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UNITED STATES SECURITIES AND
    EXCHANGE COMMISSIONWashington, D.C.
    20549
    Form 10-K
  (Mark One)þ

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended
    December 31, 2007ORo

TRANSITION REPORT UNDER SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934    Commission File Number
    001-15875
  King Pharmaceuticals,
    Inc.
 (Exact name of registrant as
    specified in its charter)
   Tennessee(State or other jurisdiction
    of
    incorporation or organization)

54-1684963(I.R.S. Employer
    Identification No.)501 Fifth Street
    Bristol, Tennessee(Address of Principal
    Executive Offices)

37620(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 and Associated
    Preferred Stock Purchase Rights

New York Stock Exchange    Securities registered under Section 12(g) of the
    Exchange Act:
    None
  þ o
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K. o
  Rule 12b-2
 Large accelerated
    filer  þ     Accelerated
    filer  o
    Non-accelerated
    filer  o     Smaller
    reporting
    company  o  Rule 12b-2 o þ
    Documents
    Incorporated by Reference:
    Certain information required in Part III of this Annual
    Report on
    Form 10-K
    is incorporated
    by reference from the registrants Proxy Statement for its
    2008 annual meeting of shareholders.




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##### 





Table of
    Contents
   
 PART I


2Item 1.


Business


2Item 1A.


Risk Factors


18Item 1B.


Unresolved Staff Comments


31Item 2.


Properties


31Item 3.


Legal Proceedings


31Item 4.


Submission of Matters to a Vote of Security
    Holders


31PART II


31Item 5.


Market for Common Equity and Related Stockholder
    Matters


31Item 6.


Selected Financial Data


33Item 7.


Managements Discussion and Analysis of
    Financial Condition and Results of Operations


34Item 7A.


Quantitative and Qualitative Disclosures About
    Market Risk


67Item 8.


Financial Statements and Supplementary Data


67Item 9.


Changes in Accountants and Disagreements with
    Accountants on Accounting and Financial Disclosure


67Item 9A.


Controls and Procedures


67Item 9B.


Other Information


68PART III


68PART IV.


69Item 15.


Exhibits and Financial Statement Schedules


69Ex-21.1 Subsidiaries of the RegistrantEx-23.1 Consent of PricewaterhouseCoopers LLPEx-31.1 Section 302 Certification of the CEOEx-31.2 Section 302 Certification of the CFOEx-32.1 Section 906 Certification of the CEOEx-32.2 Section 906 Certification of the CFO




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PART I  Item 1.
    Business    (423) 989-8000 (423) 274-8677. Form 10-K, Form 10-Q, Form 8-K 1-800-SEC-0330
         research and development

   distribution   manufacturing

   sales and marketing   packaging

   business development   quality control and assurance

   regulatory management         
    securing from the U.S. Food and Drug Administration, which
    we refer to as the FDA, additional approved uses
    (indications) for our branded pharmaceutical
    products;
    developing and producing different strengths; 2




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
    producing different package sizes;
    developing new dosage forms; and
    developing new product formulations.    Business
    Segments
    
    neuroscience
    hospital
    acute care
    legacy products (including cardiovascular/metabolic and other)  ®
    For the Years Ended December 31,2007


2006


2005Branded pharmaceuticals

$
1,857,813


$
1,724,701


$
1,542,124Meridian Auto-Injector


183,860



164,760



129,261Royalties


82,589



80,357



78,128Contract manufacturing


9,201



16,501



22,167Other


3,419



2,181



1,201Total

$
2,136,882


$
1,988,500


$
1,772,881     Recent
    Developments
  Accelerated
    Strategic Shift
  ®
 3




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New
    Generic Competition
  ® ® en banc ® ®
  ®
  New
    Branded®
    Competition
  ® ®
  Clinical
    Trial Results
  tm tm
  tm tm
  tm tm
  Expanded
    Product Portfolio and Development Pipeline
  ® tm ® ® tm
 4




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® ®
  Other
  ®
    Industry
      
    the aging of the patient population, including diseases specific
    to the aging process and demographic factors, including obesity,
    diabetes, cardiovascular disease, and patient and physician
    demand for products that meet chronic or unmet medical needs;
    technological innovation, both in drug discovery and corporate
    processes;
    merger and acquisition activity whereby pharmaceutical companies
    are acquiring one another or smaller biotechnology companies,
    and divestitures of products deemed non-strategic;
    cost containment and downward price pressure from managed care
    organizations and governmental entities, both in the United
    States and overseas;
    increased drug development, manufacturing and compliance costs
    for pharmaceutical producers;
    the rise of generic pharmaceutical companies and challenges to
    patent protection and sales exclusivity;
    more frequent product liability litigation; 5




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
    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 Segment
    
    neuroscience (including
    Skelaxin®,
    Avinza®
    and
    Sonata®),
    hospital (including
    Thrombin-JMI®
    and
    Synercid®),
    acute care (including
    Bicillin®
    and
    Intal®), and
    legacy products (including
    Altace®,
    Levoxyl®
    and
    Cytomel®).   6




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Product

Product Description and IndicationNeuroscience

Products in this category are primarily marketed to primary care
    physicians, neurologists, orthopedic surgeons and pain
    specialists.Skelaxin®

A muscle relaxant tablet indicated for the relief of
    discomforts associated with acute, painful musculoskeletal
    conditions.Avinza®

An extended-release formulation of morphine
    indicated as a once-daily treatment for moderate to severe pain
    in patients who require continuous opioid therapy for an
    extended period of time.Sonata®

A nonbenzodiazepine capsule treatment for insomnia.Hospital

Products in this category are primarily marketed to hospitals.Thrombin-JMI®

A chromatographically purified topical (bovine)
    thrombin solution indicated as an aid to hemostasis whenever
    oozing blood and minor bleeding from capillaries and small
    venules is accessible.Synercid®

An injectable antibiotic indicated for treatment of
    certain complicated skin and skin structure infections.Acute Care

Products in this category are primarily marketed to primary care
    physicians, internal medicine physicians, allergists and
    pediatricians.Bicillin®

