare). Some of
these laws may impose liability even in the absence of specific
intent to defraud. We cannot predict or reasonably estimate the
likelihood or magnitude of any such sanctions at this time. For
additional information, please see the section entitled
Risk Factors under the heading 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 and the section entitled
Managements Discussion and Analysis of Financial
Condition and Results of Operations under the heading
Governmental Investigations, Medicaid Accrual Adjustment,
and Related Matters.

Subsequent to the announcement of the SEC
investigation described above, beginning in March 2003, 22
purported class action complaints were filed by holders of our
securities against us, our directors, a former director of the
subsidiary, executive officers, former executive officers, a
subsidiary, and a former directors in the United States
District Court for the Eastern District of Tennessee, alleging
violations of the Securities Act of 1933 and/or the Securities
Exchange Act of 1934. These 22 complaints have been consolidated
in the United States District Court for the Eastern District of
Tennessee. In addition, holders of our securities filed two
class action complaints alleging violations of the Securities
Act of 1933 in Tennessee state court. We removed these two cases
to the United States District Court for the Eastern District of
Tennessee, where these two cases were consolidated with the
other class actions. Plaintiffs in these actions unsuccessfully
moved to remand these two cases back to Tennessee state court.
These two actions therefore remain part of the consolidated
action. The district court has appointed lead plaintiffs in the
consolidated action, and those lead plaintiffs filed a
consolidated amended complaint on October 21, 2003 alleging
that we, through some of our executive officers, former
executive officers, directors and former directors, made false
or misleading statements concerning our business, financial
condition and results of operations during periods beginning
February 16, 1999 and continuing until March 10, 2003.
Plaintiffs in the consolidated action have also named the
underwriters of our November 2001 public offering as defendants.
We and other defendants have filed motions to dismiss the
consolidated amended complaint, and those motions are currently
pending.

Seven purported shareholder derivative complaints
have also been filed in federal and state courts in Tennessee
alleging a breach of fiduciary duty, among other things, by some
of our officers and directors. The derivative cases in state
court were consolidated and are currently stayed. The stay will
remain in place at least until the motions to dismiss the
consolidated federal class securities action are decided. The
derivative cases in federal court are stayed until there is a
decision on the merits in the state court derivative suits.
Additionally, a class action complaint was filed in the United
States District Court for the Eastern District of Tennessee
under the Employee Retirement Income Security Act, which we
refer to as ERISA. As amended, the complaint alleges that we and
certain of our executive officers, former executive officers,
directors, former directors and an employee violated fiduciary
duties that were allegedly owed our 401(k) Retirement Savings
Plans participants and beneficiaries under ERISA. The
allegations underlying

51



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##### 



each of these additional lawsuits are similar in
many respects to those in the class action litigation described
above. We filed a motion to dismiss the ERISA action on
March 5, 2004; this motion to dismiss is currently pending.


We intend to defend all of these lawsuits
vigorously but are unable currently to predict the outcome or
reasonably estimate the range of potential loss, if any.

If any governmental sanctions are imposed, or if
we were not to prevail in the pending litigation, neither of
which we can predict or reasonably estimate at this time, our
business, financial condition, results of operations and cash
flows could be materially adversely affected. Responding to the
governmental investigations, resolving the amounts owed to
governmental agencies in connection with the underpayments and
defending us in the pending litigation has resulted, and is
expected to continue to result, in a significant diversion of
managements attention and resources and an increase in
professional fees.

Altace®
Patent Challenge

Cobalt has filed an ANDA with the FDA seeking
permission to market a generic version of Altace®. The
following U.S. patents are listed for Altace® in the
FDAs Orange Book: United States Patent
Nos. 4,587,258, the 258 patent, and 5,061,722,
the 722 patent, two composition of matter patents
related to Altace®, and United States Patent
No. 5,403,856, the 856 patent, a method-of-use patent
related to Altace®, with expiration dates of January 2005,
October 2008, and April 2012, respectively. Under the
Hatch-Waxman Act, any generic manufacturer may file an ANDA with
a Paragraph IV certification, challenging the validity or
infringement of a patent listed in the FDAs Orange Book
four years after the pioneer company obtains approval of its
NDA. Cobalt has filed a Paragraph IV certification alleging
invalidity of the 722 patent, and we filed suit on
March 14, 2003 to enforce our rights under that patent.
Pursuant to the Hatch-Waxman Act, the filing of that suit
provides us an automatic stay of FDA approval of Cobalts
ANDA for 30 months from no earlier than February 5,
2003. Should the court find in favor of a Cobalt summary
judgment motion on the 722 patent, however, we would
not receive the full benefit of that 30 month stay.
Subsequent to filing our original complaint, we amended our
complaint to add an allegation of infringement of the 856
patent. In its answer to the amended complaint, Cobalt denied
infringement and alleged that the 856 patent is invalid.
Pursuant to FDA regulations, however, Cobalt is not required to
certify against the 856 patent. We intend to
vigorously enforce our rights under the 722 and
856 patents. Regardless of the outcome of the lawsuit
involving the 722 and 856 patents, however, Cobalt
has not challenged the validity of the 258 patent and,
therefore, cannot market a generic version of Altace® prior
to the expiration of that patent in January 2005.

Levoxyl®
Patent Challenge

Mylan and KV have each filed an ANDA with the FDA
seeking permission to market a generic version of Levoxyl®.
United States Patent No. 6,555,581, the
581 patent, a utility patent with formulation claims
relating to Levoxyl®, was issued to us on April 29,
2003. The 581 patent is listed in the FDAs
Orange Book and does not expire until February 15, 2022. No
earlier than April 30, 2003, we received notice of
Mylans Paragraph IV certification, which alleges
noninfringement of the 581 patent. We filed suit
against Mylan on June 13, 2003 in the Eastern District of
Pennsylvania and on June 16, 2003 in the Northern District
of West Virginia; these suits have been consolidated in the
Northern District of West Virginia and trial is currently
scheduled for June 2005. Pursuant to the Hatch-Waxman Act, the
filing of the suits against Mylan provides us with an automatic
stay of FDA approval of Mylans ANDA for 30 months
from no earlier than April 30, 2003. On June 24, 2003,
we received notice of KVs Paragraph IV certification,
which alleges noninfringement and invalidity of the
581 patent. We filed suit against KV on
August 7, 2003. Pursuant to the Hatch-Waxman Act, the
filing of the suit against KV provides us with an automatic stay
of FDA approval of KVs ANDA for 30 months from no
earlier than June 24, 2003 and trial is currently scheduled
to begin on December 6, 2004. We intend to vigorously
enforce our rights under the 581 patent to the full
extent of the law. If we are unsuccessful in enforcing our
patent, our business, financial condition, results of operations
and cash flows could be materially adversely affected.

52



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##### 



Skelaxin®
Patent Challenge

Eon Labs, CorePharma and Mutual have each filed
an ANDA with the FDA seeking permission to market a generic
version of Skelaxin® 400 mg tablets. United States
Patent Nos. 6,407,128, the 128 patent, and 6,683,102,
the 102 patent, two method-of-use patents relating to
Skelaxin®, are listed in the FDAs Orange Book and do
not expire until December 3, 2021. Eon Labs and CorePharma
have each filed Paragraph IV certifications alleging
noninfringement and invalidity of the 128 and
102 patents. Mutual has filed a Paragraph IV
certification alleging noninfringement and invalidity of the
102 patent. We filed separate suits against Eon Labs on
January 2, 2003 and CorePharma on March 7, 2003 and
are currently assessing our right to bring suit against Mutual.
Pursuant to the Hatch-Waxman Act, the filing of the suits
against Core and Eon provides us with an automatic stay of FDA
approval of Eons ANDA for 30 months from no earlier
than November 18, 2002 and an automatic stay of FDA
approval of Cores ANDA for 30 months from no earlier
than January 24, 2003. We intend to vigorously enforce our
rights under the 128 and 102 patents to the
full extent of the law. If we are unsuccessful in enforcing this
patent, our business, financial condition, results of operations
and cash flows could be materially adversely affected.

On March 9, 2004, we received a copy of a
letter from the FDA to all ANDA applicants for Skelaxin®
stating that the use listed in the FDAs Orange Book for
the 128 patent may be deleted from the ANDA
applicants product labeling. We believe that this decision
is arbitrary, capricious, and inconsistent with the FDAs
previous position on this issue. We are currently assessing our
administrative and legal options and may request the FDA to
reinstate its previous policy on this issue and reject any ANDAs
that delete such use from their product labeling. If we are
unable to persuade the FDA to reinstate its previous policy,
however, there is a substantial likelihood that a generic
version of Skelaxin® will enter the market, and our
business, financial condition, results of operations and cash
flows could be materially adversely affected.

Prefest®Patent Challenge

Barr has filed an ANDA, which included a
Paragraph IV certification, with the FDA seeking permission
to market a generic version of Prefest®. United States
Patent No. 5,108,995, (the 995 patent, a utility
patent with method of treatment claims relating to
Prefest®, and United States Patent No. 5,382,573, the
573 patent, a utility patent with pharmaceutical
preparation claims relating to Prefest®, were issued on
April 28, 1992, and January 17, 1995, respectively.
The 995 patent and the 573 patent are both
listed in the FDAs Orange Book and do not expire until
April 28, 2009, and January 17, 2012, respectively. On
October 15, 2003, we received notice of Barrs
Paragraph IV certification, which alleges noninfringement
and invalidity of the 995 patent and the
573 patent. On November 26, 2003, we filed a
complaint against Barr in the Southern District of New York for
infringement of the 995 and 573 patents. Pursuant to
the Hatch-Waxman Act, the filing of that suit provides us an
automatic stay of FDA approval of Barrs ANDA for
30 months from no earlier than October 15, 2003. We
intend to vigorously enforce our rights under both patents.

Thimerosal/Vaccine
Related Litigation

King and/or its wholly owned subsidiary,
Parkedale Pharmaceuticals, have been named as defendants in
California, Mississippi and Illinois, along with Abbott
Laboratories, Wyeth, Aventis Pharmaceuticals, and other
pharmaceutical companies, which have manufactured or sold
products containing the mercury-based preservative, thimerosal.

In these cases, the plaintiffs attempt to link
the receipt of the mercury-based products to neurological
defects. The plaintiffs claim unfair business practices,
fraudulent misrepresentations, negligent misrepresentations, and
breach of implied warranty, which are all arguments premised on
the idea that the defendants promoted products without any
reference to the toxic hazards and potential public health
ramifications resulting from the mercury-containing
preservative. The plaintiffs also allege that the defendants
knew of the dangerous propensities of thimerosal in their
products.

53



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##### 



Kings product liability insurance carrier
has been given proper notice of all of these matters and defense
counsel are vigorously defending our interests. We seek to be
dismissed from the litigation due to, among other things, lack
of product identity in plaintiffs complaints. In 2001,
King and Parkedale were dismissed on this basis in a similar
case.

Fen/Phen
Litigation

Many distributors, marketers and manufacturers of
anorexigenic drugs have been subject to claims relating to the
use of these drugs. Generally, the lawsuits allege that the
defendants (1) misled users of the products with respect to
the dangers associated with them, (2) failed to adequately
test the products, and (3) knew or should have known about
the negative effects of the drugs, and should have informed the
public about the risks of such negative effects. The actions
generally have been brought by individuals in their own right
and have been filed in various state and federal jurisdictions
throughout the United States. They seek, among other things,
compensatory and punitive damages and/or court-supervised
medical monitoring of persons who have ingested the product. We
are one of many defendants in no more than 10 lawsuits, which
claim damages for personal injury arising from our production of
the anorexigenic drug phentermine under contract for
GlaxoSmithKline. We expect to be named in additional lawsuits
related to our production of the anorexigenic drug under
contract for GlaxoSmithKline.

While we cannot predict the outcome of these
suits, we believe that the claims against us are without merit
and intend to vigorously pursue all defenses available to us. We
are being indemnified in all of these suits by GlaxoSmithKline
for which we manufactured the anorexigenic product, provided
that neither the lawsuits nor the associated liabilities are
based upon our independent negligence or intentional acts, and
intend to submit a claim for all unreimbursed costs to our
product liability insurance carrier. However, in the event that
GlaxoSmithKline is unable to satisfy or fulfill its obligations
under the indemnity, we would have to defend the lawsuit and be
responsible for damages, if any, which are awarded against us or
for amounts in excess of our product liability coverage.

In addition, Jones, a wholly-owned subsidiary of
King, is a defendant in 926 multi-defendant lawsuits involving
the manufacture and sale of dexfenfluramine, fenfluramine, and
phentermine. These suits have been filed in various
jurisdictions throughout the United States, and in each of these
suits, Jones is one of many defendants, including manufacturers
and other distributors of these drugs. Although Jones has not at
any time manufactured dexfenfluramine, fenfluramine, or
phentermine, Jones was a distributor of a generic phentermine
product, and, after its acquisition of Abana Pharmaceuticals,
was a distributor of Obenix, its branded phentermine product.
The plaintiffs in these cases claim injury as a result of
ingesting a combination of these weight-loss drugs and are
seeking compensatory and punitive damages as well as medical
care and court supervised medical monitoring. The plaintiffs
claim liability based on a variety of theories including but not
limited to product liability, strict liability, negligence,
breach of warranty, and misrepresentation.

While we cannot predict the outcome of these
suits, we believe that the claims against us are without merit
and intend to vigorously pursue all defenses available to us.
Jones has tendered defense of these lawsuits to its insurance
carriers for handling and they are currently defending Jones in
these suits. The manufacturers of fenfluramine and
dexfenfluramine have settled many of these cases. In the event
Jones insurance coverage is inadequate to satisfy any
resulting liability, Jones will have to resume defense of these
lawsuits and be responsible for the damages, if any, that are
awarded against it.

Other Legal
Proceedings

The Parkedale facility was one of six facilities
owned by Pfizer subject to a Consent Decree of Permanent
Injunction issued August 1993 in United States of America v.
Warner-Lambert Company and Melvin R. Goodes and Lodewijk J.R.
DeVink(U.S. Dist. Ct., Dist. of N.J.). We acquired the
Parkedale facility from Pfizer in February 1998. The Parkedale
facility is currently manufacturing pharmaceutical products
subject to the Consent Decree which prohibits the manufacture
and delivery of specified drug products unless, among other
things, the products conform to cGMPs and are produced in
accordance with approved drug applications. We intend, when
appropriate, to petition for relief from the Consent Decree.

54



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##### 



We are involved in various routine legal
proceedings incident to the ordinary course of our business.

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

At the annual meeting of shareholders on
November 4, 2003, the shareholders voted on the following
proposals with the results as indicated:

1. Elected five directors to serve as follows:

|                                                                                                                                   |                                                                                                                                 |            |  |                    |             |  |  |           |  | 
|---------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------- | ---------- |  | ------------------ | ----------- |  |  | --------- |  | 
|                                                                                                                                   |                                                                                                                                 | For        |  | Withhold Authority
|                                                                                                                                   |                                                                                                                                 |            |  |                   
|                                                                                                                                   | James R. Lattanzi (term expiring 2004)                                                                                          |            |  | 215,573,652        |             |  |  | 4,297,221 | 
|                                                                                                                                   | Ted G. Wood (term expiring 2005)                                                                                                |            |  | 216,227,111        |             |  |  | 3,643,762 | 
|                                                                                                                                   | Earnest W. Deavenport, Jr. (term expiring 2006)                                                                                 |            |  | 213,420,085        |             |  |  | 6,450,788 | 
|                                                                                                                                   | Elizabeth M. Greetham (term expiring 2006)                                                                                      |            |  | 216,202,567        |             |  |  | 3,668,306 | 
|                                                                                                                                   | Philip M. Pfeffer (term expiring 2006)                                                                                          |            |  | 213,567,422        |             |  |  | 6,303,451 | 
|                                                                                                                                   | Directors continuing in service include:
    Jefferson J. Gregory; Gregory D. Jordan; R. Charles Moyer; and
    D. Greg Rooker. |            |  |                    |             |  |  |           | 
|2. Ratified the appointment of
    PricewaterhouseCoopers LLP as the independent accountants and
    auditors for 2003 as follows: |                                                                                                                                 |            |  |                    |             |  |  |          
|                                                                                                                                   |                                                                                                                                 | For        |  |                    | 209,811,102 |  |  |           |  | 
|                                                                                                                                   |                                                                                                                                 | Against    |  |                    | 8,964,512   |  |  |           |  | 
|                                                                                                                                   |                                                                                                                                 | Abstention |  |                    | 1,095,259   |  |  |           |  | 

55



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##### 



PART II



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

The following table sets forth the range of high
and low sales prices per share of our common stock for the
periods indicated. Our common stock is listed on the New York
Stock Exchange, where our stock trades under the symbol
KG. There were approximately 1,260 shareholders on
March 9, 2004, based on the number of record holders of the
common stock.

|               |  |      |       |     |  |   |       | 
|-------------- |  | ---- | ----- | --- |  | - | ----- | 
|               |  |     
|               |  | 2002
|               |  |     
|               |  | High |       | Low
|               |  |      |       |    
|First quarter  |  | $    | 42.13 |     |  | $ | 29.25 | 
|Second quarter |  |      | 35.10 |     |  |   | 18.30 | 
|Third quarter  |  |      | 21.98 |     |  |   | 15.85 | 
|Fourth quarter |  |      | 19.42 |     |  |   | 15.00 | 

|               |  |      |       |     |  |   |       | 
|-------------- |  | ---- | ----- | --- |  | - | ----- | 
|               |  |     
|               |  | 2003
|               |  |     
|               |  | High |       | Low
|               |  |      |       |    
|First quarter  |  | $    | 18.13 |     |  | $ | 11.01 | 
|Second quarter |  |      | 16.51 |     |  |   | 9.46  | 
|Third quarter  |  |      | 16.87 |     |  |   | 13.25 | 
|Fourth quarter |  |      | 16.10 |     |  |   | 12.29 | 

On March 11, 2004, the closing price of our
common stock as reported on the New York Stock Exchange was
$18.06.

We have never paid cash dividends on our common
stock. The payment of cash dividends is subject to the
discretion of the board of directors and will be dependent upon
many factors, including our earnings, our capital needs, and our
general financial condition. We currently anticipate that for
the foreseeable future, we will retain our earnings.

The following table provides information about
our equity compensation plans as of December 31, 2003.

EQUITY COMPENSATION PLAN INFORMATION

|                                                           |       |                            |           |                      |  |                                |       |  |  |  |           |           | 
|---------------------------------------------------------- | ----- | -------------------------- | --------- | -------------------- |  | ------------------------------ | ----- |  |  |  | --------- | --------- | 
|                                                           |       | Number of securities to    |           | Weighted-average     |  | Number of securities          
|                                                           |       | be issued upon exercise of |           | exercise price of    |  | remaining available for future
|                                                           |       | outstanding options,       |           | outstanding options, |  | issuance under equity         
|Plan Category                                              |       | warrants and rights        |           | warrants and rights  |  | compensation plans            
|                                                           |       |                            |           |                      |  |                               
|Equity compensation plans approved by shareholders         |       |                            | 3,849,864 |                      |  | $                              | 22.48 |  |  |  | 8,802,537 |          
|Equity compensation plans not approved by
    shareholders |       |                            |          |                      |  |                                | n/a   |  |  |  |          |          
|                                                           |       |                            |           |                      |  |                                |       |  |  |  |           |          
|                                                           | Total |                            |           | 3,849,864            |  |                                |       |  |  |  |           | 8,802,537 | 
|                                                           |       |                            |           |                      |  |                                |       |  |  |  |           |          

56



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##### 





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

The table below should be read in conjunction
with the section entitled Managements Discussion and
Analysis of Financial Condition and Results of Operations
and our audited consolidated financial statements and related
notes included elsewhere in this report.

|                                                                                                           |                                                                                              |                                       |         |      |         |      |         |       |         |      |         |      |         |   |           |      |           |   |           |      |           | 
|---------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------- | ------------------------------------- | ------- | ---- | ------- | ---- | ------- | ----- | ------- | ---- | ------- | ---- | ------- | - | --------- | ---- | --------- | - | --------- | ---- | --------- | 
|                                                                                                           |                                                                                              |                                      
|                                                                                                           |                                                                                              | For the year ended December 31,      
|                                                                                                           |                                                                                              |                                      
|                                                                                                           |                                                                                              | 1999                                  |         | 2000 |         | 2001 |         | 2002  |         | 2003
|                                                                                                           |                                                                                              |                                       |         |      |         |      |         |       |         |     
|                                                                                                           |                                                                                              |                                      
|                                                                                                           |                                                                                              | (in thousands, except per share data)
|Statement of Income Data:                                                                                  |                                                                                              |                                       |         |      |         |      |         |       |         |      |         |      |         |   |           |      |           |   |           |     
|Net sales(1)                                                                                               |                                                                                              | $                                     | 480,815 |      |         | $    | 578,769 |       |         | $    | 825,488 |      |         | $ | 1,069,960 |      |           | $ | 1,453,023 |     
|Royalty revenue                                                                                            |                                                                                              |                                       | 31,650  |      |         |      | 41,474  |       |         |      | 46,774  |      |         |   | 58,375    |      |           |   | 68,365    |     
|                                                                                                           |                                                                                              |                                       |         |      |         |      |         |       |         |      |         |      |         |   |           |      |           |   |           |     
|                                                                                                           |                                                                                              | Total revenues                        |         |      | 512,465 |      |         |       | 620,243 |      |         |      | 872,262 |   |           |      | 1,128,335 |   |           |      | 1,521,388 | 
|                                                                                                           |                                                                                              |                                       |         |      |         |      |         |       |         |      |         |      |         |   |           |      |           |   |           |     
|Gross profit                                                                                               |                                                                                              |                                       | 368,637 |      |         |      | 448,972 |       |         |      | 685,698 |      |         |   | 833,359   |      |           |   | 1,136,625 |     
|Operating income(5)                                                                                        |                                                                                              |                                       | 209,895 |      |         |      | 184,728 |       |         |      | 366,266 |      |         |   | 294,200   |      |           |   | 166,114   |     
|Interest income                                                                                            |                                                                                              |                                       | 10,507  |      |         |      | 11,875  |       |         |      | 10,975  |      |         |   | 22,395    |      |           |   | 6,849     |     
|Interest expense                                                                                           |                                                                                              |                                       | (55,371 | )    |         |      | (36,974 | )     |         |      | (12,684 | )    |         |   | (12,419   | )    |           |   | (13,396   | )   
|Valuation (charge) benefit 
    convertible notes receivable                                              |                                                                                              |                                       |        |      |         |      |        |       |         |      |        |      |         |   | (35,629   | )    |           |   | 18,151    |     
|Extinguishment of debt expense(4)                                                                          |                                                                                              |                                       | (1,150  | )    |         |      | (20,348 | )     |         |      | (22,903 | )    |         |   |          |      |           |   |          |     
|Other income (expenses), net                                                                               |                                                                                              |                                       | (3,239  | )    |         |      | 3,333   |       |         |      | 6,313   |      |         |   | (884      | )    |           |   | (629      | )   
|                                                                                                           |                                                                                              |                                       |         |      |         |      |         |       |         |      |         |      |         |   |           |      |           |   |           |     
|Income before income taxes, extraordinary item
    and cumulative effect of change in accounting principle |                                                                                              |                                       | 160,642 |      |         |      | 142,614 |       |         |      | 347,967 |      |         |   | 267,663   |      |           |   | 177,089   |     
|Income tax expense                                                                                         |                                                                                              |                                       | 60,705  |      |         |      | 68,752  |       |         |      | 129,486 |      |         |   | 85,143    |      |           |   | 71,233    |     
|                                                                                                           |                                                                                              |                                       |         |      |         |      |         |       |         |      |         |      |         |   |           |      |           |   |           |     
|Income before extraordinary item and cumulative
    effect of change in accounting principle               |                                                                                              |                                       | 99,937  |      |         |      | 73,862  |       |         |      | 218,481 |      |         |   | 182,520   |      |           |   | 105,856   |     
|Extraordinary item, net of income taxes(2)                                                                 |                                                                                              |                                       |        |      |         |      | (9,353  | )     |         |      |        |      |         |   |          |      |           |   |          |     
|                                                                                                           |                                                                                              |                                       |         |      |         |      |         |       |         |      |         |      |         |   |           |      |           |   |           |     
|                                                                                                           |                                                                                              |                                       | 99,937  |      |         |      | 64,509  |       |         |      | 218,481 |      |         |   | 182,520   |      |           |   | 105,856   |     
|Cumulative effect of change in accounting
    principle(3)                                                 |                                                                                              |                                       |        |      |         |      |        |       |         |      | (545    | )    |         |   |          |      |           |   |          |     
|                                                                                                           |                                                                                              |                                       |         |      |         |      |         |       |         |      |         |      |         |   |           |      |           |   |           |     
|Net income                                                                                                 |                                                                                              | $                                     | 99,937  |      |         | $    | 64,509  |       |         | $    | 217,936 |      |         | $ | 182,520   |      |           | $ | 105,856   |     
|                                                                                                           |                                                                                              |                                       |         |      |         |      |         |       |         |      |         |      |         |   |           |      |           |   |           |     
|Income per common share:                                                                                   |                                                                                              |                                       |         |      |         |      |         |       |         |      |         |      |         |   |           |      |           |   |           |     
|Basic:                                                                                                     |                                                                                              |                                       |         |      |         |      |         |       |         |      |         |      |         |   |           |      |           |   |           |     
|                                                                                                           | Income before extraordinary item and cumulative
    effect of change in accounting principle |                                       | $       | 0.48 |         |      | $       | 0.34  |         |      | $       | 0.94 |         |   | $         | 0.75 |           |   | $         | 0.44 |          
|                                                                                                           | Extraordinary item                                                                           |                                       |         |     |         |      |         | (0.04 | )       |      |         |     |         |   |           |     |           |   |           |     |          
|                                                                                                           | Cumulative effect of change in accounting
    principle                                      |                                       |         |     |         |      |         |      |         |      |         |     |         |   |           |     |           |   |           |     |          
|                                                                                                           |                                                                                              |                                       |         |      |         |      |         |       |         |      |         |      |         |   |           |      |           |   |           |     
|                                                                                                           |                                                                                              | $                                     | 0.48    |      |         | $    | 0.30    |       |         | $    | 0.94    |      |         | $ | 0.75      |      |           | $ | 0.44      |     
|                                                                                                           |                                                                                              |                                       |         |      |         |      |         |       |         |      |         |      |         |   |           |      |           |   |           |     
|Diluted:                                                                                                   |                                                                                              |                                       |         |      |         |      |         |       |         |      |         |      |         |   |           |      |           |   |           |     
|                                                                                                           | Income before extraordinary item and cumulative
    effect of change in accounting principle |                                       | $       | 0.47 |         |      | $       | 0.33  |         |      | $       | 0.93 |         |   | $         | 0.74 |           |   | $         | 0.44 |          
|                                                                                                           | Extraordinary item                                                                           |                                       |         |     |         |      |         | (0.04 | )       |      |         |     |         |   |           |     |           |   |           |     |          
|                                                                                                           | Cumulative effect of change in accounting
    principle                                      |                                       |         |     |         |      |         |      |         |      |         |     |         |   |           |     |           |   |           |     |          
|                                                                                                           |                                                                                              |                                       |         |      |         |      |         |       |         |      |         |      |         |   |           |      |           |   |           |     
|                                                                                                           |                                                                                              | $                                     | 0.47    |      |         | $    | 0.29    |       |         | $    | 0.93    |      |         | $ | 0.74      |      |           | $ | 0.44      |     
|                                                                                                           |                                                                                              |                                       |         |      |         |      |         |       |         |      |         |      |         |   |           |      |           |   |           |     

57



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##### 



|                     |  |              |           |      |  |      |           |  |  |   |           | 
|-------------------- |  | ------------ | --------- | ---- |  | ---- | --------- |  |  | - | --------- | 
|                     |  |             
|                     |  | December 31,
|                     |  |             
|                     |  | 2001         |           | 2002 |  | 2003
|                     |  |              |           |      |  |     
|Balance Sheet Data:  |  |              |           |      |  |      |           |  |  |   |           | 
|Working capital      |  | $            | 1,086,116 |      |  | $    | 891,738   |  |  | $ | 277,454   | 
|Total assets         |  |              | 2,506,611 |      |  |      | 2,750,660 |  |  |   | 3,177,734 | 
|Total debt           |  |              | 347,754   |      |  |      | 346,393   |  |  |   | 345,097   | 
|Shareholders equity |  |              | 1,908,284 |      |  |      | 1,931,183 |  |  |   | 2,042,180 | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Results for 2002 reflect (a) a $22,113
    charge for corrections of immaterial errors related to
    underpayments of amounts due under Medicaid and other
    governmental pricing programs for the years 1998 to 2001,
    (b) a $12,399 charge for corrections of immaterial errors
    related to underpayments of amounts due under Medicaid and other
    governmental pricing programs related to 2002 and recorded in
    the fourth quarter of 2002, and (c) an $11,970 charge
    arising from changes in accounting estimates related to Medicaid
    and other governmental pricing programs. Results for 2003
    reflect an $18,000 charge for changes in accounting estimates
    related to Medicaid for the years 1998 to 2002 and a $900 charge
    for correction of immaterial errors related to Medicaid for the
    years 1994 to 1997. For additional information, please see the
    section entitled Managements Discussion and Analysis
    of Financial Condition and Results of Operations under the
    heading Governmental Investigation, Medicaid Accrual
    Adjustment, and Related Matters and Note 7 to our audited
    consolidated financial statements.
|(2) | Reflects an asset impairment charge related to
    discontinuing the production and distribution of Fluogen®
    in the amount of $9,353 (net of taxes of $5,612) during 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|(3) | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|(4) | Reflects early extinguishment of debt expense in
    connection with the repayment of some of our debt instruments
    during 1999, 2000, and 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|(5) | Results for 2003 reflect a $15,212 reduction in
    the co-promotion fees paid to our Altace® co-promotion
    colleague as a result of the charges described above 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                

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

The following discussion should be read in
conjunction with the other parts of this report, the audited
consolidated financial statements and related notes. Historical
results and percentage relationships set forth in the statement
of income, including trends that might appear, are not
necessarily indicative of future operations. Please see the
Risk Factors and Forward-Looking
Statements sections for a discussion of the uncertainties,
risks and assumptions associated with these statements.

Overview

Our growth in total revenues during 2003
primarily resulted from our acquisition of the primary care
business in the United States and Puerto Rico of Elan
Corporation, plc on June 12, 2003, which includes
Skelaxin® and Sonata® and our acquisition of Meridian
Medical Technologies, Inc, on January 8, 2003. We believe
that these acquisitions, which include expanded pipeline
opportunities, together with the prescription growth potential
of many of our existing key products position King for future
growth.

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Sales of Key Products

In the following discussion, net sales for 2002
reflect a $22.1 million charge for corrections of
immaterial errors related to underpayments of amounts due under
Medicaid and other governmental pricing programs for the years
1998 to 2001; a $12.4 million charge for corrections of
immaterial errors related to underpayments of amounts due under
Medicaid and other governmental pricing programs related to 2002
and recorded in the fourth quarter of 2002; and a
$12.0 million charge arising from changes made in 2002 in
accounting estimates for the years 1998 to 2002 related to
Medicaid and other governmental pricing programs. Net sales for
2003 reflect an $18.0 million charge for changes in
accounting estimates related to Medicaid for the years 1998 to
2002 and a $0.9 million charge for corrections of
immaterial errors related to Medicaid for the years 1994 to
1997. For additional information, please see the section below
entitled Governmental Investigations, Medicaid Accrual
Adjustment, and Related Matters.

Altace®

Net sales of Altace® grew to
$527.1 million for the year ended December 31, 2003, a
17.1% increase from $450.0 million during the prior year.
Altace® new prescriptions totaled approximately
3.9 million and total prescriptions equaled approximately
12.7 million during 2003, increases of 12.0% and 19.2%,
respectively, over the prior year according to IMS America
monthly prescription data. Contributing also to the continued
sales growth of Altace® is the sustained shift to 10mg
Altace®, the same dose used in the landmark Heart Outcome
Prevention Evaluation, which we refer to as the HOPE
trial. Specifically, total prescriptions for 10mg
Altace® during 2003 increased approximately 32.7% over the
prior year, in comparison to an increase of 12.9% for the other
strengths of Altace combined, according to NDC Health monthly
prescription data. Total net units of Altace® sold
increased 5.1% for the year ended December 31, 2003 in
comparison to the prior year. Additionally, price increases
contributed to the continued sales growth of Altace® during
2003.

Based on Altace®s differentiating
indications, positive clinical data and prescription trends,
along with our marketing strategies and a composition of matter
patent that should protect Altace® from generic competition
through 2008, we anticipate that annual prescriptions of
Altace® should continue to grow, but not necessarily at as
high a rate as that achieved in 2003. For additional information
and a description of anticipated effect of wholesale channel
inventory on net sales of Altace®, please see the section
below entitled Wholesale Channel Inventory
Reductions.

Skelaxin®
and Sonata®

During 2003, we recorded net sales of
Skelaxin® in the amount of $179.1 million and net
sales of Sonata® totaling $72.5 million. We acquired
Skelaxin® and Sonata® from Elan on June 12, 2003.
For additional information, see the section entitled
Strategic Developments, Elans Primary Care
Business below. Net sales of Skelaxin® and
Sonata® should increase during 2004, as we will record
sales on these products for the entire year.

Thrombin-JMI®

Net sales of Thrombin-JMI® totaled
$141.7 million in 2003, a 46.8% increase from
$96.5 million during the prior year. Total net units sold
of Thrombin-JMI® increased 4.5% for the year ended
December 31, 2003 from the prior year. We are near maximum
capacity at our facility in Madison, Wisconsin which will limit
our ability to increase unit sales of Thrombin-JMI® during
2004. We are currently working on strategies to expand our
production capacity for Thrombin-JMI® which should
potentially be completed in approximately two years. We
anticipate that annual net sales of Thrombin-JMI® should
continue to grow during 2004, but not at as high a rate as that
achieved in 2003.

Levoxyl®

Levoxyl® net sales were $134.1 million
for the year ended December 31, 2003, a 20.9% decrease from
$169.5 million during the prior year. Total net units of
Levoxyl® sold decreased 28.2% for the year ended

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December 31, 2003 in comparison to the prior
year. Total prescriptions decreased approximately 1.0% from 2002
to 2003, according to IMS America prescription data. During
2003, wholesale channel inventories of Levoxyl® were
reduced. If our sales of Levoxyl® during 2003 had been
commensurate with the number of units dispensed over the same
period according to IMS America prescription data, we estimate
that our net sales of Levoxyl® would have been higher than
that actually recorded during 2003. Accordingly, we are
anticipating an increase in Levoxyl® net sales during 2004
as sales of the product created by continued demand become more
normalized.




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

In order to facilitate improved management of
wholesale channel inventory levels, we are actively engaged in
negotiations with our wholesale customers to establish inventory
management agreements related to our products. While we cannot
assure that we will successfully negotiate mutually beneficial
inventory management agreements, we believe that sales of some
of our key products, particularly Altace®, may be
dramatically lower during the first half of 2004, particularly
in the first quarter of 2004, than prescription demand would
indicate.

Research and Development

Our research and development activities involve
the discovery and development of chemical compounds, including
new chemical entities, which provide us with strategic pipeline
opportunities for the commercialization of new branded
prescription pharmaceutical products. In addition to discovering
and developing these chemical compounds, we pursue means of
enhancing the value of existing products through new uses and
formulations that may provide additional benefits to patients,
and improvements in the quality and efficiency of our
manufacturing processes.



| |                     
| | --------------------
| | Recent FDA Approvals

On June 20, 2003, we received U.S. Food and
Drug Administration, which we refer to as the FDA,
approval of a supplemental New Drug Application covering
pediatric and adult formulations of our nerve gas antidote
AtroPen®. This approval is particularly significant because
it is the first time that pediatric formulations of this
important homeland security product have been approved for use
in the United States.

On October 10, 2003, Novavax, Inc. received
FDA approval of its new drug application, which we refer to as
an NDA, for EstrasorbTM, a topical
estrogen therapy in unique lotion-like formulation for
symptomatic menopausal women. We have an exclusive worldwide
license to promote, market, distribute, and sell
EstrasorbTM, except in the United States and Puerto
Rico, where we and Novavax will co-market the product. We will
share equally with Novavax both gross profits from net sales of
EstrasorbTM and associated costs of promotion within
the United States and Puerto Rico. Novavax will receive
royalties on net sales outside of these areas. Novavax, working
together with our company, plans to launch
EstrasorbTM in the United States and Puerto Rico in
the first half of 2004.



| |                                                 
| | ------------------------------------------------
| | Product Applications Under Review by the
    FDA

An abbreviated new drug application, which we
refer to as an ANDA, covering our diazepam-filled
auto-injector is presently under review by the FDA. We currently
manufacture this product for the military as a treatment for
seizures. Once approved, this product will be the only
commercially available therapy of its kind for epileptic
seizures. We anticipate FDA approval for this product during
2004.

During the third quarter of 2003, we received an
approvable letter for Intal® HFA from the FDA. Intal®
HFA, a new inhaler formulation of our currently marketed product
Intal® for the long-term management of asthma, utilizes the
environmentally friendly propellant hydrofluoroalkane, which we
refer to as HFA. With a patent that extends through
September 2017, Intal® HFA is an important product line
extension.

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| |                                    
| | -----------------------------------
| | Sonata®Extended Release Formulation

We commenced our Phase II clinical trial
program for an extended release formulation of Sonata®, a
nonbenzodiazepine treatment for insomnia, in March 2004. The
Phase II clinical trial program is designed to select the
most effective extended release formulation of Sonata®
utilizing Elans commercially proven Spheroidal Oral Drug
Absorption System, which we refer to as SODAS, as
the drug delivery technology. The goal of the Phase II
clinical trial program is to determine which new formulation is
the most efficacious for the purpose of increasing total sleep
time and reducing any potential for premature awakenings, while
continuing to build upon the quick onset profile currently
available in the immediate release formulation of Sonata®.

With U.S. patent coverage that extends to
2018, the extended release formulation should establish
Sonata® as a long-term cornerstone product for our Company.
Moreover, this development program should provide us with the
opportunity to procure additional patents potentially covering,
among other things, unique biopharmaceutical characteristics and
methods-of-use related to the extended release formulation of
Sonata®.



| |                                   
| | ----------------------------------
| | Altace®Product Life-Cycle Projects

We entered into a licensing agreement with
SkyePharma PLC in May 2003 for the purpose of developing
and commercializing a modified-release formulation of our
Altace® product utilizing SkyePharmas patented oral
drug delivery technology Geomatrix®. SkyePharmas
Geomatrix® range of technologies involves a
fully-developed, multi-layered tablet technology that controls
the release of a products active ingredient for the
purpose of optimizing a drugs pharmacokinetic behavior.
The specific Geomatrix® technology planned for use in the
development of a modified-release formulation of Altace should
provide the product with extended duration of action and
improved bioavailability. SkyePharma has various issued patents
covering the Geomatrix® drug delivery technologies, with
U.S. patent protection extending to 2017. Also, SkyePharma has
patent applications for additional patents under review covering
its Geomatrix® drug delivery technologies.

During the fourth quarter of 2003, we completed
enrollment in the ongoing Phase IV clinical trial to
determine the safety and effectiveness of Altace® in the
treatment of hypertension (high blood pressure) in children.
This important trial, which we refer to as TOPHAT
(Treatment of Pediatric Hypertension with Altace Trial), is
scheduled to conclude by the end of 2004.



| |            
| | -----------
| | Binodenoson

On December 5, 2003, we commenced the
pivotal Phase III clinical trial program involving binodenoson.
Binodenoson is an adenosine A2a receptor agonist that we are
developing for cardiac pharmacologic stress SPECT imaging, a
procedure used to diagnose the presence and severity of coronary
artery disease. The data from the Phase II dose ranging study
indicates that binodenoson, at effective doses, is better
tolerated than adenosine, the current market leader, which was
previously developed by King.

Approximately 3 million pharmacologic stress
tests are performed in the United States each year to diagnose
heart disease in patients who cannot perform traditional
exercise stress tests. Adenosine and dipyridamole are the
current agents of choice to achieve the coronary vasodilation
necessary for cardiac imaging in the United States, but these
drugs do not distinguish between the four subtypes of adenosine
receptors. Our Phase II clinical trials showed that by
targeting the adenosine A2a receptor subtype, binodenoson
appears to detect myocardial ischemia as well as adenosine, and
produces fewer and less severe side effects like heart block,
dyspnea and chest pain than adenosine and dipyridamole. Unlike
the currently used drugs, which are administered over 4 to
6 minutes, binodenoson will be given as an intravenous
bolus dose. This advantage, coupled with the improved safety
profile, promises to make these diagnostic tests safer for
patients and easier and more efficient for physicians to
administer.

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| |    
| | ---
| | T62

During the fourth quarter of 2003, we commenced
the Phase I clinical trial program for T-62, a new chemical
entity that we are developing as a potential treatment for
neuropathic pain. When given orally, T-62 enhances the effect of
endogenous adenosine in the spinal cord and should provide
effective relief for neuropathic pain by the same mechanism as
intrathecally administered adenosine. Adenosine, a
neurotransmitter that affects the adenosine A1 receptors in
the spinal cord to normalize the pain response, has been shown
to be an effective treatment for neuropathic pain when injected
into the spinal cord via intrathecal administration. The initial
Phase I trial for T-62 is a single-center, randomized
double-blind, placebo-controlled evaluation of the safety and
pharmacokinetics of escalating single oral doses of this new
chemical entity in healthy adult subjects.

MRE0094

MRE0094, a new chemical entity, is an adenosine
A2a receptor agonist that we are developing as a potential
topical treatment for chronic diabetic foot ulcers. This product
is designed to utilize a novel approach to treating this
condition by concentrating on the inflammation associated with
such foot ulcers. Adenosine A2a receptor agonists have been
shown to promote wound closure in mice and diabetes-induced rats
by regulating the response of inflammatory cells and mediators,
promoting tissue formation through various mechanisms including
endothelial cell proliferation and migration, and promoting
tissue remodeling. In January 2004 we completed the dosing of
the initial concentration of MRE0094 in our ongoing Phase I
clinical trial program evaluating the safety of the drug in
patients.

Strategic Developments



| |                             
| | ----------------------------
| | Elans Primary Care Business

On June 12, 2003, we acquired the primary
care business of Elan and that of some of its subsidiaries, in
the United States and Puerto Rico, including the rights to
Sonata® and Skelaxin® and the rights pertaining to
potential new formulations of these products, together with
Elans United States primary care field sales force.
Product rights subject to the agreement include those related to
Sonata®, a nonbenzodiazepine treatment for insomnia, and
Skelaxin®, a muscle relaxant, in the United States, its
territories and possessions, and Puerto Rico. Under the terms of
the agreement, Elans sale of Skelaxin® included
related NDAs, copyrights, trademarks, patents and rights
pertaining to potential new formulations of Skelaxin®.
Elans sale of Sonata® included its rights to the
product, as well as certain related copyrights and
U.S. rights to potential new formulations of Sonata®.
We also acquired certain intellectual property, regulatory, and
other assets relating to Sonata® directly from Wyeth. Under
the terms of the agreement, we secured an exclusive license to
the intellectual property rights in this territory of both Wyeth
and Elan to the extent they relate to new formulations of
Sonata®, other than for use in animals. The total estimated
purchase price was $814.4 million, which included the cost
of acquisition, assumed liabilities and a portion of contingent
liabilities. The purchase price also includes the transfer of
inventory with a value of approximately $40.4 million. In
addition to the initial purchase price, we paid
$25.0 million during January 2004 as a milestone
payment to Elan relating to the continued exclusivity of
Skelaxin® and we paid $11.0 million during March 2004,
as a milestone payment to Elan in connection with the
development of new formulations of Sonata®. We also



| |   |                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | will pay royalties on the current formulation of
    Skelaxin® from the date of closing,                                                                       
|
| |  | will pay up to an additional $60.0 million
    if Elan achieves certain milestones in connection with the
    development of a reformulated version of Sonata®,
|
| |  | will pay $15.0 million as a milestone payment to
    Elan if annual net sales of a reformulated version of
    Sonata® exceed $100.0 million and               
|
| |  | will pay for costs associated with the
    development of the reformulated version of Sonata®.                                                                 

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| |                                    
| | -----------------------------------
| | Meridian Medical Technologies, Inc.

On January 8, 2003, we completed our
acquisition of Meridian, for a cash price totaling
$253.9 million. Meridian pioneered the development, and is
a leading manufacturer, of auto-injectors for the
self-administration of injectable drugs. An auto-injector is a
pre-filled, pen-like device that allows a patient or caregiver
to automatically inject a precise drug dosage quickly, easily,
safely, and reliably. This acquisition provides us with
additional lines of growing exclusive pharmaceutical products,
auto-injector technology, and enhanced pipeline opportunities.

Meridians growing commercial pharmaceutical
business primarily consists of EpiPen®, an auto-injector
filled with epinephrine for the emergency treatment of
anaphylaxis resulting from severe or allergic reactions to
insect stings or bites, foods, drugs, and other allergens, as
well as idiopathic or exercise induced anaphylaxis. Dey L.P.
markets EpiPen® pursuant to a supply agreement that expires
December 31, 2010. Under the terms of the supply agreement,
we grant Dey the exclusive right and license to market,
distribute, and sell EpiPen® worldwide.

Meridian also has growing lines of pharmaceutical
products that are presently sold primarily to the U.S.
Department of Defense, also known as the DoD, under
an Industrial Base Maintenance Contract. These products include
AtroPen® and ComboPen® which are nerve agent
antidotes. AtroPen® is an atropine-filled auto-injector and
ComboPen® consists of an atropine-filled auto-injector and
a pralidoxime-filled auto-injector. Other products sold to the
DoD include a diazepam-filled auto-injector for the treatment of
seizures and a morphine-filled auto-injector for pain
management. Additionally, in January 2004, Meridian began
selling a new auto-injector to the DoD called the Antidote
Treatment Nerve Agent Auto-injector, which we refer to as
ATNAA. ATNAA, also a nerve agent antidote, utilizes
a dual chambered auto-injector and injection process to
administer atropine and pralidoxime, which provides an improved,
more efficient means of delivering these nerve agent antidotes.
The ATNAA auto-injector and injection process has
U.S. patent coverage that extends to April 12, 2010.

Governmental Investigations, Medicaid Accrual
Adjustment, and Related Matters

As previously reported, in March 2003 the
Securities and Exchange Commission, which we refer to as the
SEC, initiated a formal investigation of our
company. We received SEC subpoenas relating to, among other
topics, sales of our products to VitaRx and Prison Health
Services, our best price lists, the pricing of our
pharmaceutical products provided to governmental Medicaid
agencies, the accrual and payment of rebates on the product
Altace®, the products Fluogen®and Lorabid®, the
King Benevolent Fund, Inc., our calculations related to Medicaid
rebates, and our Audit Committees internal review of
issues raised by the SEC investigation. As also previously
reported, on November 13, 2003, we received a subpoena
duces tecum from the Office of Inspector General of the
Department of Health and Human Services requesting the
production of documents relating to some of the matters being
investigated by the SEC and to our sales, marketing and other
business practices for Altace®, Aplisol® and
Levoxyl®.