A penicillin-based antibiotic suspension for deep
    muscular injection indicated for the treatment of infections due
    to penicillin-G-susceptible microorganisms that are susceptible
    to serum levels common to this particular dosage form.Intal®

An oral multi-dose inhaler of a non-steroidal
    anti-inflammatory agent for the preventive management of asthma.Legacy Products

Products in this category are not actively promoted through our
    sales force and many have generic competition.Cardiovascular/MetabolicAltace®(1)

An oral administration indicated for the treatment
    of hypertension and reduction of the risk of stroke, myocardial
    infarction (heart attack) and death from cardiovascular causes
    in patients 55 and over with either a history of coronary artery
    disease, stroke or peripheral vascular disease or with diabetes
    and one other cardiovascular risk factor (such as elevated
    cholesterol levels or cigarette smoking).
    Altace®
    is also indicated in stable patients who have demonstrated
    clinical signs of congestive heart failure after sustaining
    acute myocardial infarction.Levoxyl®

Color-coded, potency-marked tablets indicated for
    thyroid hormone replacement or supplemental therapy for
    hypothyroidism.Cytomel®

A tablet indicated in the medical treatment of
    hypothyroidism.     (1)
    
    We acquired licenses for the exclusive rights in the United
    States under various patents to the active ingredient in
    Altace®. 7




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Net Sales(In millions)NeuroscienceSkelaxin®

$
440.0Avinza®


108.5Sonata®


78.7HospitalThrombin-JMI®

$
267.4Synercid®


11.6Acute CareBicillin®

$
58.6Intal®


14.0Legacy ProductsCardiovascular/MetabolicAltace®

$
646.0Levoxyl®


100.1Cytomel®


47.5   Meridian
    Auto-Injector Segment
    ® ®
  ® ®
  ® ® ® ®
 8




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Royalties
    Segment
  ® ® ® ® ® ® ® ®
  ® ®
  Sales and
    Marketing
      Manufacturing
     9




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® ® ® ® ® ® ® ®
      Research
    and Development
           10




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
    Remoxytm,
    a novel formulation of long-acting oxycodone for the treatment
    of moderate to severe chronic pain, which has successfully
    completed Phase III clinical trials and our partner, Pain
    Therapeutics, Inc., is preparing to file an NDA with the FDA.
    Remoxytm
    is specifically designed to resist common methods of abuse
    associated with long-acting oxycodone products that are
    currently available.
    CorVuetm
    (binodenoson) our next generation cardiac pharmacologic
    stress-imaging agent, has successfully completed Phase III
    clinical trials and we are preparing to file an NDA with the FDA.
    Acuroxtmtablets, a novel formulation of immediate release
    oxycodone for the treatment of acute pain, which is currently in
    Phase III clinical trials.
    Acuroxtm
    is specifically designed to deter or resist common methods of
    abuse associated with immediate release oxycodone products that
    are currently available.
    Vanquixtm,
    a diazepam-filled auto-injector for the treatment of acute,
    repetitive epileptic seizures, is currently in Phase III
    clinical trials.
    Sonedenoson, formerly known as MRE0094, is an investigational
    drug for the topical treatment of chronic diabetic neuropathic
    foot ulcers. The Phase II clinical trial with Sonedenoson did
    not meet its primary endpoint. We are continuing to evaluate the
    data from this trial.
    T-62, an investigational drug for the treatment of neuropathic
    pain, has completed Phase I clinical trials and expect to begin
    patient enrollment in Phase II clinical trials in the
    middle of 2008.    Government
    Regulation
     11




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and/or
           12




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Environmental
    Matters
    Competition
  General
    Generic
    Substitutes
     13




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30-month 30-month Therapeutic
    Equivalence Evaluations 30-month
  30-month
  Intellectual
    Property
  Patents,
    Licenses and Proprietary Rights
    ® ®
  ®
  ® ®
  ®
    ® ® ®
  tm ® tm ®
 14




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Trademarks
    Backlog
    Executive
    Officers
  Name

Age

Position with the CompanyBrian A. Markison


48


President, Chief Executive Officer and Chairman of the Board of
    DirectorsJoseph Squicciarino


51


Chief Financial OfficerStephen J. Andrzejewski


42


Chief Commercial OfficerFrederick Brouillette, Jr.


56


Corporate Compliance OfficerEric J. Bruce


51


Chief Technical Operations OfficerDr. Eric G. Carter


56


Chief Science OfficerJames W. Elrod


47


General CounselJames E. Green


48


Executive Vice President, Corporate Affairs   Brian A. Markison
  Joseph Squicciarino
  Stephen J. Andrzejewski
 15




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®
  Frederick Brouillette, Jr.
  Eric J. Bruce
  Eric G. Carter
  James W. Elrod
  James E. Green
 16




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Employees
  Twenty-nine
 17




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Item 1A.
    Risk
    Factors  You should carefully consider the risks described below and
    the other information contained in this report, including our
    audited consolidated financial statements and related notes. The
    risks described below are not the only ones facing our company.
    Additional risks not presently known to us or that we currently
    deem immaterial may also impair our business operations. If any
    of the adverse events described in this Risk Factors
    section or other sections of this report actually occurs, our
    business, results of operations and financial condition could be
    materially adversely affected, the trading price, if any, of our
    securities could decline and you might lose all or part of your
    investment.
  Risks
    Related to our Business
  If we
    cannot successfully enforce our rights under the patents
    relating to two of our largest products,
    Skelaxin®
    and
    Avinza®,
    or if we are unable to secure or enforce our rights under other
    patents and trademarks and protect our trade secrets and other
    intellectual property, additional competitors could enter the
    market, and sales of these products may decline
    materially.
    ®
          In
    late 2007, the key patent associated with
    Altace®
    was invalidated by a federal court, and we expect net sales of
    Altace®
    to decrease significantly as a result. Our related restructuring
    initiative might not succeed, and, in any event, the benefits of
    the initiative will not be sufficient to offset the loss of
    revenues from decreased
    Altace®
    sales.
  ® ®
 18




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® ® ® ® ®
  ® ®
  The
    uncertainty and expense of the drug development process, actions
    by our competitors and other factors may adversely affect our
    ability to implement our strategy to grow our business through
    increased sales, acquisitions, development and in-licensing,
    and, as a result, our business or competitive position in the
    pharmaceutical industry may suffer.
      and/or
   19