In March 2003, upon the recommendation of our
management and with the assistance of independent counsel and an
independent accounting firm, the Audit Committee of our Board of
Directors initiated an assessment and internal review of issues
raised by the SEC investigation. In connection with the internal
review, we estimated that we had underpaid amounts due under
Medicaid and other governmental pricing programs, and recorded
an adjustment of $46.5 million to net sales and accrued expenses
in the fourth quarter of 2002. This amount represented our best
estimate as of July 2003 of the extent to which we had underpaid
amounts due under Medicaid and other governmental pricing
programs during the period from 1998 to 2002.

The July 2003 estimate was based upon an
extensive sample of available data supporting the calculation of
Medicaid rebates paid from 1998 to 2002, and was generated with
the assistance of outside consultants. Since that time, our
outside consultants have undertaken a comprehensive audit to
determine the actual amount of underpayments under Medicaid
during the period from 1998 to 2002. As a result of that
recently completed audit, we have determined that our accrual
for estimated amounts due under Medicaid and other governmental
pricing programs through December 31, 2002, should be
increased by

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$18.0 million. In addition, based on the results
of the comprehensive audit for the period from 1998 through
2002, we estimate that we underpaid amounts due Medicaid by $0.9
million during the period from 1994 through 1997. Accordingly,
results for the fourth quarter of 2003 include an adjustment of
$18.9 million to net sales and accrued expenses.


Following the accrual adjustment recorded in the
fourth quarter of 2002, we recovered on a pre-tax basis
approximately $9.5 million in fees we previously paid under our
Co-Promotion Agreement for Altace®, and have reduced the
accrual for these fees by this amount in the fourth quarter of
2003. In addition, fees under our Co-Promotion Agreement for
Altace® in the fourth quarter of 2003 were reduced on a
pre-tax basis by approximately $5.7 million as a result of the
accrual adjustment recorded in that quarter.

Under generally accepted accounting principles,
the $18.0 million adjustment in our accrual for Medicaid rebates
for the period from 1998 through 2002 constitutes a change in an
accounting estimate effective as of December 31, 2003. The
change resulted principally from two factors. First, the
recently completed Medicaid audit included additional data that
was used to refine the July 2003 estimate. Second, we received
legal advice that, in calculating amounts payable under
Medicaid, we should revise the methodology we had previously
been advised to use for calculating best price in
respect of a complex issue concerning rebates to pharmacy
benefit managers. The $0.9 million adjustment in our accrual for
Medicaid rebates for the period from 1994 through 1997 reflects
the correction of immaterial errors that occurred during that
period.

The Medicaid audit did not result in any changes
to our accruals for programs other than Medicaid. We are
currently in the process of conducting detailed audits of our
compliance with the requirements of several other governmental
pricing programs, but our obligations under these programs are
substantially less than our obligations under Medicaid, and we
do not expect the audits to result in material adjustments to
our accruals.

Although the amounts described above constitute
our best estimate of amounts owed in respect of Medicaid and
other governmental pricing programs, our calculations are
subject to review and challenge by the applicable governmental
agencies. In connection with the pending governmental
investigations, we have continued to engage in discussions with
representatives of the Office of Inspector General of the
Department of Health and Human Services, the Department of
Justice, the Department of Veterans Affairs, the Centers for
Medicare and Medicaid Services, and the Public Health Service.
We expect that these discussions will include a detailed review
of our calculations by the appropriate agencies, and it is
possible that this review could result in material changes. The
accruals described above relate solely to our estimated
underpayments and exclude any interest, fines, penalties or
other amounts that might be owed in connection with the
underpayments, as we cannot predict or reasonably estimate their
likelihood or magnitude at this time.

Pending determination of the precise amount of
our obligations, we have placed a total of $65.5 million in an
interest-bearing escrow account. In addition, since the first
quarter of 2003, we voluntarily have been making our Medicaid
payments on a basis that we believe represents an overpayment of
amounts actually due, and we would expect to offset these
payments against the amounts ultimately determined to be due in
respect of prior years. Based on the results of our Medicaid
audit, we estimate that these overpayments total approximately
$18.6 million as of December 31, 2003.

The governmental investigations of King described
above are continuing. The SEC, the Office of Inspector General
of the Department of Health and Human Services, the Department
of Justice, the Department of Veterans Affairs, the Public
Health Service, the Centers for Medicare and Medicaid Services
and other governmental agencies that might be investigating or
might commence an investigation of us could impose, based on a
claim of a violation of fraud and false claims laws or
otherwise, civil and/or criminal sanctions, including fines,
penalties and possible exclusion from federal health care
programs (including Medicaid and Medicare). Some of these laws
may impose liability even in the absence of specific intent to
defraud. We cannot predict or reasonably estimate the likelihood
or magnitude of any such sanctions at this time. For additional
information, please see section entitled the Risk

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Factors under the heading 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.


Subsequent to the announcement of the SEC
investigation described above, beginning in March 2003, 22
purported class action complaints were filed by holders of our
securities against us, our directors, former directors,
executive officers, former executive officers, a subsidiary, and
a former director of the subsidiary in the United States
District Court for the Eastern District of Tennessee, alleging
violations of the Securities Act of 1933 and/or the Securities
Exchange Act of 1934. These 22 complaints have been consolidated
in the United States District Court for the Eastern District of
Tennessee. In addition, holders of our securities filed two
class action complaints alleging violations of the Securities
Act of 1933 in Tennessee state court. We removed these two cases
to the United States District Court for the Eastern District of
Tennessee, where these two cases were consolidated with the
other class actions. Plaintiffs in these actions unsuccessfully
moved to remand these two cases back to Tennessee state court.
These two actions therefore remain part of the consolidated
action. The district court has appointed lead plaintiffs in the
consolidated action, and those lead plaintiffs filed a
consolidated amended complaint on October 21, 2003 alleging
that we, through some of our executive officers, former
executive officers, directors and former directors, made false
or misleading statements concerning our business, financial
condition and results of operations during periods beginning
February 16, 1999 and continuing until March 10, 2003.
Plaintiffs in the consolidated action have also named the
underwriters of our November 2001 public offering as defendants.
We and other defendants have filed motions to dismiss the
consolidated amended complaint, and those motions are currently
pending.

Seven purported shareholder derivative complaints
have also been filed in federal and state courts in Tennessee
alleging a breach of fiduciary duty, among other things, by some
of our officers and directors. The derivative cases in state
court were consolidated and are currently stayed. The stay will
remain in place at least until the motions to dismiss the
consolidated federal securities class action are decided. The
derivative cases in federal court are stayed until there is a
decision on the merits in the state court derivative suits.
Additionally, a class action complaint was filed in the United
States District Court for the Eastern District of Tennessee
under ERISA. As amended, the complaint alleges that we and
certain of our executive officers, former executive officers,
directors, former directors and an employee violated fiduciary
duties that we allegedly owed our 401(k) Retirement Savings
Plans participants and beneficiaries under ERISA. The
allegations underlying each of these additional lawsuits are
similar in many respects to those in the class action litigation
described above. We filed a motion to dismiss the ERISA action
on March 5, 2004; this motion to dismiss is currently
pending.

We intend to defend all of these lawsuits
vigorously but are unable currently to predict the outcome or
reasonably estimate the range of potential loss, if any.

If any governmental sanctions are imposed, or if
we were not to prevail in the pending litigation, neither of
which we can predict or reasonably estimate at this time, our
business, financial condition, results of operations and cash
flows could be materially adversely affected. Responding to the
government investigations, resolving the amounts owed to
governmental agencies in connection with the underpayments and
defending us in the pending litigation has resulted, and is
expected to continue to result, in a significant diversion of
managements attention and resources and an increase in
professional fees. For additional information, please see the
Risk Factors section under the heading The
governmental investigations and pending litigation could have a
material adverse effect on our business. As previously
disclosed, we determined in July 2003 as a result of the Audit
Committees internal review that we needed to dedicate
additional resources to ensure compliance with all applicable
reporting requirements for Medicaid rebates and other
governmental pricing programs. We have recently implemented a
new information technology system which better enables us to
collect and process data needed to more precisely determine our
obligations under Medicaid and other governmental pricing
programs. Although the new information technology system is
intended to significantly enhance the accuracy of our
calculations for estimating amounts due under Medicaid and other
governmental pricing programs, our processes for these
calculations and judgments involved in making these calculations
continue to involve subjective

65



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decisions and manual input, and, as a result,
these calculations remain subject to the risk of errors arising
from manual processes. Additionally, notwithstanding this
increased automation, compliance with the requirements of
government pricing programs will continue to require that we
make judgments and estimates with respect to complex matters as
to which there may be little or no regulatory or legal guidance.


In addition to improvements to our systems, we
have made several important hires, and we are continuing to
search for and hire additional qualified personnel. We have also
established a corporate compliance office, and are in the
process of implementing a compliance program intended to comport
with guidance issued by the Office of Inspector General of the
Department of Health and Human Services. We are committed to
further enhancements and continue to identify and implement
actions that improve our compliance with Medicaid and other
governmental pricing programs. The Audit Committee has stated
that it intends to monitor carefully our ongoing discussions
with appropriate regulatory authorities, as well as the
implementation of proposed improvements to systems, processes,
training and personnel.

Other Developments



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

Cobalt Pharmaceuticals, Inc. has filed an ANDA
with the FDA seeking permission to market a generic version of
Altace®. The following U.S. patents are listed for
Altace® in the FDAs Approved Drug Products with
Therapeutic Equivalence Evaluations, which is known as the
Orange Book: U.S. Patent Nos. 4,587,258, the
258 patent, and 5,061,722, the 722 patent,
two composition of matter patents related to Altace®, and
U.S. Patent No. 5,403,856, the 856 patent, a
method-of-use patent related to Altace®, with expiration
dates of January 2005, October 2008, and April 2012,
respectively. Under the Hatch-Waxman Act, any generic
manufacturer may file an ANDA with Paragraph IV
certification challenging the validity or infringement of a
patent listed in the FDAs Orange Book four years after the
pioneer company obtains approval of its NDA. Cobalt has filed a
Paragraph IV certification alleging invalidity of the
722 patent, and we filed suit on March 14, 2003
to enforce our rights under that patent. Pursuant to the
Hatch-Waxman Act, the filing of that suit provides us an
automatic stay of FDA approval of Cobalts ANDA for
30 months from no earlier than February 5, 2003.
Should the court find in favor of a Cobalt summary judgment
motion on the 722 patent, however, we would not
receive the full benefit of that 30 month stay. Subsequent
to filing our original complaint, we amended our complaint to
add an allegation of infringement of the 856 patent. In
its answer to the amended complaint, Cobalt denied infringement
and alleged that the 856 patent is invalid. Pursuant to
FDA regulations, however, Cobalt is not required to certify
against the 856 patent. We intend to vigorously
enforce our rights under the 722 and
856 patents. Regardless of the outcome of the lawsuit
involving the 722 and 856 patents, however, Cobalt
has not challenged the validity of the 258 patent and,
therefore, cannot market a generic version of Altace® prior
to the expiration of that patent in January 2005.



| |                         
| | ------------------------
| | Levoxyl®Patent Challenge

Mylan Pharmaceuticals, Inc. and KV Pharmaceutical
Company have each filed an ANDA with the FDA seeking permission
to market a generic version of Levoxyl®. United States
Patent No. 6,555,581, the 581 patent, a utility
patent with formulation claims relating to Levoxyl®, was
issued to us on April 29, 2003. The 581 patent
is listed in the FDAs Orange Book and does not expire
until February 15, 2022. No earlier than April 30,
2003, we received notice of Mylans Paragraph IV
certification, which alleges noninfringement of the
581 patent. We filed suit against Mylan on
June 13, 2003 in the Eastern District of Pennsylvania and
on June 16, 2003 in the Northern District of West Virginia;
these suits have been consolidated in the Northern District of
West Virginia and trial is currently scheduled for June 2005.
Pursuant to the Hatch-Waxman Act, the filing of the suits
against Mylan provides us with an automatic stay of FDA approval
of Mylans ANDA for 30 months from no earlier than
April 30, 2003. On June 24, 2003, we received notice
of KVs Paragraph IV certification, which alleges
noninfringement and invalidity of the 581 patent. We
filed suit against KV on August 7, 2003 and trial is
currently scheduled to begin on December 6, 2004. Pursuant
to the Hatch-Waxman Act, the filing of the suit against KV
provides us with

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an automatic stay of FDA approval of KVs
ANDA for 30 months from no earlier than June 24, 2003.
We intend to vigorously enforce our rights under the
581 patent to the full extent of the law.




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

Eon Labs, Inc., CorePharma, LLC and Mutual
Pharmaceutical Company have each filed an ANDA with the FDA
seeking permission to market a generic version of
Skelaxin®. United States Patent Nos. 6,407,128, the
128 patent, and 6,683,102, the 102 patent
two method-of-use patents relating to Skelaxin®, are listed
in the FDAs Orange Book and do not expire until
December 3, 2021. Eon Labs and CorePharma have each filed
Paragraph IV certifications alleging noninfringement and
invalidity of the 128 and 102 patents. Mutual
has filed a Paragraph IV certification alleging
noninfringement and invalidity of the 102 patent. We filed
separate suits against Eon Labs on January 2, 2003 and
CorePharma on March 7, 2003 and are currently assessing our
right to bring suit against Mutual. Pursuant to the Hatch-Waxman
Act, the filing of the suits against Core and Eon provides us
with an automatic stay of FDA approval of Eons ANDA for
30 months from no earlier than November 18, 2002 and
an automatic stay of FDA approval of Cores ANDA for
30 months from no earlier than January 24, 2003. We
intend to vigorously enforce our rights under the
128 and 102 patents to the full extent of the
law.

On March 9, 2004, we received a copy of a
letter from the FDA to all ANDA applicants for Skelaxin®
stating that the use listed in the FDAs Orange Book for
the 128 patent may be deleted from the ANDA
applicants product labeling. We believe that this decision
is arbitrary, capricious, and inconsistent with the FDAs
previous position on this issue. We are currently assessing our
administrative and legal options and may request the FDA to
reinstate its previous policy on this issue and reject any ANDAs
that delete such use from their product labeling. If we are
unable to persuade the FDA to reinstate its previous policy,
however, there is a substantial likelihood that a generic
version of Skelaxin® will enter the market, and our
business, financial condition, results of operations and cash
flows could be materially adversely affected.



| |                         
| | ------------------------
| | Prefest®Patent Challenge

Barr Laboratories, Inc. has filed an ANDA, which
included a Paragraph IV certification, with the FDA seeking
permission to market a generic version of Prefest®. United
States Patent No. 5,108,995 the 995 patent, a
utility patent with method of treatment claims relating to
Prefest®, and United States Patent No. 5,382,573, the
573 patent, a utility patent with pharmaceutical
preparation claims relating to Prefest®, were issued on
April 28, 1992, and January 17, 1995, respectively.
The 995 patent and the 573 patent are both
listed in the FDAs Orange Book and do not expire until
April 28, 2009, and January 17, 2012, respectively. On
October 15, 2003, we received notice of Barrs
Paragraph IV certification, which alleges noninfringement
and invalidity of the 995 patent and the
573 patent. On November 26, 2003, we filed a
complaint against Barr in the Southern District of New York for
infringement of the 995 and 573 patents. Pursuant to
the Hatch-Waxman Act, the filing of that suit provides us an
automatic stay of FDA approval of Barrs ANDA for
30 months from no earlier than October 15, 2003. We
intend to vigorously enforce our rights under both patents.



| |                                             
| | --------------------------------------------
| | Womens Health Initiative Clinical
    Trial

An ongoing clinical trial, the Womens
Health Initiative, is being conducted by the National Institutes
of Health. Data from that trial released in July 2002 indicated
that an increase in certain health risks may result from the
long-term use of a competitors combination hormone
replacement therapy for women. News of this data and the
perception it has created have negatively affected the entire
combination hormone therapy and the oral estrogen therapy, which
include our products Prefest®, Delestrogen® and
Menest® and may affect our future marketing efforts for
Estrasorb®. Total net sales of these womens health
products, together with Nordette®, an oral contraceptive,
decreased to $27.0 million for the year ended
December 31, 2003, a 57.1% decrease from $62.9 million
during the year ended December 31, 2002. Total
prescriptions for these products decreased an average of 29.3%
during 2003, in comparison to 2002.

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| |         
| | --------
| | Lorabid®

We acquired the antibiotic Lorabid® in the
United States and Puerto Rico from Eli Lilly and Company on
August 19, 1999 for a purchase price of $91.7 million,
including acquisition costs. Since the acquisition, sales have
declined for a variety of reasons. During the fourth quarter of
2002, we decided to divest our rights to Lorabid®. Also
during the fourth quarter of 2002, based on our
managements cash flow expectations, we determined that the
Lorabid® intangible assets were impaired and recorded an
impairment charge of $66.8 million to write down the assets
to their estimated fair value. Additionally, based on estimated
prescription trends, we believe our minimum purchase commitments
under our supply agreement with Eli Lilly for Lorabid® were
greater than the amount we would be able to sell to our
customers. As a result, during the fourth quarter of 2002 we
also recorded a $49.9 million charge related to the
liability associated with the amount of our purchase commitments
in excess of expected demand. Due to the continued decline in
prescriptions for Lorabid®, we recorded an additional
$30.0 million charge during the fourth quarter of 2003
related to the liability associated with the amount of our
purchase commitments in excess of expected demand.

As of December 31, 2003, our net intangible
assets related to Lorabid® equal $7.0 million. In
addition, there is $5.2 million of remaining exposure
related to the supply agreement.



| |                                                                                        
| | ---------------------------------------------------------------------------------------
| | Intangible Asset Issues Related to Some
    Non-Key Products and Our Rochester Facility

On March 18, 2002, the FDA approved Impax
Labs ANDA for Fludrocortisone Acetate Tablets, a generic
for Florinef®. On January 21, 2003, the FDA approved
Barr Laboratories ANDA for a second generic for
Florinef®. As of December 31, 2002, we had intangible
assets related to Florinef® with carrying values of
$135.0 million. During the first quarter of 2003, we
recorded an impairment charge in the amount of
$111.0 million reflecting the reduction in the fair value
of the Florinef® intangible assets. We determined the fair
value of our Florinef® product based on managements
discounted cash flow projections for the product. As of
December 31, 2003, we had net intangible assets related to
Florinef® of approximately $22.6 million. If
prescriptions for Florinef® continue to decline, we may
incur additional asset impairment charges related to this
product in the future.

In March 2003, we also became aware that an ANDA
for Cortisporin® ophthalmic suspension which was previously
inactive, has been reactivated by the FDA with a new sponsor. We
understand the sponsor entered the market as of April 14,
2003 with a generic equivalent for Cortisporin® ophthalmic
suspension. The entry of the generic has negatively affected our
market share for this product. As of December 31, 2003, we
have net intangible assets related to our Cortisporin®
product line in the approximate amount of $18.3 million.
Management currently believes that this asset is not impaired
based on estimated undiscounted cash flows, however, if
prescription declines exceed current expectations, we may have
to write-off a portion or all of the intangible assets
associated with those products in the future.

Prescriptions for our womens health
products, particularly Nordette® and Prefest®, have
continued to decline over the past year. As of December 31,
2003, the Nordette® and Prefest® products have net
intangible assets associated with them of $96.0 million and
$108.5 million, respectively. Management currently believes that
these assets are not impaired based on estimated undiscounted
future cash flows, however, if prescription declines exceed
current expectations, we may have to write-off a portion or all
of the intangible assets associated with these products in the
future.

Prescriptions for Tapazole® have continued
to decline since the entry of a generic substitute in August
2000. As of December 31, 2003, Tapazole® had net
intangible assets associated with it of $18.2 million.
Management currently believes that this asset is not impaired
based on estimated undiscounted future cash flows. However, if
prescription declines exceed current expectations, we may have
to write-off a portion or all of the intangible assets
associated with this product in the future.

Our Rochester facility manufactures products for
us and various third-party manufacturers. As of
December 31, 2003, the net carrying value of the property,
plant, and equipment at the Rochester facility and the net
intangible assets considered parts of the Rochester asset group
were $82.2 million and

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$18.3 million, respectively. Overall
production volume at this facility has declined. We currently
have plans to transfer to this facility the manufacture of some
of our branded prescription pharmaceutical products that are
currently manufactured for us by third parties. This should
increase production and overall profitability at our Rochester
facility. Management currently believes that these long-term
assets are not impaired based on estimated undiscounted future
cash flows. However, if production volumes continue to decline
and/or if we are not successful in transferring additional
production to the facility, we may have to write-off a portion
of the property, plant, equipment, and intangible assets
associated with the facility.


Results of Operations

The following summarizes net revenues by
operating segment (in thousands):

|                              |       |                                  |         |         |  |      |           |           |  |   |           |           | 
|----------------------------- | ----- | -------------------------------- | ------- | ------- |  | ---- | --------- | --------- |  | - | --------- | --------- | 
|                              |       |                                 
|                              |       | For the Years Ended December 31,
|                              |       |                                 
|                              |       | 2001                             |         | 2002    |  | 2003
|                              |       |                                  |         |         |  |     
|Branded pharmaceuticals(1)    |       | $                                | 793,543 |         |  | $    | 1,032,831 |           |  | $ | 1,300,948 |          
|Meridian Medical Technologies |       |                                  |        |         |  |      |          |           |  |   | 124,157   |          
|Royalties                     |       |                                  | 46,774  |         |  |      | 58,375    |           |  |   | 68,365    |          
|Contract manufacturing        |       |                                  | 29,680  |         |  |      | 35,936    |           |  |   | 27,290    |          
|Other                         |       |                                  | 2,265   |         |  |      | 1,193     |           |  |   | 628       |          
|                              |       |                                  |         |         |  |      |           |           |  |   |           |          
|                              | Total |                                  | $       | 872,262 |  |      | $         | 1,128,335 |  |   | $         | 1,521,388 | 
|                              |       |                                  |         |         |  |      |           |           |  |   |           |          






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Branded pharmaceuticals segment net revenues for
    2002 reflect (a) a $22,113 charge for corrections of
    immaterial errors related to underpayments of amounts due under
    Medicaid and other governmental pricing programs for the years
    1998 to 2001, (b) a $12,399 charge for corrections of
    immaterial errors related to underpayments of amounts due under
    Medicaid and other governmental pricing programs related to 2002
    and recorded in the fourth quarter of 2002, and (c) an
    $11,970 charge arising from changes in accounting estimates
    related to Medicaid and other governmental pricing programs.
    Branded pharmaceuticals segment net revenues for 2003 reflect an
    $18,000 charge for changes in accounting estimates related to
    Medicaid for the years 1998 to 2002 and a $900 charge for
    corrections of immaterial errors related to Medicaid for the
    years 1994 to 1997. For additional information, please see the
    section above entitled Governmental Investigations,
    Medicaid Accrual Adjustment, and Related Matters and
    Note 17 to our audited consolidated financial statements.



| |                                                                          
| | -------------------------------------------------------------------------
| | Year Ended December 31, 2003 Compared to
    Year Ended December 31, 2002



| |         
| | --------
| | Revenues

Total net revenue increased $393.1 million,
or 34.8%, to $1,521.4 million in 2003 from
$1,128.3 million in 2002, due primarily to the acquisition
and growth of branded pharmaceutical products.

Net sales from branded pharmaceutical products
increased $268.1 million, or 26.0%, to
$1,300.9 million in 2003 from $1,032.8 million in
2002. This increase was primarily due to our acquisition of
Sonata® and Skelaxin® on June 12, 2003, increased
net sales of some of our branded pharmaceutical products,
particularly Altace® and Thrombin-JMI® and the
acquisition of Intal®, Tilade®, and Synercid® on
December 30, 2002, partially offset by lower sales of
Levoxyl®, our womens health products, Lorabid®,
Cortisporin®, and Florinef®. Net sales from branded
pharmaceutical products for 2002 reflect



| |   |                                                                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a $22.1 million charge for corrections of
    immaterial errors related to underpayments of amounts due under
    Medicaid and other governmental pricing programs for the years
    1998 to 2001,                                    
|
| |  | a $12.4 million charge for corrections of
    immaterial errors related to underpayments of amounts due under
    Medicaid and other governmental pricing programs related to 2002
    and recorded in the fourth quarter of 2002, and
|
| |  | an $12.0 million charge arising from changes
    in accounting estimates related to Medicaid and other
    governmental pricing programs.                                                                                             

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Branded pharmaceuticals segment net revenues for
2003 reflect



| |   |                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------
| |  | an $18.0 million charge for changes in
    accounting estimates related to Medicaid for the years 1998 to
    2002 and
|
| |  | a $0.9 million charge for corrections of
    immaterial errors related to Medicaid for the years 1994 to 1997.        

Net sales from branded pharmaceutical products in
2002 have not been adjusted to reflect the amount of the $18.9
million adjustment made in 2003 for estimated underpayments of
amounts due under Medicaid and other governmental pricing
programs which actually related to 2002.

For additional information, please see the
section above entitled Governmental Investigations,
Medicaid Accrual Adjustment, and Related Matters and
Note 17 to our audited consolidated financial statements.
We expect continued growth in net sales from branded
pharmaceuticals products during 2004, but not at as high a rate
as that experienced in 2003.

Revenues from Meridian totaled $124.2 million in
2003. This is a new segment in 2003 due to our acquisition of
Meridian on January 8, 2003.

Revenues from royalties is derived from payments
we receive based on sales of Adenoscan® and
Adenocard®. Revenues from royalties increased
$10.0 million, or 17.1%, to $68.4 million in 2003 from
$58.4 million in 2002 primarily due to an increase in sales
of Adenoscan®. While we anticipate continued growth from
royalty revenues, we are not responsible for the marketing of
these products and, thus, are not able to predict whether growth
in 2004 will continue at the rate experienced in 2003.
Additionally, we anticipate the entry of generic competitors for
Adenocard® during the second half of 2004. Adenocard®
accounted for approximately 11.9% of our royalty revenues during
2003.

Revenues from contract manufacturing decreased
$8.6 million, or 24.0%, to $27.3 million in 2003 from
$35.9 million in 2002. We anticipate contract revenue
should be lower in 2004.



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

Total operating costs and expenses increased
$521.2 million, or 62.5%, to $1,355.3 million in 2003
from $834.1 million in 2002. This increase was primarily
due to special items during 2003 resulting in a net charge
equaling $371.9 million, compared to a net charge totaling
$152.8 million during 2002, operating costs associated with
Meridian which we acquired in January 2003, cost of revenues and
amortization associated with branded pharmaceutical products
acquired during 2003, expenses associated with the expansion of
our sales force during 2003, and cost of revenues associated
with increased unit sales of some of our branded pharmaceutical
products. Special items are those particular material income or
expense items that our management believes are not related to
our ongoing, underlying business, are not recurring, or are not
generally predictable. These items include, but are not limited
to, merger and restructuring expenses; non-capitalized expenses
associated with acquisitions, such as in-process research and
development charges and one-time inventory valuation adjustment
charges; charges resulting from the early extinguishments of
debt; asset impairment charges; expenses of drug recalls; and
gains and losses resulting from the divestiture of assets. We
believe the identification of special items enhances an analysis
of our ongoing, underlying business and an analysis of our
financial results when comparing those results to that of a
previous or subsequent like period. However, it should be noted
that the determination of whether to classify an item as a
special charge involves judgments by us.

Cost of revenues increased $89.8 million, or
30.4%, to $384.8 million in 2003 from $295.0 million
in 2002. The increase was primarily due to costs associated with
sales of branded pharmaceutical products we acquired during
2003, cost of revenues associated with Meridian which we
acquired in January 2003, partially offset by special items
related to inventory in 2002 resulting in a net charge equaling
$68.1 million

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during that year, compared to a net charge of
$36.5 million during 2003. Special items included in cost
of revenues during 2002 and 2003 are as follows:




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | As a result of declining Lorabid®
    prescriptions, during the fourth quarter of 2002 we determined
    that we will not sell all of the Lorabid® inventory that we
    were required to purchase under our supply agreement with Eli
    Lilly. Accordingly, we recorded a $49.9 million charge in 2002
    related to the liability associated with the amount of the
    purchase commitments in excess of expected demand. During the
    fourth quarter of 2003, primarily as a result of the continuing
    decline of Lorabid® prescriptions, we recorded an
    additional $30.0 million charge for purchase commitments in
    excess of expected demand.
|
| |  | We incurred a charge of $2.1 million in 2003
    relating to the step-up in the cost of Meridians inventory
    at the time of acquisition.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | We incurred a charge in the amount of
    $4.3 million in 2003 primarily related to the voluntary
    recalls of certain lots of Levoxyl®.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | We incurred a charge of $15.2 million relating to
    inventory donations during the fourth quarter of 2002,
    attributable to our decision to divest our rights to
    Lorabid®.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | We incurred a charge in the amount of $3.0
    million in 2002 primarily related to the voluntary recalls of
    Liqui-Char and Theravac® and products manufactured for us
    by DSM Pharmaceuticals.                                                                                                                                                                                                                                                                                                                                                                                                                                                             

Cost of revenues from branded pharmaceutical
products increased $28.1 million, or 11.7%, to
$267.5 million in 2003 from $239.4 million in 2002.
The increase was primarily due to cost of revenues associated
with our acquisitions and an increase in cost of sales related
to Altace®, partially offset by a decrease in the net
charge for special items associated with our inventory of
branded pharmaceutical products as described above.

Cost of revenues from Meridian Medical
Technologies was $66.2 million in 2003. This is a new
segment in 2003 due to our acquisition of Meridian on
January 8, 2003.

Cost of revenues from royalties increased
$0.8 million, or 7.6%, to $11.3 million in 2003 from
$10.5 million in 2002.

Cost of revenues associated with contract
manufacturing decreased $4.5 million, or 10.3%, to
$39.2 million in 2003 from $43.7 million in 2002 due
to decreased unit production of products we manufacture for
third parties.

As a percentage of revenues, cost of revenues
decreased to 25.3% in 2003 from 26.1% in 2002 primarily due to a
reduction in the amount of the net charge for special items
related to inventory during 2003 as described above, partially
offset by cost of revenues associated with Meridian which we
acquired in January 2003 and whose products have lower gross
margins.

Total selling, general and administrative
expenses, including co-promotion fees paid under our Co-
Promotion Agreement with Wyeth Pharmaceuticals, increased
$128.4 million, or 35.0%, to $495.3 million in 2003
from $366.9 million in 2002. This increase was primarily
attributable to special items resulting in a net charge equaling
$28.9 million for professional fees that are primarily
related to the ongoing investigations of our company by the SEC
and the Office of Inspector General of the Department of Health
and Human Services and a legal settlement related to
Lorabid®, expenses associated with expansion of our sales
force during 2003 and selling, general and administrative
expenses associated with Meridian which we acquired in January
2003. Fees under our Co-Promotion Agreement for Altace®
were reduced by $15.2 million during 2003 as a result of
the accrual adjustments during 2002 and 2003 for amounts due
under Medicaid and other governmental pricing programs for the
years 1998 to 2002. As a percentage of revenues, total selling,
general, and administrative expense was 32.6% in 2003 compared
to 32.5% in 2002. We believe that selling, general, and
administrative expenses will continue to increase during 2004
but at a lower rate than that experienced in 2003.

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Depreciation and amortization expense increased
$65.3 million, or 110.1%, to $124.6 million in 2003
from $59.3 million in 2002. This increase was primarily
attributable to the amortization of the intangible assets
associated with our acquisitions of Sonata® and
Skelaxin® on June 12, 2003; Meridian on
January 8, 2003; and Intal®, Tilade® and
Synercid® on December 30, 2002. As a percentage of
total revenues, depreciation and amortization expense increased
to 8.2% in 2003 compared to 5.3% in 2002. Our depreciation and
amortization expense is anticipated to increase at a
substantially reduced rate during 2004 compared to 2003. For
additional information, please see Note 8 to our audited
consolidated financial statements.

Total research and development expenses increased
$197.9 million to $238.1 million in 2003 from
$40.2 million in 2002. This increase was primarily due to
an increase in special items resulting in a charge equaling
$194.0 million in 2003 for acquired in-process research and
development associated with our acquisition of the rights to new
formulations of Sonata® presently under development and our
acquisition of Meridian, partially offset by a special item
resulting in a charge equaling $12.0 million during 2002 for
in-process research and development associated with our
acquisition of Intal® in December 2002. We anticipate that
research and development expense should equal approximately
$70.0 million during 2004.

In addition to the special items related to
inventory, total selling, general and administrative expense and
research and development expense described above, we incurred
other special items affecting operating costs and expenses
resulting in a net charge totaling $112.6 million during
2003 compared to a net charge totaling $72.7 million in
2002. These other special items included the following:



| |   |                                                                                                                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | During the year ended December 31, 2003, we
    incurred an intangible asset impairment charge of
    $111.0 million reflecting the reduction in the fair value
    of the Florinef® intangible assets on the approval of a
    second generic on January 21, 2003.                                  
|
| |  | During the year ended December 31, 2003, we
    incurred an intangible asset impairment charge of
    $13.6 million related to three of our smallest branded
    pharmaceutical products and the write-off of certain unutilized
    intangible assets.                                              
|
| |  | During the year ended December 31, 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.                                                                                                      
|
| |  | During the year ended December 31, 2002, we
    incurred an intangible asset impairment charge of
    $66.8 million related to our decision to divest
    Lorabid®.                                                                                                                                  
|
| |  | During the year ended December 31, 2002, we
    incurred merger, restructuring and executive retirement charges
    of $5.9 million primarily resulting from the consolidation
    of our international division into our operations in Bristol,
    Tennessee, and the retirement of two executives.



| |                 
| | ----------------
| | Operating Income

Operating income decreased $128.1 million,
or 43.5%, to $166.1 million in 2003 from
$294.2 million in 2002. As a percentage of net revenues,
operating income decreased to 10.9% in 2003 from 26.1% in 2002.
This decrease was primarily due to the special items described
above, particularly special charges totaling $194.0 million
for acquired in-process research and development relating to our
acquisition of rights to new formulations of Sonata®
presently under development and our acquisition of Meridian, and
$111.0 million intangible asset impairment special charges
related to Florinef®. While we believe operating income in
2004 will grow due to increased net sales from our branded
pharmaceutical segment and decreased special charges, we refer
you to the Risk Factors section in this report where
we describe events that could cause results to materially differ.



| |                       
| | ----------------------
| | Other Income (Expense)

Interest income decreased $15.6 million, or
69.6%, to $6.8 million in 2003 from $22.4 million in
2002 primarily due to lower balances of invested cash, cash
equivalents and marketable securities during 2003 as compared to
2002.

72



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Interest expense increased $1.0 million, or
8.1%, to $13.4 million in 2003 from $12.4 million in
2002.

Our financial results in 2003 include a special
income item in the amount of $18.2 million to reflect the
decrease in the valuation allowance for the convertible notes
receivable from Novavax. We will adjust the amount of the
valuation allowance in future periods on an as-if-converted
basis until the loan is no longer considered to be impaired.
This accounting treatment may change under Financial Accounting
Standards Board Interpretation No. 46, Consolidation
of Variable Interest Entities. For additional information,
please see Note 2 to our audited consolidated financial
statements.



| |                   
| | ------------------
| | Income Tax Expense

The effective tax rate was 40.2% in 2003 and
31.8% in 2002. The effective tax rate in 2002 was different than
the federal statutory rate of 35.0% primarily due to favorable
adjustments in the overall state tax rate, research and
development tax credits, donations of branded prescription
pharmaceutical products and tax-exempt interest. The effective
tax rate in 2003 was higher then the federal statutory rate
primarily due to state income taxes and non-deductible
in-process research and development charges incurred in
connection with our acquisition of Meridian. We anticipate the
effective tax rate in 2004 to be approximately 36.0%.



| |           
| | ----------
| | Net Income

Due to the factors set forth above, net income
decreased $76.6 million, or 42.0%, to $105.9 million
in 2003 from $182.5 million in 2002.



| |                                                                          
| | -------------------------------------------------------------------------
| | Year Ended December 31, 2002 Compared to
    Year Ended December 31, 2001



| |         
| | --------
| | Revenues

Total net revenue increased $256.1 million,
or 29.4%, to $1,128.3 million in 2002 from
$872.3 million in 2001, due primarily to the growth and
acquisition of branded pharmaceutical products.

Net sales from branded pharmaceutical products
increased $239.3 million, or 30.1%, to
$1,032.8 million in 2002 from $793.5 million in 2001.
This increase was due primarily to growth in net sales of
Altace®, Levoxyl and Thrombin-JMI®, the acquisition of
Corzide®, Delestrogen® and Florinef® and a
license to Corgard® in August 2001, and the acquisition of
Prefest® on May 29, 2002. This increase was partially
offset by a $22.1 million charge for corrections of
immaterial errors related to underpayments of amounts due under
Medicaid and other governmental pricing programs for the years
1998 to 2001; a $12.4 million charge for corrections of
immaterial errors related to underpayments of amounts due under
Medicaid and other governmental pricing programs related to 2002
and recorded in the fourth quarter of 2002; a $12.0 million
charge arising from changes made in 2002 in accounting estimates
for the years 1998 to 2002 related to Medicaid and other
governmental pricing programs; and decreases in net sales of
Lorabid®, Tapazole® and several womens health
products. Net sales from branded pharmaceutical products for
2002 and 2001 have not been reduced by estimated underpayments
of amounts due under Medicaid and other governmental pricing
programs for that year.

Revenue from royalties is derived from payments
we receive based on sales of Adenoscan® and
Adenocard®. Revenues from royalties increased
$11.6 million, or 24.8%, to $58.4 million in 2002 from
$46.8 million in 2001 primarily due to an increase in unit
sales of Adenoscan®.

Revenues from contract manufacturing increased
$6.2 million, or 20.9%, to $35.9 million in 2002 from
$29.7 million in 2001. The majority of the increase was due
to increased unit volume of products manufactured for third
parties in 2002 compared to 2001.



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

Total operating costs and expenses increased
$328.1 million, or 64.8%, to $834.1 million in 2002
from $506.0 million in 2001. The increase was primarily due
to special items during 2002 resulting in a net

73



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##### 



charge of $152.8 million, cost of revenues
associated with increased unit sales of our branded
pharmaceutical products, and increased fees associated with the
promotion of Altace® under our Co-Promotion Agreement with
Wyeth, offset by special items during 2001 resulting in a net
charge of $12.1 million.


Cost of revenues increased $108.4 million,
or 58.1%, to $295.0 million in 2002 from
$186.6 million in 2001. The increase was primarily due to
costs associated with increased unit sales of our branded
pharmaceutical products, including Altace®, Levoxyl®
and Thrombin-JMI®, and an increase in special items related
to inventory totaling $68.1 million during 2002, as
compared to a net charge totaling $8.0 million during 2001.
Special items were as follows:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | As a result of a continuing decline of
    Lorabid® prescriptions and our inability, to date, to
    divest our rights to Lorabid®, we determined that we will
    be unable to sell all of the Lorabid® inventory that we are
    required to purchase under our supply agreement with
    Eli Lilly. Accordingly, we recorded in the fourth quarter
    of 2002 a $49.9 million charge related to the liability
    associated with the amount of the purchase commitments in excess
    of expected demand.
|
| |  | We incurred a charge of $15.2 million
    relating to inventory donations during the fourth quarter of
    2002, attributable to our decision to divest our rights to
    Lorabid®.                                                                                                                                                                                                                                                                                                                           
|
| |  | We incurred a charge in the amount of
    $5.9 million during the fourth quarter of 2001 and
    $1.2 million in 2002 related to our voluntary recall of
    products manufactured for us by DSM Pharmaceuticals as a result
    of regulatory issues related to DSMs manufacturing
    facility in Greenville, North Carolina. Distribution of the
    affected products was resumed during 2002.                                                                                                           
|
| |  | We incurred a charge in the amount of
    $1.8 million during the second-quarter of 2002, due
    primarily to the voluntary recalls of Liqui-Char® and
    Theravac®, two of our smaller products.                                                                                                                                                                                                                                                                                                           
|
| |  | We incurred a charge in the amount of
    $2.1 million during the third quarter of 2001, relating to
    the write off of obsolete Levoxyl® inventory. The FDA
    approved the NDA for our new formulation of Levoxyl® on
    May 25, 2001. Pursuant to FDA guidance, we have distributed
    only the FDA approved new formulation of Levoxyl® since
    August 14, 2001.                                                                                                                                   

Cost of revenues from branded pharmaceutical
products increased $100.2 million, or 72.0%, to
$239.4 million in 2002 from $139.2 million in 2001.
This increase was primarily due to an increase in special items
affecting cost of revenues in 2002 as described above, as well
as increases in cost of revenues due to increased unit sales of
our branded pharmaceutical products, especially the
Altace®, Levoxyl® and Thrombin® product lines.

Cost of revenues from royalties increased
$2.2 million, or 26.5%, to $10.5 million in 2002 from
$8.3 million in 2001. The increase is primarily due to our
increased royalty expense that is directly related to the
increase in royalty revenue attributable to Adenocard® and
Adenoscan®.

Cost of revenues associated with contract
manufacturing increased $6.8 million, or 18.4%, to
$43.7 million in 2002 from $36.9 million in 2001 due
primarily to an increase in contract manufacturing unit sales of
products we manufactured for third parties.

As a percentage of revenues, cost of revenues
increased to 26.1% in 2002 from 21.4% in 2001 due to the
increase in special items as described above, partially offset
by an increase in sales of higher margin products.

Total selling, general and administrative
expenses increased $126.0 million, or 52.3%, to
$366.9 million in 2002 from $240.9 million in 2001. As
a percentage of total revenues, selling, general and
administrative expenses increased to 32.5% in 2002 from 27.6% in
2001. These increases were primarily attributable to fees and
expenses associated with the promotion of Altace® under the
Co-Promotion Agreement with Wyeth.

Depreciation and amortization expense increased
$11.3 million, or 23.5%, to $59.3 million in 2002 from
$48.0 million in 2001. This increase was primarily
attributable to capital expenditures in 2001 and

74



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2002, a full year of amortization of the
intangible assets related to the acquisitions of Corzide®,
Delestrogen® and Florinef® and a license to
Corgard® from Bristol-Myers Squibb in August 2001, and the
acquisition of Prefest® from Ortho-McNeil on May 29,
2002. As a percentage of total revenues, depreciation and
amortization expenses decreased modestly to 5.3% in 2002
compared to 5.5% in 2001.


Total research and development expenses increased
$13.7 million to $40.2 million in 2002 from $26.5
million in 2001. The increase is primarily due to a special item
resulting in a charge of $12.0 million for in-process
research and development related to our acquisition of
Intal® on December 30, 2002.

In addition to the special items related to
inventory and research and development described above, King
incurred other special items affecting operating costs and
expenses resulting in a net charge totaling $72.7 million
during 2002 compared to a net charge totaling $4.1 million
during the same period of the prior year. These other special
items included the following:



| |   |                                                                                                                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | During the year ended December 31, 2002, we
    incurred an intangible asset impairment charge of
    $66.8 million related to our decision to divest
    Lorabid®, reflecting managements cash flow
    expectations as of July 2003.                                                              
|
| |  | During the year ended December 31, 2002, we
    incurred merger, restructuring and executive retirement charges
    of $5.9 million primarily resulting from the consolidation
    of our international division into our operations in Bristol,
    Tennessee, and the retirement of two executives.
|
| |  | During the year ended December 31, 2001, we
    incurred merger, restructuring and other charges of
    $4.1 million resulting from the further integration of
    Jones Pharma Incorporated.                                                                                                        



| |                 
| | ----------------
| | Operating Income

Operating income decreased $72.1 million, or
19.7%, to $294.2 million in 2002 from $366.3 million
in 2001. As a percentage of net revenues, operating income
decreased to 26.1% in 2002 from 42.0% in 2001 due primarily to
an increase in the net charge related to special items during
2002 and the reduction in total revenue during 2002 due to
(a) a $22.1 million charge for corrections of
immaterial errors related to underpayments of amounts due under
Medicaid and other governmental pricing programs for the years
1998 to 2001, (b) a $12.4 million charge for
corrections of immaterial errors related to underpayments of
amounts due under Medicaid and other governmental pricing
programs related to 2002 and recorded in the fourth quarter of
2002, and (c) a $12.0 million charge arising from
changes made in 2002 in accounting estimates for the years 1998
to 2002 related to Medicaid and other governmental pricing
programs. Operating income for 2001 has not been reduced to
reflect the estimated underpayments of amounts due under
Medicaid and other governmental pricing programs for that year
as the underpayments were immaterial.



| |                       
| | ----------------------
| | Other Income (Expense)

Interest income increased $11.4 million, or
103.6%, to $22.4 million in 2002 from $11.0 million in
2001. This increase was primarily due to higher average
investments, offset by reduced rates of return on investments in
2002.

Interest expense decreased $0.3 million, or
2.4%, to $12.4 million in 2002 from $12.7 million in
2001 due primarily to substantially lower interest rates on
long-term debt.

Special items during 2002 also included a charge
of $35.6 million relating to the establishment of a
valuation allowance against the convertible notes receivable
from Novavax. SFAS No. 114, requires that we treat the
Novavax convertible notes as an impaired loan because of the
decline in the share price of Novavax common stock to levels
below that established by our common stock conversion options
associated with the convertible notes.

During the year ended December 31, 2001, we
wrote off $22.9 million of unamortized financing costs and
premiums paid resulting from the repayment of debt during this
period.

75



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##### 



We recorded other expenses of $0.9 million
in 2002 as compared to other income of $6.3 million in
2001. During 2001, other income related primarily to unrealized
gains on the conversion options associated with our Novavax
convertible notes.



| |                   
| | ------------------
| | Income Tax Expense

The effective tax rate was 31.8% in 2002 and
37.2% in 2001. The effective tax rate in 2002 was different than
the federal statutory rate of 35.0% primarily due to favorable
adjustments in the overall state tax rate, research and
development tax credits, donations of branded prescription
pharmaceutical products and tax-exempt interest. The effective
rate in 2001 was different than the federal statutory rate of
35.0% primarily due to state income taxes.



| |                                                                      
| | ---------------------------------------------------------------------
| | Income before Cumulative Effect of Change in
    Accounting Principle

Due to the factors set forth above, income before
the cumulative effect of change in accounting principle
decreased $36.0 million, or 16.5%, to $182.5 million
in 2002 from $218.5 million in 2001.



| |                                                        
| | -------------------------------------------------------
| | Cumulative Effect of Change in Accounting
    Principle

We recognized the cumulative effect of a change
in accounting principle of $0.5 million, net of income
taxes of $0.3 million, during the first quarter of 2001,
due to the adoption of SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, which
establishes accounting and reporting standards for derivative
instruments and hedging activities.



| |           
| | ----------
| | Net Income

Due to the factors set forth above, net income
decreased $35.4 million, or 16.2%, to $182.5 million
in 2002 from $217.9 million in 2001.