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
    Remoxytm,
    an investigational drug for the treatment of moderate to severe
    chronic pain that we are developing with Pain Therapeutics, Inc.;
    Acuroxtm
    tablets, an investigational drug for the treatment of acute pain
    that we are developing with Acura Pharmaceuticals, Inc.;
    CorVuetm
    (binodenoson) a myocardial pharmacologic stress imaging agent;
    Vanquixtm,
    a diazepam-filled auto-injector;
    Sonedenoson, formerly known as MRE0094, an investigational drug
    for the topical treatment of chronic diabetic foot
    ulcers; and
    T-62, an investigational drug for the treatment of neuropathic
    pain.    
    engage in product life-cycle management to develop new
    indications and line extensions for existing and acquired
    products,
    successfully develop, license or commercialize new products on a
    timely basis or at all,
    continue to develop products already in development in a cost
    effective manner, or
    obtain any FDA approvals necessary to successfully implement the
    strategies described above.      
    develop or license their products more rapidly than we can,
    complete any applicable regulatory approval process sooner than
    we can,
    market or license their products before we can market or license
    our products, or
    offer their newly developed or licensed products at prices lower
    than our prices.   20




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Seven
    of our products and our royalty segment accounted for 86.4% of
    our revenues from continuing operations in 2007 and a decrease
    in sales of these products or royalty income or an increase in
    competition in the future would have a material adverse effect
    on our results of operations.
  Revenues. ® ® ® ® ® ® ® 30.2 20.6 12.5 5.7 4.7 3.7 5.1 3.9 86.4 ® ® ® ®
  Product Competition.
  
    Altace®
    has a generic substitute that entered the market in
    December 2007.
    Skelaxin®
    competes in a highly genericized market with other muscle
    relaxants.
    Sonata®
    competes with other insomnia treatments in a highly competitive
    market. We anticipate a generic substitute will enter the market
    in the second quarter of 2008, and we expect the entry of
    generic products to cause our net sales of
    Sonata®
    to decline significantly.
    Levoxyl®
    competes in a competitive and highly genericized market with
    other levothyroxine sodium products.
    Beginning in 2008,
    Thrombin-JMI®,
    our bovine thrombin product, will face new competition from
    human thrombin and recombinant human thrombin. Omrix
    Biopharmaceuticals, Inc.s Biologics Licensing Application
    (BLA) for its human thrombin product was approved in
    September 2007. Zymogenetics, Inc. received approval of its BLA
    for recombinant human thrombin product in January 2008.      EpiPen. ® ® ®
  Royalty Revenue. ® ® ® ®
  21




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If we
    cannot integrate the business of companies or products we
    acquire, or appropriately and successfully manage and coordinate
    third-party collaborative development activities, our business
    may suffer.
    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 sales of our products decline because of, for
    example, generic competition or an inability to manufacture or
    obtain sufficient supply of product, the intangible asset value
    of any declining product could become impaired.
    We
    have entered into agreements with manufacturers and/or
    distributors of generic pharmaceutical products with whom we are
    presently engaged, or have previously been engaged, in
    litigation, and these agreements could subject us to claims that
    we have violated federal and/or state anti-trust
    laws.
  and/or and/or
    Unfavorable
    results in pending and future claims and litigation matters
    could have an adverse impact on us.
   22




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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.
  ® ® ® ® ®
  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 maintain 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.
  ® ® ® ®
  ® ® ® ® ®
   23




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® ®
  Wholesaler
    and distributor buying patterns and other factors may cause our
    quarterly results to fluctuate, and these fluctuations may
    adversely affect our short-term results. Further, our access to
    wholesaler and distributor inventory levels and sales data
    affects our ability to estimate certain reserves included in our
    financial statements.
      Our
    relationships with the U.S. Department of Defense and other
    government entities subject us to risks associated with doing
    business with the government.
   24




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Compliance
    with the terms and conditions of our corporate integrity
    agreement with the Office of Inspector General of the United
    States Department of Health and Human Services requires
    significant resources and management time and, if we fail to
    comply, we could be subject to penalties or, under certain
    circumstances, excluded from government health care programs,
    which could materially reduce our sales.
        Our
    shareholder rights plan, charter and bylaws discourage
    unsolicited takeover proposals and could prevent shareholders
    from realizing a premium on their common stock.
   25




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
    a classified Board of Directors, although the classification of
    the Board is being phased out and will be eliminated in 2010;
    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.    At
    times, our stock price has been volatile, and such volatility in
    the future could result in substantial losses for our
    investors.
    
    variations in our results of operations;
    perceived risks and uncertainties concerning our business;
    announcements of earnings;
    developments in the governmental investigations or derivative
    litigation;
    the commencement of, or adverse developments in, any material
    litigation;
    failure to meet timelines for product development or other
    projections or forward-looking statements we may make to the
    public;
    failure to meet or exceed security analysts financial
    projections for our company;
    comments or recommendations made by securities analysts;
    general market conditions;
    perceptions about market conditions in the pharmaceutical
    industry;
    announcements of technological innovations or the results of
    clinical trials or studies;
    changes in marketing, product pricing and sales strategies or
    development of new products by us or our competitors;
    changes in domestic or foreign governmental regulations or
    regulatory approval processes; and
    announcements concerning regulatory compliance and government
    agency reviews.    Risks
    Related to Our Industry
  Failure
    to comply with laws and government regulations could adversely
    affect our ability to operate our business.
   26




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An
    increase in product liability claims or product recalls could
    harm our business.
   27




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If we
    fail to comply with our reporting and payment obligations under
    the Medicaid rebate program or other governmental pricing
    programs, we could be required to reimburse government programs
    for underpayments and could be required to pay penalties,
    sanctions and fines which could have a material adverse effect
    on our business.
    The
    insolvency of any of our principal customers, who are wholesale
    pharmaceutical distributors, could have a material adverse
    effect on our business, financial condition, results of
    operations and cash flows.
    Any
    reduction in reimbursement levels by managed care organizations
    or other third-party payors may have an adverse effect on our
    revenues.
   28




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If we
    fail to comply with the safe harbors provided under various
    federal and state laws, our business could be adversely
    affected.
    and/or
  In the
    future, the publication of negative results of studies or
    clinical trials may adversely affect the sales of our products
    or the values of the intangible assets associated with
    them.
    New
    legislation or regulatory proposals may adversely affect our
    revenues.
   29




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A WARNING
    ABOUT FORWARD-LOOKING STATEMENTS
        
    the potential of, including anticipated net sales and
    prescription trends for, our branded pharmaceutical products,
    particularly
    Altace®,
    Skelaxin®,
    Avinza®,
    Thrombin-JMI®,
    Levoxyl®
    and
    Sonata®;
    expectations regarding the enforceability and effectiveness of
    product-related patents, including in particular patents related
    to
    Skelaxin®,
    Avinza®,
    Sonata®
    and
    Adenoscan®;
    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, approval and successful commercialization of
    Remoxytm,
    Acuroxtm,
    CorVuetm
    and other products;
    the successful execution of our growth and restructuring
    strategies, including our accelerated strategic shift;
    anticipated developments and expansions of our business;
    our plans for the manufacture of some of our products, including
    products manufactured by third parties;
    the potential costs, outcomes and timing of research, clinical
    trials and other development activities involving pharmaceutical
    products, including, but not limited to, the magnitude and
    timing of potential payments to third parties in connection with
    development activities;
    the development of product line extensions;
    the expected timing of the initial marketing of certain products;
    products developed, acquired or in-licensed that may be
    commercialized;
    our intent, beliefs or current expectations, primarily with
    respect to our future operating performance;
    expectations regarding sales growth, gross margins,
    manufacturing productivity, capital expenditures and effective
    tax rates;
    expectations regarding the outcome of various pending legal
    proceedings including the
    Skelaxin®
    and
    Avinza®
    patent challenges, securities litigation, and other legal
    proceedings described in this report; and
    expectations regarding our financial condition and liquidity as
    well as future cash flows and earnings.   30




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Item 1B.
    Unresolved
    Staff Comments    Item 2.
    Properties    Location

Principal Purposes

Business Segment(s)Bristol, Tennessee

Manufacturing and Administration

Branded PharmaceuticalsRochester, Michigan

Manufacturing

Branded PharmaceuticalsSt. Louis, Missouri

Manufacturing

Meridian Auto-InjectorSt. Petersburg, Florida

Manufacturing

Branded PharmaceuticalsMiddleton, Wisconsin

Manufacturing

Branded Pharmaceuticals         Item 3.
    Legal
    Proceedings    Item 4.
    Submission
    of Matters to a Vote of Security Holders    PART II  Item 5.
    Market
    for Common Equity and Related Stockholder Matters    2007High


LowFirst quarter

$
19.67


$
16.05Second quarter


21.67



19.56Third quarter


21.08



11.58Fourth quarter


11.65



9.93   2006High


LowFirst quarter

$
19.87


$
16.25Second quarter


18.48



15.83Third quarter


17.31



15.93Fourth quarter


17.46



15.74    31




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PERFORMANCE
    GRAPH
  COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
    COMPARISON
    OF 5 YEAR CUMULATIVE TOTAL RETURN
    Among King Pharmaceuticals, Inc., The S&P 500 Index
    And NYSE US SIC Code
    2830-2839,
    Drugs
  
  12/02

12/03

12/04

12/05

12/06

12/07King Pharmaceuticals, Inc.


100.00



88.77



72.13



98.43



92.61



59.57Standard & Poors 500 Stocks


100.00



128.68



142.69



149.70



173.34



182.87NYSE Stocks (SIC
    2830-2839
    U.S. Companies) Drugs


100.00



112.64



105.70



107.62



120.84



123.83  32




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Item 6.
    Selected
    Financial Data    For the Year Ended December 31,2007


2006


2005


2004


2003(In thousands, except per share data)Statement of Income Data:Total revenues

$
2,136,882


$
1,988,500


$
1,772,881


$
1,304,364


$
1,492,789Operating income (loss)(1)(2)


227,513



402,546



180,079



(41,264
)


151,952Income (loss) from continuing operations before income taxes and
    discontinued operations


250,818



424,312



178,115



(58,034
)


163,327Income tax expense (benefit)


67,600



135,730



61,485



(7,412
)


65,884Income (loss) from continuing operations


183,218



288,582



116,630



(50,622
)


97,443(Loss) income from discontinued operations(3)


(237
)


367



1,203



(109,666
)


(5,489
)Net income (loss)

$
182,981


$
288,949


$
117,833


$
(160,288
)

$
91,954Income per common share:Basic:Income (loss) from continuing operations

$
0.75


$
1.19


$
0.48


$
(0.21
)

$
0.40Income (loss) from discontinued operations










0.01



(0.45
)


(0.02
)Net income (loss)

$
0.75


$
1.19


$
0.49


$
(0.66
)

$
0.38Diluted:Income (loss) from continuing operations

$
0.75


$
1.19


$
0.48


$
(0.21
)

$
0.40Income (loss) from discontinued operations










0.01



(0.45
)


(0.02
)Net income (loss)

$
0.75


$
1.19


$
0.49


$
(0.66
)

$
0.38Dividends declared per share of common stock

$
0.00


$
0.00


$
0.00


$
0.00


$
0.00   33




---



##### Table of Contents



December 31,2007


2006


2005


2004


2003(In thousands)Balance Sheet Data:Working capital

$
1,366,569


$
1,055,677


$
276,329


$
438,133


$
241,762Total assets


3,426,822



3,329,531



2,965,242



2,924,156



3,201,530Total debt


400,000



400,000



345,000



345,000



345,097Shareholders equity


2,510,757



2,288,606



1,973,422



1,848,790



2,004,491     (1)
    
    Results for 2003 reflect a $15,212 reduction in the co-promotion
    fees paid to our
    Altace®
    co-promotion partner as a result of charges for amounts due
    under Medicaid and other governmental pricing programs for the
    years 1998 to 2002. Specifically (a) we recovered on a
    pre-tax basis $9,514 in fees we previously accrued during the
    fourth quarter of 2002 and 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.(2)
    