Off Balance Sheet Arrangements, Contractual
Obligations and Commercial Commitments

We do not have any off balance sheet
arrangements, except for operating leases in the normal course
of business as described in Note 10 to the our audited
consolidated financial statements included in this report, and
as reflected in the table below.

The following summarizes contractual obligations
and commitments as of December 31, 2003 (in thousands):

|                                   |  |                        |         |           |  |             |         |            |  |            |         |  |  |   |         |  |  |   |        | 
|---------------------------------- |  | ---------------------- | ------- | --------- |  | ----------- | ------- | ---------- |  | ---------- | ------- |  |  | - | ------- |  |  | - | ------ | 
|                                   |  |                       
|                                   |  | Payments Due by Period
|                                   |  |                       
|                                   |  |                        |         | Less Than |  | One to      |         | Four to    |  | After Five
|                                   |  | Total                  |         | One Year  |  | Three Years |         | Five Years |  | Years     
|                                   |  |                        |         |           |  |             |         |            |  |           
|Contractual Obligations:           |  |                        |         |           |  |             |         |            |  |            |         |  |  |   |         |  |  |   |        | 
|Long-term debt                     |  | $                      | 345,097 |           |  | $           | 97      |            |  | $          | 345,000 |  |  | $ |        |  |  | $ |       | 
|Operating leases                   |  |                        | 75,519  |           |  |             | 13,315  |            |  |            | 23,814  |  |  |   | 18,749  |  |  |   | 19,641 | 
|Unconditional purchase obligations |  |                        | 523,065 |           |  |             | 137,850 |            |  |            | 207,109 |  |  |   | 178,106 |  |  |   |       | 

Our unconditional purchase obligations are
primarily related to minimum purchase requirements under
contracts with suppliers to purchase raw materials and finished
goods related to our branded pharmaceutical products. The above
table does not reflect any potential milestone payments in
connection with research and development projects or
acquisitions.

We have a supply agreement with Aventis to
produce ramipril, the active ingredient in Altace®. This
supply agreement is reflected in the unconditional purchase
obligations above. This supply agreement requires us to purchase
certain minimum levels of ramipril. If sales of Altace® do
not increase at the currently anticipated rates, if we are
unable to maintain market exclusivity for Altace® in
accordance with our current expectations, if our product life
cycle management is not successful, or if we do not terminate
the supply agreement at an optimal time for us, we may incur
losses in connection with the purchase

76



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##### 



commitments under the supply agreement. In the
event we incur losses in connection with the purchase
commitments under the supply agreement, there may be a material
adverse effect upon our results of operations and cash flows.


We have a supply agreement with Eli Lilly to
produce Lorabid® which is reflected in the unconditional
purchase obligations above. This supply agreement requires us to
purchase certain minimum levels of inventory of Lorabid®
through September 1, 2005. Based on changes in estimated
prescription trends, we believe our minimum purchase commitments
under the supply agreement are greater than that which we will
be able to sell to our customers. As a result, we recorded
charges of $49.9 million during December 2002 and $30.0 million
during December 2003 related to the liability associated
with the amount of our purchase commitments in excess of
expected demand. As of December 31, 2003, we have
$5.2 million of additional exposure related to the supply
agreement if prescriptions for Lorabid® continue to decline.

Liquidity and Capital Resources



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

We believe that existing balances of cash, cash
equivalents and marketable securities, cash generated from
operations, existing revolving credit facility and funds
available to us under our universal shelf registration are
sufficient to finance our current operations and working capital
requirements on both a short term and long term basis. However,
in the event we make significant future acquisitions or change
our capital structure, we may be required to raise funds through
additional borrowings or the issuance of additional debt or
equity securities.

On January 8, 2003, we completed our
acquisition of Meridian. We paid $44.50 per common share to
Meridian shareholders, totaling approximately
$253.9 million. We financed the acquisition using our
available cash.

On June 12, 2003, we acquired the primary
care business of Elan and of some of its subsidiaries in the
United States and Puerto Rico, which includes the rights to two
branded prescription pharmaceutical products, including the
rights pertaining to potential new formulations, of Sonata®
and Skelaxin®, together with Elans United States
primary care field sales force. Product rights subject to the
agreement include those related to Sonata®, a
nonbenzodiazepine treatment for insomnia, and Skelaxin®, a
muscle relaxant, in the United States, its territories and
possessions, and Puerto Rico. Under the terms of the agreement,
Elans sale of Skelaxin® included the related NDAs,
copyrights, trademarks, patents and rights pertaining to
potential new formulations of Skelaxin®. Elans sale
of Sonata® included its rights to the product, as well as
certain related copyrights. We also acquired certain
intellectual property, regulatory, and other assets relating to
Sonata® directly from Wyeth. Under the terms of the
agreement, we secured an exclusive license to the intellectual
property rights, in this territory, of both Wyeth and Elan to
the extent they relate to new formulations of Sonata®,
other than for use in animals. The total estimated purchase
price of $814.4 million includes the cost of acquisition,
assumed liabilities and a portion of contingent liabilities. The
purchase price also includes the transfer of inventory with a
value of approximately $40.4 million. In connection with
this acquisition, we placed $163.4 million into escrow to
satisfy the deferred obligations to Wyeth that we assumed. In
addition to the initial purchase price, we paid
$25.0 million during January 2004, as a milestone payment
to Elan relating to the continued exclusivity of Sonata®
and we paid $11.0 million during March 2004, as a milestone
payment to Elan in connection with the development of new
formulations of Sonata®. We will also



| |   |                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | pay royalties on the current formulation of
    Skelaxin® from the date of closing,                                                                       
|
| |  | pay up to an additional $60.0 million if
    Elan achieves certain milestones in connection with the
    development of a reformulated version of Sonata®,
|
| |  | will pay $15.0 million as a milestone
    payment if annual net sales of a reformulated version of
    Sonata® exceed $100.0 million and                  
|
| |  | will pay for costs associated with the
    development of the reformulated version of Sonata®.                                                            

77



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We drew down a total of $125.0 million on our
$400.0 million senior secured revolving credit facility on June
3 and June 6, 2003, the proceeds of which were used to fund
a portion of the Elan acquisition on June 12, 2003. During
the third quarter of 2003, we paid off the principal balance and
have no outstanding balance as of December 31, 2003.

SEC
Investigation and Securities Litigation

Pending determination of the precise amount of
our obligations related to the governmental investigations, the
Medicaid accrual adjustment and related matters, we have placed
a total of $65.5 million in an interest-bearing escrow
account. Our accruals for amounts owed in respect of Medicaid
and other governmental pricing programs relate solely to our
estimated underpayments and exclude any interest, fines,
penalties or other amounts that might be owed in connection with
the underpayments, as we cannot predict or reasonably estimate
their likelihood or magnitude at this time. For additional
information, please see the section above entitled
Governmental Investigations, Medicaid Accrual Adjustment,
and Related Matters.



| |                             
| | ----------------------------
| | Year ended December 31, 2003

We generated net cash from operations of
$437.3 million for the year ended December 31, 2003.
Our net cash provided from operations was primarily the result
of $105.9 million in net income, adjusted for non-cash
charges for depreciation and amortization of
$125.5 million, the write-off of in-process research and
development of $194.0 million primarily related to the
acquisitions of Meridian and the primary care business of Elan,
and the impairment charge for intangible assets of
$124.6 million primarily related to Florinef®. Working
capital changes reducing cash flow from operations were due
primarily to increases in inventory and accounts receivable
resulting from increased sales. Working capital changes
increasing cash flow from operations were due primarily to
increases in accrued expenses due to the timing of our payments
for rebates.

Cash flows used in investing activities were
$882.0 million primarily due to our purchase of Meridian of
$238.5 million, our purchase of the primary care business
of Elan of $761.7 million, net proceeds from the sale of
investment securities of $227.2 million, transfers to
escrow of $67.7 million and capital expenditures of
$51.2 million.

Cash flows from financing activities were
$2.5 million, principally comprised of debt payments of
$1.3 million offset by proceeds in the amount of
$4.1 million from the exercise of employee stock options.
Included in financing activities is $125.0 million of
proceeds and $125.0 million of payments both related to
borrowings on our credit facility.



| |                             
| | ----------------------------
| | Year ended December 31, 2002

We generated net cash from operations of
$456.0 million for the year ended December 31, 2002.
Our net cash provided from operations was primarily the result
of $182.5 million in net income, adjusted for non-cash
charges for depreciation and amortization of $62.9 million,
the write-off of in-process research and development of
$12.0 million related to our acquisition of Intal®,
the impairment charge for intangible assets of $66.8 million
related to Lorabid®, and the reserve on convertible senior
notes of $35.4 million, partially offset by changes in
working capital and deferred income taxes.

Cash flows used in investing activities were
$574.3 million primarily due to the purchase of intangible
assets of $322.1 million related to our acquisitions of
Intal®, Tilade®, Synercid® and Prefest®,
capital expenditures of $73.6 million, the net purchase of
investment securities of $177.3 million, and the purchase
of Novavax convertible senior notes of $10.0 million.

Financing activities used $168.1 million of
cash flows comprised principally of the repurchase of some of
our common stock for $166.3 million.

78



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##### 





| |                             
| | ----------------------------
| | Year ended December 31, 2001

We generated net cash from operations of
$279.6 million for the year ended December 31, 2001.
Our net cash provided from operations was primarily the result
of $217.9 million in net income, adjusted for non-cash
charges for depreciation and amortization of $48.0 million
and charges of $22.9 million related to the write-off of
debt financing costs related to the early extinguishment of our
subordinated debentures partially offset by changes in working
capital.

Cash flows used in investing activities were
$382.7 million primarily due to the purchase of intangible
assets of $286.5 million related to our acquisition of
products from Bristol-Myers Squibb, capital expenditures of
$40.2 million, the purchase of investment securities of
$49.9 million, loans of $15.0 million to a supplier,
and the purchase of Novavax convertible senior notes of
$10.0 million offset by $14.1 million representing
proceeds from the repayment of loans made to a supplier.

Financing activities provided $901.3 million of
cash flow comprised principally of $75.0 million in
proceeds from the revolving credit facility, $684.4 million
in proceeds from the issuance of common shares and the exercise
of stock options and $345.0 million in proceeds from the
issuance of convertible debentures, offset by repayments of
$75.0 million on the revolving credit facility,
$115.1 million on the senior subordinated notes, and
$11.1 million of debt issuance costs.



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

As of December 31, 2003, we had
$345.1 million of long-term debt (including current
portion) outstanding, up to $388.4 million available under
our revolving credit facility, and $616.0 million available
under our universal shelf registration.

On September 20, 2001, we registered a
$1.3 billion universal shelf registration statement on
Form S-3 with the Securities and Exchange Commission. This
universal shelf registration statement allows us to sell any
combination of debt and/or equity securities in one or more
offerings up to a total of $1.3 billion. During November
2001, we completed the sale of 17,992,000 newly issued shares of
common stock for $38.00 per share ($36.67 per share net of
commissions and expenses) resulting in net proceeds of $659.8
million. Additionally, during November 2001, we issued
$345.0 million of 2 3/4% Convertible Debentures due
November 15, 2021 in a private placement. Holders may
require us to repurchase for cash all or part of these
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 accrual interest up to but not
including the date of repurchase.

On April 23, 2002, we established a
$400.0 million five year senior secured revolving credit
facility. The facility has been collateralized in general by all
real estate with a value of $5.0 million or more and all of
our personal property and that of our significant subsidiaries.
Our obligations under the senior secured revolving credit
facility are unconditionally guaranteed on a senior basis by
most of our subsidiaries. The senior secured revolving credit
facility accrues interest at our 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
facility and (b) letters of credit outstanding. We incurred
$5.1 million of deferred financing costs, which are being
amortized over five years, the life of the senior secured
revolving credit facility. This facility requires us to maintain
a minimum net worth of no less than $1.2 billion plus 50%
of our 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 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, 2003, we have
complied with these covenants. As described above, on
June 3 and June 6, 2003, we drew down a total of
$125.0 million under our senior secured revolving credit
facility to fund a portion of our acquisition of Elans
primary care business on June 12, 2003. During the third
quarter of 2003, we repaid the principal

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balance owed on our senior secured revolving
credit facility and have no outstanding borrowings as of
December 31, 2003.


As of December 31, 2003, there were no
outstanding borrowings under this facility, however, we had
$11.6 million outstanding for letters of credit under this
facility.



| |                     
| | --------------------
| | Capital Expenditures

Capital expenditures, including capital lease
obligations, were $51.2 million for the year ended
December 31, 2003 and $73.6 million for the year ended
December 31, 2002. The principal capital expenditures for
the year ended December 31, 2003 included property and
equipment purchases, new information technology system
implementation costs and building improvements for facility
upgrades and increased capacity.

We anticipate capital expenditures, including
capital lease obligations, for the year ending December 31,
2004 of approximately $75.0 to $90.0 million, which will be
funded with cash from operations. The principal capital
expenditures are anticipated to include property and equipment
purchases, new information technology system implementation
costs, building improvements for facility upgrades, cost
associated with improving our production capabilities, and costs
associated with moving production of some of our pharmaceutical
products to our facilities in St. Louis, Bristol and
Rochester.



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

We have experienced only moderate raw material
and labor price increases in recent years. While we have passed
some price increases along to our customers, we have primarily
benefited from sales growth negating most inflationary pressures.



| |                                 
| | --------------------------------
| | Recent Accounting Pronouncements

In the first quarter of 2002, we adopted SFAS
No. 141 Business Combinations, and SFAS
No. 142 Goodwill and Other Intangible Assets.
SFAS No. 141 requires all business combinations to be
accounted for under the purchase method of accounting.
SFAS No. 141 was effective for all business
combinations initiated after June 30, 2001.
SFAS No. 142 modifies the accounting and reporting for
acquired intangible assets at the time of acquisition and in
subsequent periods. Intangible assets which have finite lives
must be amortized over their estimated useful life. Intangible
assets with indefinite lives will not be amortized, but
evaluated annually for impairment. The results for the year
ended December 31, 2002 include the effect of adopting
SFAS Nos. 141 and 142, which resulted in a
$1.6 million reduction in expenses, or $1.1 million
net of tax, and no increase in basic and diluted earnings per
share.

In August 2001, the Financial Accounting
Standards Board issued SFAS No. 143, Accounting
for Asset Retirement Obligations and
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS No. 143
addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. SFAS No. 144
addresses financial accounting and reporting for the impairment
or disposal of long-lived assets. We adopted these standards
effective January 1, 2002. The implementation of these
standards did not have any effect on our financial statements.

In May 2002, the Financial Accounting Standards
Board issued SFAS No. 145, Revision of
FAS Nos. 4, 44 and 64, Amendment of FAS 13 and
Technical Corrections as of April 2002.
SFAS No. 145 is effective for fiscal periods beginning
after May 15, 2002. The primary impact of adopting
SFAS No. 145 is that gains and losses incurred upon
the extinguishment of debt will no longer qualify for treatment
as an extraordinary item in the income statement but will be
presented as non-operating gain or loss. Accordingly, for
purposes of comparison in our 2003 Form 10-K, we
reclassified the loss incurred on the extinguishment of debt
during the year ended December 31, 2001 as other expense.

In July 2002, the Financial Accounting Standards
Board issued SFAS No. 146, Accounting for Exit
or Disposal Activities. SFAS No. 146 addresses
the recognition, measurement, and reporting of costs that

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are associated with exit and disposal activities,
including costs related to terminating a contract that is not a
capital lease and termination benefits that employees who are
involuntarily terminated receive under the terms of a one-time
benefit arrangement that is not an ongoing benefit arrangement
or an individual deferred-compensation contract.
SFAS No. 146 supersedes Emerging Issues Task Force
Issue No. 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a
Restructuring). SFAS No. 146 was effective for
exit or disposal activities initiated after December 31,
2002. The implementation of this standard did not have any
effect on our financial statements.


In January 2003, the Financial Accounting
Standards Board issued Interpretation No. 46,
Consolidation of Variable Interest Entities, which
we refer to as FIN 46. FIN 46 requires a
variable interest entity to be consolidated by a company if that
company is required to absorb a majority of the variable
interest entitys expected losses or entitled to receive a
majority of the entitys residual returns or both. We are
in the process of assessing what impact this pronouncement will
have on our consolidated financial statements. Based on our
preliminary analysis of the impact of FIN 46, we believe that it
is reasonably possible that Novavax could be a variable interest
entity and our interest in Novavax may require us to consolidate
Novavax in the first quarter of 2004.

During the period from December 2000 through June
2002, we provided $40.0 million in financing to Novavax in
the form of notes receivable convertible to common stock of
Novavax. In addition, during 2001, we obtained an exclusive
worldwide license to promote, market, distribute and sell
EstrasorbTM and AndrosorbTM, following
approval, except in the United States and Puerto Rico, where we
and Novavax will co-market the products. Once approved, we will
pay Novavax a royalty based on a percentage of net sales of the
products outside of the United States and Puerto Rico. Novavax
will pay us a co-promotion fee equal to 50% of net sales less
cost of revenues of the products within the United States and
Puerto Rico. The NDA for EstrasorbTM was approved by
the FDA during October 2003. As of December 31, 2003, we
owned approximately 0.9% of Novavax common stock.

At September 30, 2003, Novavax reported
total assets of $61.6 million, total liabilities of
$48.7 million, revenues for the nine months ended
September 30, 2003 of $7.7 million, and a net loss of
$14.2 million for the nine months ended September 30,
2003.



| |                             
| | ----------------------------
| | Critical Accounting Policies

We have chosen accounting policies that we
believe are appropriate to accurately and fairly report our
operating results and financial position, and apply those
accounting policies in a consistent manner.

The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States requires that management make estimates and
assumptions. Assets, liabilities, revenues and expenses, and
disclosure of contingent assets and liabilities are affected by
such estimates and assumptions. The most significant assumptions
are employed in estimates used in determining values of
inventories and intangible assets, accruals for rebates, returns
and chargebacks, as well as estimates used in applying the
revenue recognition policy. We are subject to risks and
uncertainties that may cause actual results to differ from those
estimates, such as changes in the healthcare environment,
competition, legislation and regulation. We believe the
following accounting policies are the most critical because they
involve the most significant judgments and estimates used in
preparation of our consolidated financial statements.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Inventories.Our
    inventories are valued at the lower of cost or market value. We
    evaluate all of our 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 provide 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

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | 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 estimated
    inventory quantities which we will be able to sell to our
    customers, we record a charge in costs of revenues.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | 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 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.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We review our property 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 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.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Accruals for rebates, returns, and
    chargebacks.We establish accruals for
    rebates, returns, and chargebacks in the same period we
    recognize the related sales. The accruals reduce revenues and
    are included in accrued expenses. Accrued rebates include
    amounts due under Medicaid, managed care rebates and other
    commercial contractual rebates. We estimate accrued rebates
    based on a percentage of selling price determined from
    historical experience. With respect to accruals for estimated
    Medicaid rebates, we evaluate our historical rebate payments by
    product as a percentage of historical sales, product pricing and
    current contracts. At the time of rebate payment, which
    generally 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 any differences between estimated
    and actual payments. Due to estimates and assumptions inherent
    in determining the amount of the rebate, rebate payments remain
    subject to retroactive adjustment. Returns are accrued based on
    historical experience. Chargebacks are based on the estimated
    days of unprocessed claims using historical experience. In all
    cases, judgment is required in estimating these reserves, and
    actual claims for rebates, returns and chargebacks could be
    different from the estimates. 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.
|
| |  | 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. 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. For the year ended December 31, 2002, we
    deferred recognition of revenue associated with a purchase of
    our products by the King Benevolent Fund. We have and will
    recognize the deferred revenue as the purchased products are
    distributed by the King Benevolent                                                                                                                                                                                                                                                                                                                                                                                                          

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| |  |                                                                                                                                                                                                            
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Fund. See the Certain Relationships and
    Related Transactions in Item 13 and Note 19,
    Related Party Transactions, in our Notes to Consolidated
    Financial Statements included in this report.



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

Certain of our financial instruments are subject
to market risks, including interest rate risk. Our financial
instruments are not currently subject to foreign currency risk
or commodity price risk. We have no financial instruments held
for trading purposes.

We have marketable securities which are carried
at fair value based on current market quotes. Gains and losses
on securities are based on the specific identification method.

The fair market value of long-term fixed interest
rate debt is subject to interest rate risk. Generally, the fair
market value of fixed interest rate debt will increase as
interest rates rise and decrease as interest rates fall. In
addition, the fair value of our convertible debentures would be
impacted by our stock price. The estimated fair value of our
total long-term debt at December 31, 2003 was
$322.7 million. Fair values were determined from available
market prices, using current interest rates and terms to
maturity. If interest rates were to increase or decrease 1%, the
fair value of our long-term debt would increase or decrease by
approximately $9.0 million.

At December 31, 2003, 2002 and 2001, we did
not hold any derivative financial instruments.



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

Our audited consolidated financial statements and
related notes as of December 31, 2003 and 2002 and for each
of the three years ended December 31, 2003 are included
under Item 15 and begin on page F-1.



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

None.



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



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) | Evaluation of Disclosure Controls and
    Procedures.At the end of the period
    covered by this report, our chief executive officer and chief
    financial officer have evaluated the effectiveness of the design
    and operation of our disclosure controls and procedures (as
    defined in Exchange Act Rule 13a-14(c)). Based on that
    evaluation, the chief executive officer and chief financial
    officer have concluded that our disclosure controls and
    procedures are effective to ensure that material information
    relating to King and our consolidated subsidiaries is made known
    to these officers by others within these entities, particularly
    during the period this annual report was prepared, in order to
    allow timely decisions regarding required disclosure.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| | (b) | Changes in Internal
    Controls.As set forth in the section
    entitled Managements Discussion and Analysis of
    Financial Condition and Results of Operations under the
    heading Governmental Investigations, Medicaid Accrual
    Adjustment, and Related Matters, we have undertaken a
    substantial process to enhance our compliance with Medicaid and
    other governmental pricing program requirements. Also, effective
    August 1, we appointed a corporate compliance officer whose
    responsibilities include oversight of internal controls. In
    addition, during July 2003, we implemented a new information
    technology system. This implementation has resulted in certain
    improvements in our business processes and internal controls
    impacting financial reporting. We are taking the necessary steps
    to monitor and maintain appropriate internal controls during
    this period of change. These steps include deploying resources
    to mitigate internal control risks and performing additional
    verifications and testing to ensure data integrity. There have
    not been any additional significant changes in our internal
    controls or in other factors that could significantly affect
    these controls subsequent to the date of their evaluation.

83



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PART III



|         |                                                       
|-------- | ------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant

Our executive officers and directors as of
March 8, 2004 were as follows:

|                           |  |     |    |               |  |                                                                
|-------------------------- |  | --- | -- | ------------- |  | ---------------------------------------------------------------
|Name                       |  | Age |    | Position Held
|                           |  |     |    |              
|Jefferson J. Gregory       |  |     | 48 |               |  | Chairman of the Board and Chief Executive Officer              
|Kyle P. Macione            |  |     | 40 |               |  | President                                                      
|Brian A. Markison          |  |     | 44 |               |  | Chief Operating Officer                                        
|James R. Lattanzi          |  |     | 49 |               |  | Chief Financial Officer and Director                           
|John A. A. Bellamy         |  |     | 42 |               |  | Executive Vice President, Legal Affairs and
    General Counsel
|Frederick Brouillette, Jr. |  |     | 53 |               |  | Corporate Compliance Officer                                   
|Earnest W. Deavenport, Jr. |  |     | 65 |               |  | Director                                                       
|Elizabeth M. Greetham      |  |     | 54 |               |  | Director                                                       
|Gregory D. Jordan          |  |     | 52 |               |  | Director                                                       
|R. Charles Moyer           |  |     | 58 |               |  | Director                                                       
|Philip M. Pfeffer          |  |     | 59 |               |  | Director                                                       
|D. Greg Rooker             |  |     | 56 |               |  | Director                                                       
|Ted G. Wood                |  |     | 66 |               |  | Director                                                       

Jefferson J. Gregoryhas served as Chairman of the Board of King since June 2002 and
as Chief Executive Officer since January 2002. He has served as
a director of King since 1995. He had served as President of
King since 1993. He was formerly the Director of Regulatory
Affairs and Product Information for General Injectables and
Vaccines, Inc. from 1991 to 1993 and was a consultant to the
pharmaceutical industry from 1989 to 1991. He formerly served as
a registered pharmacist in retail pharmacies in the Washington
D.C. and Baltimore, Maryland metropolitan areas. He graduated
from the University of Maryland School of Law with a Juris
Doctor in 1985, University of Maryland School of Pharmacy with a
Bachelor of Science degree in Pharmacy in 1979, and Montgomery
College with an Associate of Arts degree in 1976.

Kyle P. Macionehas
served as President of King since April 2002. He had served as
Executive Vice President, Corporate Affairs since January 1998
and as Corporate Counsel since March 1996. He was formerly a
corporate attorney with the law firm of Elliott Lawson &
Pomrenke in Bristol, Virginia from 1992 to 1996. He graduated
from Washington & Lee University School of Law with a
Juris Doctor in 1991, University of Alabama with a Masters of
Accountancy in 1987, and University of Mississippi with a
Bachelor of Accountancy in 1986. He is a Certified Public
Accountant and licensed to practice law in Tennessee and
Virginia.

Brian A. Markisonhas served as Chief Operating Officer of King since
March 8, 2004. Prior to joining King, Mr. Markison had
served in various positions with Bristol-Myers Squibb since
1982. From 2001 until he joined King, he served as President of
Bristol-Myers Squibbs Oncology, Virology and Oncology
Therapeutics Network businesses. Between 1998 and 2001, he
served variously as Senior Vice President,
Neuroscience/Infectious Disease; President,
Neuroscience/Infectious Disease/Dermatology; and Vice President,
Operational Excellence and Productivity. He previously served in
various positions with Bristol-Myers Squibb relating to
marketing and sales. Mr. Markinson graduated from Iona
College in 1982 with a Bachelor of Science degree.

James R. Lattanzihas served as Kings Chief Financial Officer since
September 2000 and as a director since October 2002. Prior to
joining King, Mr. Lattanzi, a Certified Public Accountant,
was with

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PricewaterhouseCoopers for 24 years
(11 years as a business assurance partner), serving in the
Pittsburgh office, New York national office and most recently as
the managing partner of PricewaterhouseCoopers Greensboro,
North Carolina office. Mr. Lattanzi graduated from Indiana
University of Pennsylvania in 1976 with a degree in accounting.


John A. A. Bellamyhas served as Executive Vice President of Legal Affairs and
General Counsel since February 1995. He was formerly a corporate
attorney with the law firm of Hunter, Smith & Davis in
Kingsport, Tennessee from 1990 to 1995. He graduated from the
University of Tennessee College of Law with a Juris Doctor with
Honors in 1990, and graduated Summa Cum Laude with Honors in
Independent Study from King College in 1984 with a Bachelor of
Arts degree in Classics and English. He is a member of the
Licensing Executives Society and related professional
organizations.

Frederick Brouillette,
Jr.has served as Corporate Compliance
Officer since August 2003. He served as Executive Vice
President, Finance from January 2003 until August 2003 and as
Vice President, Risk Management beginning in February 2001.
Prior to joining King, Mr. Brouillette, a Certified Public
Accountant, was with PricewaterhouseCoopers for 4 years, serving
most recently in that firms Richmond, Virginia office
providing internal audit outsourcing and internal control
consulting services. He was formerly the chief internal audit
executive for two major public corporations and served for 12
years in the public accounting audit practice of Peat, Marwick
Mitchell & Co., the predecessor firm to KPMG.
Mr. Brouillette is a member of the Virginia Society of
Certified Public Accountants, the American Institute of
Certified Public Accountants, and the Institute of Internal
Auditors. He graduated with honors from the University of
Virginias McIntire School of Commerce in 1973 with a
Bachelor of Science degree in accounting.

Earnest W. Deavenport,
Jr.,has served as a director since
May 2000. He was formerly Chairman of the Board and Chief
Executive Officer of Eastman Chemical Company, Kingsport,
Tennessee, where he had served in various capacities since 1960.
He was Chairman of the National Association of Manufacturers in
1998 and is currently a member of the National Academy of
Engineering. Mr. Deavenport is also a member of the boards
of directors of Acuity Brands, Inc., AmSouth Bancorporation and
Theragenics Corporation, each a publicly-held corporation.
Mr. Deavenport graduated from Massachusetts Institute of
Technology with a Masters of Science in Management in 1985 and
from Mississippi State University with a Bachelor of Science
degree in Chemical Engineering in 1960.

Elizabeth M.
Greethamhas served as director since
November 2003. She has served as a director of DrugAbuse
Sciences, Inc. since 1998 and as its Chief Executive Officer
since August 2000. Ms. Greetham previously served as the
Chief Financial Officer and Senior Vice President, Business
Development of Drug Abuse Sciences from April 1999 to August
2000. Prior to joining DrugAbuse Sciences, Ms. Greetham was
a portfolio manager with Weiss, Peck, & Greer, an
institutional investment management firm, where she managed the
WPG Life Sciences Funds, L.P., which invests in select
biotechnology stocks. Prior to that Ms. Greetham was a
consultant to F. Eberstadt & Co. In total,
Ms. Greetham has over 25 years of experience as a
portfolio manager and health care analyst in the United States
and Europe. She is also a member of the board of directors of
Guilford Pharmaceuticals Inc. and Stressgen Biotechnologies
Corporation, each a publicly-held corporation. Ms. Greetham
earned a Master of Arts (Honours) degree in Economics from the
University of Edinburgh, Scotland in 1971.

Gregory D. Jordanhas served as a director since June 2001. He has served as
President of King College in Bristol, Tennessee since 1997,
having joined the King College faculty in 1980. He received his
Bachelor of Arts degree from Belhaven College in 1973; his
Masters of Arts and Divinity degrees from Trinity Evangelical
Divinity School in 1976 and 1977, respectively; his Doctorate in
Hebraic and Cognate Studies from Hebrew Union
College  Jewish Institute of Religion in 1987; and
his Masters of Business Administration from the Babcock Graduate
School of Management at Wake Forest University in 2004.

R. Charles Moyer,
Ph.D.,has served as a director since
December 2000. Dr. Moyer is Dean Emeritus of the Babcock
Graduate School of Management at Wake Forest University, having
served as Dean from 1996 until his retirement as Dean in August
2003. Dr. Moyer currently holds the GMAC Insurance Chair of
Finance at Wake Forest University. Prior to joining the faculty
at Wake Forest in 1988, Dr. Moyer was

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Finance Department Chairman at Texas Tech
University. Dr. Moyer earned his Doctorate in Finance and
Managerial Economics from the University of Pittsburgh in 1971,
his Masters of Business Administration from the University of
Pittsburgh in 1968, and his Bachelor of Arts degree in Economics
from Howard University in 1967.


Philip M. Pfefferhas served as a director since February 2003. Mr. Pfeffer
is President and Chief Executive Officer of Treemont Capital,
Inc., a private equity investment company, which he founded in
1999. He previously served as Chief Executive Officer and
director of Borders Group, Inc., a publicly-held book, music and
video retailer from November 1998 to April 1999.
Mr. Pfeffer was also a Director and President and Chief
Operating Officer of Random House, Inc. from May 1996 to
September 1998 and a member of the board of directors and audit
committee of Ingram Micro Inc., a company that became
publicly-held in November 1996, from April 1981 to June 2001.
Prior to that, Mr. Pfeffer was Executive Vice President and
a director of Ingram Industries from January 1981 to March 1996
and served in various other positions including Chairman and
Chief Executive Officer of Ingram Distribution Group Inc. and
its predecessor companies from December 1977 to March 1996.
Mr. Pfeffer earned a Bachelor of Arts degree in Mathematics
and Chemistry in 1965 and a Master of Arts degree in Economics
in 1966, and received an honorary Doctor of Humane Letters
degree in 1997, each from Southern Illinois University.

D. Greg Rookerhas served as a director since October 1997. Mr. Rooker is
the former owner and President of Family Community Newspapers of
Southwest Virginia, Inc., Wytheville, Virginia, which consists
of six community newspapers and a national monthly motor sports
magazine. He is a co-founder of the Jason Foundation and Brain
Injury Services of SWVA, Inc., each a non-profit organization
providing services to brain injury survivors. Mr. Rooker
serves as Secretary/Treasurer of The Jason Foundation and as
President of Brain Injury Services of SWVA, Inc. Mr. Rooker
graduated from Northwestern University with a degree in
Journalism in 1969.

Ted G. Woodhas
served as a director since August 2003. Mr. Wood is retired
from The United Company in Bristol, Virginia, where he was the
Vice Chairman from January 2003 until August 2003. Prior to
that, he served as President of the United Operating Companies
from 1998 to 2002. Mr. Wood served as a director of King
from April 1997 to May 2000. From 1992 to 1993, he was President
of Boehringer Mannheim Pharmaceutical Corporation in Rockville,
Maryland. From 1993 to 1994, he was President of KV
Pharmaceutical in St. Louis, Missouri. From 1975 to 1991,
he was employed by SmithKline Beecham Corporation where he
served as President of Beecham Laboratories from 1988 to 1989
and Executive Vice President of SmithKline from 1990 to 1991.
Mr. Wood is also a member of the board of directors of
Pozen, Inc., a publicly-held corporation. He graduated from the
University of Kentucky with a Bachelor of Science degree in
Commerce in 1960. In 1986 he completed the Advanced Management
Program at Harvard University.

Compensation of Directors

For 2003 each non-employee director of King
received an annual fee of $30,000, payable quarterly, plus a fee
of $1,500 for participation in each board meeting. Non-employee
directors also received $750 for each committee meeting attended
which was held on a day when a meeting of the board was convened
and $1,200 for each meeting attended that was held on a day when
a meeting of the board was not convened. Upon the specific
approval of the Compensation and Human Resources Committee,
non-employee directors may be compensated $250 per hour for
extraordinary board-related service for which compensation is
not otherwise received. The chairman of the Audit Committee was
paid an annual fee of $10,000 and the chairmen of the
Compensation and Human Resources Committee and the Nominating
and Corporate Governance Committee were paid an annual fee of
$5,000. Committee members received an annual fee of $4,000. In
addition, the board has agreed to pay members who serve on the
newly appointed search committee for candidates for chief
executive officer the same fees as those described above,
including $5,000 for the Chairman of that committee. Also,
independent members of the board will receive $1,200 for each
executive session they attend if the session is held on a day
that a meeting of the board is not held. They will receive no
additional compensation if they meet on the same day that a
meeting of the board is held. Travel expenses related to board
or committee meetings were reimbursed.

86



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Non-employee directors may use corporate aircraft
up to 10 hours of flight time per year, but only for
flights for which the primary purpose relates to Kings
business. Use of corporate aircraft is treated as compensation
to the director as may be required by the Internal Revenue Code.
During 2003 the following non-employee directors used corporate
aircraft, and their use was treated as compensation in the
amounts indicated: Earnest W. Deavenport, $343; James E.
Gregory, $7,681; Gregory D. Jordan, $731; and D. Greg Rooker,
$4,511. In addition, Audit Committee Chairman D. Greg
Rooker, received approximately $38,000 for extraordinary work
performed during the course of the Audit Committees 2003
investigation of issues related to the SECs investigation
of our company. Members of the Board also receive continuing
education fees of up to $2,000 per day for up to three days
per year. Each non-employee director is annually awarded an
option for 10,000 shares of common stock under our 1998
Non-Employee Director Stock Option Plan. Options exercisable for
191,697 shares of common stock have been issued to our
current non-employee directors.


Meetings of Directors

The Board of Directors held 16 meetings during
2003. No director attended less than 75% of all meetings held.

Classification of Board of Directors

Pursuant to our Bylaws, the Board of Directors is
divided into three classes of directors, each containing, as
nearly as possible, an equal number of directors. Directors
within each class are elected to serve three-year terms and
approximately one-third of the directors sit for election at
each annual meeting of the shareholders. A classified board of
directors may have the effect of deterring or delaying any
attempt by any group to obtain control of King by a proxy
contest since such third party would be required to have its
nominees elected at two separate meetings of the shareholders in
order to elect a majority of the members of the Board of
Directors.

Committees of the Board of Directors

The Board of Directors has appointed an Audit
Committee, a Compensation and Human Resources Committee and a
Nominating and Corporate Governance Committee.

Audit Committee.The
Audit Committee, which currently consists of D. Greg Rooker,
Chairman, Gregory D. Jordan, R. Charles Moyer, and Philip M.
Pfeffer, is responsible for overseeing our financial reporting
process, including the development and maintenance of systems of
internal accounting and financial controls. The Committee is
solely responsible for retaining outside auditors to audit our
books, records and financial statements and review our systems
of accounting. The Committee is also solely responsible for the
compensation, termination and oversight of our outside auditors,
who report directly to the Committee. The Audit Committees
other principal responsibilities include: reviewing and
discussing with management and the outside auditors the audited
financial statements to be included in the annual report on
Form 10-K and, based on this review and discussion,
recommending to the Board that the audited financial statements
be included in the annual report on Form 10-K; reviewing
and discussing with management and the outside auditors the
quarterly financial statements to be included in the quarterly
report on Form 10-Q; discussing and reviewing earnings
press releases; overseeing the performance of our internal audit
function; and overseeing compliance with legal and regulatory
requirements. The Audit Committee met nineteen times in 2003.

The Board has determined that there is at least
one audit committee financial expert, Philip M. Pfeffer, serving
on the Audit Committee and that Mr. Pfeffer is independent
of King under the independence standards of the New York Stock
Exchange.

Compensation and Human Resources
Committee.The Compensation and Human
Resources Committee, which currently consists of Earnest W.
Deavenport, Jr., Chairman, Elizabeth M. Greetham, and Ted G.
Wood, is responsible for administering and determining executive
compensation and awards under our stock option plans (other than
our 1998 Non-Employee Director Stock Option Plan) and for

87



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oversight of other human resources issues. The
principal responsibilities of the Committee are to maintain a
general compensation philosophy for the executive officers of
the Company; to establish the corporate goals and objectives
upon which the compensation of the Chief Executive Officer is
based and to set the Chief Executive Officers compensation
in light of the Chief Executive Officers performance; to
review and approve the recommendations of the Chief Executive
Officer with regard to the compensation and benefits of other
executive officers; to oversee the administration of the
Companys compensation and benefit plans; to oversee the
administration of the Companys management development
process, including the plans for succession of executive
officers; and to oversee regulatory compliance with respect to
compensation matters. The Compensation Committee met five times
in 2003.


Nominating and Corporate Governance
Committee.The Nominating and
Corporate Governance Committee currently consists of Gregory D.
Jordan, Chairman, Earnest W. Deavenport, Jr., and D. Greg
Rooker. The principal responsibilities of the Committee are: to
identify individuals qualified to become Board members and
recommend these individuals to the Board for appointment or
nomination for election to the Board; to oversee corporate
governance matters; to assist the principal committees of the
Board in developing written charters; and to develop, recommend
and assist in implementing corporate governance guidelines for
our company.

Corporate Code of Conduct and Ethics

The Board has adopted a Corporate Code of Conduct
and Ethics which applies to all of our directors, officers and
employees. A copy of the Code is available through our website,
www.kingpharm.com.

88



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|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

The following table summarizes all compensation
earned by our chief executive officer and by each of the four
other most highly compensated executive officers whose total
annual salary and bonus exceeded $100,000 for services rendered
in all capacities for the year ended December 31, 2003.

SUMMARY COMPENSATION TABLE

|                                    |                                                 |                     |      |            |  |              |         |              |  |        |           |        |  |  |        |        |  |  |        |        | 
|----------------------------------- | ----------------------------------------------- | ------------------- | ---- | ---------- |  | ------------ | ------- | ------------ |  | ------ | --------- | ------ |  |  | ------ | ------ |  |  | ------ | ------ | 
|                                    |                                                 |                     |      |            |  |              |         | Long-term    |  |       
|                                    |                                                 |                     |      |            |  |              |         | Compensation |  |       
|                                    |                                                 |                     |      |            |  |             
|                                    |                                                 | Annual Compensation |      | Securities |  | All Other   
|                                    |                                                 |                     |      | Underlying |  | Compensation
|Name and Current Principal Position |                                                 | Year                |      | Salary($)  |  | Bonus($)(1)  |         | Options(#)   |  | ($)(2)
|                                    |                                                 |                     |      |            |  |              |         |              |  |       
|Jefferson J. Gregory                |                                                 |                     | 2003 |            |  |              | 594,071 |              |  |        |          |        |  |  |       |        |  |  | 76,445 |       
|                                    | Chief Executive Officer and                     |                     |      | 2002       |  |              |         | 450,000      |  |        |           | 75,000 |  |  |        | 30,000 |  |  |        | 25,462 | 
|                                    | Chairman of the Board                           |                     |      | 2001       |  |              |         | 450,540      |  |        |           | 75,000 |  |  |        | 25,000 |  |  |        | 30,408 | 
|Joseph R. Gregory(3)                |                                                 |                     | 2003 |            |  |              | 75,000  |              |  |        | 1,425,000 |        |  |  |       |        |  |  | 25,683 |       
|                                    | Former Vice Chairman of the Board and           |                     |      | 2002       |  |              |         | 450,000      |  |        |           | 75,000 |  |  |        | 25,000 |  |  |        | 46,802 | 
|                                    | former President, Monarch Pharmaceuticals, Inc. |                     |      | 2001       |  |              |         | 450,810      |  |        |           | 75,000 |  |  |        | 25,000 |  |  |        | 45,749 | 
|Kyle P. Macione(4)                  |                                                 |                     | 2003 |            |  |              | 450,000 |              |  |        |          |        |  |  |       |        |  |  | 21,489 |       
|                                    | President                                       |                     |      | 2002       |  |              |         | 384,874      |  |        |           | 20,000 |  |  |        | 25,000 |  |  |        | 7,585  | 
|                                    |                                                 |                     | 2001 |            |  |              | 215,008 |              |  |        | 20,000    |        |  |  | 7,500  |        |  |  | 5,586  |       
|James R. Lattanzi                   |                                                 |                     | 2003 |            |  |              | 450,000 |              |  |        |          |        |  |  |       |        |  |  | 33,771 |       
|                                    | Chief Financial Officer                         |                     |      | 2002       |  |              |         | 325,000      |  |        |           | 35,000 |  |  |        | 10,000 |  |  |        | 60,370 | 
|                                    |                                                 |                     | 2001 |            |  |              | 300,810 |              |  |        | 35,000    |        |  |  | 10,000 |        |  |  | 17,238 |       
|John A. A. Bellamy                  |                                                 |                     | 2003 |            |  |              | 300,000 |              |  |        |          |        |  |  |       |        |  |  | 13,200 |       
|                                    | Executive Vice President of Legal               |                     |      | 2002       |  |              |         | 225,000      |  |        |           | 20,000 |  |  |        | 7,500  |  |  |        | 45,774 | 
|                                    | Affairs and General Counsel                     |                     |      | 2001       |  |              |         | 131,017      |  |        |           | 20,000 |  |  |        | 7,500  |  |  |        | 5,586  | 
|Frederick Brouillette, Jr.(5)       |                                                 |                     | 2003 |            |  |              | 207,646 |              |  |        | 6,000     |        |  |  |       |        |  |  | 8,742  |       
|                                    | Corporate Compliance Officer                    |                     |      | 2002       |  |              |         | 173,250      |  |        |           | 5,000  |  |  |        | 2,500  |  |  |        | 7,293  | 
|                                    |                                                 |                     | 2001 |            |  |              | 146,384 |              |  |        | 5,000     |        |  |  | 9,166  |        |  |  | 10,138 |       



---



|    |                                                                                                                                                          
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Bonuses paid in an indicated year are in
    consideration of performance in the prior year.                                                             
|   
|(2) | Reflects matching contribution to the 401(k)
    plan, relocation expense reimbursement and income related to the
    personal use of corporate aircraft.
|   
|(3) | Joseph R. Gregory retired effective
    February 28, 2003.                                                                                               
|   
|(4) | Mr. Macione was named President of King in
    April 2002. He formerly was Executive Vice President, Corporate
    Affairs.                              
|   
|(5) | Mr. Brouillette was named Corporate
    Compliance Officer of King in August 2003. He formerly was
    Executive Vice President, Finance.                

There were no options to purchase shares of
common stock or stock appreciation rights granted to executive
officers named in the Summary Compensation Table above during
the year ended December 31, 2003.

89



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The following table discloses information
regarding stock options held at the end of or exercised in
fiscal year 2003 for executive officers named in the summary
Compensation Table above as of December 31, 2003.

AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL
YEAR

AND FISCAL YEAR-END OPTION/SAR
VALUES


|                           |  |             |        |          |  |                        |         |                              |  |             |         |               |  |  |   |  |  |   |         |  |  |   |   | 
|-------------------------- |  | ----------- | ------ | -------- |  | ---------------------- | ------- | ---------------------------- |  | ----------- | ------- | ------------- |  |  | - |  |  | - | ------- |  |  | - | - | 
|                           |  |             |        |          |  |                        |         |                             
|                           |  |             |        |          |  | Securities underlying  |         | Value of unexercised in-the-
|                           |  |             |        |          |  | unexercised options at |         | money options at            
|                           |  | Shares      |        |          |  | December 31, 2003      |         | December 31, 2003(1)        
|                           |  | acquired on |        | Value    |  |                        |         |                             
|Name                       |  | exercise    |        | realized |  | Exercisable            |         | Unexercisable                |  | Exercisable |         | Unexercisable
|                           |  |             |        |          |  |                        |         |                              |  |             |         |              
|Jefferson J. Gregory       |  |             |       |          |  | $                      |        |                              |  |             | 213,331 |               |  |  |  |  |  | $ | 794,497 |  |  | $ |  | 
|Joseph R. Gregory          |  |             | 75,000 |          |  | $                      | 675,622 |                              |  |             |        |               |  |  |  |  |  | $ |        |  |  | $ |  | 
|Kyle P. Macione            |  |             |       |          |  | $                      |        |                              |  |             | 62,000  |               |  |  |  |  |  | $ | 47,670  |  |  | $ |  | 
|James R. Lattanzi          |  |             |       |          |  | $                      |        |                              |  |             | 66,665  |               |  |  |  |  |  | $ |        |  |  | $ |  | 
|John A. A. Bellamy         |  |             |       |          |  | $                      |        |                              |  |             | 53,165  |               |  |  |  |  |  | $ | 139,467 |  |  | $ |  | 
|Frederick Brouillette, Jr. |  |             |       |          |  | $                      |        |                              |  |             | 11,666  |               |  |  |  |  |  | $ |        |  |  | $ |  | 






|    |                                                                                                                                        
|--- | ---------------------------------------------------------------------------------------------------------------------------------------
|(1) | Based on $15.26 per share, the closing price of
    the common stock as quoted on the New York Stock Exchange at
    December 31, 2003.