    Effective January 1, 2006, we adopted Statement of
    Financial Accounting Standards No. 123(R), Share
    Based Payment, which requires the recognition of the fair
    value of stock-based compensation in earnings. This statement
    was adopted using the modified prospective application method
    and therefore our prior periods have not been restated and do
    not reflect the recognition of stock-based compensation costs.
    During 2007 and 2006, we incurred on a pre-tax basis $27,652 and
    $24,718, respectively, of compensation costs related to our
    stock-based compensation arrangements.(3)
    
    Reflects the classification of
    Nordette®
    and
    Prefest®
    product lines as discontinued operations. See Note 27,
    Discontinued Operations, in Part IV,
    Item 15(a)(1), Exhibits and Financial Statement
    Schedules.  Item 7.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations    OVERVIEW
  Our
    Business
     34




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##### Table of Contents




    neuroscience (including
    Skelaxin®,
    Avinza®
    and
    Sonata®),
    hospital (including
    Thrombin-JMI®
    and
    Synercid®),
    acute care (including
    Bicillin®
    and
    Intal®), and
    legacy products (including
    Altace®,
    Levoxyl®
    and
    Cytomel®).  ®
  Executive
    Summary
  ®
  Accelerated
    Strategic Shift
  ®
  New
    Generic Competition
  ® ® en banc 180-day 180-day ®
 35




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##### Table of Contents



Expanded
    Product Portfolio and Development Pipeline
  Neuroscience
  ® ®
  ® tm ® ® TM
  ® tm
  Hospital
  ® ®
  tm , ® , ® tm ®
  ® ® ®
  ®
 36




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##### Table of Contents



Our
    Research and Development Projects
    tm tm tm tm tm
  tm ® tm
  tm tm tm tm tm
  tm
    Rochester,
    Michigan Sterile Manufacturing Facility
  ®
 37




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##### Table of Contents



OPERATING
    RESULTS
    For the Years Ended December 31,2007


2006


2005(In thousands)Total RevenuesBranded pharmaceuticals

$
1,857,813


$
1,724,701


$
1,542,124Meridian Auto-Injector


183,860



164,760



129,261Royalties


82,589



80,357



78,128Contract manufacturing


9,201



16,501



22,167Other


3,419



2,181



1,201Total revenues

$
2,136,882


$
1,988,500


$
1,772,881Cost of Revenues, exclusive of depreciation, amortization and
    impairmentsBranded pharmaceuticals

$
467,507


$
317,677


$
222,924Meridian Auto-Injector


76,050



74,576



62,958Royalties


10,158



9,748



9,003Contract manufacturing


9,434



17,636



27,055Other


3,385



171



1,045Total cost of revenues

$
566,534


$
419,808


$
322,985     For the Years Ended December 31,2007


2006


2005(In thousands)Gross Sales

$
2,623,330


$
2,461,588


$
2,240,852Commercial Rebates


188,966



188,652



192,203Medicare Part D Rebates


59,103



54,221



Medicaid Rebates


39,608



27,219



78,753Chargebacks


97,251



102,876



99,057Returns


11,679



14,832



5,012Trade Discounts/Other


90,211



84,720



91,090$
2,136,512


$
1,989,068


$
1,774,737Discontinued Operations


(370
)


568



1,856Net Sales

$
2,136,882


$
1,988,500


$
1,772,881   ® Auto-Injector
  ®
 38




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##### Table of Contents



® ® ® ® ®
    Accrual
    for Rebates, including Administrative Fees
  2007


2006


2005(In thousands)Balance at January 1, net of prepaid amounts

$
53,765


$
126,240


$
179,062Current provision related to sales made in current period


285,253



282,603



294,964Current provision related to sales made in prior periods


2,424



(12,511
)


(24,008
)Rebates paid


(276,141
)


(342,567
)


(323,778
)Balance at December 31, net of prepaid amounts

$
65,301


$
53,765


$
126,240     ®
   39




---



##### Table of Contents



Accrual
    for Returns
  2007


2006


2005(In thousands)Balance at January 1

$
42,001


$
50,902


$
122,863Current provision


11,679



14,832



5,012Actual returns


(20,820
)


(23,733
)


(76,973
)Ending balance at December 31

$
32,860


$
42,001


$
50,902     ®
 40




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##### Table of Contents



Accrual
    for Chargebacks
  2007


2006


2005(In thousands)Balance at January 1

$
13,939


$
13,153


$
27,953Current provision


97,251



102,876



99,057Actual chargebacks


(100,070
)


(102,090
)


(113,857
)Ending balance at December 31

$
11,120


$
13,939


$
13,153   Branded
    Pharmaceuticals Segment
  ChangeFor the Years Ended December 31,


2007 vs. 2006


2006 vs. 20052007


2006


2005


$


%


$


%(In thousands)Branded
    pharmaceutical revenue:Altace®

$
645,989


$
652,962


$
554,353


$
(6,973
)


(1.1
)%

$
98,609



17.8
%Skelaxin®


440,003



415,173



344,605



24,830



6.0



70,568



20.5Thrombin-JMI®


267,354



246,520



220,617



20,834



8.5



25,903



11.7Avinza®


108,546











108,546











Levoxyl®


100,102



111,771



139,513



(11,669
)


(10.4
)


(27,742
)


(19.9
)Sonata®


78,695



85,809



83,162



(7,114
)


(8.3
)


2,647



3.2Other


217,124



212,466



199,874



4,658



2.2



12,592



6.3Total revenue

$
1,857,813


$
1,724,701


$
1,542,124


$
133,112



7.7
%

$
182,577



11.8
%Cost of Revenues,
    exclusive of depreciation, amortization and impairments

$
467,507


$
317,677


$
222,924


$
149,830



47.2
%

$
94,753



42.5
%   ® ®
   41




---



##### Table of Contents



® ®
  Sales
    of Key Products
  Altace®
  ® ®
  ® ® ® ® ®
  ® ® ®
  Skelaxin®
  ® ® ® ® ®
  ® ® ®
  ®
  Thrombin-JMI®
  ® ®
 42




---



##### Table of Contents



®
  Avinza®
  ® ® ® ®
  ®
  Levoxyl®
  ® ® ®
  ® ® ® ®
  Sonata®
  ® ® ®
  ® ® ®
  Other
  ® ®
 43




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##### Table of Contents



Cost
    of Revenues
  ® ® ®
  ®
      
    An inventory valuation allowance that resulted in a charge of
    $78.8 million for inventories associated with
    Altace®
    in 2007. For additional information please see Note 8,
    Inventory, in Part IV, Item 15(a)(1),
    Exhibits and Financial Statement Schedules.


    A charge of $25.4 million primarily associated with minimum
    purchase requirements under a supply agreement to purchase raw
    material inventory associated with
    Altace®
    in 2007. For additional information please see Note 8,
    Inventory, in Part IV, Item 15(a)(1),
    Exhibits and Financial Statement Schedules.
    A contract termination that resulted in a charge of
    $3.8 million in 2007.
    A benefit of approximately $6.1 million resulting from the
    termination of purchase commitments for some of our smaller
    products which reduced our cost of revenues from branded
    pharmaceutical products in 2005.
    Product returned as a result of a
    Levoxyl®
    voluntary recall was less than originally estimated.
    Accordingly, cost of revenues from branded pharmaceutical
    products in 2005 was reduced by approximately $2.5 million.  ®
 44




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##### Table of Contents



Meridian
    Auto-Injector Segment
  ChangeFor the Years Ended December 31,


2007-2006


2006-20052007


2006


2005


$


%


$


%(In thousands)Meridian Auto-Injector revenue

$
183,860


$
164,760


$
129,261


$
19,100



11.6
%

$
35,499



27.5
%Cost of Revenues, exclusive of depreciation, amortization and
    impairments


76,050



74,576



62,958



1,474



2.0



11,618



18.5$
107,810


$
90,184


$
66,303


$
17,626



19.5
%

$
23,881



36.0
%   ® ® ® ® ®
  ® ® ®
    Royalties
    Segment
  ChangeFor the Years Ended December 31


2007-2006


2006-20052007


2006


2005


$


%


$


%(In thousands)Royalty revenue

$
82,589


$
80,357


$
78,128


$
2,232



2.8
%

$
2,229



2.9
%Cost of Revenues, exclusive of depreciation, amortization and
    impairments


10,158



9,748



9,003



410



4.2



745



8.3$
72,431


$
70,609


$
69,125


$
1,822



2.6
%

$
1,484



2.1
%   ®
 45




---



##### Table of Contents



Contract
    Manufacturing Segment
  ChangeFor the Years Ended December 31,


2007-2006


2006-20052007


2006


2005


$


%


$


%(In thousands)Contract manufacturing revenue

$
9,201


$
16,501


$
22,167


$
(7,300
)


(44.2
)%

$
(5,666
)


(25.6
)%Cost of Revenues, exclusive of depreciation, amortization and
    impairments


9,434



17,636



27,055



(8,202
)


(46.5
)


(9,419
)


(34.8
)$
(233
)

$
(1,135
)

$
(4,888
)

$
902



79.5
%

$
3,753



76.8
%         Operating
    Costs and Expenses
  ChangeFor the Years Ended December 31,


2007-2006


2006-20052007


2006


2005


$


%


$


%(In thousands)Cost of revenues, exclusive of depreciation, amortization and
    impairments

$
566,534


$
419,808


$
322,985


$
146,726



35.0
%

$
96,823



30.0
%Selling, general and administrative


691,034



713,965



636,483



(22,931
)


(3.2
)


77,482



12.2Research and development


184,735



253,596



262,726



(68,861
)


(27.2
)


(9,130
)


(3.5
)Depreciation and amortization


173,863



147,549



147,049



26,314



17.8



500



<1.0Asset impairments


223,025



47,842



221,054



175,183



>100



(173,212
)


(78.4
)Restructuring charges


70,178



3,194



4,180



66,984



>100



(986
)


(23.6
)Gain on sale of products










(1,675
)










1,675



100.0Total operating costs and expenses

$
1,909,369


$
1,585,954


$
1,592,802


$
323,415



20.4
%

$
(6,848
)


(0.4
)%  46




---



##### Table of Contents



Selling,
    General and Administrative Expenses
  ChangeFor the Years Ended December 31,


2007-2006


2006-20052007


2006


2005


$


%


$


%(In thousands)Selling, general and administrative, exclusive of co-promotion
    fees

$
511,303


$
496,215


$
409,451


$
15,088



3.0
%

$
86,764



21.2
%Mylan transaction costs










3,898











(3,898
)


(100.0
)Co-promotion fees


179,731



217,750



223,134



(38,019
)


(17.5
)


(5,384
)


(2.4
)Total selling, general and administrative

$
691,034


$
713,965


$
636,483


$
(22,931
)


(3.2
)%

$
77,482



12.2
%     ® ® ® ®
  ®
  Share-Based Payment
      
    Charges of $2.1 million, $0.1 million, and
    $19.8 million during 2007, 2006 and 2005, respectively,
    primarily due to professional fees related to the now-completed
    investigation of our company by the HHS/OIG, and the SEC, and
    on-going private plaintiff securities litigation. During
    2007 and 2006, we 47




---



##### Table of Contents



received payment from our insurance carriers for the recovery of
    legal fees in the amount of $3.4 million and
    $6.8 million, respectively, related to the securities
    litigation. These recoveries have been reflected as reductions
    of professional fees in 2007 and 2006. For additional
    information, please see Note 19, Commitments and
    Contingencies, in Part IV, Item 15(a)(1),
    Exhibits and Financial Statement Schedules.  
    A charge of $45.1 million during 2006 related to the
    results of a binding arbitration proceeding with Elan
    Corporation, plc regarding an agreement concerning the
    development of a modified release formulation of
    Sonata®.
    During 2004, we incurred a charge of $5.0 million as
    estimated settlement costs related to the termination of this
    agreement. For additional information please see Note 13,
    Accrued Expenses, in Part IV,
    Item 15(a)(1), Exhibits and Financial Statement
    Schedules.
    Charges in the amount of $3.9 million in 2005 for
    professional fees and expenses related to the terminated merger
    agreement with Mylan Laboratories, Inc.  Research
    and Development Expense
  For the Years Ended