Compensation Committee Interlocks and Insider
Participation

The Compensation and Human Resources Committee of
the Board of Directors is responsible for developing and
administering compensation philosophy. Committee members who
served at various times in 2003 were Earnest W.
Deavenport, Jr., Chairman, former director Frank W.
DeFriece, Jr., Elizabeth M. Greetham, Gregory D. Jordan, R.
Charles Moyer, Philip M. Pfeffer, Greg Rooker and Ted G. Wood.
No member of the Compensation and Human Resources Committee
during 2003 was a current or former officer of King or any of
its subsidiaries.

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Item 12.Security
Ownership of Certain Beneficial Owners and
Management

The following table sets forth certain
information regarding the ownership of the common stock as of
March 9, 2004, for (i) each person who owns more than
5% of the common stock, (ii) each director and executive
officer of King, and (iii) all executive officers and
directors of King as a group.

|                                                                     |  |                         |            |             |  |  |      | 
|-------------------------------------------------------------------- |  | ----------------------- | ---------- | ----------- |  |  | ---- | 
|                                                                     |  |                        
|                                                                     |  | Beneficial Ownership of
|                                                                     |  | Common Stock           
|                                                                     |  |                        
|                                                                     |  |                         |            | Percentage 
|Executive Officer, Directors                                         |  | Number of               |            | Outstanding
|and 5% Shareholders                                                  |  | Shares                  |            | Shares(1)  
|                                                                     |  |                         |            |            
|Jefferson J. Gregory(2)                                              |  |                         | 1,979,900  |             |  |  | *    | 
|Kyle P. Macione(3)                                                   |  |                         | 75,920     |             |  |  | *    | 
|Brian A. Markison                                                    |  |                         | 0          |             |  |  | *    | 
|James R. Lattanzi(4)                                                 |  |                         | 68,969     |             |  |  | *    | 
|John A. A. Bellamy(5)                                                |  |                         | 155,141    |             |  |  | *    | 
|Frederick Brouillette, Jr. (6)                                       |  |                         | 12,152     |             |  |  | *    | 
|Earnest W. Deavenport, Jr.(7)                                        |  |                         | 24,833     |             |  |  | *    | 
|Elizabeth M. Greetham                                                |  |                         | 0          |             |  |  | *    | 
|Gregory D. Jordan(8)                                                 |  |                         | 10,000     |             |  |  | *    | 
|R. Charles Moyer(9)                                                  |  |                         | 23,466     |             |  |  | *    | 
|D. Greg Rooker(10)                                                   |  |                         | 193,812    |             |  |  | *    | 
|Philip M. Pfeffer                                                    |  |                         | 0          |             |  |  | *    | 
|Ted G. Wood                                                          |  |                         | 46,666     |             |  |  | *    | 
|All executive officers and directors as a group
    (13 persons)(11) |  |                         | 2,590,859  |             |  |  | 1.1  | 
|Wellington Management Company, LLP(12)                               |  |                         | 29,162,464 |             |  |  | 12.1 | 
|Putnam, LLC d/b/a Putnam Investments(13)                             |  |                         | 12,964,933 |             |  |  | 5.4  | 






| |   |             
| | - | ------------
| | * | Less than 1%



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Unless otherwise indicated, beneficial ownership
    consists of sole voting and investing power based on 241,354,416
    shares issued and outstanding as of March 9, 2004. Options
    to purchase shares which are exercisable or become exercisable
    within 60 days of March 9, 2004 are deemed to be
    outstanding for the purpose of computing the percentage of
    outstanding shares owned by each person to whom a portion of
    such options relate but are not deemed to be outstanding for the
    purpose of computing the percentage owned by any other person.
|
| | (2) | Includes 1,539,880 shares jointly owned with
    Mr. Gregorys spouse and 87,333 shares beneficially
    owned by Gregory Investments, L.P., the general partners of
    which are Mr. Gregory and his spouse, and
    213,331 shares issuable upon the exercise of options
    granted to Mr. Gregory.                                                                                                                                                                                                                                                                             
|
| | (3) | Includes 62,000 shares issuable upon the exercise
    of options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| | (4) | Includes 300 shares jointly owned with
    Mr. Lattanzis spouse, 2,004 shares held in
    Mr. Lattanzis 401(k) retirement plan account and
    66,665 shares issuable upon the exercise of options.                                                                                                                                                                                                                                                                                                                                                                               
|
| | (5) | Includes 62,499 shares issuable upon the exercise
    of options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| | (6) | Includes 11,666 shares issuable upon the exercise
    of options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| | (7) | Includes 23,333 shares issuable upon the exercise
    of options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| | (8) | Includes 10,000 shares issuable upon the exercise
    of options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| | (9) | Includes 23,333 shares issuable upon the exercise
    of options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

91



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|     |                                                                                                                                                                                                                                                                                               
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Includes 33,332 shares held in trust for the
    benefit of Mr. Rookers children, 8,549 shares held by
    Mr. Rookers spouse, 13,420 shares owned by The Jason
    Foundation, a private foundation controlled by Mr. Rooker,
    and 73,333 shares issuable upon the exercise of options. 
|    
|(11) | Includes 619,493 shares issuable upon the
    exercise of options.                                                                                                                                                                                                                            
|    
|(12) | Based on a Schedule 13G filed in February
    2004 with the SEC on behalf of Wellington Management Company,
    LLP, 75 State Street, Boston, Massachusetts 02109.                                                                                                                            
|    
|(13) | Based on a Schedule 13G filed in February
    2004 with the SEC on behalf of Putnam, LLC d/b/a Putnam
    Investments; Marsh & McLennan Companies, Inc.; Putnam
    Investment Management, LLC; and The Putnam Advisory Company,
    LLC, One Post Office Square, Boston, Massachusetts 02109.

Item 13.Certain
Relationships and Related Transactions

In June 2003 we acquired Elans primary care
business. At the time of the acquisition, Jefferson J. Gregory,
our Chairman and Chief Executive Officer, owned 45,000 shares of
Elan which he had purchased in February 2002. At the time of the
acquisition, D. Greg Rooker, the Chairman of our Audit
Committee, owned 1,500 shares of Elan, which he had owned for
several years.

SJ Strategic Investments LLC, an affiliate of
John M. Gregory, our former Chairman of the Board and a brother
of Jefferson J. Gregory, purchased, in January 2003,
4.75 million shares of Novavax. Including additional open
market purchases, SJ currently owns approximately 19% of the
outstanding shares of Novavax. King currently owns approximately
300,000 shares of common stock of Novavax and has a right to
convert debt into approximately 5.2 million shares of
Novavax.

The King Benevolent Fund, Inc. (Benevolent
Fund) is a nonprofit corporation organized under the laws
of the Commonwealth of Virginia and is exempt from taxation
under Section 501(c)(3) of the Internal Revenue Code.
The Benevolent Fund obtains pharmaceutical products either as
gifts-in-kind from manufacturers or by purchase from third-party
distributors or wholesalers. The Benevolent Fund donates the
pharmaceutical products purchased or received as gifts-in-kind
to medical missions in the United States and in foreign
countries to advance its humanitarian aid efforts. The
Benevolent Fund was founded in 1994 by John M. Gregory, who also
founded King and was our Chairman of the Board until
June 28, 2002 and our Chief Executive Officer until
January 1, 2002. John M. Gregory owned more than 5% of our
common stock until May 6, 2002. John M. Gregory, who serves
as President of the Board of Directors of the Benevolent Fund,
is the brother of Jefferson J. Gregory, who became our Chief
Executive Officer on January 1, 2002 and our Chairman of
the Board on June 28, 2002, and James E. Gregory, who
served as a director from June 2002 to August 2003. In addition,
Mary Ann Blessing, a sister of Jefferson J. Gregory and James E.
Gregory, served as the Chief Operating Officer of the Benevolent
Fund until approximately January 2001 and presently serves as a
director and Treasurer of the Board of the Directors of the
Benevolent Fund. Carol Shrader, mother of Brian Shrader, Chief
Financial Officer of King until September 2000, is presently a
director of the Benevolent Fund.

Jefferson J. Gregory and James E. Gregory were
members of the Board of Directors of the Benevolent Fund in
1999, 2000, 2001 and 2002, but no longer hold those positions.
In addition, Joseph R. Gregory, who was Vice Chairman of our
Board and President of our wholly-owned subsidiary Monarch
Pharmaceuticals, Inc. until February 2003, served as a director
of the Benevolent Fund in 1999, 2000, 2001 and 2002, but no
longer holds that position. Joseph R. Gregory is the brother of
Jefferson J. Gregory, James E. Gregory, John M. Gregory and Mary
Ann Blessing. Herschel Blessing, an Executive Vice-President of
King until July 1, 2002, is the husband of Mary Ann
Blessing and a director of the Benevolent Fund.

We occasionally donate our products to the
Benevolent Fund. We donated inventory with a carrying value of
$4.1 million in 2001, $22.6 million in 2002, and
$16.3 million in 2003.

92



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##### 



In addition to receiving donations of products
directly from pharmaceutical manufacturers, the Benevolent Fund
also purchases pharmaceutical products, including those
manufactured by King, from third-party distributors or
wholesalers.

On December 26, 2002, we sold $4,701,195 of
Cortisporin®, Silvadene® and Tigan® to a
third-party wholesaler, which in turn resold those products to
the King Benevolent Fund in January 2003. We deferred
recognition of the revenue from this sale to the third-party
wholesaler and treated this sale in a manner analogous to the
consignment method. As of the date of shipment of the purchased
products to the third-party wholesaler, we recorded deferred
revenue in the amount of $4,701,195 and classified the purchased
products as if they were consignment inventory at our cost of
such inventory. We are recognizing the deferred revenue as the
purchased products are distributed by the Benevolent Fund, which
has provided us with the requisite information relating to the
timing and amount of such distributions. As of December 31,
2003, we had recognized $4,270,420 of the deferred revenue.

The Benevolent Fund has made, and may in the
future make, additional purchases of our products from
third-party distributors or wholesalers, and such purchases may
or may not be brought to our attention. We expect that all or
nearly all such purchases by the Benevolent Fund are likely to
be of product sold by us in the ordinary course of our business.
Absent special circumstances that would make those sales
material to investors, we would not intend to disclose future
indirect sales to the Benevolent Fund even if we do become aware
of them.

During 2001, we donated $103,000 to King College,
which is located in Bristol, Tennessee. Gregory D. Jordan,
one of our directors, is the president of King College.
Jefferson J. Gregory, our Chairman and Chief Executive Officer,
served as a member of the King College Board of Trustees from
1994 until 1998, as the Boards Vice Chairman from 1998
until 2001 and as its Chairman from 2001 until 2003.

During 2002, we paid $73,000 to James
E. Gregory, one of our former directors, for consulting
services. Of that amount, $23,000 was paid in the form of
personal use of the corporate aircraft.

During the years ended December 31, 2001,
2002 and 2003, we paid $5,000, $171,000 and $88,000,
respectively to the Wake Forest University School of Medicine
for research and development activities. R. Charles Moyer, one
of our directors, is Dean Emeritus of the Babcock Graduate
School of Management at Wake Forest University.

Item 14.Principal
Accountant Fees and Services

Our Audit Committee has adopted a policy which
requires that all services to be provided to us by our
independent auditors, including audit services, audit-related
services, tax services and other services, and fees related to
these services, be pre-approved by the Committee. The Committee
may provide general pre-approval of certain types of services,
but must review all such general pre-approvals not less than
annually. A service of any type not generally pre-approved by
the Committee requires the Committees specific
pre-approval. Before pre-approving the provision of any service,
the Committee must determine that provision of the service by
the independent auditor would not impair the auditors
independence. The policy prohibits delegation of the
Committees pre-approval responsibilities to our management.

During 2003, PricewaterhouseCoopers LLP not only
acted as independent auditors for us and our subsidiaries (work
related to auditing the annual financial statements for fiscal
year 2003 and reviewing the financial statements included in our
Forms 10-Q) but also rendered on our behalf other services,
including tax related services and other accounting and auditing
services. The following table sets forth the aggregate fees
billed or expected to be billed by PricewaterhouseCoopers LLP
for audit services rendered in connection with the financial
statements and reports for fiscal years 2002 and 2003 and for
other services

93



---



##### 



rendered during fiscal years 2002 and 2003 on our
behalf, including all expenses incurred in connection with these
services, which have been or will be billed to us.


|                   |       |      |           |           |  |   |         |           | 
|------------------ | ----- | ---- | --------- | --------- |  | - | ------- | --------- | 
|                   |       | 2002 |           | 2003     
|                   |       |      |           |          
|Audit Fees         |       | $    | 2,378,741 | (1)       |  | $ | 919,761 |          
|Audit Related Fees |       |      | 1,312,255 |           |  |   | 571,093 |          
|Tax Fees           |       |      | 545,648   |           |  |   | 569,651 |          
|All Other Fees     |       |      | 2,800     |           |  |   | 17,900  |          
|                   |       |      |           |           |  |   |         |          
|                   | Total |      | $         | 4,239,444 |  |   | $       | 2,078,405 | 
|                   |       |      |           |           |  |   |         |          



---



|    |                                                                                                                                                                                                                                                                                                                                                                                            
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes fees relating to the SEC investigation.
    For additional information, please see the section entitled
    Managements Discussion and Analysis of Financial
    Condition and Results of Operations under the heading
    Governmental Investigations, Medicaid Accrual Adjustment
    and Related Matters and Note 17 to our audited
    consolidated financial statements.

94



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##### 



PART IV

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

(a) Documents filed as a part of this report:



| |     |                     
| | --- | --------------------
| | (1) | Financial Statements

|                                                                                                                                            |  |             |     | 
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | --- | 
|                                                                                                                                            |  | Page number
|                                                                                                                                            |  |            
|Report of Independent Auditors                                                                                                              |  |             | F-1 | 
|Consolidated Balance Sheets as of
    December 31, 2002 and 2003                                                                            |  |             | F-2 | 
|Consolidated Statements of Income for the years
    ended December 31, 2001, 2002 and 2003                                                  |  |             | F-3 | 
|Consolidated Statements of Shareholders
    Equity and Other Comprehensive Income for the years ended
    December 31, 2001, 2002 and 2003 |  |             | F-4 | 
|Consolidated Statements of Cash Flows for the
    years ended December 31, 2001, 2002 and 2003                                              |  |             | F-5 | 
|Notes to Consolidated Financial Statements                                                                                                  |  |             | F-6 | 
|(2) Financial Statement
    Schedule Valuation and Qualifying Accounts                                                                      |  |             | S-1 | 

All other schedules have been omitted because of
the absence of conditions under which they are required or
because the required information is given in the above-listed
financial statements or notes thereto.

(b) Reports on Form 8-K.

During the quarter ended December 31, 2003,
we filed one Current Report on Form 8-K. A report was filed
on October 28, 2003 furnishing under Item 12 a press
release announcing our third quarter 2003 financial results.

(c) Exhibits

The following Exhibits are filed herewith or
incorporated herein by reference:

|        |       |    |  |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|------- | ----- | -- |  | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|        | 10.4( | 3) |  |            |  | Convertible Notes of Novavax, Inc. to King
    Pharmaceuticals, Inc. dated December 19, 2000,
    September 7, 2001 and June 26, 2002; Note Purchase
    Agreements by and between Novavax, Inc. and King
    Pharmaceuticals, Inc. dated as of December 19, 2000,
    September 7, 2001, and June 26, 2002; Investor Rights
    Agreement by and between Novavax, Inc. and King Pharmaceuticals,
    Inc. dated as of December 19, 2000, as amended; and
    Registration Rights Agreement by and between Novavax, Inc. and
    King Pharmaceuticals, Inc. dated as of December 19, 2000,
    as amended.
|        | 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
    2 3/4% Convertible Debentures due November 15, 2021.                                                                                                                                                                                                                                                                                                                                                                        

95



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##### 



|        |       |     |  |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|------- | ----- | --- |  | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |     |  |            
|Number  |       |     |  | Description
|        |       |     |  |            
|        | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                
|        | 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 |     |  |            |  | King Pharmaceuticals, Inc. Non-Employee
    Directors Deferred Compensation Plan.                                                                                                                                                                                                                                                                                                                                                                                                           
|        | 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.                                                                                                                                                                                                                                                                                                                                                                                        



---



|    |                                                                                                                                    
|--- | -----------------------------------------------------------------------------------------------------------------------------------
|(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.                                            

96



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##### 



REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Shareholders of

King Pharmaceuticals, Inc.


In our opinion, the consolidated financial
statements listed in the index appearing under
Item 15(a)(1) present fairly, in all material respects, the
financial position of King Pharmaceuticals, Inc. and its
subsidiaries at December 31, 2002 and 2003, and the results
of their operations and their cash flows for each of the three
years in the period ended December 31, 2003 in conformity
with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the financial
statement schedule listed in the index appearing under
Item 15(a)(2) presents fairly, in all material respects,
the information set forth therein when read in conjunction with
the related consolidated financial statements. These financial
statements and financial statement schedule are the
responsibility of the Companys management; our
responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.
We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.

As discussed in Note 22 to the consolidated
financial statements, in 2002 the Company adopted SFAS
No. 142, Goodwill and Other Intangible Assets.

PricewaterhouseCoopers LLP

Greensboro, North Carolina


February 19, 2004


F-1



---



##### 



KING PHARMACEUTICALS, INC.

CONSOLIDATED BALANCE SHEETS

as of December 31, 2002 and
2003


(in thousands, except share data)


|                                                              |                                                                                                                              |                                            |           |           |           |  |           |           |           | 
|------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | --------- | --------- | --------- |  | --------- | --------- | --------- | 
|                                                              |                                                                                                                              | 2002                                       |           | 2003     
|                                                              |                                                                                                                              |                                            |           |          
|ASSETS                                                        |                                                                                                                              |                                            |           |           |           |  |           |          
|Current assets:                                               |                                                                                                                              |                                            |           |           |           |  |           |          
|                                                              | Cash and cash equivalents                                                                                                    |                                            | $         | 588,225   |           |  | $         | 146,053   |          
|                                                              | Restricted cash                                                                                                              |                                            |           |          |           |  |           | 133,969   |          
|                                                              | Marketable securities                                                                                                        |                                            |           | 227,263   |           |  |           |          |          
|                                                              | Accounts receivable, net of allowance of $7,513
    and $11,055                                                              |                                            |           | 159,987   |           |  |           | 246,417   |          
|                                                              | Inventories                                                                                                                  |                                            |           | 167,153   |           |  |           | 264,898   |          
|                                                              | Deferred income tax assets                                                                                                   |                                            |           | 106,168   |           |  |           | 124,930   |          
|                                                              | Prepaid expenses and other current assets                                                                                    |                                            |           | 12,906    |           |  |           | 30,036    |          
|                                                              |                                                                                                                              |                                            |           |           |           |  |           |          
|                                                              |                                                                                                                              | Total current assets                       |           |           | 1,261,702 |  |           |           | 946,303   | 
|Property, plant and equipment, net                            |                                                                                                                              |                                            | 217,114   |           |           |  | 257,659   |          
|Goodwill                                                      |                                                                                                                              |                                            | 12,742    |           |           |  | 121,355   |          
|Intangible assets, net                                        |                                                                                                                              |                                            | 1,219,571 |           |           |  | 1,756,993 |          
|Other assets (includes restricted cash of $0 and
    $30,265) |                                                                                                                              |                                            | 39,531    |           |           |  | 76,117    |          
|Deferred income tax assets                                    |                                                                                                                              |                                            |          |           |           |  | 19,307    |          
|                                                              |                                                                                                                              |                                            |           |           |           |  |           |          
|                                                              |                                                                                                                              | Total assets                               |           | $         | 2,750,660 |  |           | $         | 3,177,734 | 
|                                                              |                                                                                                                              |                                            |           |           |           |  |           |          
|LIABILITIES AND SHAREHOLDERS
    EQUITY                      |                                                                                                                              |                                            |           |           |           |  |           |          
|Current liabilities:                                          |                                                                                                                              |                                            |           |           |           |  |           |          
|                                                              | Accounts payable                                                                                                             |                                            | $         | 49,889    |           |  | $         | 83,078    |          
|                                                              | Accrued expenses                                                                                                             |                                            |           | 297,528   |           |  |           | 506,033   |          
|                                                              | Income taxes payable                                                                                                         |                                            |           | 21,247    |           |  |           | 79,641    |          
|                                                              | Current portion of long term debt                                                                                            |                                            |           | 1,300     |           |  |           | 97        |          
|                                                              |                                                                                                                              |                                            |           |           |           |  |           |          
|                                                              |                                                                                                                              | Total current liabilities                  |           |           | 369,964   |  |           |           | 668,849   | 
|Long-term debt                                                |                                                                                                                              |                                            | 345,093   |           |           |  | 345,000   |          
|Deferred income tax liabilities                               |                                                                                                                              |                                            | 33,596    |           |           |  |          |          
|Other liabilities                                             |                                                                                                                              |                                            | 70,824    |           |           |  | 121,705   |          
|                                                              |                                                                                                                              |                                            |           |           |           |  |           |          
|                                                              |                                                                                                                              | Total liabilities                          |           |           | 819,477   |  |           |           | 1,135,554 | 
|                                                              |                                                                                                                              |                                            |           |           |           |  |           |          
|Commitments and contingencies (Note 17)                       |                                                                                                                              |                                            |           |           |           |  |           |          
|Shareholders equity:                                         |                                                                                                                              |                                            |           |           |           |  |           |          
|                                                              | Preferred stock, 15,000,000 shares authorized, no
    shares issued or outstanding                                           |                                            |           |          |           |  |           |          |          
|                                                              | Common stock, no par value, 300,000,000 shares
    authorized, 240,624,751 and 241,190,852 shares issued and
    outstanding |                                            |           | 1,201,897 |           |  |           | 1,205,970 |          
|                                                              | Retained earnings                                                                                                            |                                            |           | 729,241   |           |  |           | 835,097   |          
|                                                              | Accumulated other comprehensive income                                                                                       |                                            |           | 45        |           |  |           | 1,113     |          
|                                                              |                                                                                                                              |                                            |           |           |           |  |           |          
|                                                              |                                                                                                                              | Total shareholders equity                 |           |           | 1,931,183 |  |           |           | 2,042,180 | 
|                                                              |                                                                                                                              |                                            |           |           |           |  |           |          
|                                                              |                                                                                                                              | Total liabilities and shareholders equity |           | $         | 2,750,660 |  |           | $         | 3,177,734 | 
|                                                              |                                                                                                                              |                                            |           |           |           |  |           |          

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

F-2



---



##### 



KING PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF INCOME

for the years ended December 31, 2001, 2002
and 2003


(in thousands, except share data)


|                                                                              |                                                                                        |                                                                       |                                           |         |         |         |         |           |         |           |         |           |         |           | 
|----------------------------------------------------------------------------- | -------------------------------------------------------------------------------------- | --------------------------------------------------------------------- | ----------------------------------------- | ------- | ------- | ------- | ------- | --------- | ------- | --------- | ------- | --------- | ------- | --------- | 
|                                                                              |                                                                                        | 2001                                                                  |                                           | 2002    |         | 2003   
|                                                                              |                                                                                        |                                                                       |                                           |         |         |        
|Revenues:                                                                     |                                                                                        |                                                                       |                                           |         |         |         |         |           |         |           |         |          
|                                                                              | Net sales                                                                              |                                                                       | $                                         | 825,488 |         |         | $       | 1,069,960 |         |           | $       | 1,453,023 |        
|                                                                              | Royalty revenue                                                                        |                                                                       |                                           | 46,774  |         |         |         | 58,375    |         |           |         | 68,365    |        
|                                                                              |                                                                                        |                                                                       |                                           |         |         |         |         |           |         |           |         |          
|                                                                              |                                                                                        |                                                                       | Total revenues                            |         |         | 872,262 |         |           |         | 1,128,335 |         |           |         | 1,521,388 | 
|                                                                              |                                                                                        |                                                                       |                                           |         |         |         |         |           |         |           |         |          
|Operating costs and expenses:                                                 |                                                                                        |                                                                       |                                           |         |         |         |         |           |         |           |         |          
|                                                                              | Costs of revenues, exclusive of depreciation
    shown below                           |                                                                       |                                           | 186,564 |         |         |         | 294,976   |         |           |         | 384,763   |        
|                                                                              |                                                                                        |                                                                       |                                           |         |         |         |         |           |         |           |         |          
|                                                                              | Selling, general and administrative, exclusive of
    co-promotion fees                |                                                                       |                                           | 151,839 |         |         |         | 180,266   |         |           |         | 301,917   |        
|                                                                              | Co-promotion fees                                                                      |                                                                       |                                           | 89,041  |         |         |         | 186,657   |         |           |         | 193,350   |        
|                                                                              |                                                                                        |                                                                       |                                           |         |         |         |         |           |         |           |         |          
|                                                                              |                                                                                        |                                                                       | Total selling, general and administrative |         |         | 240,880 |         |           |         | 366,923   |         |           |         | 495,267   | 
|                                                                              |                                                                                        |                                                                       |                                           |         |         |         |         |           |         |           |         |          
|                                                                              | Research and development                                                               |                                                                       |                                           | 26,507  |         |         |         | 28,184    |         |           |         | 44,078    |        
|                                                                              | Research and development  in process upon
    acquisition                             |                                                                       |                                           |        |         |         |         | 12,000    |         |           |         | 194,000   |        
|                                                                              |                                                                                        |                                                                       |                                           |         |         |         |         |           |         |           |         |          
|                                                                              |                                                                                        |                                                                       | Total research and development            |         |         | 26,507  |         |           |         | 40,184    |         |           |         | 238,078   | 
|                                                                              |                                                                                        |                                                                       |                                           |         |         |         |         |           |         |           |         |          
|                                                                              | Depreciation and amortization                                                          |                                                                       |                                           | 47,966  |         |         |         | 59,297    |         |           |         | 124,575   |        
|                                                                              | Intangible asset impairment                                                            |                                                                       |                                           |        |         |         |         | 66,844    |         |           |         | 124,616   |        
|                                                                              | Merger, restructuring, and other special charges                                       |                                                                       |                                           | 4,079   |         |         |         | 5,911     |         |           |         |          |        
|                                                                              | Gain on sale of intangible assets                                                      |                                                                       |                                           |        |         |         |         |          |         |           |         | (12,025   | )      
|                                                                              |                                                                                        |                                                                       |                                           |         |         |         |         |           |         |           |         |          
|                                                                              |                                                                                        |                                                                       | Total operating costs and expenses        |         |         | 505,996 |         |           |         | 834,135   |         |           |         | 1,355,274 | 
|                                                                              |                                                                                        |                                                                       |                                           |         |         |         |         |           |         |           |         |          
|                                                                              | Operating income                                                                       |                                                                       |                                           | 366,266 |         |         |         | 294,200   |         |           |         | 166,114   |        
|                                                                              |                                                                                        |                                                                       |                                           |         |         |         |         |           |         |           |         |          
|Other income (expense):                                                       |                                                                                        |                                                                       |                                           |         |         |         |         |           |         |           |         |          
|                                                                              | Interest income                                                                        |                                                                       |                                           | 10,975  |         |         |         | 22,395    |         |           |         | 6,849     |        
|                                                                              | Interest expense                                                                       |                                                                       |                                           | (12,684 | )       |         |         | (12,419   | )       |           |         | (13,396   | )      
|                                                                              | Valuation benefit (charge)  convertible
    notes receivable                          |                                                                       |                                           |        |         |         |         | (35,629   | )       |           |         | 18,151    |        
|                                                                              | Extinguishment of debt expense                                                         |                                                                       |                                           | (22,903 | )       |         |         |          |         |           |         |          |        
|                                                                              | Other, net                                                                             |                                                                       |                                           | 6,313   |         |         |         | (884      | )       |           |         | (629      | )      
|                                                                              |                                                                                        |                                                                       |                                           |         |         |         |         |           |         |           |         |          
|                                                                              |                                                                                        |                                                                       | Total other income (expense)              |         |         | (18,299 | )       |           |         | (26,537   | )       |           |         | 10,975    | 
|                                                                              |                                                                                        |                                                                       |                                           |         |         |         |         |           |         |           |         |          
|                                                                              | Income before income taxes and cumulative effect
    of change in accounting principle |                                                                       |                                           | 347,967 |         |         |         | 267,663   |         |           |         | 177,089   |        
|Income tax expense                                                            |                                                                                        |                                                                       | (129,486                                  | )       |         |         | (85,143 | )         |         |           | (71,233 | )        
|                                                                              |                                                                                        |                                                                       |                                           |         |         |         |         |           |         |           |         |          
|                                                                              |                                                                                        | Income before cumulative effect of change in
    accounting principle |                                           |         | 218,481 |         |         |           | 182,520 |           |         |           | 105,856 |          
|Cumulative effect of change in accounting
    principle, net of taxes of $325 |                                                                                        |                                                                       | (545                                      | )       |         |         |        |           |         |           |        |          
|                                                                              |                                                                                        |                                                                       |                                           |         |         |         |         |           |         |           |         |          
|Net income                                                                    |                                                                                        | $                                                                     | 217,936                                   |         |         | $       | 182,520 |           |         | $         | 105,856 |          
|                                                                              |                                                                                        |                                                                       |                                           |         |         |         |         |           |         |           |         |          
|Income per common share:                                                      |                                                                                        |                                                                       |                                           |         |         |         |         |           |         |           |         |          
|                                                                              | Basic: Income before cumulative effect of change
    in accounting principle           |                                                                       | $                                         | 0.94    |         |         | $       | 0.75      |         |           | $       | 0.44      |        
|                                                                              | Cumulative
    effect of change in accounting principle                                |                                                                       |                                           |        |         |         |         |          |         |           |         |          |        
|                                                                              |                                                                                        |                                                                       |                                           |         |         |         |         |           |         |           |         |          
|                                                                              | Net income                                                                             |                                                                       | $                                         | 0.94    |         |         | $       | 0.75      |         |           | $       | 0.44      |        
|                                                                              |                                                                                        |                                                                       |                                           |         |         |         |         |           |         |           |         |          
|                                                                              | Diluted: Income before cumulative effect of
    change in accounting principle         |                                                                       | $                                         | 0.93    |         |         | $       | 0.74      |         |           | $       | 0.44      |        
|                                                                              | Cumulative
    effect of change in accounting principle                                |                                                                       |                                           |        |         |         |         |          |         |           |         |          |        
|                                                                              |                                                                                        |                                                                       |                                           |         |         |         |         |           |         |           |         |          
|                                                                              | Net
    income                                                                         |                                                                       | $                                         | 0.93    |         |         | $       | 0.74      |         |           | $       | 0.44      |        
|                                                                              |                                                                                        |                                                                       |                                           |         |         |         |         |           |         |           |         |          

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

F-3



---



##### 



KING PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS
EQUITY

AND OTHER COMPREHENSIVE INCOME


for the years ended December 31, 2001,
2002 and 2003


(in thousands, except share data)


|                           |                                                                      |                            |             |            |   |               |           |          |   |       |         |         |  |   |       |     |  |   |           |          |         | 
|-------------------------- | -------------------------------------------------------------------- | -------------------------- | ----------- | ---------- | - | ------------- | --------- | -------- | - | ----- | ------- | ------- |  | - | ----- | --- |  | - | --------- | -------- | ------- | 
|                           |                                                                      |                            |             |            |   | Accumulated   |           |         
|                           |                                                                      | Common Stock               |             |            |   | Other         |           |         
|                           |                                                                      |                            |             | Retained   |   | Comprehensive |           |         
|                           |                                                                      | Shares                     |             | Amount     |   | Earnings      |           | Income   |   | Total
|                           |                                                                      |                            |             |            |   |               |           |          |   |      
|Balance, December 31, 2000 |                                                                      |                            | 170,841,178 |            |   | $             | 658,948   |          |   | $     | 328,785 |         |  | $ |      |     |  | $ | 987,733   |         
|                           |                                                                      |                            |             |            |   |               |           |          |   |       |         |         |  |   |       |     |  |   |           |         
|Comprehensive income:      |                                                                      |                            |             |            |   |               |           |          |   |       |         |         |  |   |       |     |  |   |           |         
|                           | Net income                                                           |                            |             |           |   |               |           |         |   |       |         | 217,936 |  |   |       |    |  |   |           | 217,936  |        
|                           |                                                                      |                            |             |            |   |               |           |          |   |       |         |         |  |   |       |     |  |   |           |         
|                           |                                                                      | Total comprehensive income |             |            |   |               |           |          |   |       |         |         |  |   |       |     |  |   |           |          | 217,936 | 
|                           |                                                                      |                            |             |            |   |               |           |          |   |       |         |         |  |   |       |     |  |   |           |         
|                           | Four for three common stock split                                    |                            |             | 56,941,365 |   |               |           | (418     | ) |       |         |        |  |   |       |    |  |   |           | (418     | )      
|                           | Stock option activity                                                |                            |             | 1,918,441  |   |               |           | 43,287   |   |       |         |        |  |   |       |    |  |   |           | 43,287   |        
|                           | Issuance of common shares                                            |                            |             | 17,992,000 |   |               |           | 659,746  |   |       |         |        |  |   |       |    |  |   |           | 659,746  |        
|                           |                                                                      |                            |             |            |   |               |           |          |   |       |         |         |  |   |       |     |  |   |           |         
|Balance, December 31, 2001 |                                                                      |                            | 247,692,984 |            |   |               | 1,361,563 |          |   |       | 546,721 |         |  |   |      |     |  |   | 1,908,284 |         
|                           |                                                                      |                            |             |            |   |               |           |          |   |       |         |         |  |   |       |     |  |   |           |         
|Comprehensive income:      |                                                                      |                            |             |            |   |               |           |          |   |       |         |         |  |   |       |     |  |   |           |         
|                           | Net income                                                           |                            |             |           |   |               |           |         |   |       |         | 182,520 |  |   |       |    |  |   |           | 182,520  |        
|                           | Net unrealized gain on marketable securities, net
    of tax of $24  |                            |             |           |   |               |           |         |   |       |         |        |  |   |       | 45  |  |   |           | 45       |        
|                           |                                                                      |                            |             |            |   |               |           |          |   |       |         |         |  |   |       |     |  |   |           |         
|                           |                                                                      | Total comprehensive income |             |            |   |               |           |          |   |       |         |         |  |   |       |     |  |   |           |          | 182,565 | 
|                           |                                                                      |                            |             |            |   |               |           |          |   |       |         |         |  |   |       |     |  |   |           |         
|                           | Stock option activity                                                |                            |             | 431,767    |   |               |           | 6,608    |   |       |         |        |  |   |       |    |  |   |           | 6,608    |        
|                           | Stock repurchases                                                    |                            |             | (7,500,000 | ) |               |           | (166,274 | ) |       |         |        |  |   |       |    |  |   |           | (166,274 | )      
|                           |                                                                      |                            |             |            |   |               |           |          |   |       |         |         |  |   |       |     |  |   |           |         
|Balance, December 31, 2002 |                                                                      |                            | 240,624,751 |            |   |               | 1,201,897 |          |   |       | 729,241 |         |  |   | 45    |     |  |   | 1,931,183 |         
|                           |                                                                      |                            |             |            |   |               |           |          |   |       |         |         |  |   |       |     |  |   |           |         
|Comprehensive income:      |                                                                      |                            |             |            |   |               |           |          |   |       |         |         |  |   |       |     |  |   |           |         
|                           | Net income                                                           |                            |             |           |   |               |           |         |   |       |         | 105,856 |  |   |       |    |  |   |           | 105,856  |        
|                           | 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 |             |            |   |               |           |          |   |       |         |         |  |   |       |     |  |   |           |          | 106,924 | 
|                           |                                                                      |                            |             |            |   |               |           |          |   |       |         |         |  |   |       |     |  |   |           |         
|                           | Stock option activity                                                |                            |             | 566,101    |   |               |           | 4,073    |   |       |         |        |  |   |       |    |  |   |           | 4,073    |        
|                           |                                                                      |                            |             |            |   |               |           |          |   |       |         |         |  |   |       |     |  |   |           |         
|Balance, December 31, 2003 |                                                                      |                            | 241,190,852 |            |   | $             | 1,205,970 |          |   | $     | 835,097 |         |  | $ | 1,113 |     |  | $ | 2,042,180 |         
|                           |                                                                      |                            |             |            |   |               |           |          |   |       |         |         |  |   |       |     |  |   |           |         

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

F-4



---



##### 



KING PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

for the years ended December 31, 2001,
2002 and 2003


(in thousands)


|                                                        |                                                                                       |                                                         |                                           |          |        |         |          |          |         |         |          |          |          |         |  
|------------------------------------------------------- | ------------------------------------------------------------------------------------- | ------------------------------------------------------- | ----------------------------------------- | -------- | ------ | ------- | -------- | -------- | ------- | ------- | -------- | -------- | -------- | ------- | -
|                                                        |                                                                                       | 2001                                                    |                                           | 2002     |        | 2003   
|                                                        |                                                                                       |                                                         |                                           |          |        |        
|Cash flows from operating activities:                   |                                                                                       |                                                         |                                           |          |        |         |          |          |         |         |          |         
|                                                        | Net income                                                                            |                                                         | $                                         | 217,936  |        |         | $        | 182,520  |         |         | $        | 105,856  |         
|                                                        | Adjustments to reconcile net income to net cash
    provided by operating activities: |                                                         |                                           |          |        |         |          |          |         |         |          |          |         
|                                                        |                                                                                       | Depreciation and amortization                           |                                           |          | 47,966 |         |          |          | 59,971  |         |          |          | 125,502  |        
|                                                        |                                                                                       | Amortization of deferred financing costs                |                                           |          | 1,040  |         |          |          | 2,898   |         |          |          | 3,160    |        
|                                                        |                                                                                       | Extinguishment of debt expense                          |                                           |          | 22,902 |         |          |          |        |         |          |          |         |        
|                                                        |                                                                                       | Cumulative effect of change in accounting
    principle |                                           |          | 870    |         |          |          |        |         |          |          |         |        
|                                                        |                                                                                       | Stock compensation charge                               |                                           |          | 3,229  |         |          |          |        |         |          |          |         |        
|                                                        |                                                                                       | Write-off of inventory                                  |                                           |          |       |         |          |          | 15,152  |         |          |          |         |        
|                                                        |                                                                                       | Deferred income taxes                                   |                                           |          | 15,209 |         |          |          | (78,061 | )       |          |          | (130,593 | )      
|                                                        |                                                                                       | Valuation charge on convertible notes receivable        |                                           |          |       |         |          |          | 35,443  |         |          |          | (18,151  | )      
|                                                        |                                                                                       | Net unrealized gain on convertible notes
    receivable |                                           |          | (8,546 | )       |          |          |        |         |          |          |         |        
|                                                        |                                                                                       | Tax benefits of stock options exercised                 |                                           |          | 12,430 |         |          |          | 2,206   |         |          |          |         |        
|                                                        |                                                                                       | Impairment of intangible assets                         |                                           |          |       |         |          |          | 66,844  |         |          |          | 124,616  |        
|                                                        |                                                                                       | In-process research and development charges             |                                           |          |       |         |          |          | 12,000  |         |          |          | 194,000  |        
|                                                        |                                                                                       | Gain on sale of intangible assets                       |                                           |          |       |         |          |          |        |         |          |          | (12,020  | )      
|                                                        |                                                                                       | Other non-cash items, net                               |                                           |          | 2,948  |         |          |          | 4,525   |         |          |          | 6,058    |        
|                                                        |                                                                                       | Changes in operating assets and liabilities:            |                                           |          |        |         |          |          |         |         |          |          |          |        
|                                                        |                                                                                       |                                                         | Accounts receivable                       |          |        | (44,114 | )        |          |         | (3,713  | )        |          |          | (84,186 | )
|                                                        |                                                                                       |                                                         | Inventories                               |          |        | (46,489 | )        |          |         | (70,727 | )        |          |          | (52,320 | )
|                                                        |                                                                                       |                                                         | Prepaid expenses and other current assets |          |        | (484    | )        |          |         | (5,090  | )        |          |          | 27,307  |  
|                                                        |                                                                                       |                                                         | Other assets                              |          |        | 3,136   |          |          |         | (1,020  | )        |          |          | (2,578  | )
|                                                        |                                                                                       |                                                         | Accounts payable                          |          |        | (9,722  | )        |          |         | 31,318  |          |          |          | 34,708  |  
|                                                        |                                                                                       |                                                         | Accrued expenses and other liabilities    |          |        | 41,519  |          |          |         | 197,304 |          |          |          | 68,139  |  
|                                                        |                                                                                       |                                                         | Deferred revenue                          |          |        | (9,247  | )        |          |         | (9,090  | )        |          |          | (9,092  | )
|                                                        |                                                                                       |                                                         | Income taxes                              |          |        | 28,977  |          |          |         | 13,529  |          |          |          | 56,898  |  
|                                                        |                                                                                       |                                                         |                                           |          |        |         |          |          |         |         |          |         
|                                                        |                                                                                       |                                                         | Net cash provided by operating activities |          |        | 279,560 |          |          |         | 456,009 |          |          |          | 437,304 |  
|                                                        |                                                                                       |                                                         |                                           |          |        |         |          |          |         |         |          |         
|Cash flows from investing activities:                   |                                                                                       |                                                         |                                           |          |        |         |          |          |         |         |          |         
|                                                        | Purchases of investment securities                                                    |                                                         |                                           | (49,880  | )      |         |          | (823,112 | )       |         |          | (25,903  | )       
|                                                        | Proceeds from maturity and sale of investment
    securities                          |                                                         |                                           |         |        |         |          | 645,798  |         |         |          | 253,097  |         
|                                                        | Transfer (to)/from restricted cash                                                    |                                                         |                                           |         |        |         |          |         |         |         |          | (67,743  | )       
|                                                        | Convertible senior notes                                                              |                                                         |                                           | (10,000  | )      |         |          | (10,000  | )       |         |          |         |         
|                                                        | Loans receivable                                                                      |                                                         |                                           | (15,000  | )      |         |          |         |         |         |          |         |         
|                                                        | Purchases of property, plant and equipment                                            |                                                         |                                           | (40,167  | )      |         |          | (73,587  | )       |         |          | (51,201  | )       
|                                                        | Acquisition of primary care business of Elan                                          |                                                         |                                           |         |        |         |          |         |         |         |          | (761,745 | )       
|                                                        | Acquisition of Meridian                                                               |                                                         |                                           |         |        |         |          |         |         |         |          | (238,498 | )       
|                                                        | Purchases of intangible assets                                                        |                                                         |                                           | (286,500 | )      |         |          | (322,100 | )       |         |          | (19,300  | )       
|                                                        | Proceeds from loan receivable                                                         |                                                         |                                           | 14,086   |        |         |          | 4,310    |         |         |          | 13,320   |         
|                                                        | Proceeds from sale of intangible assets                                               |                                                         |                                           | 3,332    |        |         |          |         |         |         |          | 15,659   |         
|                                                        | Other investing activities                                                            |                                                         |                                           | 1,446    |        |         |          | 4,388    |         |         |          | 295      |         
|                                                        |                                                                                       |                                                         |                                           |          |        |         |          |          |         |         |          |         
|Net cash used in investing activities                   |                                                                                       |                                                         | (382,683                                  | )        |        |         | (574,303 | )        |         |         | (882,019 | )       
|                                                        |                                                                                       |                                                         |                                           |          |        |         |          |          |         |         |          |         
|Cash flows from financing activities:                   |                                                                                       |                                                         |                                           |          |        |         |          |          |         |         |          |         
|                                                        | Proceeds from revolving credit facility                                               |                                                         |                                           | 75,000   |        |         |          |         |         |         |          | 125,000  |         
|                                                        | Payments on revolving credit facility                                                 |                                                         |                                           | (75,000  | )      |         |          |         |         |         |          | (125,000 | )       
|                                                        | Proceeds from issuance of common shares and
    exercise of stock options, net        |                                                         |                                           | 684,435  |        |         |          | 4,402    |         |         |          | 4,053    |         
|                                                        | Stock repurchases                                                                     |                                                         |                                           |         |        |         |          | (166,274 | )       |         |          |         |         
|                                                        | Payment of senior subordinated debt                                                   |                                                         |                                           | (115,098 | )      |         |          |         |         |         |          |         |         
|                                                        | Payments on other long-term debt                                                      |                                                         |                                           | (1,489   | )      |         |          | (1,361   | )       |         |          | (1,296   | )       
|                                                        | Proceeds from convertible debentures                                                  |                                                         |                                           | 345,000  |        |         |          |         |         |         |          |         |         
|                                                        | Debt issuance costs                                                                   |                                                         |                                           | (11,100  | )      |         |          | (4,850   | )       |         |          | (214     | )       
|                                                        | Other                                                                                 |                                                         |                                           | (418     | )      |         |          |         |         |         |          |         |         
|                                                        |                                                                                       |                                                         |                                           |          |        |         |          |          |         |         |          |         
|Net cash (used in) provided by financing
    activities |                                                                                       |                                                         | 901,330                                   |          |        |         | (168,083 | )        |         |         | 2,543    |         
|                                                        |                                                                                       |                                                         |                                           |          |        |         |          |          |         |         |          |         
|Increase (decrease) in cash and cash
    equivalents    |                                                                                       |                                                         | 798,207                                   |          |        |         | (286,377 | )        |         |         | (442,172 | )       
|Cash and cash equivalents, beginning of year            |                                                                                       |                                                         | 76,395                                    |          |        |         | 874,602  |          |         |         | 588,225  |         
|                                                        |                                                                                       |                                                         |                                           |          |        |         |          |          |         |         |          |         
|Cash and cash equivalents, end of year                  |                                                                                       | $                                                       | 874,602                                   |          |        | $       | 588,225  |          |         | $       | 146,053  |         
|                                                        |                                                                                       |                                                         |                                           |          |        |         |          |          |         |         |          |         
|Supplemental disclosure of cash paid for:               |                                                                                       |                                                         |                                           |          |        |         |          |          |         |         |          |         
|Interest                                                |                                                                                       | $                                                       | 15,433                                    |          |        | $       | 11,731   |          |         | $       | 13,396   |         
|                                                        |                                                                                       |                                                         |                                           |          |        |         |          |          |         |         |          |         
|Taxes                                                   |                                                                                       | $                                                       | 96,773                                    |          |        | $       | 153,966  |          |         | $       | 144,918  |         
|                                                        |                                                                                       |                                                         |                                           |          |        |         |          |          |         |         |          |         

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

F-5



---



##### 



KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

(in thousands, except share data)




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

King Pharmaceuticals, Inc. (King or
the Company) is a vertically integrated
pharmaceutical company that develops, manufactures, markets and
sells branded prescription pharmaceutical products. Through a
national sales force and co-promotion arrangements, King markets
its branded pharmaceutical products to general/family
practitioners, internal medicine physicians, cardiologists,
endocrinologists, neurologists, psychiatrists,
obstetricians/gynecologists, and hospitals across the United
States and in Puerto Rico. The Company also provides contract
manufacturing for a number of the worlds leading
pharmaceutical and biotechnology companies. In addition, the
Company receives royalties from the rights of certain products
(Adenocard® and Adenoscan®) previously sold.