ChangeDecember 31,


2007-2006


2006-20052007


2006


2005


$


$(In thousands)Research and development

$
149,425


$
143,596


$
74,015


$
5,829


$
69,581Research and development  in-process upon acquisition


35,310



110,000



188,711



(74,690
)


(78,711
)Total research and development

$
184,735


$
253,596


$
262,726


$
(68,861
)

$
(9,130
)       
    A charge equaling $32.0 million during 2007 associated with
    our collaborative agreement with Acura Pharmaceuticals, Inc.
    (Acura) to develop and commercialize certain
    immediate release opioid analgesic products utilizing
    Acuras proprietary
    Aversion®
    (abuse-deterrent/abuse-resistant) Technology in the United
    States, Canada and Mexico. The agreement provides us with an
    exclusive license for
    Acuroxtm
    (oxycodone HCl, niacin and a unique combination of other
    ingredients) tablets and another undisclosed immediate release
    opioid product utilizing Acuras
    Aversion®
    Technology. In addition, the agreement provides us with an
    option to license all future opioid analgesic products developed
    utilizing Acuras
    Aversion®
    Technology.
    Acuroxtm
    tablets are intended to effectively treat moderate to moderately
    severe acute pain while resisting or deterring common methods of
    abuse, including intravenous injection or oral consumption of
    tablets dissolved in liquids, nasal inhalation of crushed
    tablets and intentional swallowing of excessive numbers of
    tablets.In connection with the agreement with Acura, we recognized the
    above payments of $32.0 million as in-process research and
    development expense during 2007. This amount was expensed as the
    in-process research and development project had not received
    regulatory approval and had no alternative future use. The
    in-process research and development project is part of the
    branded pharmaceutical segment.
    Acuroxtm
    is currently in Phase III of clinical development. We believe
    there is a reasonable probability 48




---



##### Table of Contents



of completing the project successfully. However, the success of
    the project depends on the outcome of the Phase III clinical
    trial program and approval by the FDA. The estimated cost to
    complete the project at the execution of the agreement was
    approximately $9.0 million. If the Phase III clinical
    trials are successful, we would expect to obtain FDA approval in
    2009 or 2010.  
    A charge equaling $3.1 million during 2007 for a payment to
    Mutual Pharmaceutical Company (Mutual) to jointly
    research and develop one or more improved formulations of
    metaxalone. Under the agreement with Mutual, we sought
    Mutuals expertise in developing improved formulations of
    metaxalone, including improved formulations Mutual developed
    prior to execution of this agreement and access to Mutuals
    and United Research Laboratories rights in intellectual
    property pertaining to these formulations. Development
    activities under this agreement ceased in December 2007.
    A charge equaling $110.0 million during 2006 for our
    acquisition of in-process research and development associated
    with our collaboration with Arrow to commercialize one or more
    novel formulations of ramipril, the active ingredient in our
    Altace®
    product. Under a series of agreements, Arrow has granted us
    rights to certain current and future NDAs regarding novel
    formulations of ramipril and intellectual property, including
    patent rights and technology licenses relating to these novel
    formulations. Arrow will have responsibility for the manufacture
    and supply of new formulations of ramipril for us. However,
    under certain conditions, we may manufacture and supply the
    formulations of ramipril instead of Arrow. Arrow will earn fees
    for the manufacture and supply of the new formulations of
    ramipril. Arrow filed an NDA for a tablet formulation of
    ramipril in January 2006 (the Ramipril
    Application).  At the time of our acquisition of this
    project, its success was dependent on additional development
    activities and FDA approval. The estimated cost to complete the
    project at the execution of these agreements was approximately
    $3.5 million. The FDA approved the NDA on February 27,
    2007. Arrow granted us an exclusive option to acquire their
    entire right, title and interest to the Ramipril Application or
    any future filed Amended Ramipril Application for the amount of
    $5.0 million. In April 2007, we exercised our option and
    paid $5.0 million to Arrow. As a result, we own the entire
    right, title and interest in the Ramipril Application. We
    launched the tablet formulation in February 2008.
    A charge equaling $153.7 million during 2005 for our
    acquisition of in-process research and development associated
    with our strategic alliance with Pain Therapeutics to develop
    and commercialize
    Remoxytm
    and other opioid painkillers that resist common methods of
    abuse.
    Remoxytm
    is an investigational drug in late-stage clinical development by
    Pain Therapeutics for the treatment of moderate to severe
    chronic pain. We are responsible for all research and
    development expenses related to this alliance. The value of the
    in-process research and development project was expensed on the
    date of acquisition as it had not received regulatory approval
    and had no alternative future use.
    Remoxytm
    has successfully completed Phase III of clinical
    development and Pain Therapeutics expects to file the NDA in the
    second quarter of 2008. We currently anticipate obtaining FDA
    approval in 2009. We believe there is a reasonable probability
    of completing the project successfully. However, the success of
    the project depends on regulatory approval and our ability to
    successfully manufacture the product.
    A charge of $35.0 million during 2005 for our acquisition
    of in-process research and development due to our co-exclusive
    license agreement with Mutual Pharmaceutical Company whereby we
    obtained a license to certain intellectual property relating to
    metaxalone. The intellectual property licensed to us relates to
    the potential for improved dosing and administration of
    metaxalone. The value of the in-process research and development
    project was expensed on the date of acquisition as it had not
    received regulatory approval and had no alternative future use.  Depreciation
    and Amortization Expense
  ® ® ® ®
 49