These consolidated financial statements include
the accounts of King and all of its wholly owned subsidiaries.
All intercompany transactions and balances have been eliminated
in consolidation.

2.     Summary of
Significant Accounting Policies

Use of Estimates.The preparation of consolidated
financial statements in conformity with accounting principles
generally accepted in the United States requires management to
make estimates and assumptions. Assets, liabilities, revenues
and expenses, and disclosure of contingent assets and
liabilities are affected by such estimates and assumptions. The
most significant assumptions are employed in estimates used in
determining allowances for doubtful accounts, values of
inventories and intangible assets, accruals for rebates, returns
and chargebacks, as well as estimates used in applying the
revenue recognition policy and accounting for the Novavax
convertible senior notes and the Co-Promotion Agreement with
Wyeth. The Company is subject to risks and uncertainties that
may cause actual results to differ from those estimates.

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. This is generally at the time products are received
by the customer. Accruals for estimated discounts, 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. For the year ended December 31, 2002, the
Company deferred recognition of revenue associated with a
purchase of our products by the King Benevolent Fund. The
Company is recognizing the deferred revenue as the purchased
products are distributed by the King Benevolent Fund. (see Note
19.)

Accruals for rebates, returns, and
chargebacks.We establish accruals for
rebates, returns, and chargebacks in the same period we
recognize the related sales. The accruals reduce revenues and
are included in accrued expenses. Accrued rebates include
amounts due under Medicaid, managed care rebates and other
commercial contractual rebates. We estimate accrued rebates
based on a percentage of selling price determined from
historical experience. With respect to accruals for estimated
Medicaid rebates, we evaluate our historical rebate payments by
product as a percentage of historical sales, product pricing and
current contracts. At the time of rebate payment, which
generally 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 any differences between estimated
and actual payments. Due to estimates and assumptions inherent
in determining the amount of the rebate, rebate payments remain
subject to retroactive adjustment. Returns are accrued based on
historical experience. Chargebacks are based on the estimated
days of unprocessed claims using historical experience. In all
cases, judgment is required in estimating

F-6



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

these reserves, and actual claims for rebates,
returns and chargebacks could be different from the estimates.
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.

Shipping and Handling Costs.The Company incurred $2,455, $2,072,
$2,790 in 2001, 2002, and 2003 respectively, related to
third-party shipping and handling costs classified with selling,
general and administrative expenses in the consolidated
statements of operations. The Company does not bill customers
for such costs.

Cash and Cash Equivalents.The Company considers all highly
liquid investments with an original maturity of three months or
less when purchased to be cash equivalents. The Companys
cash and cash equivalents are placed in large domestic banks,
which limits the amount of credit exposure.

Marketable Securities.The Company classifies its existing
marketable securities as available-for-sale. These securities
are carried at fair market value based on current market quotes,
with unrealized gains and losses reported in shareholders
equity as a component of other comprehensive income. Gains or
losses on securities sold are based on the specific
identification method. The Companys policy is to only
invest in high-grade corporate bonds, government agencies and
municipalities. The Company reviews its investment portfolio as
deemed necessary and, where appropriate, adjusts individual
securities for other-than-temporary impairments. The Company
does not hold these securities for speculative or trading
purposes.

Inventories.Inventories are stated at the lower of
cost or market. Cost is determined using the first-in, first-out
(FIFO) method. Product samples held for distribution to
third parties represent 11% and 7% of inventory as of
December 31, 2002 and December 31, 2003, respectively.
Product sample costs are charged to selling, general and
administrative costs in the accompanying consolidated statement
of income upon distribution to a third party.

Income Taxes.Deferred tax assets and liabilities
are determined based on the difference between the financial
statement and the tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the
differences are expected to reverse. A valuation allowance is
recorded when, in the opinion of management, it is more likely
than not that some or all of the deferred tax assets will not be
realized.

Litigation.At
various times the Company may be involved in patent, product
liability, consumer, commercial, environmental and tax
litigations and claims; government investigations; and other
legal proceedings that arise from time to time in the ordinary
course of business (see Note 17). The Company accrues for
amounts related to these legal matters if it is probable that a
liability has been incurred and an amount is reasonably
estimable.

Financial Instruments and Derivatives.The Company does not use financial
instruments for trading purposes. Interest rate protection
agreements, which are a type of derivative instrument, are
sometimes used to manage interest rate risks. The notional
amounts of the interest rate protection agreements entered into
by the Company are used to measure the interest to be paid or
received and do not represent the amount of exposure to loss. At
December 31, 2002 and 2003, the Company did not have any
interest rate protection agreements or other derivatives
outstanding.

The fair value of financial instruments is
determined by reference to various market data or other
valuation techniques as appropriate. Unless otherwise disclosed,
the fair values of financial instruments approximate their
recorded values.

The Company recognized the cumulative effect of a
change in accounting principle of $545, net of income taxes of
$325, during the first quarter of 2001, due to the adoption of
Statement of Financial Accounting Standards (SFAS)
No. 133, Accounting for Derivative Instruments and
Hedging Activities, as amended by SFAS No. 138, which
establishes accounting and reporting standards for

F-7



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

derivative instruments and hedging activities. As
of December 31, 2002 and 2003, the Company held no
derivative financial instruments.

Property, Plant and Equipment.Property, plant and equipment are
stated at cost. Maintenance and repairs are expensed as
incurred. Depreciation is computed over the estimated useful
lives of the related assets using the straight-line method for
financial statement purposes and accelerated methods for income
tax purposes. The estimated useful lives are principally 15 to
40 years for buildings and improvements and 3 to 15 years
for machinery and equipment.

The Company capitalizes certain computer software
and development costs incurred in connection with developing or
obtaining computer software for internal use. Capitalized
software costs are amortized over the estimated useful lives of
the software which generally range from 3 to 7 years.

In the event that facts and circumstances
indicate that the carrying amount of property, plant and
equipment may be impaired, evaluation of recoverability is
performed using the estimated future undiscounted cash flows
associated with the asset compared to the assets carrying
amount to determine if a write-down is required. To the extent
such projection indicates that undiscounted cash flow is not
expected to be adequate to recover the carrying amount, the
asset would be written down to its fair value.

Intangible Assets and Goodwill.Intangible assets, which include
primarily acquired product rights, trademarks, and patents, are
stated at cost, net of accumulated amortization. Amortization is
computed over the estimated useful lives, ranging from 2 to
40 years, using primarily the straight-line method.
Beginning in 2002, goodwill and certain other intangible assets
are not amortized, but are tested for impairment on an annual
basis, or more frequently if conditions warrant interim testing.
The Company reviews its intangible assets for possible
impairment whenever events or circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company
reviews goodwill for possible impairment annually, or whenever
events or circumstances indicate that the carrying amount may
not be recoverable. In evaluating goodwill for impairment, the
Company estimates fair value of the Companys 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, the Companys
amortization policies reflect judgments on the estimated useful
lives of assets.

Research and Development Costs.Research and development costs are
expensed as incurred. Upfront and milestone payments made to
third parties in connection with research and development
collaborations are expensed as incurred up to the point of
regulatory approval. Payments made to third parties subsequent
to regulatory approval are capitalized and amortized over the
remaining useful life. Amounts capitalized for such payments are
included in intangibles assets. Acquired research and
development projects for products that have not received
regulatory approval and that do not have alternative future use
are expensed.

Deferred Financing Costs.Financing costs related to the
$345,000 convertible debt are being amortized over five years to
the first date the debt can be put by the holders to the
Company. Financing costs related to the Senior Secured Revolving
Credit Facility (Note 12) are being amortized over five years,
the term of the facility.

Insurance.The
Company is self-insured with respect to its healthcare benefit
program. The Company pays a fee to a third party to administer
the plan. The Company has stop loss coverage on a per employee
basis as well as in the aggregate. Self-insured costs are
accrued based upon reported claims and an estimated liability
for claims incurred but not reported.

F-8



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Advertising.The
Company expenses advertising costs as incurred and these costs
are included as selling, general and administrative expenses.
Advertising costs for the years ended December 31, 2001,
2002, and 2003 were $48,460, $56,532, and $71,043 respectively.

Promotional Fees to Wyeth.On June 22, 2000, the Company
entered into a Co-Promotion Agreement with Wyeth to promote
Altace® in the United States and Puerto Rico through
October 29, 2008. Under the agreement, Wyeth paid an
upfront fee of $75,000 to King, which was classified as other
liabilities and is being amortized as a reduction of marketing
expenses over the term of the agreement.

In connection with the Co-Promotion Agreement
with Wyeth, the Company agreed to pay Wyeth an annual
promotional fee as follows:



| |   |                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | For 2001 and 2002, approximately 20% of
    Altace® net sales up to $165,000, 50% of Altace® net
    sales from $165,000 to $465,000 and 52.5% of Altace® net
    sales in excess of $465,000.                        
|
| |  | For years subsequent to 2002 through 2008,
    approximately 15% of Altace® net sales up to $165,000, 50%
    of Altace® net sales from $165,000 to $465,000 and 52.5% of
    Altace® net sales in excess of $465,000.

The co-promotion fee is accrued quarterly based
on a percentage of Altace® net sales at a rate equal to the
expected relationship of the expected co-promotion fee for the
year to applicable expected Altace® net sales for the year.

Stock Compensation.The Company has adopted the disclosure only provision of SFAS
No. 123, Accounting for Stock Based
Compensation. Accordingly, since options were granted at
fair value, no compensation cost has been recognized for stock
options granted to date. Had compensation cost for these plans
been determined for options granted, consistent with SFAS
No. 123, the Companys net income and diluted income
per share would have decreased to the following pro forma
amounts for the years ended December 31, 2001, 2002 and
2003:

|                                                                       |                                        |      |   |         |  |      |   |         |  |  |   |         | 
|---------------------------------------------------------------------- | -------------------------------------- | ---- | - | ------- |  | ---- | - | ------- |  |  | - | ------- | 
|                                                                       |                                        | 2001 |   | 2002    |  | 2003
|                                                                       |                                        |      |   |         |  |     
|Income before cumulative effect of change in
    accounting principle: |                                        |      |   |         |  |      |   |         |  |  |   |        
|                                                                       | As reported                            |      | $ | 218,481 |  |      | $ | 182,520 |  |  | $ | 105,856 | 
|                                                                       | Compensation costs for options granted |      |   | 13,643  |  |      |   | 8,142   |  |  |   | 1,506   | 
|                                                                       |                                        |      |   |         |  |      |   |         |  |  |   |        
|                                                                       | Pro forma                              |      | $ | 204,838 |  |      | $ | 174,378 |  |  | $ | 104,350 | 
|                                                                       |                                        |      |   |         |  |      |   |         |  |  |   |        
|Net income:                                                            |                                        |      |   |         |  |      |   |         |  |  |   |        
|                                                                       | As reported                            |      | $ | 217,936 |  |      | $ | 182,520 |  |  | $ | 105,856 | 
|                                                                       | Compensation costs for options granted |      |   | 13,643  |  |      |   | 8,142   |  |  |   | 1,506   | 
|                                                                       |                                        |      |   |         |  |      |   |         |  |  |   |        
|                                                                       | Pro forma                              |      | $ | 204,293 |  |      | $ | 174,378 |  |  | $ | 104,350 | 
|                                                                       |                                        |      |   |         |  |      |   |         |  |  |   |        
|Diluted income per share:                                              |                                        |      |   |         |  |      |   |         |  |  |   |        
|Income before cumulative effect of change in
    accounting principle: |                                        |      |   |         |  |      |   |         |  |  |   |        
|                                                                       | As reported                            |      | $ | 0.93    |  |      | $ | 0.74    |  |  | $ | 0.44    | 
|                                                                       |                                        |      |   |         |  |      |   |         |  |  |   |        
|                                                                       | Pro forma                              |      | $ | 0.88    |  |      | $ | 0.71    |  |  | $ | 0.43    | 
|                                                                       |                                        |      |   |         |  |      |   |         |  |  |   |        
|Net income:                                                            |                                        |      |   |         |  |      |   |         |  |  |   |        
|                                                                       | As reported                            |      | $ | 0.93    |  |      | $ | 0.74    |  |  | $ | 0.44    | 
|                                                                       |                                        |      |   |         |  |      |   |         |  |  |   |        
|                                                                       | Pro forma                              |      | $ | 0.87    |  |      | $ | 0.71    |  |  | $ | 0.43    | 
|                                                                       |                                        |      |   |         |  |      |   |         |  |  |   |        

F-9



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The fair value of each option grant is estimated
on the date of grant using the Black-Scholes option pricing
model with the following weighted-average assumptions used for
grants in 2001, 2002 and 2003:

|                        |  |      |       |      |  |      |       |   |  |  |       |  
|----------------------- |  | ---- | ----- | ---- |  | ---- | ----- | - |  |  | ----- | -
|                        |  | 2001 |       | 2002 |  | 2003
|                        |  |      |       |      |  |     
|Expected life of option |  |      | 4.00  |      |  |      | 4.00  |   |  |  | 4.00  |  
|Risk-free interest rate |  |      | 3.60  | %    |  |      | 3.07  | % |  |  | 2.79  | %
|Expected volatility     |  |      | 62.38 | %    |  |      | 71.59 | % |  |  | 61.00 | %
|Expected dividend yield |  |      | 0.00  | %    |  |      | 0.00  | % |  |  | 0.00  | %

The weighted average fair values of options
granted during 2001, 2002 and 2003 are $19.38, $10.91, and
$7.63, respectively.

Accounting Standards Not Yet
Adopted.In January 2003, the
Financial Accounting Standards Board issued Interpretation
No. 46, Consolidation of Variable Interest
Entities (FIN 46). FIN 46 requires a
variable interest entity to be consolidated by a company if that
company is required to absorb a majority of the variable
interest entitys expected losses or entitled to receive a
majority of the entitys residual returns or both. The
Company is in the process of assessing what impact this
pronouncement will have on its consolidated financial
statements. Based on its preliminary analysis of the impact of
FIN 46, the Company believes that it is reasonably possible that
Novavax, Inc. (Novavax) could be a variable interest
entity, and our interest in Novavax may require that the Company
consolidate Novavax in the first quarter of 2004.

During the period from December 2000 through
June 2002, the Company provided $40.0 million in
financing to Novavax in the form of notes receivable convertible
to common stock of Novavax. In addition, during 2001, the
Company obtained an exclusive worldwide license to promote,
market, distribute and sell Estrasorb and Androsorb,
following approval, except in the United States and Puerto Rico,
where King and Novavax will co-market the products. Once
approved, the Company will pay Novavax a royalty based on a
percentage of net sales of the products outside of the United
States and Puerto Rico. Novavax will pay King a co-promotion fee
equal to 50% of net sales less cost of revenues of the products
within the United States and Puerto Rico. The New Drug
Application for EstrasorbTM was approved by the
U.S. Food and Drug Administration during October 2003. King
owns approximately 0.9% of Novavax common stock.

At September 30, 2003, Novavax reported
total assets of $61.6 million, total liabilities of
$48.7 million, revenues for the nine months ended
September 30, 2003 of $7.7 million, and a net loss of
$14.2 million for the nine months ended September 30,
2003.

Reclassifications.Certain amounts from the prior consolidated financial statements
have been reclassified to conform to the presentation adopted in
2003.

3.     Concentrations
of Credit Risk

A significant portion of the Companys sales
is to wholesaler customers in the pharmaceutical industry. The
Company monitors the extension of credit to customers and has
not experienced significant credit losses. The following table
represents the relative percentage of accounts receivable from
significant customers compared to net accounts receivable:

|           |  |      |      |      |  |      |      |   |  |  |      |  
|---------- |  | ---- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|           |  | 2001 |      | 2002 |  | 2003
|           |  |      |      |      |  |     
|Customer A |  |      | 25.4 | %    |  |      | 15.1 | % |  |  | 28.4 | %
|Customer B |  |      | 15.4 | %    |  |      | 13.2 | % |  |  | 19.2 | %
|Customer C |  |      | 12.1 | %    |  |      | 18.5 | % |  |  | 20.8 | %

F-10



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table represents a summary of sales
to significant customers as a percentage of the Companys
total revenues:

|           |  |      |      |      |  |      |      |   |  |  |      |  
|---------- |  | ---- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|           |  | 2001 |      | 2002 |  | 2003
|           |  |      |      |      |  |     
|Customer A |  |      | 20.2 | %    |  |      | 21.5 | % |  |  | 20.8 | %
|Customer B |  |      | 17.5 | %    |  |      | 32.9 | % |  |  | 26.0 | %
|Customer C |  |      | 18.4 | %    |  |      | 24.0 | % |  |  | 15.5 | %

The Company invests its excess cash primarily in
government, municipal obligations and high-quality corporate
debt securities and commercial paper. The commercial paper
securities are highly liquid and the remaining investments
typically mature within two years (although there is an
established secondary market for sales at any given time). Based
on the nature of the financial instruments and/or historical
realization of these financial instruments, management believes
they bear minimal risk.

4.     Marketable
Securities

The following table represents the contractual
maturities of marketable securities held as of December 31,
2002 and 2003:

|                   |                                     |      |         |         |  |   |         |         | 
|------------------ | ----------------------------------- | ---- | ------- | ------- |  | - | ------- | ------- | 
|                   |                                     | 2002 |         | 2003   
|                   |                                     |      |         |        
|Less than one year |                                     | $    | 554,562 |         |  | $ | 102,925 |        
|One to five years  |                                     |      | 170,930 |         |  |   |        |        
|                   |                                     |      |         |         |  |   |         |        
|                   | Total securities available-for-sale |      | $       | 725,492 |  |   | $       | 102,925 | 
|                   |                                     |      |         |         |  |   |         |        

All available-for-sale securities are considered
current, as the Company intends to use them for current
operating and investing purposes. At December 31, 2002 and
2003, approximately $498,229 and $102,925, respectively, of
available-for-sale securities with original maturities of
90 days or less were included in cash and cash equivalents.
The remaining amounts totaling approximately $227,263 at
December 31, 2002 are classified as marketable securities
on the Companys balance sheet.

At December 31, 2002, the Company had net
unrealized gains from marketable securities of $45, net of tax,
recorded in other comprehensive income. The carrying amount of
available-for-sale securities and their approximate fair values
at December 31, 2003 were as follows:

|                      |       |           |        |            |  |            |   |       |  |   |   |   |  |   |        |         | 
|--------------------- | ----- | --------- | ------ | ---------- |  | ---------- | - | ----- |  | - | - | - |  | - | ------ | ------- | 
|                      |       |           |        | Gross      |  | Gross      |   |      
|                      |       | Amortized |        | Unrealized |  | Unrealized |   | Fair 
|                      |       | Cost      |        | Gains      |  | Losses     |   | Value
|                      |       |           |        |            |  |            |   |      
|Municipal obligations |       | $         | 70,925 |            |  | $          |  |       |  | $ |  |   |  | $ | 70,925 |        
|Corporate bonds       |       |           | 32,000 |            |  |            |  |       |  |   |  |   |  |   | 32,000 |        
|                      |       |           |        |            |  |            |   |       |  |   |   |   |  |   |        |        
|                      | Total |           | $      | 102,925    |  |            | $ |      |  |   | $ |  |  |   | $      | 102,925 | 
|                      |       |           |        |            |  |            |   |       |  |   |   |   |  |   |        |        

The Company realized $1,960 and $178 of net gains
on marketable securities during 2002 and 2003, respectively.

At December 31, 2002 and December 31,
2003, the Company held Novavax common stock with a market value
of $46 and $1,952, respectively, which is classified as other
assets in the accompanying financial statements (see
Note 9). At December 31, 2003, the Company had net
unrealized gains from Novavax common stock of $719, net of tax,
recorded in other comprehensive income.

F-11



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

5.     Inventory

Inventory consists of the following:

|                                                                                     |  |      |         |      |  |   |         |  
|------------------------------------------------------------------------------------ |  | ---- | ------- | ---- |  | - | ------- | -
|                                                                                     |  | 2002 |         | 2003
|                                                                                     |  |      |         |     
|Raw materials                                                                        |  | $    | 56,778  |      |  | $ | 139,675 |  
|Work-in process                                                                      |  |      | 7,810   |      |  |   | 11,508  |  
|Finished goods (including $17,951 and $18,252 of
    sample inventory, respectively) |  |      | 110,623 |      |  |   | 144,374 |  
|                                                                                     |  |      |         |      |  |   |         |  
|                                                                                     |  |      | 175,211 |      |  |   | 295,557 |  
|Less inventory valuation allowance                                                   |  |      | (8,058  | )    |  |   | (30,659 | )
|                                                                                     |  |      |         |      |  |   |         |  
|                                                                                     |  | $    | 167,153 |      |  | $ | 264,898 |  
|                                                                                     |  |      |         |      |  |   |         |  

DSM Pharmaceuticals, Inc. (DSM) one
of the Companys third-party manufacturers, informed the
Company on November 21, 2001, that they ceased operations
at their sterile manufacturing facilities in Greenville, North
Carolina, as a result of U.S. Food and Drug Administration
(FDA) concerns relating to compliance issues. Due to
the compliance issues, DSM recommended that the Company initiate
a voluntary recall of all products that they manufacture for
King. The Company initiated a voluntary recall of these products
on December 18, 2001. As a result, the Company recorded
special charges, included as cost of revenues, of $5,933,
$1,206, and $1,227 during 2001, 2002, and 2003, respectively,
primarily to provide for product returns and the write-off of
inventory.

During 2001, the Company wrote-off obsolete
Levoxyl® inventory of $2,059. The FDA approved the New Drug
Application (NDA) for a new formulation of
Levoxyl® on May 25, 2001. Pursuant to FDA guidance,
the Company may distribute only the FDA-approved new formulation
of Levoxyl® after August 14, 2001.

The Company recorded a special charge in the
amount of $1,827 during 2002 relating primarily to the
Companys voluntary recall of Liqui-Char® and
Theravac®, two of the Companys smaller volume
products.

As discussed in Note 8 below, the Company
donated $15,152 of Lorabid® inventory to a charitable
organization as a result of the decision in the fourth quarter
of 2002 to divest the Lorabid® intangible assets and
accrued a $49,877 liability related to the excess purchase
commitments under the Lorabid® supply agreement. In the
fourth quarter of 2003, the Company recorded an additional
$29,959 liability related to the excess purchase commitments
under the Lorabid® supply agreement.

During 2003, the Company recorded special charges
of $3,088, primarily related to voluntary recalls of certain
lots of Levoxyl.

During 2003, the Company recorded special charges
of $2,144 relating to the step-up in the cost of Meridians
inventory at the time of acquisition.

F-12



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

6.     Property,
Plant and Equipment

Property, plant and equipment consists of the
following:

|                              |                               |      |         |         |   |   |         |         |  
|----------------------------- | ----------------------------- | ---- | ------- | ------- | - | - | ------- | ------- | -
|                              |                               | 2002 |         | 2003   
|                              |                               |      |         |        
|Land                          |                               | $    | 9,108   |         |   | $ | 9,476   |        
|Buildings and improvements    |                               |      | 87,908  |         |   |   | 102,346 |        
|Machinery and equipment       |                               |      | 92,104  |         |   |   | 178,635 |        
|Equipment under capital lease |                               |      | 1,018   |         |   |   |        |        
|Capital projects in progress  |                               |      | 73,151  |         |   |   | 34,160  |        
|                              |                               |      |         |         |   |   |         |        
|                              |                               |      | 263,289 |         |   |   | 324,617 |        
|                              | Less accumulated depreciation |      |         | (46,175 | ) |   |         | (66,958 | )
|                              |                               |      |         |         |   |   |         |        
|                              |                               | $    | 217,114 |         |   | $ | 257,659 |        
|                              |                               |      |         |         |   |   |         |        

Included in net property, plant and equipment as
of December 31, 2002 and 2003 are computer software costs
of $1,247 and $29,914, respectively. Computer software costs
during 2003 are primarily related to the new information
technology system.

Depreciation expense for the years ended
December 31, 2001, 2002 and 2003 was $9,749, $11,233, and
$21,285, respectively, which includes $424, $632 and $3,687,
respectively, related to computer software.

The Companys Rochester facility
manufactures products for the Company and various third-party
manufacturers. At December 31, 2003, the net carrying value
of the property, plant and equipment at the Rochester facility
and the intangible assets considered part of the Rochester asset
group were $82,158 and $18,265, respectively. Overall production
volume at this facility declined during the year ended
December 31, 2003. The Company currently has plans to
transfer to this facility the manufacture of some of its
products that are currently manufactured for the Company by
third parties. This should increase production and overall
profitability at the Rochester facility. Management currently
believes that these long-term assets are not impaired based on
estimated undiscounted future cash flows. However, if production
volumes continue to decline and/ or if the Company is not
successful in transferring additional production to the
facility, the Company may have to write-off a portion of the
property, plant, equipment and intangible assets associated with
this facility.

7.     Acquisitions
and Dispositions

On June 12, 2003, the Company acquired the
primary care business of Elan Corporation, plc
(Elan) and of some of its subsidiaries in the United
States and Puerto Rico, including the rights to Sonata® and
Skelaxin® and the rights pertaining to potential new
formulations of these products, together with Elans United
States primary care field sales force. The Company believes that
the acquisition of these branded pharmaceutical products should
provide additional growth opportunities in the branded
pharmaceuticals segment through promotional activities,
development opportunities and a significantly expanded field
sales force. Product rights subject to the agreement include
those related to Sonata®, a nonbenzodiazepine treatment for
insomnia, and Skelaxin®, a muscle relaxant, in the United
States, its territories and possessions, and Puerto Rico. Under
the terms of the agreement, Elans sale of Skelaxin®
included related New Drug Applications, copyrights, trademarks,
patents and rights pertaining to potential new formulations of
Skelaxin®. Elans sale of Sonata® included its
rights to the product, as well as certain related copyrights.
The Company also acquired certain intellectual property,
regulatory and other assets relating to Sonata® directly
from Wyeth. Under the terms of the agreement, the Company
secured an exclusive license to the intellectual property
rights, in this territory, of both Wyeth and Elan to the extent
they relate to new formulations of Sonata®, other than for
use in animals.

F-13



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The total initial purchase price of $814,368
includes the cost of acquisition, assumed liabilities and a
portion of contingent liabilities. See the allocation of the
purchase price in the table below. The identifiable intangible
assets have been assigned useful lives with a weighted-average
range of 16.5 years. The acquired business is included in
the branded pharmaceuticals segment. In connection with this
acquisition, $163,416 was placed into escrow to satisfy the
deferred obligations to Wyeth that were assumed by the Company
in connection with the acquisition. Since the Company is
entitled to the interest income and can direct investments of
the escrow fund, the Company has included the escrow amount in
current restricted cash and other long-term assets as restricted
cash. The $163,416 placed into escrow was included in the
purchase price as liabilities acquired. These deferred
obligations are payable on a quarterly basis through March 2005.
As of December 31, 2003, $96,375 remains in the escrow fund.

The Company also will pay royalties on net sales
of the current formulation of Skelaxin® from the date of
closing and certain significant development and regulatory
milestones relating to the ongoing reformulation of
Sonata®. Contingent liabilities include a portion of the
following conditional obligations of the Company:



| |   |                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------
| |  | an additional $60,000 if Elan achieves specific
    milestones in connection with the development of new
    formulations of Sonata®; and
|
| |  | $15,000 if annual net sales of a reformulation of
    Sonata® exceed $100.0 million.                                                     

In addition to the initial purchase price, the
Company paid $25,000 in January 2004 as a milestone payment to
Elan relating to the continued exclusivity of Skelaxin® and
an $11,000 during March 2004 as a milestone payment to Elan in
connection with the development of new formulations of
Sonata®.

Of the total estimated purchase price, $175,000
was allocated to an acquired in-process research and development
project associated with the Companys acquisition of rights
to new formulations of Sonata®. Specifically, the goal of
the project is to successfully develop a modified-release
formulation of Sonata® that enables patients who have
difficulty staying asleep to remain asleep for a longer period
of time when utilizing the reformulated product. The value of
the acquired in-process research and development project was
expensed on the date of acquisition, as it had not received
regulatory approval as of that date and had no alternative
future use. The project was valued through the application of a
probability-weighted, discounted cash flow approach with the
assistance of an independent valuation specialist. The estimated
cash flows were projected over a 25-year period utilizing a
discount rate of 20%. The estimated cost to complete the project
at the time of the acquisition was approximately $120,000, which
includes up to $71,000 that will be paid upon successful
attainment of certain significant development milestones of the
project. At the time of the acquisition, the project was in
Phase I of clinical development. The Company believes that
there is a reasonable probability of completing the project
successfully. However, the success of the project depends on the
outcome of future clinical trials involving a modified-release
formulation of Sonata® and the FDA approval of the product.
Management currently anticipates that the completion of the
project should occur no earlier than 2006. If the project is not
successfully completed before 2008, the Companys business,
financial position, results of operations and cash flows could
be materially adversely affected.

F-14



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The allocation of the initial purchase price of
the primary care business of Elan is as follows:

|                                                                        |                      |   |         |         | 
|----------------------------------------------------------------------- | -------------------- | - | ------- | ------- | 
|Cash consideration, including transaction fees(1)                       |                      | $ | 598,332 |        
|Liabilities acquired                                                    |                      |   | 216,036 |        
|                                                                        |                      |   |         |        
|                                                                        | Total purchase price |   | $       | 814,368 | 
|                                                                        |                      |   |         |        
|Allocation of purchase price:                                           |                      |   |         |        
|Intangible assets                                                       |                      | $ | 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.

The Company has recorded $123,000 of the purchase
price as patents and $474,000 of the purchase price as
trademarks and product rights within intangible assets.

On January 8, 2003, the Company completed
its acquisition of Meridian Medical Technologies, Inc.
(Meridian). Meridian is a leading manufacturer of
auto-injectors for the self-administration of injectable
pharmaceuticals. The Company believes the acquisition of
Meridian provides additional lines of pharmaceutical products,
auto-injector technology and development opportunities. The
Company paid a cash price of $44.50 per common share to Meridian
shareholders, totaling approximately $246,592, and incurred
$7,317 of expenses related to the transaction resulting in a
total purchase price of $253,909.

The allocation of the purchase price of Meridian
is as follows:

|                                                     |  |   |         |  
|---------------------------------------------------- |  | - | ------- | -
|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 |  
|                                                     |  |   |         |  

None of the goodwill is expected to be deductible
for tax purposes. The identifiable intangible assets have been
assigned useful lives with a weighted-average range of
32.2 years. The acquisition is allocated to the Meridian
Medical Technologies segment. The Company financed the
acquisition using available cash on hand.

As mentioned above, $19,000 of the purchase price
was allocated to an acquired in-process research and development
project, an auto-injector pre-filled with diazepam indicated
for, among other things, the treatment of epileptic seizures and
management of anxiety disorders. The value of the acquired
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. The project was valued
through the application of a probability-weighted, discounted
cash flow approach with the assistance of an independent
valuation specialist. The estimated cash flows were projected
over a 30-year period utilizing a discount rate of 21%. Pre-tax
margins (after an adjustment to reflect the use of auto-injector
core technology) were assumed to

F-15



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

be (10%) in 2003 and improving to 23% in
10 years. The estimated cost to complete the project was
less than $700. The project was submitted to the FDA as an
Abbreviated New Drug Application (ANDA), which
references an approved New Drug Application (NDA)
owned by the United States Army for a diazepam-filled
auto-injector currently manufactured under contract exclusively
by Meridian. The application for the project is under review by
the FDA and the Company must satisfactorily respond to
chemistry, microbiology, manufacturing and other questions from
the FDA that arise as a result of its normal review and approval
process. The Company anticipates FDA approval of the project
during 2004. The project was substantially complete as of the
valuation date. The success of the project is dependent upon
whether the FDA approves the ANDA for the Companys
diazepam-filled auto-injector. The Company is not aware of any
material issues with respect to the FDAs review of the
ANDA. Even if the project is not successfully completed, it
would not materially adversely affect the Companys results
of operations.

The following unaudited pro forma summary
presents the financial information as if the acquisitions of
Meridian and the primary care business of Elan had occurred on
January 1, 2003 for the year ended December 31, 2003
and on January 1, 2002 for the year ended December 31,
2002. These pro forma results have been prepared for comparative
purposes and do not purport to be indicative of what would have
occurred had the acquisition been made on January 1, 2003 or
January 1, 2002, nor are they indicative of future results.

|                                  |  |              |           |      |  |   |           | 
|--------------------------------- |  | ------------ | --------- | ---- |  | - | --------- | 
|                                  |  |             
|                                  |  | Year Ended  
|                                  |  | December 31,
|                                  |  |             
|                                  |  | 2002         |           | 2003
|                                  |  |              |           |     
|Total revenues                    |  | $            | 1,414,119 |      |  | $ | 1,638,153 | 
|                                  |  |              |           |      |  |   |           | 
|Net income                        |  | $            | 61,383    |      |  | $ | 115,730   | 
|                                  |  |              |           |      |  |   |           | 
|Basic earnings per common share   |  | $            | 0.25      |      |  | $ | 0.48      | 
|                                  |  |              |           |      |  |   |           | 
|Diluted earnings per common share |  | $            | 0.25      |      |  | $ | 0.48      | 
|                                  |  |              |           |      |  |   |           | 

On December 30, 2002, the Company acquired
or licensed the exclusive rights, including the NDA, trademarks,
product rights and certain patents, to three branded
prescription pharmaceutical products from Aventis for $197,500,
plus $4,300 in expenses. The products include the rights in the
United States, Puerto Rico, and Canada to Intal® and
Tilade®, inhaled anti-inflammatory agents for the
management of asthma, and worldwide rights, excluding Japan, to
Synercid®, an injectable antibiotic. The acquisition was
financed with cash on hand. The Company has recorded $35,864 of
the purchase price as patents and $155,937 of the purchase price
as trademarks and product rights within intangible assets.

In connection with the acquisition, $12,000 of
the purchase price was allocated to an in-process research and
development project. 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. The project was for a new formulation of Intal®
using a new propellant that was valued through the application
of a probability-weighted, discounted cash flow approach by
independent valuation specialists. The estimated cash flows were
projected over periods ranging from zero to 16 years using
a discount rate of 20.5%. Operating margins were assumed to be
similar to historical margins of similar products. The estimated
cost to complete the project was less than $2,000 and the
project was expected to be completed during 2004. The project
was substantially complete as of the valuation date. The success
of the project is dependent upon whether the Company receives
FDA approval. The Company received an approvable letter
pertaining to this product from the FDA during the third quarter
of 2003. The Company currently anticipates final approval of the
product during 2004. If the project is not successfully
completed it would not materially adversely affect the
Companys results of operations.

F-16



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

As additional consideration to Aventis for
Synercid®, the Company agreed to potential milestone
payments totaling $75,000. On December 31, 2003, the
Company paid Aventis a milestone payment of $10,300 for the
continued recognition of Synercid® as an effective
treatment for vancomycin-resistant enterococcus faecium. The
Company will potentially pay Aventis additional milestone
payments totaling $39,800 over the next two years, payable in
annual installments of $21,200, and $18,600 on December 31,
2004 and December 31, 2005, respectively, which relate to the
continued recognition of Synercid® as an effective
treatment for vancomycin-resistant enterococcus faecium. The
remaining $25,000 milestone is payable to Aventis if
Synercid® should receive FDA approval to treat methicillin
resistant staphylococcus aureus, or King will pay Aventis a
one-time payment of $5,000 the first time during any
twelve-month period net sales of Synercid® exceed $60,000,
and a one-time payment of $20,000 the first time during any
twelve-month period net sales of Synercid® exceed $75,000.

On May 29, 2002, the Company acquired the
exclusive rights to Prefest® tablets in the United States,
its territories and possessions and Puerto Rico, including the
related NDA, Investigational NDA, copyrights, and patents or
licenses to the related patents from Ortho-McNeil
Pharmaceutical, Inc., a Johnson & Johnson subsidiary. The
Company paid $108,000 for the product rights upon closing plus
approximately $3,300 of expenses. During February 2003 the
Company paid Ortho-McNeil an additional $7,000 upon receipt of
the FDAs approval to rename the product
Prefest®, which was previously named
Ortho-Prefest. The acquisition was financed with
cash on hand. Of the total purchase price of $111,300 at
December 31, 2002, $80,442 was allocated to trademarks and
product rights and $30,858 was allocated to patents. The patent
is being amortized over eleven years and five months, the
remaining life on the primary patent. The trademark and product
rights are being amortized over 25 years.

On August 8, 2001, the Company acquired
three branded pharmaceutical products and a fully paid license
to a fourth product from Bristol-Myers Squibb for $285,000 plus
approximately $1,500 of expenses. The products acquired include
Bristol-Myers Squibbs rights to the NDAs, trademarks and
product rights in the United States to Corzide®,
Delestrogen® and Florinef®. King also acquired a fully
paid license to and trademark for Corgard® in the United
States. The acquisition was financed with a combination of
borrowings under the Companys Senior Secured Credit
Facility and cash on hand. The product rights are being
amortized over 20 to 30 years. See Note 8 for a
discussion of an intangible asset impairment charge related to
Florinef® that the Company recorded during the first
quarter of 2003.

On September, 8, 2003, the Company sold the
Soloxine®, Pancrezyme®, Tumil-K®, Uroeze®,
and Ammonil product lines (the animal health
products) to Virbac Corporation (Virbac) for
$15,133, including $1,823 allocated to the contract
manufacturing obligation. These assets included related product
assets, intellectual property, unfilled customer orders,
inventories and manufacturing equipment. As part of the
transaction, the Company will contract manufacture the
Soloxine® product for Virbac for up to one year. Of the
selling price, $1,500 was placed into escrow and is not
available to the Company until the earlier of one year from the
closing date or the occurrence of certain events. This escrow is
included in restricted cash in the Companys financial
statements. The Company recorded a $10,307 gain on the sale the
animal health products, which is included as a reduction in
total operating costs and expenses in the financial statements.

F-17



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

8.     Intangible
Assets and Goodwill

Intangible assets consist of the following:

|                              |                         |          |           |              |  |          |         |              |  |   |           |           |  |   |         |         | 
|----------------------------- | ----------------------- | -------- | --------- | ------------ |  | -------- | ------- | ------------ |  | - | --------- | --------- |  | - | ------- | ------- | 
|                              |                         |          |           |             
|                              |                         | 2002     |           | 2003        
|                              |                         |          |           |             
|                              |                         | Gross    |           |              |  | Gross    |         |             
|                              |                         | Carrying |           | Accumulated  |  | Carrying |         | Accumulated 
|                              |                         | Amount   |           | Amortization |  | Amount   |         | Amortization
|                              |                         |          |           |              |  |          |         |             
|Trademarks and product rights |                         | $        | 1,197,686 |              |  | $        | 123,176 |              |  | $ | 1,722,619 |           |  | $ | 185,651 |        
|Patents                       |                         |          | 173,027   |              |  |          | 30,697  |              |  |   | 289,158   |           |  |   | 71,393  |        
|Other intangibles             |                         |          | 9,526     |              |  |          | 6,795   |              |  |   | 9,804     |           |  |   | 7,544   |        
|                              |                         |          |           |              |  |          |         |              |  |   |           |           |  |   |         |        
|                              | Total intangible assets |          | $         | 1,380,239    |  |          | $       | 160,668      |  |   | $         | 2,021,581 |  |   | $       | 264,588 | 
|                              |                         |          |           |              |  |          |         |              |  |   |           |           |  |   |         |        

Amortization expense for the years ended
December 31, 2001, 2002, and 2003 was $38,217, $48,738, and
$103,290, respectively. Estimated annual amortization expense at
December 31, 2003 for each of the five succeeding fiscal
years is as follows:

|                               |  |        |         | 
|------------------------------ |  | ------ | ------- | 
|Fiscal Year Ended December 31, |  | Amount
|                               |  |       
|2004                           |  | $      | 138,122 | 
|2005                           |  |        | 117,943 | 
|2006                           |  |        | 98,467  | 
|2007                           |  |        | 95,865  | 
|2008                           |  |        | 88,938  | 

During January 2003, the Company was notified of
the approval by the FDA of a second generic fludrocortisone
acetate, USP, a product that represents additional competition
for the Companys Florinef® (fludrocortisone acetate,
USP) product. The Company recorded an impairment charge in the
amount of $110,970 in the first quarter of 2003 reflecting the
reduction in the fair value of the Florinef® intangible
assets. The Company determined the fair value of its
Florinef® product rights based on managements
discounted cash flow projections for the product. Florinef®
is included in the Companys branded pharmaceuticals
reporting segment. As of December 31, 2003, net intangible
assets associated with the Florinef® product equal $22,599.
If sales of Florinef® continue to decline, we may incur
additional write-offs in the future.

The Company acquired the antibiotic Lorabid®
in the United States and Puerto Rico from Eli Lilly and Company
(Eli Lilly) on August 19, 1999 for a purchase
price of $91,700, including acquisition costs. Since the
acquisition, prescriptions declined for a variety of reasons.
During the fourth quarter of 2002, the Company decided to divest
its rights to Lorabid®.

As a result of a continuing decline of
Lorabid® prescriptions, management determined that it would
not be able to sell all the Lorabid® product the Company is
required to purchase under its supply contract with Eli Lilly.
Accordingly, under the requirements of Accounting Research
Bulletin No. 43, the Company recorded a $49,877 liability
related to Lorabid® purchase commitments in excess of
expected demand as a charge to cost of revenues in the fourth
quarter of 2002. During the fourth quarter of 2003, primarily as
a result of the continuing decline of Lorabid®
prescriptions, the Company recorded an additional $29,959 for
purchase commitments in excess of expected demand as a charge to
cost of revenues. As of December 31, 2003, the excess
purchase commitment accrual totals $53,740.

The Company also reviewed the Lorabid®
intangible assets for impairment under SFAS No. 144. Based
on that review, the Company determined that the Lorabid®
intangible assets were impaired and recorded an impairment
charge of $66,844 in the fourth quarter of 2002 to write down
the assets to their

F-18



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

estimated fair value as of December 31,
2002. As of December 31, 2003, net intangible assets
associated with the Lorabid® product equals $6,955. If
prescriptions of Lorabid® continue to decline, the
Companys maximum additional exposure for purchase
commitments in excess of demand is $5,174.

In addition, as a result of the decision in the
fourth quarter of 2002 to divest the Lorabid® intangible
assets, the Company donated $15,152 of Lorabid® inventory
to a charitable organization. This donation was classified
within cost of revenues during 2002 in the accompanying
statements of income. Lorabid® is included in the
Companys branded pharmaceutical reporting segment.

In March 2003, the Company also became aware
that an ANDA for Cortisporin® ophthalmic suspension which
was previously inactive had been reactivated by the FDA with a
new sponsor. The Company understands the sponsor entered the
market as of April 14, 2003 with a generic equivalent for
Cortisporin® ophthalmic suspension. The entry of the
generic has negatively affected the Companys market share
for this product. At December 31, 2003, the Company had net
intangible assets related to Cortisporin® of approximately
$18,304. Management currently believes that this asset is not
impaired based on estimated undiscounted cash flows, however, if
prescription declines exceed current expectations, we may have
to write-off a portion or all of the intangible assets
associated with those products.

Prescriptions for the Companys womens
health products, particularly Nordette® and Prefest®,
have continued to decline over the past year. As of
December 31, 2003, the Nordette® and Prefest®
products have net intangible assets associated with them of
$96,019 and $108,482, respectively. Management currently
believes that these assets are not impaired based on estimated
undiscounted future cash flows, however, if prescription
declines exceed current expectations, the Company may have to
write-off a portion or all of the intangible assets associated
with those products in the future.

Prescriptions for Tapazole® continued to
decline over the past two years. At December 31, 2003,
Tapazole® has net intangible assets associated with it
totaling $18,240. Management currently believes that this asset
is not impaired based on estimated undiscounted future cash
flows. However, if prescription declines exceed current
expectations, the Company may have to write-off a portion or all
of the intangible assets associated with this product.

During the fourth quarter of 2003, the Company
incurred intangible asset impairment charges totaling $13,646
that were related to three of the Companys smallest
branded pharmaceutical products and the write-off of some
unutilized intangible assets. The impairment charges related to
the branded pharmaceutical products were primarily the result of
declining prescriptions and manufacturing issues with respect to
these products. The impairment charge related to the unutilized
intangible assets were the result of the Companys
assessment of the prospects for commercialization of products
utilizing those intangible assets. All of the affected
intangible assets were part of the branded pharmaceuticals
segment.

Goodwill at December 31, 2001, 2002 and 2003
is as follows:

|                                              |  |         |        |          |  |       |         |  |  |   |         | 
|--------------------------------------------- |  | ------- | ------ | -------- |  | ----- | ------- |  |  | - | ------- | 
|                                              |  | Branded |        | Meridian |  |      
|                                              |  | Segment |        | Segment  |  | Total
|                                              |  |         |        |          |  |      
|Goodwill at December 31, 2001                 |  | $       | 12,742 |          |  | $     |        |  |  | $ | 12,742  | 
|Goodwill at December 31, 2002                 |  |         | 12,742 |          |  |       |        |  |  |   | 12,742  | 
|Goodwill associated with Meridian acquisition |  |         |       |          |  |       | 108,613 |  |  |   | 108,613 | 
|Goodwill at December 31, 2003                 |  |         | 12,742 |          |  |       | 108,613 |  |  |   | 121,355 | 

F-19



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

9.     Other
Assets

Other assets consist of the following:

|                                                 |  |      |        |      |  |   |        | 
|------------------------------------------------ |  | ---- | ------ | ---- |  | - | ------ | 
|                                                 |  | 2002 |        | 2003
|                                                 |  |      |        |     
|Convertible senior notes receivable from Novavax |  | $    | 12,345 |      |  | $ | 32,404 | 
|Restricted cash                                  |  |      |       |      |  |   | 30,265 | 
|Loan receivable                                  |  |      | 14,277 |      |  |   | 1,101  | 
|Deferred financing costs, net                    |  |      | 12,339 |      |  |   | 9,393  | 
|Other                                            |  |      | 570    |      |  |   | 2,954  | 
|                                                 |  |      |        |      |  |   |        | 
|                                                 |  | $    | 39,531 |      |  | $ | 76,117 | 
|                                                 |  |      |        |      |  |   |        | 

On December 19, 2000, September 7,
2001, and June 24, 2002, the Company acquired convertible
senior notes of $20,000, $10,000 and $10,000, respectively, from
Novavax, Inc. (Novavax). The convertible senior
notes earn interest at 4% payable semi-annually in June and
December. The convertible senior notes are due December 19,
2007. The convertible senior notes are convertible to common
shares of Novavax at a specified conversion price. At
December 31, 2002 and 2003, the convertible senior notes
were convertible to 17.0% and 12.4%, respectively, of the
outstanding common shares of Novavax. During 2001, the Company
recognized an unrealized gain net of amortization of $8,081
related to the conversion option on the convertible senior notes
in accordance with SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. The gain
has been recorded in other income in the accompanying financial
statements. During September 2001, the Company modified the
agreement with Novavax, which resulted in the option no longer
being considered a derivative. During 2002, the convertible
senior notes were deemed to be impaired as defined under SFAS
No. 114, Accounting by Creditors for Impairment of a
Loan. The Company recorded a valuation allowance of
$35,443 during 2002. During 2003, this valuation allowance was
reduced by $18,151. The Company determined the amount of the
valuation allowance by reference to the December 31, 2002
and December 31, 2003 quoted market price of the Novavax
common stock. The amount of the valuation allowance will be
adjusted in future periods until such time as the loan is no
longer considered to be impaired. During the year ended December
31, 2001, Novavax paid interest due on the convertible senior
notes in cash of $722 and Novavax common stock with a value of
$232. During the year ended December 31, 2002, Novavax paid
interest due on the convertible senior notes in cash of $604 and
Novavax common stock with a value of $800. For the year ended
December 31, 2003, Novavax paid the interest related to the
convertible notes in cash of $1,600. During 2002 and 2003, the
value of Novavax common stock fluctuated. Accordingly, the
Company incurred a charge in the amount of $186 during 2002 and
income of $1,106 during 2003 to adjust the carrying value of the
Novavax common stock the Company received interest earned on the
Novavax Convertible Senior Notes during 2001 and 2002.

On June 22, 2000, the Company entered into
an agreement with Aventis Pharma Deutschland Gmbh
(Aventis) to provide Aventis with funds for a
facilities expansion that provides additional production
capacity for an outsourced product of the Company. During 2000
and 2001, the Company loaned Aventis $15,000 and $15,000,
respectively, under this agreement. This loan bears interest at
8% and is being repaid by reducing amounts otherwise payable on
the purchase of inventory. During 2001, 2002, and 2003,
inventory in the amount of $14,086, $4,310, and $13,321,
respectively, was received as principle and interest payments
against these loans.

Amortization expense related to deferred
financing costs was $1,040, $2,898, and $3,163 for 2001, 2002,
and 2003, respectively, and is included in interest expense.

F-20



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

In connection with the acquisition of the primary
care business of Elan (see Note 7) in June 2003, $163,416
was placed into the escrow to satisfy Elans deferred
obligations to Wyeth that were assumed by the Company. Interest
income during 2003 includes $710 that is related to interest
earned on the funds in escrow. During 2003, $67,751 of the
deferred obligation was paid to Wyeth from funds in escrow. As
of December 31, 2003, $96,375 remains in escrow to satisfy
the deferred obligation to Wyeth, $66,770 of which represents a
short-term obligation and is classified as restricted cash and
$29,605 of which represents a long-term obligation and is
classified as other assets in the accompanying financial
statements.

10.     Lease
Obligations

The Company leases certain office and
manufacturing equipment and automobiles under non-cancelable
operating leases with terms from one to five years. Estimated
future minimum lease payments as of December 31, 2003 for
leases with initial or remaining terms in excess of one year are
as follows:

|           |  |   |        | 
|---------- |  | - | ------ | 
|2004       |  | $ | 13,315 | 
|2005       |  |   | 13,580 | 
|2006       |  |   | 10,234 | 
|2007       |  |   | 9,518  | 
|2008       |  |   | 9,231  | 
|Thereafter |  |   | 19,641 | 

Lease expense for the years ended
December 31, 2001, 2002 and 2003 was approximately $7,846,
$10,189, and $10,411, respectively.

11.     Accrued
Expenses

Accrued expenses consist of the following:

|                                              |  |      |         |      |  |   |         | 
|--------------------------------------------- |  | ---- | ------- | ---- |  | - | ------- | 
|                                              |  | 2002 |         | 2003
|                                              |  |      |         |     
|Rebates (see Note 17)                         |  | $    | 140,949 |      |  | $ | 232,472 | 
|Accrued co-promotion fees                     |  |      | 68,295  |      |  |   | 53,925  | 
|Current portion of loss contract (see Note 8) |  |      | 32,679  |      |  |   | 37,619  | 
|Product returns and chargebacks               |  |      | 22,611  |      |  |   | 50,131  | 
|Accrued interest                              |  |      | 1,216   |      |  |   | 1,216   | 
|Product recall accrual                        |  |      | 758     |      |  |   | 1,832   | 
|Contingent liabilities (see Note 7)           |  |      |        |      |  |   | 69,212  | 
|Other                                         |  |      | 31,020  |      |  |   | 59,626  | 
|                                              |  |      |         |      |  |   |         | 
|                                              |  | $    | 297,528 |      |  | $ | 506,033 | 
|                                              |  |      |         |      |  |   |         | 

F-21



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

12.     Long-Term
Debt

Long-term debt consists of the following:

|                                                                                                                                                           |                      |      |         |       |  |   |         |    | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------- | ---- | ------- | ----- |  | - | ------- | -- | 
|                                                                                                                                                           |                      | 2002 |         | 2003 
|                                                                                                                                                           |                      |      |         |      
|Convertible debentures(a)                                                                                                                                  |                      | $    | 345,000 |       |  | $ | 345,000 |   
|Senior subordinated notes(b)                                                                                                                               |                      |      | 93      |       |  |   | 93      |   
|Senior secured revolving credit facility(c)                                                                                                                |                      |      |        |       |  |   |        |   
|Notes payable to former shareholders, due in
    equal annual installments of principal and interest (at a rate
    of 6%) of $1,226 through December 2003 |                      |      | 1,156   |       |  |   |        |   
|Various capital leases with interest rates
    ranging from 8.3% to 12.7% and maturing at various times through
    2003                                   |                      |      | 144     |       |  |   | 4       |   
|                                                                                                                                                           |                      |      |         |       |  |   |         |   
|                                                                                                                                                           |                      |      | 346,393 |       |  |   | 345,097 |   
|                                                                                                                                                           | Less current portion |      |         | 1,300 |  |   |         | 97 | 
|                                                                                                                                                           |                      |      |         |       |  |   |         |   
|                                                                                                                                                           |                      | $    | 345,093 |       |  | $ | 345,000 |   
|                                                                                                                                                           |                      |      |         |       |  |   |         |   






|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | During the fourth quarter of 2001, the Company
    issued $345,000 of 2 3/4% 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 2 3/4%, which will be reset
    (but not below 2 3/4% or above 4 1/4%) 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|(b) |  | On March 3, 1999, the Company issued
    $150,000 of 10 3/4% Senior Subordinated Notes due 2009.
    During 2000 and 2001, the Company redeemed $53,618 and $96,289,
    respectively, at a price of $59,144 and $114,299, respectively.
    The Company redeemed the remaining Senior Subordinated Notes of
    $93 during the first quarter of 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|(c) |  | 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

F-22



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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,
2003, there were no outstanding borrowings under this facility,
however, the Company had $11,600 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 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, 2003, the Company
    has complied with these covenants.

During 2001, as a result of terminating its
Senior Credit Facility and redemption, through a tender offer of
$96,300, of the Companys 10 3/4% Senior Subordinated
Notes prior to maturity, the Company recorded a charge of
$22,903, resulting from the write-off of deferred financing
costs and the payment of an early redemption premium which is
classified as other expense in the accompanying financial
statements.

For the years ended December 31, 2001, 2002
and 2003, the Company capitalized interest of approximately
$1,256, $1,127, and $1,180 respectively.

The aggregate maturities of long-term debt
(including capital lease obligations) at December 31, 2003
are as follows:

|     |  |   |         | 
|---- |  | - | ------- | 
|2004 |  | $ | 97      | 
|2005 |  |   |        | 
|2006 |  |   | 345,000 | 
|2007 |  |   |        | 
|2008 |  |   |        | 
|     |  |   |         | 
|     |  | $ | 345,097 | 
|     |  |   |         | 

F-23



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

13.     Other
Liabilities

Other liabilities consist of the following:

|                                                |  |      |        |      |  |   |         | 
|----------------------------------------------- |  | ---- | ------ | ---- |  | - | ------- | 
|                                                |  | 2002 |        | 2003
|                                                |  |      |        |     
|Contingent milestone liabilities (Note 7)       |  | $    |       |      |  | $ | 39,302  | 
|Deferred revenue from co-promotion revenue fees |  |      | 52,876 |      |  |   | 34,694  | 
|Contingent escrow liabilities (Note 7)          |  |      |       |      |  |   | 29,605  | 
|Long-term portion of loss contract (Note 8)     |  |      | 17,198 |      |  |   | 16,121  | 
|Other                                           |  |      | 750    |      |  |   | 1,983   | 
|                                                |  |      |        |      |  |   |         | 
|                                                |  | $    | 70,824 |      |  | $ | 121,705 | 
|                                                |  |      |        |      |  |   |         | 

14.     Financial
Instruments

The following disclosures of the estimated fair
values of financial instruments are made in accordance with the
requirements of SFAS No. 107, Disclosures About Fair
Value of Financial Instruments. The estimated fair value
amounts have been determined by the Company using available
market information and appropriate valuation methodologies.

Cash and Cash Equivalents, Accounts Receivable
and Accounts Payable.The carrying
amounts of these items are a reasonable estimate of their fair
values.

Marketable Securities.The fair value of marketable
securities was based primarily on quoted market prices
(Note 4). If quoted market prices are not readily
available, fair values are based on quoted market prices of
comparable instruments.

Convertible Senior Notes Receivable from
Novavax.At December 31, 2002 and
2003, the carrying amount of the convertible notes receivable
were at their estimated fair value based on the quoted market
price of Novavax common stock on an as-if-converted basis.

Long-Term Debt.The
fair value of the Companys long-term debt, including the
current portion, at December 31, 2002 and 2003 is estimated
to be approximately $310,485 and $322,674, respectively, using
discounted cash flow analyses and based on the Companys
incremental borrowing rates for similar types of borrowing
arrangements.

15.     Income
Taxes

The net income tax expense (benefit) is
summarized as follows:

|              |         |                |         |        |         |      |        |         |         |   |        |          |          |  
|------------- | ------- | -------------- | ------- | ------ | ------- | ---- | ------ | ------- | ------- | - | ------ | -------- | -------- | -
|              |         | 2001           |         | 2002   |         | 2003
|              |         |                |         |        |         |     
|Current       |         |                |         |        |         |      |        |         |         |   |        |         
|              | Federal |                | $       | 99,534 |         |      | $      | 154,347 |         |   | $      | 189,057  |         
|              | State   |                |         | 14,743 |         |      |        | 8,857   |         |   |        | 12,800   |         
|              |         |                |         |        |         |      |        |         |         |   |        |         
|              |         | Total current  |         | $      | 114,277 |      |        | $       | 163,204 |   |        | $        | 201,857  |  
|              |         |                |         |        |         |      |        |         |         |   |        |         
|Deferred      |         |                |         |        |         |      |        |         |         |   |        |         
|              | Federal |                | $       | 13,147 |         |      | $      | (71,158 | )       |   | $      | (126,150 | )       
|              | State   |                |         | 2,062  |         |      |        | (6,903  | )       |   |        | (4,474   | )       
|              |         |                |         |        |         |      |        |         |         |   |        |         
|              |         | Total deferred |         | $      | 15,209  |      |        | $       | (78,061 | ) |        | $        | (130,624 | )
|              |         |                |         |        |         |      |        |         |         |   |        |         
|Total expense |         | $              | 129,486 |        |         | $    | 85,143 |         |         | $ | 71,233 |         
|              |         |                |         |        |         |      |        |         |         |   |        |         

F-24



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

A reconciliation of the difference between the
federal statutory tax rate and the effective income tax rate as
a percentage of income before income taxes and extraordinary
item is as follows:

|                                           |  |      |       |      |  |      |       |   |  |  |       |  
|------------------------------------------ |  | ---- | ----- | ---- |  | ---- | ----- | - |  |  | ----- | -
|                                           |  | 2001 |       | 2002 |  | 2003
|                                           |  |      |       |      |  |     
|Federal statutory tax rate                 |  |      | 35.0  | %    |  |      | 35.0  | % |  |  | 35.0  | %
|State income taxes, net of federal benefit |  |      | 3.0   |      |  |      | 0.7   |   |  |  | 4.3   |  
|Charitable donations                       |  |      | (0.4) |      |  |      | (2.7) |   |  |  | (3.5) |  
|In-process research and development        |  |      |      |      |  |      |      |   |  |  | 3.8   |  
|Other                                      |  |      | (0.4) |      |  |      | (1.2) |   |  |  | 0.6   |  
|                                           |  |      |       |      |  |      |       |   |  |  |       |  
|Effective tax rate                         |  |      | 37.2  | %    |  |      | 31.8  | % |  |  | 40.2  | %
|                                           |  |      |       |      |  |      |       |   |  |  |       |  

The tax effects of temporary differences that
give rise to significant portions of the deferred tax assets and
liabilities are as follows:

|                              |                                |      |         |         |   |   |         |         |  
|----------------------------- | ------------------------------ | ---- | ------- | ------- | - | - | ------- | ------- | -
|                              |                                | 2002 |         | 2003   
|                              |                                |      |         |        
|Accrued expenses and reserves |                                | $    | 105,395 |         |   | $ | 136,822 |        
|Net operating losses          |                                |      |        |         |   |   | 4,008   |        
|Intangible assets             |                                |      |        |         |   |   | 42,111  |        
|Other                         |                                |      | 923     |         |   |   | 2,032   |        
|                              |                                |      |         |         |   |   |         |        
|                              | Total deferred tax assets      |      |         | 106,318 |   |   |         | 184,973 |  
|Valuation allowance           |                                |      |        |         |   |   | (6,525  | )      
|                              |                                |      |         |         |   |   |         |        
|                              | Net deferred tax assets        |      |         | 106,318 |   |   |         | 178,448 |  
|                              |                                |      |         |         |   |   |         |        
|Property, plant and equipment |                                |      | (13,998 | )       |   |   | (16,188 | )      
|Intangible assets             |                                |      | (8,521  | )       |   |   |        |        
|Other                         |                                |      | (11,227 | )       |   |   | (18,023 | )      
|                              |                                |      |         |         |   |   |         |        
|                              | Total deferred tax liabilities |      |         | (33,746 | ) |   |         | (34,211 | )
|                              |                                |      |         |         |   |   |         |        
|                              | Net deferred tax asset         |      | $       | 72,572  |   |   | $       | 144,237 |  
|                              |                                |      |         |         |   |   |         |        

The Company has $11.1 million of foreign
operating loss carryforwards which may be carried forward
indefinitely; a valuation allowance has been provided as it is
more likely than not that the deferred tax assets relating to
those loss carryforwards will not be fully realized.
Additionally, a valuation allowance has been provided against
certain state deferred tax assets where it is more likely than
not that the deferred tax asset will not be realized.

16.     Benefit
Plans

The Company sponsors a defined contribution
employee retirement savings 401(k) plan that covers all
employees over 21 years of age. The plan allows for
employees contributions, which are matched by the Company
up to a specific amount under provisions of the plan. Company
contributions during the years ended December 31, 2001,
2002 and 2003 were $2,134, $2,412, and $3,860, respectively. The
plan also provides for discretionary profit-sharing
contributions by the Company. There were no discretionary
profit-sharing contributions during the years ended
December 31, 2001, 2002 and 2003. The increase during 2003
is primarily due to an increase in the number of employees and
an increase in the Companys matching percentage.

F-25



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

17.     Commitments
and Contingencies



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

Many distributors, marketers and manufacturers of
anorexigenic drugs have been subject to claims relating to the
use of these drugs. Generally, the lawsuits allege that the
defendants (1) misled users of the products with respect to
the dangers associated with them, (2) failed to adequately
test the products and (3) knew or should have known about
the negative effects of the drugs, and should have informed the
public about the risks of such negative effects. The actions
generally have been brought by individuals in their own right
and have been filed in various state and federal jurisdictions
throughout the United States. They seek, among other things,
compensatory and punitive damages and/or court supervised
medical monitoring of persons who have ingested the product. The
Company is one of many defendants in no more than
10 lawsuits that claim damages for personal injury arising
from the Companys production of the anorexigenic drug
phentermine under contract for GlaxoSmithKline. The Company
expects to be named in additional lawsuits related to the
Companys production of the anorexigenic drug under
contract for GlaxoSmithKline.

While the Company cannot predict the outcome of
these suits, the Company believes that the claims against it are
without merit and intends to vigorously pursue all defenses
available to it. The Company is being indemnified in all of
these suits by GlaxoSmithKline for which the Company
manufactured the anorexigenic product, provided that neither the
lawsuits nor the associated liabilities are based upon the
independent negligence or intentional acts of the Company, and
intends to submit a claim for all unreimbursed costs to the
Companys product liability insurance carrier. However, in
the event that GlaxoSmithKline is unable to satisfy or fulfill
its obligations under the indemnity, the Company would have to
defend the lawsuits and be responsible for damages, if any, that
are awarded against it or for amounts in excess of the
Companys product liability coverage. A reasonable estimate
of possible losses related to these suits cannot be made.

In addition, Jones Pharma, Incorporated
(Jones), a wholly owned subsidiary of the Company,
is a defendant in approximately 926 multi-defendant
lawsuits involving the manufacture and sale of dexfenfluramine,
fenfluramine and phentermine. These suits have been filed in
various jurisdictions throughout the United States, and in each
of these suits Jones is one of many defendants, including
manufacturers and other distributors of these drugs. Although
Jones has not at any time manufactured dexfenfluramine,
fenfluramine, or phentermine, Jones was a distributor of a
generic phentermine product and, after the acquisition of Abana
Pharmaceuticals, was a distributor of Obenix®, its branded
phentermine product. The plaintiffs in these cases claim injury
as a result of ingesting a combination of these weight-loss
drugs and are seeking compensatory and punitive damages as well
as medical care and court supervised medical monitoring. The
plaintiffs claim liability based on a variety of theories
including but not limited to, product liability, strict
liability, negligence, breach of warranty, and misrepresentation.

Jones denies any liability incident to the
distribution of Obenix® or its generic phentermine product
and intends to pursue all defenses available to it. Jones has
tendered defense of these lawsuits to its insurance carriers for
handling and they are currently defending Jones in these suits.
The manufacturers of fenfluramine and dexfenfluramine have
settled many of these cases. In the event that Jones
insurance coverage is inadequate to satisfy any resulting
liability, Jones will have to resume defense of these lawsuits
and be responsible for the damages, if any, that are awarded
against it.

While the Company cannot predict the outcome of
these suits, management believes that the claims against Jones
are without merit and intends to vigorously pursue all defenses
available. The Company is unable to disclose an aggregate dollar
amount of damages claimed because many of these complaints are
multi-party suits and do not state specific damage amounts.
Rather, these claims typically state damages

F-26



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

as may be determined by the court or similar
language and state no specific amount of damages against Jones.
Additionally, the Company cannot reasonably estimate possible
losses related to the lawsuits.



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

King and Parkedale Pharmaceuticals, Inc.
(Parkedale), a wholly owned subsidiary of King, have
been named as defendants in California, Illinois and
Mississippi, along with Abbott Laboratories, Wyeth, Aventis
Pharmaceuticals, and other pharmaceutical companies that have
manufactured or sold products containing the mercury-based
preservative, thimerosal.

In these cases, the plaintiffs attempt to link
the receipt of the mercury-based products to neurological
defects. The plaintiffs claim unfair business practices,
fraudulent misrepresentations, negligent misrepresentations, and
breach of implied warranty, which are all arguments premised on
the idea that the defendants promoted products without any
reference to the toxic hazards and potential public health
ramifications resulting from the mercury-containing
preservative. The plaintiffs also allege that the defendants
knew of the dangerous propensities of thimerosal in their
products.

The Companys product liability insurance
carrier has been given proper notice of all of these matters and
defense counsel is vigorously defending the Companys
interests. The Company intends to file a motion to be dismissed
from the litigation due, among other things, to lack of product
identity in the plaintiffs complaints. In 2001, the
Company was dismissed on this basis in a similar case. The
Company intends to defend these lawsuits vigorously but is
unable currently to predict the outcome or reasonably estimate
the range of potential loss, if any.



| |                                                                    
| | -------------------------------------------------------------------
| | Governmental Investigations and Securities and
    ERISA Litigation

As previously reported, in March 2003 the SEC
initiated a formal investigation of King. The Company received
SEC subpoenas relating to, among other topics, sales of
Kings products to VitaRx and Prison Health Services, the
Companys best price lists, the pricing of the
Companys pharmaceutical products provided to governmental
Medicaid agencies, the accrual and payment of rebates on the
product Altace®, the products Fluogen® and
Lorabid®, the King Benevolent Fund, Inc., the
Companys calculations related to Medicaid rebates, and the
Audit Committees internal review of issues raised by the
SEC investigation. As also previously reported, on
November 13, 2003, the Company received a subpoena duces
tecum from the Office of Inspector General at the Department of
Health and Human Services requesting the production of documents
relating to some of the matters being investigated by the SEC
and to the Companys sales, marketing and other business
practices for Altace®, Aplisol® and Levoxyl®.

In March 2003, upon the recommendation of
management and with the assistance of independent counsel and an
independent accounting firm, the Audit Committee of the
Companys Board of Directors initiated an assessment and
internal review of issues raised by the SEC investigation. In
connection with the internal review, King estimated that it had
underpaid amounts due under Medicaid and other governmental
pricing programs, and recorded an adjustment of $46,500 to net
sales and accrued expenses in the fourth quarter of 2002. This
amount represented the Companys best estimate as of July
2003 of the extent to which we had underpaid amounts due under
Medicaid and other governmental pricing programs during the
period from 1998 to 2002.

The July 2003 estimate was based upon an
extensive sample of available data supporting the calculation of
Medicaid rebates paid from 1998 to 2002, and was generated with
the assistance of outside consultants. Since that time,
Kings outside consultants have undertaken a comprehensive
audit to determine the actual amount of underpayments under
Medicaid during the period from 1998 to 2002. As a result of
that recently completed audit, King has determined that its
accrual for estimated amounts due under Medicaid and other
governmental pricing programs through December 31, 2002,
should be increased

F-27



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

by $18,000. In addition, based on the results of
the comprehensive audit for the period from 1998 through 2002,
the Company estimates that it underpaid amounts due Medicaid by
$900 during the period from 1994 through 1997. Accordingly,
results for the fourth quarter of 2003 include an adjustment of
$18,900 to net sales and accrued expenses.

Following the accrual adjustment recorded in the
fourth quarter of 2002, the Company recovered on a pre-tax basis
approximately $9,500 in fees it previously paid under its
Co-Promotion Agreement for Altace® and has recognized this
amount in the fourth quarter of 2003. In addition, fees under
the Companys Co-Promotion Agreement for Altace® in
the fourth quarter of 2003 were reduced on a pre-tax basis by
approximately $5,700 as a result of the accrual adjustment
recorded in that quarter.

Under generally accepted accounting principles,
the $18,000 adjustment in the Companys accrual for
Medicaid rebates for the period from 1998 through 2002
constitutes a change in an accounting estimate effective as of
December 31, 2003. The change resulted principally from two
factors. First, the recently completed Medicaid audit included
additional data that was used to refine the July 2003 estimate.
Second, the Company received legal advice that, in calculating
amounts payable under Medicaid, it should revise the methodology
it had previously been advised to use for calculating best
price in respect of a complex issue concerning rebates to
pharmacy benefit managers. The $900 adjustment in the
Companys accrual for Medicaid rebates for the period from
1994 through 1997 reflects the correction of immaterial errors
that occurred during that period.

The Medicaid audit did not result in any changes
to the Companys accruals for programs other than Medicaid.
King is currently in the process of conducting detailed audits
of its compliance with the requirements of several other
governmental pricing programs, but its obligations under these
programs are substantially smaller than its obligations under
Medicaid, and the Company does not expect the audits to result
in material adjustments to its accruals.

Although the amounts described above constitute
the Companys best estimate of amounts owed in respect of
Medicaid and other governmental pricing programs, its
calculations are subject to review and challenge by the
applicable government agencies. In connection with the pending
governmental investigations, the Company has continued to engage
in discussions with representatives of the Office of Inspector
General of the Department of Health and Human Services, the
Department of Justice, the Department of Veterans Affairs, the
Centers for Medicare and Medicaid Services, and the Public
Health Service. The Company expects that these discussions will
include a detailed review of its calculations by the appropriate
agencies, and it is possible that this review could result in
material changes. The accruals described above relate solely to
Kings estimated underpayments and exclude any interest,
fines, penalties or other amounts that might be owed in
connection with the underpayments, as the Company cannot predict
or reasonably estimate their likelihood or magnitude at this
time.

Pending determination of the precise amount of
our obligations, the Company has placed a total of $65,500 in an
interest-bearing escrow account ($46,500 during 2003 and $19,000
during 2004). In addition, since the first quarter of 2003, the
Company voluntarily has been making its Medicaid payments on a
basis that it believe represents an overpayment of amounts
actually due, and King would expect to offset these payments
against the amounts ultimately determined to be due in respect
of prior years. Based on the results of the Medicaid audit, the
Company estimates that these overpayments total approximately
$18,579 as of December 31, 2003.

The governmental investigations of King described
above are continuing. The SEC, the Office of Inspector General
of the Department of Health and Human Services, the Department
of Justice, the Department of Veterans Affairs, the Public
Health Service, the Centers for Medicare and Medicaid Services
and other governmental agencies that might be investigating or
might commence an investigation of King could impose, based on a
claim of a violation of fraud and false claims laws or
otherwise, civil

F-28



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##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

and/or criminal sanctions, including fines,
penalties and possible exclusion from federal health care
programs (including Medicaid and Medicare). Some of these laws
may impose liability even in the absence of specific intent to
defraud. The Company cannot predict or reasonably estimate the
likelihood or magnitude of any such sanctions at this time.

Subsequent to the announcement of the SEC
investigation described above, beginning in March 2003, 22
purported class action complaints were filed by holders of the
Companys securities against the Company, its directors,
former directors, executive officers, former executive officers,
a Company subsidiary, and a former director of the subsidiary in
the United States District Court for the Eastern District of
Tennessee, alleging violations of the Securities Act of 1933
and/or the Securities Exchange Act of 1934. These 22 complaints
have been consolidated in the United States District Court for
the Eastern District of Tennessee. In addition, holders of the
Companys securities filed two class action complaints
alleging violations of the Securities Act of 1933 in Tennessee
state court. The Company removed these two cases to the United
States District Court for the Eastern District of Tennessee,
where these two cases were consolidated with the other class
actions. Plaintiffs in these actions unsuccessfully moved to
remand these two cases back to Tennessee state court. These two
actions therefore remain part of the consolidated action. The
district court has appointed lead plaintiffs in the consolidated
action, and those lead plaintiffs filed a consolidated amended
complaint on October 21, 2003 alleging that King, through
some of its executive officers, former executive officers,
directors and former directors, made false or misleading
statements concerning its business, financial condition and
results of operations during periods beginning February 16,
1999 and continuing until March 10, 2003. Plaintiffs in the
consolidated action have also named the underwriters of
Kings November 2001 public offering as defendants. The
Company and other defendants have filed motions to dismiss the
consolidated amended complaint, and those motions are currently
pending.

Seven purported shareholder derivative complaints
have also been filed in federal and state courts in Tennessee
alleging a breach of fiduciary duty, among other things, by some
of the Companys officers and directors. The derivative
cases in state court were consolidated and are currently stayed.
The stay will remain in place at least until the motion to
dismiss the federal securities class action are decided. The
derivative case in federal court are stayed until there is a
decision on the merits in the state court derivative suits.
Additionally, a class action complaint was filed in the United
States District Court for the Eastern District of Tennessee
under the Employee Retirement Income Security Act
(ERISA). As amended, the complaint alleges that the
Company and certain of its executive officers, former executive
officers, directors, former directors and an employee of the
Company violated fiduciary duties that they allegedly owed the
Companys 401(k) Retirement Savings Plans
participants and beneficiaries under ERISA. The allegations
underlying each of these additional lawsuits are similar in many
respects to those in the class action litigation described
above. The Company filed a motion to dismiss the ERISA action on
March 5, 2004; this motion to dismiss is currently pending.
The Company intends to defend all of these lawsuits vigorously
but is unable currently to predict the outcome or reasonably
estimate the range of potential loss, if any.

If any governmental sanctions are imposed, or if
the Company were not to prevail in the pending litigation,
neither of which the Company can predict or reasonably estimate
at this time, the Companys business, financial condition,
results of operations and cash flows could be materially
adversely affected. Responding to the government investigations,
resolving the amounts owed to governmental agencies in
connection with the underpayments and defending King in the
pending litigation has resulted, and is expected to continue to
result, in a significant diversion of managements
attention and resources and an increase in professional fees.

F-29



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##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



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

The Rochester facility was one of six facilities
owned by Pfizer subject to a Consent Decree of Permanent
Injunction issued August 1993 in United States of
America v. Warner-Lambert Company and Melvin R. Goodes
and Lodewijk J.R. DeVink (U.S. Dist. Ct., Dist. of
N.J.) (the Consent Decree). The Company acquired the
Rochester facility in February 1998. The Rochester facility is
currently manufacturing pharmaceutical products subject to the
Consent Decree that prohibits the manufacture and delivery of
specified drug products unless, among other things, the products
conform to current good manufacturing practices and are produced
in accordance with an approved ANDA or NDA. The Company intends,
when appropriate, to petition for relief from the Consent Decree.

Cobalt Pharmaceuticals, Inc.
(Cobalt), a generic drug manufacturer located in
Mississauga, Ontario, Canada, has filed an ANDA with the FDA
seeking permission to market a generic version of Altace®.
The following U.S. patents are listed for Altace® in the
FDAs Approved Drug Products With Therapeutic
Equivalence Evaluations(the Orange Book): U.S.
Patent Nos. 4,587,258 (the
258 patent) and 5,061,722 (the
722 patent), two composition of matter
patents related to Altace®, and U.S. Patent
No. 5,403,856 (the 856 patent), a
method-of-use patent related to Altace®, with expiration
dates of January 2005, October 2008, and April 2012,
respectively. Under the federal Hatch-Waxman Act of 1984, any
generic manufacturer may file an ANDA with a certification (a
Paragraph IV certification) challenging the
validity or infringement of a patent listed in the FDAs
Orange Book four years after the pioneer company obtains
approval of its NDA. Cobalt has filed a Paragraph IV
certification alleging invalidity of the 722 patent,
and the Company filed suit on March 14, 2003 to enforce its
rights under that patent. Pursuant to the Hatch-Waxman Act, the
filing of that suit provides the Company an automatic stay of
FDA approval of Cobalts ANDA for 30 months from no
earlier than February 5, 2003. Should the court find in
favor of a Cobalt summary judgment motion on the
722 patent, however, the Company would not receive
the full benefit of that 30 month stay. Subsequent to
filing its original complaint, the Company amended its complaint
to add an allegation of infringement of the 856 patent. In
its answer to the amended complaint, Cobalt denied infringement
and alleged that the 856 patent is invalid. Pursuant to
FDA regulations, however, Cobalt is not required to certify
against the 856 patent. The Company intends to
vigorously enforce its rights under the 722 and
856 patents. Regardless of the outcome of the lawsuit
involving the 722 and 856 patents, however, Cobalt
has not challenged the validity of the 258 patent and,
therefore, cannot market a generic version of Altace® prior
to the expiration of that patent in January 2005.

Eon Labs, Inc. (Eon Labs),
CorePharma, LLC (CorePharma) and Mutual
Pharmaceutical Co., Inc. (Mutual) have each filed an
ANDA with the FDA seeking permission to market a generic version
of Skelaxin®. United States Patent Nos. 6,407,128 (the
128 patent) and 6,683,102 (the
102 patent) two method-of-use patents relating
to Skelaxin®, are listed in the FDAs Orange Book and
do not expire until December 3, 2021. Eon Labs and
CorePharma have each filed Paragraph IV certifications
alleging noninfringement and invalidity of the
128 and 102 patents. Mutual has filed a
Paragraph IV certification alleging noninfringement and
invalidity of the 102 patent. The Company filed separate
suits against Eon Labs on January 2, 2003 and CorePharma on
March 7, 2003 and is currently assessing its right to bring
suit against Mutual. Pursuant to the Hatch-Waxman Act, the
filing of the suits against Core and Eon provides the Company
with an automatic stay of FDA approval of Eons ANDA for 30
months from no earlier than November 18, 2002 and an
automatic stay of FDA approval of Cores ANDA for 30 months
from no earlier than January 24, 2003. The Company intends
to vigorously enforce its rights under the 128 and
102 patents to the full extent of the law.

On March 9, 2004, the Company received a
copy of a letter from the FDA to all ANDA applicants for
Skelaxin® stating that the use listed in the FDAs
Orange Book for the 128 patent may be deleted from the
ANDA applicants product labeling. The Company believes
that this decision is arbitrary,

F-30



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##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

capricious, and inconsistent with the FDAs
previous position on this issue. The Company is currently
assessing its legal options and may request the FDA to reinstate
its previous policy on this issue and reject any ANDAs that
delete such use from their product labeling. If the Company is
unable to persuade the FDA to reinstate its previous policy,
however, there is a substantial likelihood that a generic
version of Skelaxin® will enter the market, and our
business, financial condition, results of operations and cash
flows could be materially adversely affected.

Mylan Pharmaceuticals, Inc. (Mylan)
and KV Pharmaceutical Company (KV) have each
filed an ANDA with the FDA seeking permission to market a
generic version of Levoxyl®. United States Patent
No. 6,555,581 (the 581 patent), a
utility patent with formulation claims relating to
Levoxyl®, was issued to the Company on April 29, 2003.
The 581 patent is listed in the FDAs Orange
Book and does not expire until February 15, 2022. No
earlier than April 30, 2003, the Company received notice of
Mylans Paragraph IV certification, which alleges
noninfringement of the 581 patent. The Company filed
suit against Mylan on June 13, 2003 in the Eastern District
of Pennsylvania and on June 16, 2003 in the Northern
District of West Virginia; these suits have been consolidated in
the Northern District of West Virginia and trial is currently
scheduled in June 2005. Pursuant to the Hatch-Waxman Act, the
filing of the suits against Mylan provides the Company with an
automatic stay of FDA approval of Mylans ANDA for 30
months from no earlier than April 30, 2003. On
June 24, 2003, the Company received notice of KVs
Paragraph IV certification, which alleges noninfringement
and invalidity of the 581 patent. The Company filed
suit against KV on August 7, 2003 and the trial is
currently scheduled to begin on December 6, 2004. Pursuant
to the Hatch-Waxman Act, the filing of the suit against KV
provides the Company with an automatic stay of FDA approval of
KVs ANDA for 30 months from no earlier than June 24,
2003. The Company intends to vigorously enforce its rights under
the 581 patent to the full extent of the law.

Barr Laboratories Inc. (Barr) has
filed an ANDA, which included a Paragraph IV certification,
with the FDA seeking permission to market a generic version of
Prefest®. United States Patent No. 5,108,995 (the
995 patent), a utility patent with method
of treatment claims relating to Prefest®, and United States
Patent No. 5,382,573 (the
573 patent), a utility patent with
pharmaceutical preparation claims relating to Prefest®,
were issued on April 28, 1992, and January 17, 1995,
respectively. The 995 patent and the
573 patent are both listed in the FDAs Orange
Book and do not expire until April 28, 2009, and
January 17, 2012, respectively. On October 15, 2003,
the Company received notice of Barrs Paragraph IV
certification, which alleges noninfringement and invalidity of
the 995 patent and the 573 patent. On
November 26, 2003, the Company filed a Complaint against
Barr in the Southern District of New York for infringement of
the 995 and 573 patents. Pursuant to the
Hatch-Waxman Act, the filing of that suit provides the Company
an automatic stay of FDA approval of Barrs ANDA for 30
months from no earlier than October 15, 2003. The Company
intends to vigorously enforce its rights under both patents.

The Company is involved in various routine legal
proceedings incident to the ordinary course of its business.

F-31



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##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



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

The following summarizes the Companys
unconditional purchase obligations at December 31, 2003:

|           |       |   |         |         | 
|---------- | ----- | - | ------- | ------- | 
|2004       |       | $ | 137,850 |        
|2005       |       |   | 119,279 |        
|2006       |       |   | 87,830  |        
|2007       |       |   | 88,399  |        
|2008       |       |   | 89,707  |        
|Thereafter |       |   | -0-     |        
|           |       |   |         |        
|           | Total |   | $       | 523,065 | 
|           |       |   |         |        

The unconditional purchase obligations of the
Company are primarily related to minimum purchase requirements
under contracts with suppliers to purchase raw materials and
finished goods related to the Companys branded
pharmaceutical products.

The Company has a supply agreement with Aventis
to produce ramipril, the active ingredient in Altace®. This
supply agreement is reflected in the unconditional purchase
obligations above. This supply agreement requires the Company to
purchase certain minimum levels of ramipril as long as the
Company maintains market exclusivity on Altace® in the
United States. If sales of Altace® do not increase at the
currently anticipated rates, if the Company is unable to
maintain market exclusivity for Altace® in accordance with
current expectations, if the Companys product life cycle
management is not successful, or if the Company does not
terminate the supply agreement at an optimal time, the Company
may incur losses in connection with the purchase commitments
under the supply agreement. In the event the Company incurs
losses in connection with the purchase commitments under the
supply agreement, there may be a material adverse effect upon
the Companys results of operations and cash flows.

The Company has a supply agreement with Eli Lilly
to produce Lorabid® which is reflected in the unconditional
purchase obligations above. This supply agreement requires the
Company to purchase certain minimum levels of inventory of
Lorabid® through September 1, 2005. Based on changes
in estimated prescription trends, the Company believes the
minimum purchase commitments under the supply agreement are
greater than that which the Company will be able to sell to its
customers. As a result, the Company recorded charges of $49,877
during 2002 and $29,959 during the fourth quarter of 2003
related to the liability associated with the amount of its
purchase commitments in excess of expected demand.

18.     Segment
Information

The Companys business is classified into
five reportable segments: branded pharmaceuticals, Meridian
Medical Technologies, royalties, contract manufacturing and all
other. Branded pharmaceuticals include a variety of branded
prescription products over eight therapeutic areas, including
cardiovascular, endocrinology/womens health, orthopedic,
critical care, neurology/central nervous system, anti-infective,
respiratory, and other. These branded prescription products have
been aggregated because of the similarity in regulatory
environment, manufacturing processes, methods of distribution,
and types of customer. The Meridian Medical Technologies segment
is a new segment during 2003 as a result of the acquisition of
Meridian on January 8, 2003. Meridian develops,
manufactures, and sells auto-injector pharmaceutical products to
both commercial and government markets. The principal source of
revenues in the commercial market is the EpiPen® product
line marketed by Dey L.P., which is primarily prescribed for the
treatment of severe allergic reactions. Government revenues are
principally derived from the sale of nerve agent antidotes and
other emergency medicine auto-injector products marketed to the
U.S. Department of Defense and other federal, state and local
agencies, particularly those involved in homeland security, as
well as to approved foreign governments. Contract manufacturing
includes pharmaceutical manufacturing

F-32



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##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

services the Company provides to third-party
pharmaceutical and biotechnology companies. Royalties include
revenues the Company derives from pharmaceutical products after
the Company has transferred the manufacturing or marketing
rights to third parties in exchange for licensing fees or
royalty payments.

The Company primarily evaluates its segments
based on gross profit. Reportable segments were separately
identified based on revenues, gross profit (excluding
depreciation) and total assets. Revenues among the segments are
presented in the individual segments and removed through
eliminations in the information below. Substantially all of the
eliminations relate to sales from the contract manufacturing
segment to the branded pharmaceuticals segment.

The following represents selected information for
the Companys reportable segments for the periods indicated:

|                |                                    |                                  |                             |         |         |         |   |           |         |           |   |           |         |           | 
|--------------- | ---------------------------------- | -------------------------------- | --------------------------- | ------- | ------- | ------- | - | --------- | ------- | --------- | - | --------- | ------- | --------- | 
|                |                                    |                                 
|                |                                    | For the years ended December 31,
|                |                                    |                                 
|                |                                    | 2001                             |                             | 2002    |         | 2003   
|                |                                    |                                  |                             |         |         |        
|Total revenues: |                                    |                                  |                             |         |         |         |   |           |         |           |   |          
|                | Branded pharmaceuticals(1)         |                                  | $                           | 794,261 |         |         | $ | 1,032,831 |         |           | $ | 1,300,948 |        
|                | Meridian Medical Technologies      |                                  |                             |        |         |         |   |          |         |           |   | 124,157   |        
|                | Royalties                          |                                  |                             | 46,774  |         |         |   | 58,375    |         |           |   | 68,365    |        
|                | Contract manufacturing(2)          |                                  |                             | 79,443  |         |         |   | 143,373   |         |           |   | 278,836   |        
|                | All other                          |                                  |                             | 2,265   |         |         |   | 1,193     |         |           |   | 628       |        
|                | Eliminations                       |                                  |                             | (50,481 | )       |         |   | (107,437  | )       |           |   | (251,546  | )      
|                |                                    |                                  |                             |         |         |         |   |           |         |           |   |          
|                |                                    |                                  | Consolidated total revenues |         | $       | 872,262 |   |           | $       | 1,128,335 |   |           | $       | 1,521,388 | 
|                |                                    |                                  |                             |         |         |         |   |           |         |           |   |          
|Segment profit: |                                    |                                  |                             |         |         |         |   |           |         |           |   |          
|                | Branded pharmaceuticals            |                                  | $                           | 654,331 |         |         | $ | 793,361   |         |           | $ | 1,033,515 |        
|                | Meridian Medical Technologies      |                                  |                             |        |         |         |   |          |         |           |   | 57,954    |        
|                | Royalties                          |                                  |                             | 38,474  |         |         |   | 47,881    |         |           |   | 57,121    |        
|                | Contract manufacturing             |                                  |                             | (7,229  | )       |         |   | (7,727    | )       |           |   | (11,942   | )      
|                | All other                          |                                  |                             | 122     |         |         |   | (156      | )       |           |   | (23       | )      
|                |                                    |                                  |                             |         |         |         |   |           |         |           |   |          
|                |                                    |                                  | Consolidated segment profit |         | $       | 685,698 |   |           | $       | 833,359   |   |           | $       | 1,136,625 | 
|                |                                    |                                  |                             |         |         |         |   |           |         |           |   |          
|                | Other operating costs and expenses |                                  |                             | 319,432 |         |         |   | 539,159   |         |           |   | 970,511   |        
|                |                                    |                                  |                             |         |         |         |   |           |         |           |   |          
|                |                                    | Operating income                 |                             | $       | 366,266 |         |   | $         | 294,200 |           |   | $         | 166,114 |          
|                |                                    |                                  |                             |         |         |         |   |           |         |           |   |          



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Results for 2002 reflect (a) a $22,113
    charge for corrections of immaterial errors related to
    underpayments of amounts due under Medicaid and other
    governmental pricing programs for the years 1998 to 2001,
    (b) a $12,399 charge for corrections of immaterial errors
    related to underpayments of amounts due under Medicaid and other
    governmental pricing programs related to 2002 and recorded in
    the fourth quarter of 2002, and (c) an $11,970 charge
    arising from changes in accounting estimates related to Medicaid
    and other governmental pricing programs. Results for 2003
    reflect an $18,000 charge for changes in accounting estimates
    related to Medicaid for the years 1998 to 2002 and a $900 charge
    for corrections of immaterial errors related to Medicaid for the
    years 1994 to 1997. For additional information regarding these
    charges, see Note 17.

F-33



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##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                                                                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Contract manufacturing revenues include $49,763,
    $107,437, and $251,546 of intercompany sales for the years ended
    December 31, 2001, 2002 and 2003, respectively.

|              |                               |                           |   |           |           |  |   |           |           | 
|------------- | ----------------------------- | ------------------------- | - | --------- | --------- |  | - | --------- | --------- | 
|              |                               |                          
|              |                               | As of December 31,       
|              |                               |                          
|              |                               | 2002                      |   | 2003     
|              |                               |                           |   |          
|Total assets: |                               |                           |   |           |           |  |   |          
|              | Branded pharmaceuticals       |                           | $ | 2,642,380 |           |  | $ | 2,897,137 |          
|              | Meridian Medical Technologies |                           |   |          |           |  |   | 250,935   |          
|              | Royalties                     |                           |   | 18,738    |           |  |   | 20,032    |          
|              | Contract manufacturing        |                           |   | 98,404    |           |  |   | 90,992    |          
|              | All other                     |                           |   | 11        |           |  |   | 10        |          
|              | Eliminations                  |                           |   | (8,873    | )         |  |   | (81,372   | )        
|              |                               |                           |   |           |           |  |   |          
|              |                               | Consolidated total assets |   | $         | 2,750,660 |  |   | $         | 3,177,734 | 
|              |                               |                           |   |           |           |  |   |          

The following represents branded pharmaceutical
revenues by therapeutic area:

|                |                              |                                              |   |         |         |      |   |         |           |  |   |         |           | 
|--------------- | ---------------------------- | -------------------------------------------- | - | ------- | ------- | ---- | - | ------- | --------- |  | - | ------- | --------- | 
|                |                              |                                             
|                |                              | For the years ended December 31,            
|                |                              |                                             
|                |                              | 2001                                         |   | 2002    |         | 2003
|                |                              |                                              |   |         |         |     
|Total revenues: |                              |                                              |   |         |         |      |   |         |           |  |   |        
|                | Cardiovascular               |                                              | $ | 308,502 |         |      | $ | 483,052 |           |  | $ | 562,386 |          
|                | Anti-infective               |                                              |   | 140,661 |         |      |   | 116,133 |           |  |   | 85,834  |          
|                | Critical care                |                                              |   | 84,136  |         |      |   | 104,885 |           |  |   | 148,426 |          
|                | Endocrinology/womens health |                                              |   | 231,358 |         |      |   | 296,107 |           |  |   | 196,421 |          
|                | Neuroscience                 |                                              |   |        |         |      |   |        |           |  |   | 251,664 |          
|                | Respiratory                  |                                              |   | 3,866   |         |      |   | 1,993   |           |  |   | 42,250  |          
|                | Other branded                |                                              |   | 25,738  |         |      |   | 30,661  |           |  |   | 13,967  |          
|                |                              |                                              |   |         |         |      |   |         |           |  |   |        
|                |                              | Consolidated branded pharmaceutical revenues |   | $       | 794,261 |      |   | $       | 1,032,831 |  |   | $       | 1,300,948 | 
|                |                              |                                              |   |         |         |      |   |         |           |  |   |        

Capital expenditures of $40,167, $73,587, and
$51,201 for the years ended December 31, 2001, 2002 and
2003, respectively, are substantially related to the branded
pharmaceuticals and contract manufacturing segments.

19.     Related Party
Transactions

The Benevolent Fund is a nonprofit corporation
organized under the laws of the Commonwealth of Virginia and is
exempt from taxation under Section 501(c)(3) of the
Internal Revenue Code. The Benevolent Fund obtains
pharmaceutical products either as gifts-in-kind from
manufacturers or by purchase from third-party distributors or
wholesalers. The Benevolent Fund donates the pharmaceutical
products purchased or received as gifts-in-kind to medical
missions in the United States and in foreign countries to
advance its humanitarian aid efforts. The Benevolent Fund was
founded in 1994 by John M. Gregory, who also founded King and
was its Chairman of the Board until June 28, 2002 and its
Chief Executive Officer until January 1, 2002. John M.
Gregory owned more than 5% of the Companys common stock
until May 6, 2002. John M. Gregory, who serves as President
of the Board of Directors of the Benevolent Fund, is the brother
of Jefferson J. Gregory, who became the Companys Chief
Executive Officer on January 1, 2002 and the Companys
Chairman of the Board on June 28, 2002, and James E.
Gregory, a former director of the Company. In addition, Mary Ann
Blessing, a sister of Jefferson J. Gregory, John M. Gregory
and James E. Gregory, served as the Chief Operating Officer
of the Benevolent Fund until approximately January 2001 and
presently serves as a director and Treasurer of the Board of the
Directors of the Benevolent Fund. Carol Shrader, mother of Brian
Shrader, Chief Financial Officer of the Company until September
2000, is presently a director of the Benevolent Fund.

F-34



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##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Jefferson J. Gregory and James E.
Gregory were members of the Board of Directors of the Benevolent
Fund in 1999, 2000, 2001 and 2002, but no longer hold those
positions. In addition, Joseph R. Gregory, who was Vice Chairman
of the Companys Board of Directors and President of the
Companys wholly-owned subsidiary Monarch Pharmaceuticals,
Inc. until February 2003, served as a director of the Benevolent
Fund in 1999, 2000, 2001 and 2002, but no longer holds that
position. Joseph R. Gregory is the brother of
Jefferson J. Gregory, James E. Gregory, John M.
Gregory and Mary Ann Blessing. Herschel Blessing, Executive Vice
President of Logistics for King until July 1, 2002, is the
husband of Mary Ann Blessing and a director of the Benevolent
Fund.

The Company occasionally donates its products to
the Benevolent Fund. The Company donated inventory with a
carrying value of $4,107 in 2001, $22,586 in 2002, and $16,322
in 2003. In addition to receiving donations of products directly
from pharmaceutical manufacturers, the Benevolent Fund also
purchases pharmaceutical products, including those manufactured
by King, from third-party distributors or wholesalers.

On December 26, 2002, the Company sold
$4,701 of Cortisporin®, Silvadene® and Tigan® to
a third-party wholesaler, which in turn resold those products to
the Benevolent Fund in January 2003. The Company is recognizing
revenue associated with this transaction as the Benevolent Fund
distributes the products to the beneficiaries of the Benevolent
Funds charitable donations. During 2003, the Company
recognized $4,270 of the deferred revenue.

During 2001, the Company donated $103 to King
College, which is located in Bristol, Tennessee. Gregory D.
Jordan, a director of the Company, is the president of King
College. Jefferson J. Gregory, the Companys Chairman and
Chief Executive Officer, served as a member of the King College
Board of Trustees from 1994 until 1998, as the Boards Vice
Chairman from 1998 until 2001 and as its Chairman from 2001
until 2003.

During 2002, the Company paid $73 to
James E. Gregory, a former director of the Company, for
consulting services. Of that amount, $23 was paid in the form of
personal use of the corporate aircraft.

During the years ended December 2001, 2002 and
2003, the Company paid $5, $171, and $88 to the Wake Forest
University School of Medicine, respectively, for research and
development activities. R. Charles Moyer, a director of the
Company, is the Dean Emeritus of the Babcock Graduate School of
Management at Wake Forest University.

20.     Stockholders
Equity



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

The Company is authorized to issue
15 million shares of blank-check preferred
stock, the terms and conditions of which will be determined by
the Board of Directors. As of December 31, 2002 and 2003,
there were no shares issued or outstanding.



| |               
| | --------------
| | 2001 Offerings

On November 7, 2001 and November 20,
2001, the Company completed the sale of 16,000,000 and
1,992,000, respectively, of newly issued shares of common stock
for $38.00 per share ($36.67 per share net of commissions and
expenses) resulting in net proceeds of $659,767.



| |             
| | ------------
| | Stock Splits

On June 20, 2001, the Companys Board
of Directors declared a four for three stock split for
shareholders of record as of July 3, 2001, which was
distributed July 19, 2001. The stock split has been
reflected in all share data contained in these consolidated
financial statements.

F-35



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                         
| | ------------------------
| | Stock Repurchase Program

On May 13, 2002, the Companys Board of
Directors authorized a plan to repurchase up to 7.5 million
shares of the Companys common stock. Under the plan, the
Company could repurchase shares of its common stock in the
open-market from time to time, depending on market conditions,
share price and other factors. During the year ended
December 31, 2002, the Company completed the plan,
repurchasing 7.5 million shares for a total purchase price
of $166,274.



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

Accumulated other comprehensive income consists
of the following components:

|                                                              |  |      |    |      |  |   |       | 
|------------------------------------------------------------- |  | ---- | -- | ---- |  | - | ----- | 
|                                                              |  | 2002 |    | 2003
|                                                              |  |      |    |     
|Net unrealized gains on marketable securities,
    net of tax |  | $    | 45 |      |  | $ | 719   | 
|Foreign currency translation, net of tax                      |  |      |   |      |  |   | 394   | 
|                                                              |  |      |    |      |  |   |       | 
|                                                              |  | $    | 45 |      |  | $ | 1,113 | 
|                                                              |  |      |    |      |  |   |       | 



| |                   
| | ------------------
| | Stock Option Plans

The Company has various incentive stock plans for
executives and employees. In connection with the plans, options
to purchase common stock are granted at option prices not less
than the fair market values of the common stock at the time the
options are granted and either vest immediately or ratably over
a period of up to ten years from the grant date. As of
December 31, 2003, options for 8,802,537 shares of
common stock are available for future grant. A total of
4,648,646, 4,908,317 and 3,849,864 options to purchase common
stock were outstanding under these plans as of December 31,
2001, 2002 and 2003, respectively, of which 3,276,934,
4,211,652, and 3,561,167, respectively, were exercisable.

Certain of the incentive stock plans allow for
employee payment of option exercise prices in the form of either
cash or previously held common stock of the Company. Shares
tendered in payment of the option exercise price must be owned
by the employee making the tender, for either six months or one
year depending on how the shares were acquired, prior to the
date of tender.

A summary of the status of the Companys
plans as of December 31, 2003 and changes during the years
ended December 31, 2001, 2002 and 2003 are presented in the
table below:

|                                                               |           |      |           |            |   |      |           |          |   |   |           |          |  
|-------------------------------------------------------------- | --------- | ---- | --------- | ---------- | - | ---- | --------- | -------- | - | - | --------- | -------- | -
|                                                               |           | 2001 |           | 2002       |   | 2003
|                                                               |           |      |           |            |   |     
|Outstanding options, January 1                                 |           |      | 5,882,509 |            |   |      | 4,648,646 |          |   |   | 4,908,317 |         
|                                                               | Exercised |      |           | (1,972,628 | ) |      |           | (436,160 | ) |   |           | (578,245 | )
|                                                               | Granted   |      |           | 915,712    |   |      |           | 895,750  |   |   |           | 101,000  |  
|                                                               | Cancelled |      |           | (176,947   | ) |      |           | (199,919 | ) |   |           | (581,208 | )
|                                                               |           |      |           |            |   |      |           |          |   |   |           |         
|Outstanding options, December 31                               |           |      | 4,648,646 |            |   |      | 4,908,317 |          |   |   | 3,849,864 |         
|                                                               |           |      |           |            |   |      |           |          |   |   |           |         
|Weighted average price of options outstanding,
    January 1   |           | $    | 15.45     |            |   | $    | 20.83     |          |   | $ | 21.27     |         
|                                                               |           |      |           |            |   |      |           |          |   |   |           |         
|Weighted average price of options exercised                    |           | $    | 13.46     |            |   | $    | 9.95      |          |   | $ | 7.31      |         
|                                                               |           |      |           |            |   |      |           |          |   |   |           |         
|Weighted average price of options granted                      |           | $    | 38.39     |            |   | $    | 19.69     |          |   | $ | 13.95     |         
|                                                               |           |      |           |            |   |      |           |          |   |   |           |         
|Weighted average price of options cancelled                    |           | $    | 15.67     |            |   | $    | 28.52     |          |   | $ | 25.90     |         
|                                                               |           |      |           |            |   |      |           |          |   |   |           |         
|Weighted average price of options outstanding,
    December 31 |           | $    | 20.83     |            |   | $    | 21.27     |          |   | $ | 22.48     |         
|                                                               |           |      |           |            |   |      |           |          |   |   |           |         

F-36



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Options outstanding at December 31, 2003
have exercise prices between $4.67 and $44.26, with a weighted
average exercise price of $22.48 and a remaining contractual
life of approximately 6.22 years.

|                  |               |        |  |           |  |               |   |       |  |  |  |      | 
|----------------- | ------------- | ------ |  | --------- |  | ------------- | - | ----- |  |  |  | ---- | 
|                  |               |        |  | Weighted  |  | Weighted     
|                  |               |        |  | Average   |  | Average      
|                  |               |        |  | Exercise  |  | Remaining    
|Range of Exercise |               |        |  | Price per |  | Contractual  
|Prices per Share  |               | Shares |  | Share     |  | Life in Years
|                  |               |        |  |           |  |              
|Outstanding:      |               |        |  |           |  |               |   |       |  |  |  |     
|                  | $4.67-$18.96  |        |  | 1,075,073 |  |               | $ | 8.36  |  |  |  | 3.51 | 
|                  | $18.98-$29.81 |        |  | 1,453,783 |  |               |   | 20.85 |  |  |  | 7.15 | 
|                  | $30.25-$44.26 |        |  | 1,321,008 |  |               |   | 35.77 |  |  |  | 7.41 | 
|                  |               |        |  |           |  |               |   |       |  |  |  |     
|                  | $4.67-$44.26  |        |  | 3,849,864 |  |               | $ | 22.48 |  |  |  |      | 
|                  |               |        |  |           |  |               |   |       |  |  |  |     

|                  |               |        |  |                  |  |  |   |       | 
|----------------- | ------------- | ------ |  | ---------------- |  |  | - | ----- | 
|                  |               |        |  | Weighted        
|Range of Exercise |               |        |  | Average Exercise
|Prices per Share  |               | Shares |  | Price per Share 
|                  |               |        |  |                 
|Exercisable:      |               |        |  |                  |  |  |   |      
|                  | $4.67-$18.96  |        |  | 959,818          |  |  | $ | 7.77  | 
|                  | $18.98-$29.81 |        |  | 1,281,091        |  |  |   | 20.92 | 
|                  | $30.25-44.26  |        |  | 1,320,258        |  |  |   | 35.77 | 
|                  |               |        |  |                  |  |  |   |      
|                  | $4.67-$44.26  |        |  | 3,561,167        |  |  | $ | 22.88 | 
|                  |               |        |  |                  |  |  |   |      

During 2001, 2002 and 2003, the Company granted
53,332, 50,000 and 70,000 options, respectively, of common stock
to its directors under the 1998 Stock Option Plan at an exercise
price equal to market value at the date of grant. The options
vested immediately upon grant for the 2001 and 2002 grants and
after one year of service for the 2003 grant. Options totaling
304,965 issued under the 1998 Stock Option Plan were outstanding
at December 31, 2003 of which 234,965 were fully vested.
Options under the 1998 Stock Option Plan expire 10 years
from the date of grant. These options are included in amounts
reflected in the above tables.



|    |                        
|--- | -----------------------
|21. | Income per Common Share

The basic and diluted income per common share was
determined based on the following share data:

|                                 |                                  |      |  |             |  |      |  |             |  |  |  |             | 
|-------------------------------- | -------------------------------- | ---- |  | ----------- |  | ---- |  | ----------- |  |  |  | ----------- | 
|                                 |                                  | 2001 |  | 2002        |  | 2003
|                                 |                                  |      |  |             |  |     
|Basic income per common share:   |                                  |      |  |             |  |      |  |             |  |  |  |            
|                                 | Weighted average common shares   |      |  | 231,542,983 |  |      |  | 244,375,770 |  |  |  | 240,989,093 | 
|                                 |                                  |      |  |             |  |      |  |             |  |  |  |            
|Diluted income per common share: |                                  |      |  |             |  |      |  |             |  |  |  |            
|                                 | Weighted average common shares   |      |  | 231,542,983 |  |      |  | 244,375,770 |  |  |  | 240,989,093 | 
|                                 | Effect of dilutive stock options |      |  | 2,363,376   |  |      |  | 1,322,898   |  |  |  | 537,540     | 
|                                 |                                  |      |  |             |  |      |  |             |  |  |  |            
|                                 | Weighted average common shares   |      |  | 233,906,359 |  |      |  | 245,698,668 |  |  |  | 241,526,633 | 
|                                 |                                  |      |  |             |  |      |  |             |  |  |  |            

The weighted average stock options that were
anti-dilutive at December 31, 2001, 2002 and 2003 were
220,431, 1,669,922, and 3,034,318 shares, respectively. The
convertible debentures could also be converted into
6,877,990 shares of common stock in the future, subject to
certain contingencies outlined in the indenture (Note 12).
Because such contingencies were not fulfilled, the convertible
debentures were not considered in the calculation of diluted
income per common share.

F-37



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                                               
|--- | ----------------------------------------------
|22. | Recently Adopted Accounting
    Pronouncements

In the first quarter of 2002, the Company adopted
SFAS No. 141, Business Combinations, and
SFAS No. 142 Goodwill and Other Intangible
Assets. SFAS No. 141 requires all business
combinations to be accounted for under the purchase method of
accounting. SFAS No. 141 was effective for all
business combinations initiated after June 30, 2001.
SFAS No. 142 modifies the accounting and reporting for
acquired intangible assets at the time of acquisition and in
subsequent periods. Intangible assets which have finite lives
must be amortized over their estimated useful life. Intangible
assets with indefinite lives will not be amortized, but
evaluated annually for impairment.

SFAS No. 142 also required an
additional impairment test for existing goodwill ($12,742) and
for the indefinite-lived intangible assets ($19,192) that
existed at the time SFAS No. 142 was adopted to determine
whether any write-down was required as of the beginning of 2002.
Upon completion of such testing, management determined that no
write-down to the carrying value of these assets was required.

The following table reflects consolidated results
adjusted as though the adoption of SFAS No. 142 occurred as
of January 1, 2001:

|                                 |              |                                          |             |         |      |         |   |         |   |         |   |         |   |         | 
|-------------------------------- | ------------ | ---------------------------------------- | ----------- | ------- | ---- | ------- | - | ------- | - | ------- | - | ------- | - | ------- | 
|                                 |              |                                         
|                                 |              | For the Year Ended December 31,         
|                                 |              |                                         
|                                 |              | 2001                                     |             | 2002    |      | 2003   
|                                 |              |                                          |             |         |      |        
|Net income:                      |              |                                          |             |         |      |         |   |         |   |         |   |        
|                                 | As reported: |                                          | $           | 217,936 |      |         | $ | 182,520 |   |         | $ | 105,856 |  
|                                 |              | Goodwill amortization                    |             |         | 408  |         |   |         |  |         |   |         |  |        
|                                 |              | Indefinite-life intangibles amortization |             |         | 595  |         |   |         |  |         |   |         |  |        
|                                 |              |                                          |             |         |      |         |   |         |   |         |   |        
|                                 |              |                                          | As adjusted |         | $    | 218,939 |   |         | $ | 182,520 |   |         | $ | 105,856 | 
|                                 |              |                                          |             |         |      |         |   |         |   |         |   |        
|Basic income per common share:   |              |                                          |             |         |      |         |   |         |   |         |   |        
|                                 | As reported: |                                          | $           | 0.94    |      |         | $ | 0.75    |   |         | $ | 0.44    |  
|                                 |              | Goodwill amortization                    |             |         |     |         |   |         |  |         |   |         |  |        
|                                 |              | Indefinite-life intangibles amortization |             |         | 0.01 |         |   |         |  |         |   |         |  |        
|                                 |              |                                          |             |         |      |         |   |         |   |         |   |        
|                                 |              |                                          | As adjusted |         | $    | 0.95    |   |         | $ | 0.75    |   |         | $ | 0.44    | 
|                                 |              |                                          |             |         |      |         |   |         |   |         |   |        
|Diluted income per common share: |              |                                          |             |         |      |         |   |         |   |         |   |        
|                                 | As reported: |                                          | $           | 0.93    |      |         | $ | 0.74    |   |         | $ | 0.44    |  
|                                 |              | Goodwill amortization                    |             |         |     |         |   |         |  |         |   |         |  |        
|                                 |              | Indefinite-life intangibles amortization |             |         | 0.01 |         |   |         |  |         |   |         |  |        
|                                 |              |                                          |             |         |      |         |   |         |   |         |   |        
|                                 |              |                                          | As adjusted |         | $    | 0.94    |   |         | $ | 0.74    |   |         | $ | 0.44    | 
|                                 |              |                                          |             |         |      |         |   |         |   |         |   |        

In May 2002, the Financial Accounting
Standards Board issued SFAS No. 145, Rescission of
FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Corrections as of
April 2002. SFAS No. 145 was effective for
fiscal periods beginning after May 15, 2002. The primary
impact on the Company of adopting SFAS No. 145 was that
gains and losses incurred upon the extinguishment of debt will
no longer qualify for extraordinary item treatment in the income
statement but will normally be presented as a non-operating gain
or loss. Accordingly, the Company reclassified the loss incurred
upon the extinguishment of debt during the year ended
December 31, 2001 to other expense.

23.     Restructuring
Activities and Executive Retirements

During 2002, the Company consolidated the
international division into the Companys operations in
Bristol, Tennessee, decided to sell the veterinary business, and
decided to terminate production at one of its facilities. These
activities eliminated approximately 35 employee positions
of which approximately 16 were hourly and 19 were salaried. Also
during 2002, two executives retired and were paid $4,325.

F-38



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Accordingly, the Company incurred a charge of
$5,911 during the year ended December 31, 2002. The Company
had $2,216 accrued relating to these activities as of
December 31, 2002, which was paid during 2003.



|    |                                                
|--- | -----------------------------------------------
|24. | Quarterly Financial Information
    (unaudited)

The following table sets forth summary financial
information for the years ended December 31, 2002 and 2003:

|                                           |                   |       |         |        |  |       |         |        |  |   |         |      |  |   |         |       |  
|------------------------------------------ | ----------------- | ----- | ------- | ------ |  | ----- | ------- | ------ |  | - | ------- | ---- |  | - | ------- | ----- | -
|2002 By Quarter                            |                   | First |         | Second |  | Third |         | Fourth
|                                           |                   |       |         |        |  |       |         |       
|Total revenues                             |                   | $     | 258,065 |        |  | $     | 282,533 |        |  | $ | 315,705 |      |  | $ | 272,032 |      
|Gross profit                               |                   |       | 209,957 |        |  |       | 227,305 |        |  |   | 252,143 |      |  |   | 143,954 |      
|Operating income (loss)                    |                   |       | 112,261 |        |  |       | 117,424 |        |  |   | 129,967 |      |  |   | (65,451 | )    
|Net income (loss)                          |                   |       | 71,320  |        |  |       | 58,398  |        |  |   | 84,245  |      |  |   | (31,442 | )    
|Basic income (loss) per common share(1):   |                   |       |         |        |  |       |         |        |  |   |         |      |  |   |         |      
|                                           | Net income (loss) |       | $       | 0.29   |  |       | $       | 0.24   |  |   | $       | 0.35 |  |   | $       | (0.13 | )
|Diluted income (loss) per common share(1): |                   |       |         |        |  |       |         |        |  |   |         |      |  |   |         |      
|                                           | Net income (loss) |       | $       | 0.29   |  |       | $       | 0.24   |  |   | $       | 0.35 |  |   | $       | (0.13 | )

|                                           |                   |       |         |        |   |       |         |        |   |   |         |      |  |   |         |      | 
|------------------------------------------ | ----------------- | ----- | ------- | ------ | - | ----- | ------- | ------ | - | - | ------- | ---- |  | - | ------- | ---- | 
|2003 By Quarter                            |                   | First |         | Second |   | Third |         | Fourth
|                                           |                   |       |         |        |   |       |         |       
|Total revenues                             |                   | $     | 343,843 |        |   | $     | 370,710 |        |   | $ | 424,204 |      |  | $ | 382,631 |     
|Gross profit                               |                   |       | 263,803 |        |   |       | 278,601 |        |   |   | 333,783 |      |  |   | 260,438 |     
|Operating income (loss)                    |                   |       | (7,460  | )      |   |       | (57,211 | )      |   |   | 160,406 |      |  |   | 70,379  |     
|Net income (loss)                          |                   |       | (7,193  | )      |   |       | (35,015 | )      |   |   | 106,087 |      |  |   | 41,977  |     
|Basic (loss) income per common share(1):   |                   |       |         |        |   |       |         |        |   |   |         |      |  |   |         |     
|                                           | Net (loss) income |       | $       | (0.03  | ) |       | $       | (0.15  | ) |   | $       | 0.44 |  |   | $       | 0.17 | 
|Diluted (loss) income per common share(1): |                   |       |         |        |   |       |         |        |   |   |         |      |  |   |         |     
|                                           | Net (loss) income |       | $       | (0.03  | ) |       | $       | (0.15  | ) |   | $       | 0.44 |  |   | $       | 0.17 | 






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

The information shown above for the fourth
quarter of 2002 reflects significant charges consisting of a
$46.5 million adjustment to the Companys accrual for
estimated amounts due under Medicaid and other governmental
pricing programs. Included in the $46.5 million adjustment
are amounts representing corrections of immaterial errors. The
impact of these immaterial errors in each of the three quarters
prior to the fourth quarter of 2002 on revenues is $5,495,
$2,831, and $2,070, respectively, and on diluted income per
common share is $0.02, $0.01, and $0.01, respectively.

The information shown above for the fourth
quarter 2003 reflects



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | an $18,000 adjustment reducing total revenues for
    estimated amounts due under Medicaid for the period from 1998 to
    2002,                                                                                                                                                                                                                                                                                        
|
| |  | a $900 adjustment reducing total revenues for
    estimated amounts due under Medicaid for the period from 1994 to
    1997,                                                                                                                                                                                                                                                                                            
|
| |  | a $280 adjustment reducing royalty expense
    related to royalties due on the Companys Altace®
    product as a result of the Medicaid adjustment during 2003
    described above,                                                                                                                                                                                                                                    
|
| |  | a $15,212 adjustment reducing the co-promotion
    fees paid to our Altace® co-promotion colleague as a result
    of the charges described above for amounts due under Medicaid
    and other governmental pricing programs for the years 1998 to
    2002. Specifically (a) the Company recovered on a pre-tax basis
    $9,514 in fees which the Company previously accrued during the
    fourth quarter of 2002 and

F-39



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |  |                                                                                                                                                                                                                                                                                                                                 
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | has reduced the accrual for these fees by this
    amount in the fourth quarter of 2003 and (b) fees under the
    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.



|    |                  
|--- | -----------------
|25. | Subsequent Events

On February 19, 2004, Jefferson J.
Gregory announced his plan to retire as the Chief Executive
Officer of the Company. The Companys Board of Directors
has begun a search for a new Chief Executive Officer and
Mr. Gregory intends to continue as Chief Executive Officer
until a successor is appointed.

On February 19, 2004 the Company transferred
an additional $19,000 into escrow to cover the additional
Medicaid accrual for the period from 1994 to 2002. This amount
has been reflected as restricted cash in the accompanying
financial statements.



|    |                               
|--- | ------------------------------
|26. | Guarantor Financial Statements

Each of the Companys subsidiaries, except
Monarch Pharmaceuticals Ireland Limited formed in January, 2003
(the Guarantor Subsidiaries), has guaranteed, on a
full, unconditional and joint and several basis, the
Companys performance under the $345,000, 2 3/4%
Convertible Debentures due 2021 and under the $400,000 Senior
Secured Revolving Credit Facility on a joint and several basis.
There are no restrictions under the Companys financing
arrangements on the ability of the Guarantor Subsidiaries to
distribute funds to the Company in the form of cash dividends,
loans or advances. The following combined financial data
provides information regarding the financial position, results
of operations and cash flows of the Guarantor Subsidiaries
(condensed consolidating financial data). Separate financial
statements and other disclosures concerning the Guarantor
Subsidiaries are not presented because management has determined
that such information would not be material to the holders of
the debt.

F-40



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

GUARANTOR SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE
SHEETS


|                                          |                                            |                   |           |              |  |             |           |              |   |   |            |            |   |   |           |           | 
|----------------------------------------- | ------------------------------------------ | ----------------- | --------- | ------------ |  | ----------- | --------- | ------------ | - | - | ---------- | ---------- | - | - | --------- | --------- | 
|                                          |                                            |                  
|                                          |                                            | December 31, 2002
|                                          |                                            |                  
|                                          |                                            |                   |           | Guarantor    |  | Eliminating |           | King        
|                                          |                                            | King              |           | Subsidiaries |  | Entries     |           | Consolidated
|                                          |                                            |                   |           |              |  |             |           |             
|ASSETS                                    |                                            |                   |           |              |  |             |           |              |   |   |            |            |   |   |           |          
|Current assets:                           |                                            |                   |           |              |  |             |           |              |   |   |            |            |   |   |           |          
|Cash and cash equivalents                 |                                            | $                 | 594,385   |              |  | $           | (6,160    | )            |   | $ |           |            |   | $ | 588,225   |          
|Marketable securities                     |                                            |                   | 227,263   |              |  |             |          |              |   |   |           |            |   |   | 227,263   |          
|Restricted cash                           |                                            |                   |          |              |  |             |          |              |   |   |           |            |   |   |          |          
|Accounts receivable, net                  |                                            |                   | 17,352    |              |  |             | 151,469   |              |   |   | (8,834     | )          |   |   | 159,987   |          
|Inventories                               |                                            |                   | 45,761    |              |  |             | 121,392   |              |   |   |           |            |   |   | 167,153   |          
|Deferred income tax assets                |                                            |                   | 36,328    |              |  |             | 69,840    |              |   |   |           |            |   |   | 106,168   |          
|Prepaid expenses and other current assets |                                            |                   | 7,996     |              |  |             | 4,910     |              |   |   |           |            |   |   | 12,906    |          
|                                          |                                            |                   |           |              |  |             |           |              |   |   |            |            |   |   |           |          
|                                          | Total current assets                       |                   |           | 929,085      |  |             |           | 341,451      |   |   |            | (8,834     | ) |   |           | 1,261,702 | 
|Property, plant, and equipment, net       |                                            |                   | 51,587    |              |  |             | 165,527   |              |   |   |           |            |   |   | 217,114   |          
|Goodwill                                  |                                            |                   |          |              |  |             | 12,742    |              |   |   |           |            |   |   | 12,742    |          
|Intangible assets, net                    |                                            |                   | 892,793   |              |  |             | 326,778   |              |   |   |           |            |   |   | 1,219,571 |          
|Other assets                              |                                            |                   | 25,254    |              |  |             | 14,277    |              |   |   |           |            |   |   | 39,531    |          
|Deferred income tax assets                |                                            |                   |          |              |  |             |          |              |   |   |           |            |   |   |          |          
|Investment in subsidiaries                |                                            |                   | 1,126,245 |              |  |             |          |              |   |   | (1,126,245 | )          |   |   |          |          
|                                          |                                            |                   |           |              |  |             |           |              |   |   |            |            |   |   |           |          
|                                          | Total assets                               |                   | $         | 3,024,964    |  |             | $         | 860,775      |   |   | $          | (1,135,079 | ) |   | $         | 2,750,660 | 
|                                          |                                            |                   |           |              |  |             |           |              |   |   |            |            |   |   |           |          
|LIABILITIES AND SHAREHOLDERS EQUITY      |                                            |                   |           |              |  |             |           |              |   |   |            |            |   |   |           |          
|Current liabilities:                      |                                            |                   |           |              |  |             |           |              |   |   |            |            |   |   |           |          
|Accounts payable                          |                                            | $                 | 26,119    |              |  | $           | 32,604    |              |   | $ | (8,834     | )          |   | $ | 49,889    |          
|Accrued expenses                          |                                            |                   | 42,542    |              |  |             | 254,986   |              |   |   |           |            |   |   | 297,528   |          
|Income taxes payable                      |                                            |                   | 18,870    |              |  |             | 2,377     |              |   |   |           |            |   |   | 21,247    |          
|Current portion of long-term debt         |                                            |                   | 1,300     |              |  |             |          |              |   |   |           |            |   |   | 1,300     |          
|                                          |                                            |                   |           |              |  |             |           |              |   |   |            |            |   |   |           |          
|                                          | Total current liabilities                  |                   |           | 88,831       |  |             |           | 289,967      |   |   |            | (8,834     | ) |   |           | 369,964   | 
|Long-term debt                            |                                            |                   | 345,093   |              |  |             |          |              |   |   |           |            |   |   | 345,093   |          
|Deferred income tax liabilities           |                                            |                   | 11,991    |              |  |             | 21,605    |              |   |   |           |            |   |   | 33,596    |          
|Other liabilities                         |                                            |                   | 70,074    |              |  |             | 750       |              |   |   |           |            |   |   | 70,824    |          
|Intercompany (receivable) payable         |                                            |                   | 577,792   |              |  |             | (577,792  | )            |   |   |           |            |   |   |          |          
|                                          |                                            |                   |           |              |  |             |           |              |   |   |            |            |   |   |           |          
|                                          | Total liabilities                          |                   |           | 1,093,781    |  |             |           | (265,470     | ) |   |            | (8,834     | ) |   |           | 819,477   | 
|                                          |                                            |                   |           |              |  |             |           |              |   |   |            |            |   |   |           |          
|Shareholders equity                      |                                            |                   | 1,931,183 |              |  |             | 1,126,245 |              |   |   | (1,126,245 | )          |   |   | 1,931,183 |          
|                                          |                                            |                   |           |              |  |             |           |              |   |   |            |            |   |   |           |          
|                                          | Total liabilities and shareholders equity |                   | $         | 3,024,964    |  |             | $         | 860,775      |   |   | $          | (1,135,079 | ) |   | $         | 2,750,660 | 
|                                          |                                            |                   |           |              |  |             |           |              |   |   |            |            |   |   |           |          

[Additional columns below]

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

|                                          |                                            |                   |           |              |  |                 |           |              |  |         |            |             |   |              |           |           |  |   |       |        |  |   |        |        |   |   |           |           | 
|----------------------------------------- | ------------------------------------------ | ----------------- | --------- | ------------ |  | --------------- | --------- | ------------ |  | ------- | ---------- | ----------- | - | ------------ | --------- | --------- |  | - | ----- | ------ |  | - | ------ | ------ | - | - | --------- | --------- | 
|                                          |                                            |                  
|                                          |                                            | December 31, 2003
|                                          |                                            |                  
|                                          |                                            |                   |           | King         |  |                
|                                          |                                            |                   |           | Consolidated |  | Monarch         |           |             
|                                          |                                            |                   |           | with         |  | Pharmaceuticals |           |             
|                                          |                                            |                   |           | Guarantor    |  | Eliminating     |           | Guarantor    |  | Ireland |            | Eliminating |   | King        
|                                          |                                            | King              |           | Subsidiaries |  | Entries         |           | Subsidiaries |  | Limited |            | Entries     |   | Consolidated
|                                          |                                            |                   |           |              |  |                 |           |              |  |         |            |             |   |             
|ASSETS                                    |                                            |                   |           |              |  |                 |           |              |  |         |            |             |   |              |           |           |  |   |       |        |  |   |        |        |   |   |           |          
|Current assets:                           |                                            |                   |           |              |  |                 |           |              |  |         |            |             |   |              |           |           |  |   |       |        |  |   |        |        |   |   |           |          
|Cash and cash equivalents                 |                                            | $                 | 140,617   |              |  | $               | 3,641     |              |  | $       |           |             |   | $            | 144,258   |           |  | $ | 1,795 |        |  | $ |       |        |   | $ | 146,053   |          
|Marketable securities                     |                                            |                   |          |              |  |                 |          |              |  |         |            |             |   |              |          |           |  |   |      |        |  |   |        |        |   |   |          |          
|Restricted cash                           |                                            |                   | 67,199    |              |  |                 | 66,770    |              |  |         |           |             |   |              | 133,969   |           |  |   |      |        |  |   |       |        |   |   | 133,969   |          
|Accounts receivable, net                  |                                            |                   | 4,529     |              |  |                 | 240,574   |              |  |         |           |             |   |              | 245,103   |           |  |   | 1,314 |        |  |   |       |        |   |   | 246,417   |          
|Inventories                               |                                            |                   | 228,093   |              |  |                 | 36,554    |              |  |         |           |             |   |              | 264,647   |           |  |   | 251   |        |  |   |       |        |   |   | 264,898   |          
|Deferred income tax assets                |                                            |                   | 16,428    |              |  |                 | 108,502   |              |  |         |           |             |   |              | 124,930   |           |  |   |      |        |  |   |       |        |   |   | 124,930   |          
|Prepaid expenses and other current assets |                                            |                   | 5,249     |              |  |                 | 24,787    |              |  |         |           |             |   |              | 30,036    |           |  |   |      |        |  |   |       |        |   |   | 30,036    |          
|                                          |                                            |                   |           |              |  |                 |           |              |  |         |            |             |   |              |           |           |  |   |       |        |  |   |        |        |   |   |           |          
|                                          | Total current assets                       |                   |           | 462,115      |  |                 |           | 480,828      |  |         |            |            |   |              |           | 942,943   |  |   |       | 3,360  |  |   |        |       |   |   |           | 946,303   | 
|Property, plant, and equipment, net       |                                            |                   | 115,442   |              |  |                 | 142,217   |              |  |         |           |             |   |              | 257,659   |           |  |   |      |        |  |   |       |        |   |   | 257,659   |          
|Goodwill                                  |                                            |                   |          |              |  |                 | 121,355   |              |  |         |           |             |   |              | 121,355   |           |  |   |      |        |  |   |       |        |   |   | 121,355   |          
|Intangible assets, net                    |                                            |                   | 6,955     |              |  |                 | 1,742,536 |              |  |         |           |             |   |              | 1,749,491 |           |  |   | 7,502 |        |  |   |       |        |   |   | 1,756,993 |          
|Other assets                              |                                            |                   | 45,410    |              |  |                 | 30,707    |              |  |         |           |             |   |              | 76,117    |           |  |   |      |        |  |   |       |        |   |   | 76,117    |          
|Deferred income tax assets                |                                            |                   | 14,831    |              |  |                 | 4,476     |              |  |         |           |             |   |              | 19,307    |           |  |   |      |        |  |   |       |        |   |   | 19,307    |          
|Investment in subsidiaries                |                                            |                   | 2,307,745 |              |  |                 |          |              |  |         | (2,302,228 | )           |   |              | 5,517     |           |  |   |      |        |  |   | (5,517 | )      |   |   |          |          
|                                          |                                            |                   |           |              |  |                 |           |              |  |         |            |             |   |              |           |           |  |   |       |        |  |   |        |        |   |   |           |          
|                                          | Total assets                               |                   | $         | 2,952,498    |  |                 | $         | 2,522,119    |  |         | $          | (2,302,228  | ) |              | $         | 3,172,389 |  |   | $     | 10,862 |  |   | $      | (5,517 | ) |   | $         | 3,177,734 | 
|                                          |                                            |                   |           |              |  |                 |           |              |  |         |            |             |   |              |           |           |  |   |       |        |  |   |        |        |   |   |           |          
|LIABILITIES AND SHAREHOLDERS EQUITY      |                                            |                   |           |              |  |                 |           |              |  |         |            |             |   |              |           |           |  |   |       |        |  |   |        |        |   |   |           |          
|Current liabilities:                      |                                            |                   |           |              |  |                 |           |              |  |         |            |             |   |              |           |           |  |   |       |        |  |   |        |        |   |   |           |          
|Accounts payable                          |                                            | $                 | 51,924    |              |  | $               | 31,135    |              |  | $       |           |             |   | $            | 83,059    |           |  | $ | 19    |        |  | $ |       |        |   | $ | 83,078    |          
|Accrued expenses                          |                                            |                   | 55,764    |              |  |                 | 450,269   |              |  |         |           |             |   |              | 506,033   |           |  |   |      |        |  |   |       |        |   |   | 506,033   |          
|Income taxes payable                      |                                            |                   | 78,363    |              |  |                 | 838       |              |  |         |           |             |   |              | 79,201    |           |  |   | 440   |        |  |   |       |        |   |   | 79,641    |          
|Current portion of long-term debt         |                                            |                   | 97        |              |  |                 |          |              |  |         |           |             |   |              | 97        |           |  |   |      |        |  |   |       |        |   |   | 97        |          
|                                          |                                            |                   |           |              |  |                 |           |              |  |         |            |             |   |              |           |           |  |   |       |        |  |   |        |        |   |   |           |          
|                                          | Total current liabilities                  |                   |           | 186,148      |  |                 |           | 482,242      |  |         |            |            |   |              |           | 668,390   |  |   |       | 459    |  |   |        |       |   |   |           | 668,849   | 
|Long-term debt                            |                                            |                   | 345,000   |              |  |                 |          |              |  |         |           |             |   |              | 345,000   |           |  |   |      |        |  |   |       |        |   |   | 345,000   |          
|Deferred income tax liabilities           |                                            |                   |          |              |  |                 |          |              |  |         |           |             |   |              |          |           |  |   |      |        |  |   |       |        |   |   |          |          
|Other liabilities                         |                                            |                   | 50,953    |              |  |                 | 70,752    |              |  |         |           |             |   |              | 121,705   |           |  |   |      |        |  |   |       |        |   |   | 121,705   |          
|Intercompany (receivable) payable         |                                            |                   | 329,396   |              |  |                 | (333,103  | )            |  |         |           |             |   |              | (3,707    | )         |  |   | 3,707 |        |  |   |       |        |   |   |          |          
|                                          |                                            |                   |           |              |  |                 |           |              |  |         |            |             |   |              |           |           |  |   |       |        |  |   |        |        |   |   |           |          
|                                          | Total liabilities                          |                   |           | 911,497      |  |                 |           | 219,891      |  |         |            |            |   |              |           | 1,131,388 |  |   |       | 4,166  |  |   |        |       |   |   |           | 1,135,554 | 
|                                          |                                            |                   |           |              |  |                 |           |              |  |         |            |             |   |              |           |           |  |   |       |        |  |   |        |        |   |   |           |          
|Shareholders equity                      |                                            |                   | 2,041,001 |              |  |                 | 2,302,228 |              |  |         | (2,302,228 | )           |   |              | 2,041,001 |           |  |   | 6,696 |        |  |   | (5,517 | )      |   |   | 2,042,180 |          
|                                          |                                            |                   |           |              |  |                 |           |              |  |         |            |             |   |              |           |           |  |   |       |        |  |   |        |        |   |   |           |          
|                                          | Total liabilities and shareholders equity |                   | $         | 2,952,498    |  |                 | $         | 2,522,119    |  |         | $          | (2,302,228  | ) |              | $         | 3,172,389 |  |   | $     | 10,862 |  |   | $      | (5,517 | ) |   | $         | 3,177,734 | 
|                                          |                                            |                   |           |              |  |                 |           |              |  |         |            |             |   |              |           |           |  |   |       |        |  |   |        |        |   |   |           |          

F-41



---



##### 



GUARANTOR SUBSIDIARIES

CONSOLIDATING STATEMENTS OF
OPERATIONS

|                                                                                       |                                                          |                   |                                    |                   |         |             |          |              |         |         |          |              |          |             |          |              |         |         |         |         |         |         |          |           |         |           |          |          |          |          |         |           |         |           |  
|-------------------------------------------------------------------------------------- | -------------------------------------------------------- | ----------------- | ---------------------------------- | ----------------- | ------- | ----------- | -------- | ------------ | ------- | ------- | -------- | ------------ | -------- | ----------- | -------- | ------------ | ------- | ------- | ------- | ------- | ------- | ------- | -------- | --------- | ------- | --------- | -------- | -------- | -------- | -------- | ------- | --------- | ------- | --------- | -
|                                                                                       |                                                          |                   |                                    |                  
|                                                                                       |                                                          | December 31, 2001 |                                    | December 31, 2002
|                                                                                       |                                                          |                   |                                    |                  
|                                                                                       |                                                          |                   |                                    | Guarantor         |         | Eliminating |          | King         |         |         |          | Guarantor    |          | Eliminating |          | King        
|                                                                                       |                                                          | King              |                                    | Subsidiaries      |         | Entries     |          | Consolidated |         | King    |          | Subsidiaries |          | Entries     |          | Consolidated
|                                                                                       |                                                          |                   |                                    |                   |         |             |          |              |         |         |          |              |          |             |          |             
|Revenues:                                                                              |                                                          |                   |                                    |                   |         |             |          |              |         |         |          |              |          |             |          |              |         |         |         |         |         |         |          |           |         |           |          |          |          |          |         |          
|                                                                                       | Net sales                                                |                   | $                                  | 27,206            |         |             | $        | 821,469      |         |         | $        | (23,187      | )        |             | $        | 825,488      |         |         | $       | 235,154 |         |         | $        | 1,067,981 |         |           | $        | (233,175 | )        |          | $       | 1,069,960 |        
|                                                                                       | Royalty revenue                                          |                   |                                    |                  |         |             |          | 46,774       |         |         |          |             |          |             |          | 46,774       |         |         |         |        |         |         |          | 58,375    |         |           |          |         |          |          |         | 58,375    |        
|                                                                                       |                                                          |                   |                                    |                   |         |             |          |              |         |         |          |              |          |             |          |              |         |         |         |         |         |         |          |           |         |           |          |          |          |          |         |          
|                                                                                       |                                                          |                   | Total revenues                     |                   |         | 27,206      |          |              |         | 868,243 |          |              |          | (23,187     | )        |              |         | 872,262 |         |         |         | 235,154 |          |           |         | 1,126,356 |          |          |          | (233,175 | )       |           |         | 1,128,335 |  
|                                                                                       |                                                          |                   |                                    |                   |         |             |          |              |         |         |          |              |          |             |          |              |         |         |         |         |         |         |          |           |         |           |          |          |          |          |         |          
|Operating costs and expenses:                                                          |                                                          |                   |                                    |                   |         |             |          |              |         |         |          |              |          |             |          |              |         |         |         |         |         |         |          |           |         |           |          |          |          |          |         |          
|                                                                                       | Costs of revenues                                        |                   |                                    | 26,425            |         |             |          | 183,326      |         |         |          | (23,187      | )        |             |          | 186,564      |         |         |         | 122,922 |         |         |          | 405,229   |         |           |          | (233,175 | )        |          |         | 294,976   |        
|                                                                                       | Selling, general and administrative                      |                   |                                    | 12,660            |         |             |          | 228,220      |         |         |          |             |          |             |          | 240,880      |         |         |         | 14,166  |         |         |          | 352,757   |         |           |          |         |          |          |         | 366,923   |        
|                                                                                       | Depreciation and amortization                            |                   |                                    | 23,381            |         |             |          | 24,585       |         |         |          |             |          |             |          | 47,966       |         |         |         | 35,658  |         |         |          | 23,639    |         |           |          |         |          |          |         | 59,297    |        
|                                                                                       | Research and development                                 |                   |                                    | 8,199             |         |             |          | 18,308       |         |         |          |             |          |             |          | 26,507       |         |         |         | 12,676  |         |         |          | 27,508    |         |           |          |         |          |          |         | 40,184    |        
|                                                                                       | Intangible asset impairment                              |                   |                                    |                  |         |             |          |             |         |         |          |             |          |             |          |             |         |         |         | 66,844  |         |         |          |          |         |           |          |         |          |          |         | 66,844    |        
|                                                                                       | Merger, restructuring and other nonrecurring
    charges |                   |                                    | (361              | )       |             |          | 4,440        |         |         |          |             |          |             |          | 4,079        |         |         |         |        |         |         |          | 5,911     |         |           |          |         |          |          |         | 5,911     |        
|                                                                                       | Gain on sale of intangible assets                        |                   |                                    |                  |         |             |          |             |         |         |          |             |          |             |          |             |         |         |         |        |         |         |          |          |         |           |          |         |          |          |         |          |        
|                                                                                       |                                                          |                   |                                    |                   |         |             |          |              |         |         |          |              |          |             |          |              |         |         |         |         |         |         |          |           |         |           |          |          |          |          |         |          
|                                                                                       |                                                          |                   | Total operating costs and expenses |                   |         | 70,304      |          |              |         | 458,879 |          |              |          | (23,187     | )        |              |         | 505,996 |         |         |         | 252,266 |          |           |         | 815,044   |          |          |          | (233,175 | )       |           |         | 834,135   |  
|                                                                                       |                                                          |                   |                                    |                   |         |             |          |              |         |         |          |              |          |             |          |              |         |         |         |         |         |         |          |           |         |           |          |          |          |          |         |          
|Operating income                                                                       |                                                          |                   | (43,098                            | )                 |         |             | 409,364  |              |         |         |         |              |          |             | 366,266  |              |         |         | (17,112 | )       |         |         | 311,312  |           |         |           |         |          |          |          | 294,200 |          
|                                                                                       |                                                          |                   |                                    |                   |         |             |          |              |         |         |          |              |          |             |          |              |         |         |         |         |         |         |          |           |         |           |          |          |          |          |         |          
|Other income (expense):                                                                |                                                          |                   |                                    |                   |         |             |          |              |         |         |          |              |          |             |          |              |         |         |         |         |         |         |          |           |         |           |          |          |          |          |         |          
|                                                                                       | Interest income                                          |                   |                                    | 9,472             |         |             |          | 1,503        |         |         |          |             |          |             |          | 10,975       |         |         |         | 21,227  |         |         |          | 1,168     |         |           |          |         |          |          |         | 22,395    |        
|                                                                                       | Interest expense                                         |                   |                                    | (13,398           | )       |             |          | 714          |         |         |          |             |          |             |          | (12,684      | )       |         |         | (12,400 | )       |         |          | (19       | )       |           |          |         |          |          |         | (12,419   | )      
|                                                                                       | Valuation charge  convertible notes
    receivable      |                   |                                    |                  |         |             |          |             |         |         |          |             |          |             |          |             |         |         |         | (35,629 | )       |         |          |          |         |           |          |         |          |          |         | (35,629   | )      
|                                                                                       | Extinguishment of debt expense                           |                   |                                    | (22,903           | )       |             |          |             |         |         |          |             |          |             |          | (22,903      | )       |         |         |        |         |         |          |          |         |           |          |         |          |          |         |          |        
|                                                                                       | Other, net                                               |                   |                                    | 8,593             |         |             |          | (2,280       | )       |         |          |             |          |             |          | 6,313        |         |         |         | (190    | )       |         |          | (694      | )       |           |          |         |          |          |         | (884      | )      
|                                                                                       | Equity in earnings of subsidiaries                       |                   |                                    | 246,856           |         |             |          |             |         |         |          | (246,856     | )        |             |          |             |         |         |         | 202,483 |         |         |          |          |         |           |          | (202,483 | )        |          |         |          |        
|                                                                                       | Intercompany interest (expense)                          |                   |                                    | 16,147            |         |             |          | (16,147      | )       |         |          |             |          |             |          |             |         |         |         | 8,916   |         |         |          | (8,916    | )       |           |          |         |          |          |         |          |        
|                                                                                       |                                                          |                   |                                    |                   |         |             |          |              |         |         |          |              |          |             |          |              |         |         |         |         |         |         |          |           |         |           |          |          |          |          |         |          
|                                                                                       |                                                          |                   | Total other income (expense)       |                   |         | 244,767     |          |              |         | (16,210 | )        |              |          | (246,856    | )        |              |         | (18,299 | )       |         |         | 184,407 |          |           |         | (8,461    | )        |          |          | (202,483 | )       |           |         | (26,537   | )
|                                                                                       |                                                          |                   |                                    |                   |         |             |          |              |         |         |          |              |          |             |          |              |         |         |         |         |         |         |          |           |         |           |          |          |          |          |         |          
|Income before income taxes and cumulative effect
    of change in accounting principle |                                                          |                   | 201,669                            |                   |         |             | 393,154  |              |         |         | (246,856 | )            |          |             | 347,967  |              |         |         | 167,295 |         |         |         | 302,851  |           |         |           | (202,483 | )        |          |          | 267,663 |          
|Income tax (expense) benefit                                                           |                                                          |                   | 16,812                             |                   |         |             | (146,298 | )            |         |         |         |              |          |             | (129,486 | )            |         |         | 15,225  |         |         |         | (100,368 | )         |         |           |         |          |          |          | (85,143 | )        
|                                                                                       |                                                          |                   |                                    |                   |         |             |          |              |         |         |          |              |          |             |          |              |         |         |         |         |         |         |          |           |         |           |          |          |          |          |         |          
|Income (loss) before cumulative effect of
    change in accounting principle           |                                                          |                   | 218,481                            |                   |         |             | 246,856  |              |         |         | (246,856 | )            |          |             | 218,481  |              |         |         | 182,520 |         |         |         | 202,483  |           |         |           | (202,483 | )        |          |          | 182,520 |          
|Cumulative effect of change in accounting
    principle                                |                                                          |                   | (545                               | )                 |         |             |         |              |         |         |         |              |          |             | (545     | )            |         |         |        |         |         |         |         |           |         |           |         |          |          |          |        |          
|                                                                                       |                                                          |                   |                                    |                   |         |             |          |              |         |         |          |              |          |             |          |              |         |         |         |         |         |         |          |           |         |           |          |          |          |          |         |          
|                                                                                       |                                                          | Net income        |                                    | $                 | 217,936 |             |          | $            | 246,856 |         |          | $            | (246,856 | )           |          | $            | 217,936 |         |         | $       | 182,520 |         |          | $         | 202,483 |           |          | $        | (202,483 | )        |         | $         | 182,520 |          
|                                                                                       |                                                          |                   |                                    |                   |         |             |          |              |         |         |          |              |          |             |          |              |         |         |         |         |         |         |          |           |         |           |          |          |          |          |         |          

[Additional columns below]

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

|                                                                                       |                                                          |                   |                                    |              |         |                 |        |              |        |           |         |              |         |          |         |           |         |           |       |       |       |       |         |           |         |           | 
|-------------------------------------------------------------------------------------- | -------------------------------------------------------- | ----------------- | ---------------------------------- | ------------ | ------- | --------------- | ------ | ------------ | ------ | --------- | ------- | ------------ | ------- | -------- | ------- | --------- | ------- | --------- | ----- | ----- | ----- | ----- | ------- | --------- | ------- | --------- | 
|                                                                                       |                                                          |                  
|                                                                                       |                                                          | December 31, 2003
|                                                                                       |                                                          |                  
|                                                                                       |                                                          |                   |                                    | King         |         |                
|                                                                                       |                                                          |                   |                                    | Consolidated |         | Monarch         |        |             
|                                                                                       |                                                          |                   |                                    | with         |         | Pharmaceuticals |        |             
|                                                                                       |                                                          |                   |                                    | Guarantor    |         | Eliminating     |        | Guarantor    |        | Ireland   |         | King        
|                                                                                       |                                                          | King              |                                    | Subsidiaries |         | Entries         |        | Subsidiaries |        | Limited   |         | Consolidated
|                                                                                       |                                                          |                   |                                    |              |         |                 |        |              |        |           |         |             
|Revenues:                                                                              |                                                          |                   |                                    |              |         |                 |        |              |        |           |         |              |         |          |         |           |         |           |       |       |       |       |         |          
|                                                                                       | Net sales                                                |                   | $                                  | 329,974      |         |                 | $      | 1,449,474    |        |           | $       | (329,481     | )       |          | $       | 1,449,967 |         |           | $     | 3,056 |       |       | $       | 1,453,023 |        
|                                                                                       | Royalty revenue                                          |                   |                                    |             |         |                 |        | 68,365       |        |           |         |             |         |          |         | 68,365    |         |           |       |      |       |       |         | 68,365    |        
|                                                                                       |                                                          |                   |                                    |              |         |                 |        |              |        |           |         |              |         |          |         |           |         |           |       |       |       |       |         |          
|                                                                                       |                                                          |                   | Total revenues                     |              |         | 329,974         |        |              |        | 1,517,839 |         |              |         | (329,481 | )       |           |         | 1,518,332 |       |       |       | 3,056 |         |           |         | 1,521,388 | 
|                                                                                       |                                                          |                   |                                    |              |         |                 |        |              |        |           |         |              |         |          |         |           |         |           |       |       |       |       |         |          
|Operating costs and expenses:                                                          |                                                          |                   |                                    |              |         |                 |        |              |        |           |         |              |         |          |         |           |         |           |       |       |       |       |         |          
|                                                                                       | Costs of revenues                                        |                   |                                    | 145,931      |         |                 |        | 567,431      |        |           |         | (329,481     | )       |          |         | 383,881   |         |           |       | 882   |       |       |         | 384,763   |        
|                                                                                       | Selling, general and administrative                      |                   |                                    | 65,800       |         |                 |        | 429,361      |        |           |         |             |         |          |         | 495,161   |         |           |       | 106   |       |       |         | 495,267   |        
|                                                                                       | Depreciation and amortization                            |                   |                                    | 8,013        |         |                 |        | 116,139      |        |           |         |             |         |          |         | 124,152   |         |           |       | 423   |       |       |         | 124,575   |        
|                                                                                       | Research and development                                 |                   |                                    | 900          |         |                 |        | 237,178      |        |           |         |             |         |          |         | 238,078   |         |           |       |      |       |       |         | 238,078   |        
|                                                                                       | Intangible asset impairment                              |                   |                                    | 7,425        |         |                 |        | 117,191      |        |           |         |             |         |          |         | 124,616   |         |           |       |      |       |       |         | 124,616   |        
|                                                                                       | Merger, restructuring and other nonrecurring
    charges |                   |                                    |             |         |                 |        |             |        |           |         |             |         |          |         |          |         |           |       |      |       |       |         |          |        
|                                                                                       | Gain on sale of intangible assets                        |                   |                                    | (810         | )       |                 |        | (11,215      | )      |           |         |             |         |          |         | (12,025   | )       |           |       |      |       |       |         | (12,025   | )      
|                                                                                       |                                                          |                   |                                    |              |         |                 |        |              |        |           |         |              |         |          |         |           |         |           |       |       |       |       |         |          
|                                                                                       |                                                          |                   | Total operating costs and expenses |              |         | 227,259         |        |              |        | 1,456,085 |         |              |         | (329,481 | )       |           |         | 1,353,863 |       |       |       | 1,411 |         |           |         | 1,355,274 | 
|                                                                                       |                                                          |                   |                                    |              |         |                 |        |              |        |           |         |              |         |          |         |           |         |           |       |       |       |       |         |          
|Operating income                                                                       |                                                          |                   | 102,715                            |              |         |                 | 61,754 |              |        |           |        |              |         |          | 164,469 |           |         |           | 1,645 |       |       |       | 166,114 |          
|                                                                                       |                                                          |                   |                                    |              |         |                 |        |              |        |           |         |              |         |          |         |           |         |           |       |       |       |       |         |          
|Other income (expense):                                                                |                                                          |                   |                                    |              |         |                 |        |              |        |           |         |              |         |          |         |           |         |           |       |       |       |       |         |          
|                                                                                       | Interest income                                          |                   |                                    | 5,960        |         |                 |        | 889          |        |           |         |             |         |          |         | 6,849     |         |           |       |      |       |       |         | 6,849     |        
|                                                                                       | Interest expense                                         |                   |                                    | (13,391      | )       |                 |        | (5           | )      |           |         |             |         |          |         | (13,396   | )       |           |       |      |       |       |         | (13,396   | )      
|                                                                                       | Valuation charge  convertible notes
    receivable      |                   |                                    | 18,151       |         |                 |        |             |        |           |         |             |         |          |         | 18,151    |         |           |       |      |       |       |         | 18,151    |        
|                                                                                       | Extinguishment of debt expense                           |                   |                                    |             |         |                 |        |             |        |           |         |             |         |          |         |          |         |           |       |      |       |       |         |          |        
|                                                                                       | Other, net                                               |                   |                                    | (649         | )       |                 |        | (150         | )      |           |         |             |         |          |         | (799      | )       |           |       | 170   |       |       |         | (629      | )      
|                                                                                       | Equity in earnings of subsidiaries                       |                   |                                    | 60,110       |         |                 |        |             |        |           |         | (60,110      | )       |          |         |          |         |           |       |      |       |       |         |          |        
|                                                                                       | Intercompany interest (expense)                          |                   |                                    | (9,567       | )       |                 |        | 9,567        |        |           |         |             |         |          |         |          |         |           |       |      |       |       |         |          |        
|                                                                                       |                                                          |                   |                                    |              |         |                 |        |              |        |           |         |              |         |          |         |           |         |           |       |       |       |       |         |          
|                                                                                       |                                                          |                   | Total other income (expense)       |              |         | 60,614          |        |              |        | 10,301    |         |              |         | (60,110  | )       |           |         | 10,805    |       |       |       | 170   |         |           |         | 10,975    | 
|                                                                                       |                                                          |                   |                                    |              |         |                 |        |              |        |           |         |              |         |          |         |           |         |           |       |       |       |       |         |          
|Income before income taxes and cumulative effect
    of change in accounting principle |                                                          |                   | 163,329                            |              |         |                 | 72,055 |              |        |           | (60,110 | )            |         |          | 175,274 |           |         |           | 1,815 |       |       |       | 177,089 |          
|Income tax (expense) benefit                                                           |                                                          |                   | 58,652                             |              |         |                 | 11,945 |              |        |           |        |              |         |          | 70,597  |           |         |           | 636   |       |       |       | 71,233  |          
|                                                                                       |                                                          |                   |                                    |              |         |                 |        |              |        |           |         |              |         |          |         |           |         |           |       |       |       |       |         |          
|Income (loss) before cumulative effect of
    change in accounting principle           |                                                          |                   | 104,677                            |              |         |                 | 60,110 |              |        |           | (60,110 | )            |         |          | 104,677 |           |         |           | 1,179 |       |       |       | 105,856 |          
|Cumulative effect of change in accounting
    principle                                |                                                          |                   |                                   |              |         |                 |       |              |        |           |        |              |         |          |        |           |         |           |      |       |       |       |        |          
|                                                                                       |                                                          |                   |                                    |              |         |                 |        |              |        |           |         |              |         |          |         |           |         |           |       |       |       |       |         |          
|                                                                                       |                                                          | Net income        |                                    |              | 104,677 |                 |        |              | 60,110 |           |         | $            | (60,110 | )        |         | $         | 104,677 |           |       | $     | 1,179 |       |         | $         | 105,856 |          
|                                                                                       |                                                          |                   |                                    |              |         |                 |        |              |        |           |         |              |         |          |         |           |         |           |       |       |       |       |         |          

F-42



---



##### 



KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

GUARANTOR SUBSIDIARIES

CONSOLIDATING STATEMENTS OF CASH
FLOWS


|                                                              |                                                                                |                                           |           |                   |         |              |          |              |         |      |         |              |        |              |          |              |         |   |          |          |         |   |          |          |         |   |         |          |        |   |          |          |         |  
|------------------------------------------------------------- | ------------------------------------------------------------------------------ | ----------------------------------------- | --------- | ----------------- | ------- | ------------ | -------- | ------------ | ------- | ---- | ------- | ------------ | ------ | ------------ | -------- | ------------ | ------- | - | -------- | -------- | ------- | - | -------- | -------- | ------- | - | ------- | -------- | ------ | - | -------- | -------- | ------- | -
|                                                              |                                                                                |                                           |           |                  
|                                                              |                                                                                | December 31, 2001                         |           | December 31, 2002
|                                                              |                                                                                |                                           |           |                  
|                                                              |                                                                                |                                           |           | King              |         |              |          | King        
|                                                              |                                                                                | King                                      |           | Subsidiaries      |         | Eliminations |          | Consolidated |         | King |         | Subsidiaries |        | Eliminations |          | Consolidated
|                                                              |                                                                                |                                           |           |                   |         |              |          |              |         |      |         |              |        |              |          |             
|Cash flows from operating activities:                         |                                                                                |                                           |           |                   |         |              |          |              |         |      |         |              |        |              |          |              |         |   |          |          |         |   |          |          |         |   |         |          |        |   |          |         
|                                                              | Net income                                                                     |                                           | $         | 217,936           |         |              | $        | 246,856      |         |      | $       | (246,856     | )      |              | $        | 217,936      |         |   | $        | 182,520  |         |   | $        | 202,483  |         |   | $       | (202,483 | )      |   | $        | 182,520  |        
|Equity in earnings of subsidiaries                            |                                                                                |                                           | (246,856  | )                 |         |              |         |              |         |      | 246,856 |              |        |              |         |              |         |   | (202,483 | )        |         |   |         |          |         |   | 202,483 |          |        |   |         |         
|                                                              | Adjustments to reconcile net income to net cash
    provided by                |                                           |           |                   |         |              |          |              |         |      |         |              |        |              |          |              |         |   |          |          |         |   |          |          |         |   |         |          |        |   |          |          |        
|                                                              | Operating activities:                                                          |                                           |           |                   |         |              |          |              |         |      |         |              |        |              |          |              |         |   |          |          |         |   |          |          |         |   |         |          |        |   |          |          |        
|                                                              | Depreciation and amortization                                                  |                                           |           | 23,383            |         |              |          | 24,583       |         |      |         |             |        |              |          | 47,966       |         |   |          | 36,333   |         |   |          | 23,638   |         |   |         |         |        |   |          | 59,971   |        
|                                                              | Amortization of deferred financing costs                                       |                                           |           | 1,040             |         |              |          |             |         |      |         |             |        |              |          | 1,040        |         |   |          | 2,898    |         |   |          |         |         |   |         |         |        |   |          | 2,898    |        
|                                                              | Extinguishment of debt expense                                                 |                                           |           | 22,902            |         |              |          |             |         |      |         |             |        |              |          | 22,902       |         |   |          |         |         |   |          |         |         |   |         |         |        |   |          |         |        
|                                                              | Cumulative effect of change in accounting
    principle                        |                                           |           | 870               |         |              |          |             |         |      |         |             |        |              |          | 870          |         |   |          |         |         |   |          |         |         |   |         |         |        |   |          |         |        
|                                                              | Stock compensation charge                                                      |                                           |           | 3,229             |         |              |          |             |         |      |         |             |        |              |          | 3,229        |         |   |          |         |         |   |          |         |         |   |         |         |        |   |          |         |        
|                                                              | Write-down of inventory                                                        |                                           |           |                  |         |              |          |             |         |      |         |             |        |              |          |             |         |   |          |         |         |   |          | 15,152   |         |   |         |         |        |   |          | 15,152   |        
|                                                              | Deferred income taxes                                                          |                                           |           | 14,957            |         |              |          | 252          |         |      |         |             |        |              |          | 15,209       |         |   |          | (29,972  | )       |   |          | (48,089  | )       |   |         |         |        |   |          | (78,061  | )      
|                                                              | Valuation charge on convertible notes receivable                               |                                           |           |                  |         |              |          |             |         |      |         |             |        |              |          |             |         |   |          | 35,443   |         |   |          |         |         |   |         |         |        |   |          | 35,443   |        
|                                                              | Net unrealized gain on convertible senior notes                                |                                           |           | (8,546            | )       |              |          |             |         |      |         |             |        |              |          | (8,546       | )       |   |          |         |         |   |          |         |         |   |         |         |        |   |          |         |        
|                                                              | Tax benefits of stock options exercised                                        |                                           |           | 12,430            |         |              |          |             |         |      |         |             |        |              |          | 12,430       |         |   |          | 2,206    |         |   |          |         |         |   |         |         |        |   |          | 2,206    |        
|                                                              | Impairment of intangible assets                                                |                                           |           |                  |         |              |          |             |         |      |         |             |        |              |          |             |         |   |          | 66,844   |         |   |          |         |         |   |         |         |        |   |          | 66,844   |        
|                                                              | In-process research and development charges                                    |                                           |           |                  |         |              |          |             |         |      |         |             |        |              |          |             |         |   |          | 12,000   |         |   |          |         |         |   |         |         |        |   |          | 12,000   |        
|                                                              | Gain on sales of intangible assets                                             |                                           |           |                  |         |              |          |             |         |      |         |             |        |              |          |             |         |   |          |         |         |   |          |         |         |   |         |         |        |   |          |         |        
|                                                              | Other non-cash items, net                                                      |                                           |           | (15               | )       |              |          | 2,963        |         |      |         |             |        |              |          | 2,948        |         |   |          | (873     | )       |   |          | 5,398    |         |   |         |         |        |   |          | 4,525    |        
|                                                              | Changes in operating assets and liabilities:                                   |                                           |           |                   |         |              |          |              |         |      |         |              |        |              |          |              |         |   |          |          |         |   |          |          |         |   |         |          |        |   |          |          |        
|                                                              |                                                                                | Accounts receivable                       |           |                   | (5,829  | )            |          |              | (42,069 | )    |         |              | 3,784  |              |          |              | (44,114 | ) |          |          | (4,617  | ) |          |          | (2,787  | ) |         |          | 3,691  |   |          |          | (3,713  | )
|                                                              |                                                                                | Inventories                               |           |                   | (14,827 | )            |          |              | (31,662 | )    |         |              |       |              |          |              | (46,489 | ) |          |          | (27,078 | ) |          |          | (43,649 | ) |         |          |       |   |          |          | (70,727 | )
|                                                              |                                                                                | Prepaid expenses and other current assets |           |                   | 17,010  |              |          |              | (17,494 | )    |         |              |       |              |          |              | (484    | ) |          |          | (6,330  | ) |          |          | 1,240   |   |         |          |       |   |          |          | (5,090  | )
|                                                              |                                                                                | Other assets                              |           |                   | (993    | )            |          |              | 4,129   |      |         |              |       |              |          |              | 3,136   |   |          |          | 3       |   |          |          | (1,023  | ) |         |          |       |   |          |          | (1,020  | )
|                                                              |                                                                                | Accounts payable                          |           |                   | 1,902   |              |          |              | (7,840  | )    |         |              | (3,784 | )            |          |              | (9,722  | ) |          |          | 21,338  |   |          |          | 13,671  |   |         |          | (3,691 | ) |          |          | 31,318  |  
|                                                              |                                                                                | Accrued expenses and other liabilities    |           |                   | (4,667  | )            |          |              | 46,186  |      |         |              |       |              |          |              | 41,519  |   |          |          | 53,476  |   |          |          | 143,828 |   |         |          |       |   |          |          | 197,304 |  
|                                                              |                                                                                | Deferred revenue                          |           |                   | (9,247  | )            |          |              |        |      |         |              |       |              |          |              | (9,247  | ) |          |          | (9,090  | ) |          |          |        |   |         |          |       |   |          |          | (9,090  | )
|                                                              |                                                                                | Income taxes                              |           |                   | 16,540  |              |          |              | 12,437  |      |         |              |       |              |          |              | 28,977  |   |          |          | 23,589  |   |          |          | (10,060 | ) |         |          |       |   |          |          | 13,529  |  
|                                                              |                                                                                |                                           |           |                   |         |              |          |              |         |      |         |              |        |              |          |              |         |   |          |          |         |   |          |          |         |   |         |          |        |   |          |         
|Net cash flows (used in) provided by operating
    activities |                                                                                |                                           | 41,219    |                   |         |              | 238,341  |              |         |      |        |              |        |              | 279,560  |              |         |   | 156,207  |          |         |   | 299,802  |          |         |   |        |          |        |   | 456,009  |         
|                                                              |                                                                                |                                           |           |                   |         |              |          |              |         |      |         |              |        |              |          |              |         |   |          |          |         |   |          |          |         |   |         |          |        |   |          |         
|Cash flows from investing activities:                         |                                                                                |                                           |           |                   |         |              |          |              |         |      |         |              |        |              |          |              |         |   |          |          |         |   |          |          |         |   |         |          |        |   |          |         
|                                                              | Purchase of investment securities                                              |                                           |           | (49,880           | )       |              |          |             |         |      |         |             |        |              |          | (49,880      | )       |   |          | (823,112 | )       |   |          |         |         |   |         |         |        |   |          | (823,112 | )      
|                                                              | Proceeds from maturity and sale of investment
    securities                   |                                           |           |                  |         |              |          |             |         |      |         |             |        |              |          |             |         |   |          | 645,798  |         |   |          |         |         |   |         |         |        |   |          | 645,798  |        
|                                                              | Transfer (to)/from restricted cash                                             |                                           |           |                  |         |              |          |             |         |      |         |             |        |              |          |             |         |   |          |         |         |   |          |         |         |   |         |         |        |   |          |         |        
|                                                              | Convertible senior note                                                        |                                           |           | (10,000           | )       |              |          |             |         |      |         |             |        |              |          | (10,000      | )       |   |          | (10,000  | )       |   |          |         |         |   |         |         |        |   |          | (10,000  | )      
|                                                              | Loans receivable                                                               |                                           |           |                  |         |              |          | (15,000      | )       |      |         |             |        |              |          | (15,000      | )       |   |          |         |         |   |          |         |         |   |         |         |        |   |          |         |        
|                                                              | Purchases of property, plant and equipment                                     |                                           |           | (12,064           | )       |              |          | (28,103      | )       |      |         |             |        |              |          | (40,167      | )       |   |          | (15,214  | )       |   |          | (58,373  | )       |   |         |         |        |   |          | (73,587  | )      
|                                                              | Acquisition of primary care business of Elan                                   |                                           |           |                  |         |              |          |             |         |      |         |             |        |              |          |             |         |   |          |         |         |   |          |         |         |   |         |         |        |   |          |         |        
|                                                              | Acquisition of Meridian                                                        |                                           |           |                  |         |              |          |             |         |      |         |             |        |              |          |             |         |   |          |         |         |   |          |         |         |   |         |         |        |   |          |         |        
|                                                              | Purchases of intangible assets                                                 |                                           |           | (286,500          | )       |              |          |             |         |      |         |             |        |              |          | (286,500     | )       |   |          | (322,100 | )       |   |          |         |         |   |         |         |        |   |          | (322,100 | )      
|                                                              | Proceeds from loan receivable                                                  |                                           |           |                  |         |              |          | 14,086       |         |      |         |             |        |              |          | 14,086       |         |   |          |         |         |   |          | 4,310    |         |   |         |         |        |   |          | 4,310    |        
|                                                              | Proceeds from sale of intangible assets                                        |                                           |           | 3,332             |         |              |          |             |         |      |         |             |        |              |          | 3,332        |         |   |          |         |         |   |          |         |         |   |         |         |        |   |          |         |        
|                                                              | Other investing activities                                                     |                                           |           |                  |         |              |          | 1,446        |         |      |         |             |        |              |          | 1,446        |         |   |          | 28       |         |   |          | 4,360    |         |   |         |         |        |   |          | 4,388    |        
|                                                              |                                                                                |                                           |           |                   |         |              |          |              |         |      |         |              |        |              |          |              |         |   |          |          |         |   |          |          |         |   |         |          |        |   |          |         
|Net cash used in investing activities                         |                                                                                |                                           | (355,112  | )                 |         |              | (27,571  | )            |         |      |        |              |        |              | (382,683 | )            |         |   | (524,600 | )        |         |   | (49,703  | )        |         |   |        |          |        |   | (574,303 | )       
|                                                              |                                                                                |                                           |           |                   |         |              |          |              |         |      |         |              |        |              |          |              |         |   |          |          |         |   |          |          |         |   |         |          |        |   |          |         
|Cash flows from financing activities:                         |                                                                                |                                           |           |                   |         |              |          |              |         |      |         |              |        |              |          |              |         |   |          |          |         |   |          |          |         |   |         |          |        |   |          |         
|                                                              | Proceeds from revolving credit facility                                        |                                           |           | 75,000            |         |              |          |             |         |      |         |             |        |              |          | 75,000       |         |   |          |         |         |   |          |         |         |   |         |         |        |   |          |         |        
|                                                              | Payments on revolving credit facility                                          |                                           |           | (75,000           | )       |              |          |             |         |      |         |             |        |              |          | (75,000      | )       |   |          |         |         |   |          |         |         |   |         |         |        |   |          |         |        
|                                                              | Proceeds from issuance of common shares and
    exercise of stock options, net |                                           |           | 684,435           |         |              |          |             |         |      |         |             |        |              |          | 684,435      |         |   |          | 4,402    |         |   |          |         |         |   |         |         |        |   |          | 4,402    |        
|                                                              | Stock repurchases                                                              |                                           |           |                  |         |              |          |             |         |      |         |             |        |              |          |             |         |   |          | (166,274 | )       |   |          |         |         |   |         |         |        |   |          | (166,274 | )      
|                                                              | Payment of senior subordinated debt                                            |                                           |           | (115,098          | )       |              |          |             |         |      |         |             |        |              |          | (115,098     | )       |   |          |         |         |   |          |         |         |   |         |         |        |   |          |         |        
|                                                              | Payments on other long-term debt                                               |                                           |           | (1,460            | )       |              |          | (29          | )       |      |         |             |        |              |          | (1,489       | )       |   |          | (1,348   | )       |   |          | (13      | )       |   |         |         |        |   |          | (1,361   | )      
|                                                              | Proceeds from convertible debentures                                           |                                           |           | 345,000           |         |              |          |             |         |      |         |             |        |              |          | 345,000      |         |   |          |         |         |   |          |         |         |   |         |         |        |   |          |         |        
|                                                              | Debt issuance costs                                                            |                                           |           | (11,100           | )       |              |          |             |         |      |         |             |        |              |          | (11,100      | )       |   |          | (4,850   | )       |   |          |         |         |   |         |         |        |   |          | (4,850   | )      
|                                                              | Other                                                                          |                                           |           | (418              | )       |              |          |             |         |      |         |             |        |              |          | (418         | )       |   |          |         |         |   |          |         |         |   |         |         |        |   |          |         |        
|                                                              | Intercompany                                                                   |                                           |           | 212,609           |         |              |          | (212,609     | )       |      |         |             |        |              |          |             |         |   |          | 248,457  |         |   |          | (248,457 | )       |   |         |         |        |   |          |         |        
|                                                              |                                                                                |                                           |           |                   |         |              |          |              |         |      |         |              |        |              |          |              |         |   |          |          |         |   |          |          |         |   |         |          |        |   |          |         
|Net cash provided by (used in) financing
    activities       |                                                                                |                                           | 1,113,968 |                   |         |              | (212,638 | )            |         |      |        |              |        |              | 901,330  |              |         |   | 80,387   |          |         |   | (248,470 | )        |         |   |        |          |        |   | (168,083 | )       
|                                                              |                                                                                |                                           |           |                   |         |              |          |              |         |      |         |              |        |              |          |              |         |   |          |          |         |   |          |          |         |   |         |          |        |   |          |         
|Increase (decrease) in cash and cash equivalents              |                                                                                |                                           | 800,075   |                   |         |              | (1,868   | )            |         |      |        |              |        |              | 798,207  |              |         |   | (288,006 | )        |         |   | 1,629    |          |         |   |        |          |        |   | (286,377 | )       
|Cash and cash equivalents, beginning of period                |                                                                                |                                           | 82,316    |                   |         |              | (5,921   | )            |         |      |        |              |        |              | 76,395   |              |         |   | 882,391  |          |         |   | (7,789   | )        |         |   |        |          |        |   | 874,602  |         
|                                                              |                                                                                |                                           |           |                   |         |              |          |              |         |      |         |              |        |              |          |              |         |   |          |          |         |   |          |          |         |   |         |          |        |   |          |         
|Cash and cash equivalents, end of period                      |                                                                                | $                                         | 882,391   |                   |         | $            | (7,789   | )            |         | $    |        |              |        | $            | 874,602  |              |         | $ | 594,385  |          |         | $ | (6,160   | )        |         | $ |        |          |        | $ | 588,225  |         
|                                                              |                                                                                |                                           |           |                   |         |              |          |              |         |      |         |              |        |              |          |              |         |   |          |          |         |   |          |          |         |   |         |          |        |   |          |         

[Additional columns below]

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

|                                                              |                                                                                |                                           |          |              |         |                 |          |              |         |         |        |              |        |   |          |          |         |   |       |       |        |   |          |          |         |  
|------------------------------------------------------------- | ------------------------------------------------------------------------------ | ----------------------------------------- | -------- | ------------ | ------- | --------------- | -------- | ------------ | ------- | ------- | ------ | ------------ | ------ | - | -------- | -------- | ------- | - | ----- | ----- | ------ | - | -------- | -------- | ------- | -
|                                                              |                                                                                |                                          
|                                                              |                                                                                | December 31, 2003                        
|                                                              |                                                                                |                                          
|                                                              |                                                                                |                                           |          | King         |         |                
|                                                              |                                                                                |                                           |          | Consolidated |         | Monarch         |          |             
|                                                              |                                                                                |                                           |          | with         |         | Pharmaceuticals |          |             
|                                                              |                                                                                |                                           |          | Guarantor    |         | Ireland         |          | King        
|                                                              |                                                                                | King                                      |          | Subsidiaries |         | Eliminations    |          | Subsidiaries |         | Limited |        | Consolidated
|                                                              |                                                                                |                                           |          |              |         |                 |          |              |         |         |        |             
|Cash flows from operating activities:                         |                                                                                |                                           |          |              |         |                 |          |              |         |         |        |              |        |   |          |          |         |   |       |       |        |   |          |         
|                                                              | Net income                                                                     |                                           | $        | 104,677      |         |                 | $        | 60,110       |         |         | $      | (60,110      | )      |   | $        | 104,677  |         |   |       | 1,179 |        |   |          | 105,856  |        
|Equity in earnings of subsidiaries                            |                                                                                |                                           | (60,110  | )            |         |                 |         |              |         |         | 60,110 |              |        |   |         |          |         |   |      |       |        |   |         |         
|                                                              | Adjustments to reconcile net income to net cash
    provided by                |                                           |          |              |         |                 |          |              |         |         |        |              |        |   |          |          |         |   |       |       |        |   |          |          |        
|                                                              | Operating activities:                                                          |                                           |          |              |         |                 |          |              |         |         |        |              |        |   |          |          |         |   |       |       |        |   |          |          |        
|                                                              | Depreciation and amortization                                                  |                                           |          | 8,914        |         |                 |          | 116,165      |         |         |        |             |        |   |          | 125,079  |         |   |       | 423   |        |   |          | 125,502  |        
|                                                              | Amortization of deferred financing costs                                       |                                           |          | 3,160        |         |                 |          |             |         |         |        |             |        |   |          | 3,160    |         |   |       |      |        |   |          | 3,160    |        
|                                                              | Extinguishment of debt expense                                                 |                                           |          |             |         |                 |          |             |         |         |        |             |        |   |          |         |         |   |       |      |        |   |          |         |        
|                                                              | Cumulative effect of change in accounting
    principle                        |                                           |          |             |         |                 |          |             |         |         |        |             |        |   |          |         |         |   |       |      |        |   |          |         |        
|                                                              | Stock compensation charge                                                      |                                           |          |             |         |                 |          |             |         |         |        |             |        |   |          |         |         |   |       |      |        |   |          |         |        
|                                                              | Write-down of inventory                                                        |                                           |          |             |         |                 |          |             |         |         |        |             |        |   |          |         |         |   |       |      |        |   |          |         |        
|                                                              | Deferred income taxes                                                          |                                           |          | 13,357       |         |                 |          | (143,950     | )       |         |        |             |        |   |          | (130,593 | )       |   |       |      |        |   |          | (130,593 | )      
|                                                              | Valuation charge on convertible notes receivable                               |                                           |          | (18,151      | )       |                 |          |             |         |         |        |             |        |   |          | (18,151  | )       |   |       |      |        |   |          | (18,151  | )      
|                                                              | Net unrealized gain on convertible senior notes                                |                                           |          |             |         |                 |          |             |         |         |        |             |        |   |          |         |         |   |       |      |        |   |          |         |        
|                                                              | Tax benefits of stock options exercised                                        |                                           |          |             |         |                 |          |             |         |         |        |             |        |   |          |         |         |   |       |      |        |   |          |         |        
|                                                              | Impairment of intangible assets                                                |                                           |          | 7,425        |         |                 |          | 117,191      |         |         |        |             |        |   |          | 124,616  |         |   |       |      |        |   |          | 124,616  |        
|                                                              | In-process research and development charges                                    |                                           |          |             |         |                 |          | 194,000      |         |         |        |             |        |   |          | 194,000  |         |   |       |      |        |   |          | 194,000  |        
|                                                              | Gain on sales of intangible assets                                             |                                           |          | (805         | )       |                 |          | (11,215      | )       |         |        |             |        |   |          | (12,020  | )       |   |       |      |        |   |          | (12,020  | )      
|                                                              | Other non-cash items, net                                                      |                                           |          | 47           |         |                 |          | 6,011        |         |         |        |             |        |   |          | 6,058    |         |   |       |      |        |   |          | 6,058    |        
|                                                              | Changes in operating assets and liabilities:                                   |                                           |          |              |         |                 |          |              |         |         |        |              |        |   |          |          |         |   |       |       |        |   |          |          |        
|                                                              |                                                                                | Accounts receivable                       |          |              | 12,823  |                 |          |              | (86,861 | )       |        |              | (8,834 | ) |          |          | (82,872 | ) |       |       | (1,314 | ) |          |          | (84,186 | )
|                                                              |                                                                                | Inventories                               |          |              | (84,826 | )               |          |              | 32,095  |         |        |              |       |   |          |          | (52,731 | ) |       |       | 411    |   |          |          | (52,320 | )
|                                                              |                                                                                | Prepaid expenses and other current assets |          |              | 1,189   |                 |          |              | 26,118  |         |        |              |       |   |          |          | 27,307  |   |       |       |       |   |          |          | 27,307  |  
|                                                              |                                                                                | Other assets                              |          |              | (2,570  | )               |          |              | (8      | )       |        |              |       |   |          |          | (2,578  | ) |       |       |       |   |          |          | (2,578  | )
|                                                              |                                                                                | Accounts payable                          |          |              | (11,585 | )               |          |              | 37,440  |         |        |              | 8,834  |   |          |          | 34,689  |   |       |       | 19     |   |          |          | 34,708  |  
|                                                              |                                                                                | Accrued expenses and other liabilities    |          |              | 11,853  |                 |          |              | 56,286  |         |        |              |       |   |          |          | 68,139  |   |       |       |       |   |          |          | 68,139  |  
|                                                              |                                                                                | Deferred revenue                          |          |              | (9,092  | )               |          |              |        |         |        |              |       |   |          |          | (9,,092 | ) |       |       |       |   |          |          | (9,092  | )
|                                                              |                                                                                | Income taxes                              |          |              | 97,062  |                 |          |              | (40,604 | )       |        |              |       |   |          |          | 56,458  |   |       |       | 440    |   |          |          | 56,898  |  
|                                                              |                                                                                |                                           |          |              |         |                 |          |              |         |         |        |              |        |   |          |          |         |   |       |       |        |   |          |         
|Net cash flows (used in) provided by operating
    activities |                                                                                |                                           | 73,368   |              |         |                 | 362,778  |              |         |         |       |              |        |   | 436,146  |          |         |   | 1,158 |       |        |   | 437,304  |         
|                                                              |                                                                                |                                           |          |              |         |                 |          |              |         |         |        |              |        |   |          |          |         |   |       |       |        |   |          |         
|Cash flows from investing activities:                         |                                                                                |                                           |          |              |         |                 |          |              |         |         |        |              |        |   |          |          |         |   |       |       |        |   |          |         
|                                                              | Purchase of investment securities                                              |                                           |          | (25,903      | )       |                 |          |             |         |         |        |             |        |   |          | (25,903  | )       |   |       |      |        |   |          | (25,903  | )      
|                                                              | Proceeds from maturity and sale of investment
    securities                   |                                           |          | 253,097      |         |                 |          |             |         |         |        |             |        |   |          | 253,097  |         |   |       |      |        |   |          | 253,097  |        
|                                                              | Transfer (to)/from restricted cash                                             |                                           |          | (67,743      | )       |                 |          |             |         |         |        |             |        |   |          | (67,743  | )       |   |       |      |        |   |          | (67,743  | )      
|                                                              | Convertible senior note                                                        |                                           |          |             |         |                 |          |             |         |         |        |             |        |   |          |         |         |   |       |      |        |   |          |         |        
|                                                              | Loans receivable                                                               |                                           |          |             |         |                 |          |             |         |         |        |             |        |   |          |         |         |   |       |      |        |   |          |         |        
|                                                              | Purchases of property, plant and equipment                                     |                                           |          | (7,874       | )       |                 |          | (43,327      | )       |         |        |             |        |   |          | (51,201  | )       |   |       |      |        |   |          | (51,201  | )      
|                                                              | Acquisition of primary care business of Elan                                   |                                           |          |             |         |                 |          | (761,745     | )       |         |        |             |        |   |          | (761,745 | )       |   |       |      |        |   |          | (761,745 | )      
|                                                              | Acquisition of Meridian                                                        |                                           |          | (253,908     | )       |                 |          | 15,410       |         |         |        |             |        |   |          | (238,498 | )       |   |       |      |        |   |          | (238,498 | )      
|                                                              | Purchases of intangible assets                                                 |                                           |          | (9,000       | )       |                 |          | (10,300      | )       |         |        |             |        |   |          | (19,300  | )       |   |       |      |        |   |          | (19,300  | )      
|                                                              | Proceeds from loan receivable                                                  |                                           |          |             |         |                 |          | 13,320       |         |         |        |             |        |   |          | 13,320   |         |   |       |      |        |   |          | 13,320   |        
|                                                              | Proceeds from sale of intangible assets                                        |                                           |          | 14,460       |         |                 |          | 1,199        |         |         |        |             |        |   |          | 15,659   |         |   |       |      |        |   |          | 15,659   |        
|                                                              | Other investing activities                                                     |                                           |          | 46           |         |                 |          | 249          |         |         |        |             |        |   |          | 295      |         |   |       |      |        |   |          | 295      |        
|                                                              |                                                                                |                                           |          |              |         |                 |          |              |         |         |        |              |        |   |          |          |         |   |       |       |        |   |          |         
|Net cash used in investing activities                         |                                                                                |                                           | (96,825  | )            |         |                 | (785,194 | )            |         |         |       |              |        |   | (882,019 | )        |         |   |      |       |        |   | (882,019 | )       
|                                                              |                                                                                |                                           |          |              |         |                 |          |              |         |         |        |              |        |   |          |          |         |   |       |       |        |   |          |         
|Cash flows from financing activities:                         |                                                                                |                                           |          |              |         |                 |          |              |         |         |        |              |        |   |          |          |         |   |       |       |        |   |          |         
|                                                              | Proceeds from revolving credit facility                                        |                                           |          | 125,000      |         |                 |          |             |         |         |        |             |        |   |          | 125,000  |         |   |       |      |        |   |          | 125,000  |        
|                                                              | Payments on revolving credit facility                                          |                                           |          | (125,000     | )       |                 |          |             |         |         |        |             |        |   |          | (125,000 | )       |   |       |      |        |   |          | (125,000 | )      
|                                                              | Proceeds from issuance of common shares and
    exercise of stock options, net |                                           |          | 4,053        |         |                 |          |             |         |         |        |             |        |   |          | 4,053    |         |   |       |      |        |   |          | 4,053    |        
|                                                              | Stock repurchases                                                              |                                           |          |             |         |                 |          |             |         |         |        |             |        |   |          |         |         |   |       |      |        |   |          |         |        
|                                                              | Payment of senior subordinated debt                                            |                                           |          |             |         |                 |          |             |         |         |        |             |        |   |          |         |         |   |       |      |        |   |          |         |        
|                                                              | Payments on other long-term debt                                               |                                           |          | (1,296       | )       |                 |          |             |         |         |        |             |        |   |          | (1,296   | )       |   |       |      |        |   |          | (1,296   | )      
|                                                              | Proceeds from convertible debentures                                           |                                           |          |             |         |                 |          |             |         |         |        |             |        |   |          |         |         |   |       |      |        |   |          |         |        
|                                                              | Debt issuance costs                                                            |                                           |          | (214         | )       |                 |          |             |         |         |        |             |        |   |          | (214     | )       |   |       |      |        |   |          | (214     | )      
|                                                              | Other                                                                          |                                           |          |             |         |                 |          |             |         |         |        |             |        |   |          |         |         |   |       |      |        |   |          |         |        
|                                                              | Intercompany                                                                   |                                           |          | (432,854     | )       |                 |          | 432,217      |         |         |        |             |        |   |          | (637     | )       |   |       | 637   |        |   |          |         |        
|                                                              |                                                                                |                                           |          |              |         |                 |          |              |         |         |        |              |        |   |          |          |         |   |       |       |        |   |          |         
|Net cash provided by (used in) financing
    activities       |                                                                                |                                           | (430,311 | )            |         |                 | 432,217  |              |         |         |       |              |        |   | 1,906    |          |         |   | 637   |       |        |   | 2,543    |         
|                                                              |                                                                                |                                           |          |              |         |                 |          |              |         |         |        |              |        |   |          |          |         |   |       |       |        |   |          |         
|Increase (decrease) in cash and cash equivalents              |                                                                                |                                           | (453,768 | )            |         |                 | 9,801    |              |         |         |       |              |        |   | (443,967 | )        |         |   | 1,795 |       |        |   | (442,172 | )       
|Cash and cash equivalents, beginning of period                |                                                                                |                                           | 594,385  |              |         |                 | (6,160   | )            |         |         |       |              |        |   | 588,225  |          |         |   |      |       |        |   | 588,225  |         
|                                                              |                                                                                |                                           |          |              |         |                 |          |              |         |         |        |              |        |   |          |          |         |   |       |       |        |   |          |         
|Cash and cash equivalents, end of period                      |                                                                                | $                                         | 140,617  |              |         | $               | 3,641    |              |         | $       |       |              |        | $ | 144,258  |          |         |   | 1,795 |       |        |   | 146,053  |         
|                                                              |                                                                                |                                           |          |              |         |                 |          |              |         |         |        |              |        |   |          |          |         |   |       |       |        |   |          |         

F-43



---



##### 



In accordance with Section 13 or 15(d) of
the Securities Exchange Act of 1934, the registrant has caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.



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





| |     |                         
| | --- | ------------------------
| | By: | /s/ JEFFERSON J. GREGORY

| |                                     
| | ------------------------------------
| |                                     
| | Jefferson J. Gregory                
| | Chairman and Chief Executive Officer

March 11, 2004

In accordance with the requirements of the
Securities Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the
capacities and on the date indicated.

|                                                         |  |                                                                          |  |      |                | 
|-------------------------------------------------------- |  | ------------------------------------------------------------------------ |  | ---- | -------------- | 
|Signature                                                |  | Capacity                                                                 |  | Date
|                                                         |  |                                                                          |  |     
|                                                        
|/s/ JEFFERSON J. GREGORYJefferson J. Gregory             |  | Chairman and Chief Executive Officer                                     |  |      | March 11, 2004 | 
|                                                        
|/s/ JAMES R. LATTANZIJames R. Lattanzi                   |  | Chief Financial Officer (principal financial and
    accounting officer) |  |      | March 11, 2004 | 
|                                                        
|/s/ EARNEST W. DEAVENPORT, JR.Earnest W. Deavenport, Jr. |  | Director                                                                 |  |      | March 11, 2004 | 
|                                                        
|/s/ ELIZABETH M. GREETHAMElizabeth M. Greetham           |  | Director                                                                 |  |      | March 11, 2004 | 
|                                                        
|/s/ GREGORY D. JORDANGregory D. Jordan                   |  | Director                                                                 |  |      | March 11, 2004 | 
|                                                        
|/s/ R. CHARLES MOYERR. Charles Moyer                     |  | Director                                                                 |  |      | March 11, 2004 | 
|                                                        
|/s/ PHILIP M. PFEFFERPhilip M. Pfeffer                   |  | Director                                                                 |  |      | March 11, 2004 | 
|                                                        
|/s/ D. GREG ROOKERD. Greg Rooker                         |  | Director                                                                 |  |      | March 11, 2004 | 
|                                                        
|/s/ TED G. WOODTed G. Wood                               |  | Director                                                                 |  |      | March 11, 2004 | 

II-1



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##### 



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, 2003                                                                                   |  | $            | 7,513 |                    |  | $          | 4,176 |               |  | $          | 1,063 |  |  | $ | 1,697 |  |  | $ | 11,055 | 
|Year ended December 31, 2002                                                                                   |  |              | 6,047 |                    |  |            | 4,700 |               |  |            | 890   |  |  |   | 4,124 |  |  |   | 7,513  | 
|Year ended December 31, 2001                                                                                   |  |              | 5,000 |                    |  |            | 2,952 |               |  |            |      |  |  |   | 1,905 |  |  |   | 6,047  | 
|                                                                                                              
|Valuation allowance for deferred tax assets,
    deducted from deferred income tax assets in the balance sheet |  |              |       |                    |  |            |       |               |  |            |       |  |  |   |       |  |  |   |        | 
|Year ended December 31, 2003                                                                                   |  | $            |      |                    |  | $          | 3,124 |               |  | $          | 3,401 |  |  | $ |      |  |  | $ | 6,525  | 
|Year ended December 31, 2002                                                                                   |  |              |      |                    |  |            |      |               |  |            |      |  |  |   |      |  |  |   |       | 
|Year ended December 31, 2001                                                                                   |  |              |      |                    |  |            |      |               |  |            |      |  |  |   |      |  |  |   |       | 



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

S-1