---



##### Table of Contents



®
  ® ®
  ®
    Other
    Operating Expenses
    
    An intangible asset impairment charge of $146.4 million in
    2007 related to our
    Altace®
    product as a result of the invalidation of the 722 patent
    which covered the
    Altace®
    product. Following the Circuit Courts decision, we reduced
    the estimated useful life of this product and forecasted net
    sales. This decrease in estimated remaining useful life and
    forecasted net sales reduced the probability-weighted estimated
    undiscounted future cash flows associated with
    Altace®
    intangible assets to a level below their carrying value. We
    determined the fair value of these assets based on
    probability-weighted estimated discounted future cash flows.
    A charge of $46.4 million in 2007 related to the write-down
    of our Rochester, Michigan sterile manufacturing facility and
    certain legacy branded pharmaceutical products which we
    classified as held for sale. On October 1, 2007, we closed
    the asset purchase agreement with JHP, pursuant to which JHP
    acquired our Rochester, Michigan sterile manufacturing facility,
    some of our legacy products that are manufactured there and the
    related contract manufacturing business. For additional
    information, please see Note 11, Intangible Assets
    and Goodwill, in Part IV, Item 15(a)(1),
    Exhibits and Financial Statement Schedules.
    Intangible asset impairment charges of $30.2 million in
    2007 primarily related to our decision to no longer pursue the
    development of a new formulation of
    Intal®
    utilizing hydroflouroalkane as a propellant. An intangible asset
    impairment charge in 2006 of $47.8 million, which is
    primarily related to lower than expected prescription growth for
    Intal®
    and
    Tilade®.
    An intangible asset impairment charge in 2005 of
    $221.1 million, which primarily related to a greater than
    expected decline in prescriptions for
    Sonata®
    and an anticipated decline in prescriptions for
    Corzide®.
    These charges were recorded in order to adjust the carrying
    value of the intangible assets on our balance sheet associated
    with these products so as to reflect the estimated fair value of
    these assets at the time the charges were incurred.
    Restructuring charges in the amount of $68.6 million in
    2007 primarily due to our restructuring initiative designed to
    accelerate a planned strategic shift emphasizing our focus in
    neuroscience, hospital and acute care medicine and separation
    payments associated with the sale of the Rochester, Michigan
    sterile manufacturing facility discussed above. Restructuring
    charges of $1.3 million and $3.2 million during 2007
    and 2006, respectively for separation payments that primarily
    arose in 50




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##### Table of Contents



connection with our decision to transfer the production of
    Levoxyl®
    from our St. Petersburg, Florida facility to the Bristol,
    Tennessee facility. Restructuring charges of $0.3 million
    in 2007 and $2.3 million in 2005 due to a decision to
    reduce our workforce in order to improve efficiencies in our
    operations. Restructuring charges of $1.9 million in 2005
    primarily as a result of separation agreements with several of
    our executives, the relocation of our sales and marketing
    operations from Bristol, Tennessee to New Jersey and our
    decision to discontinue some relatively insignificant products
    associated with our Meridian Auto-Injector business.  
    Income of $1.7 million in 2005 primarily due to a gain on
    the termination of our co-promotion and license agreements with
    Novavax, Inc. regarding
    Estrasorbtm
    and the repurchase by Novavax of all of its convertible notes
    which we held.  ® and/or
  ® ® ® ®
    NON-OPERATING
    ITEMS
  For the Years Ended December 31,2007


2006


2005(In thousands)Interest income

$
42,491


$
32,152


$
18,175Interest expense


(7,818
)


(9,857
)


(11,931
)Loss on investment


(11,591
)






(6,182
)Gain on early extinguishment of debt






628



Other, net


223



(1,157
)


(2,026
)Income tax expense


67,600



135,730



61,485Discontinued operations


(237
)


367



1,203   Other
    Income (Expense)
      
    A loss of $11.6 million in 2007 related to our investment
    in Palatin.
    Income of $0.6 million during 2006 resulting from the early
    retirement of our
    23/4% Convertible
    Debentures due November 15, 2021. 51




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##### Table of Contents




    A charge of $6.2 million in 2005 in order to writedown our
    investment in Novavax common stock to fair value. During the
    third quarter of 2005, we sold our investment in Novavax.  Income
    Tax Expense
          Off-Balance
    Sheet Arrangements, Contractual Obligations and Commercial
    Commitments
      Payment Due by PeriodLess Than


One to


Four to


More ThanTotal


One Year


Three Years


Five Years


Five Years(In thousands)Contractual Obligations:Long-term debt

$
400,000


$



$



$



$
400,000Operating leases


72,366



11,846



21,952



20,562



18,006Unconditional purchase obligations


304,141



151,499



93,824



23,998



34,820Interest on long-term debt


26,306



5,000



10,000



10,000



1,306Total

$
802,813


$
168,345


$
125,776


$
54,560


$
454,132     ® ® ® ®
 52




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##### Table of Contents



® ®
  ® ®
    Liquidity
    and Capital Resources
  General
      tax-exempt
  tax-exempt
 53




---



##### Table of Contents



® tm ® ®
  tm tm
  ® ® ® ®
  ®
   54




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##### Table of Contents



® ® ® ®
  ®
  
    If calendar year net sales are less than $200.0 million,
    the royalty payment will be 5% of all net sales.
    If calendar year net sales are greater than $200.0 million,
    then the royalty payment will be 10% of all net sales up to
    $250.0 million, plus 15% of net sales greater than
    $250.0 million.  ® ® ®
  tm ® tm ®
  ® ® ® ®
 55




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##### Table of Contents




    For 2006, 15% of
    Altace®
    net sales up to $165.0 million, 42.5% of
    Altace®
    net sales in excess of $165.0 million and less than or
    equal to $465.0 million, and 52.5% of
    Altace®
    net sales that are in excess of $465.0 million and less
    than or equal to $585.0 million.
    For 2007, 30% of
    Altace®
    net sales, with the fee not to exceed $178.5 million.
    For 2008, 22.5% of
    Altace®
    net sales, with the fee not to exceed $134.0 million.
    For 2009, 14.2% of
    Altace®
    net sales, with the fee not to exceed $84.5 million.
    For 2010, 25% of
    Altace®
    net sales, with the fee not to exceed $5.0 million.  ® ®
    tm
  ® ®
  ® ®
    ®
 56




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##### Table of Contents



tm tm tm tm tm
  ® ® ® ®
  Settlement
    of Governmental Pricing Investigation
          Form 8-K
  SEC
    Investigation
   57




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##### Table of Contents



Securities
    and Derivative Litigation
              Patent
    Challenges
  ® ® ® ®
  Cash
    Flows
  Operating
    Activities
  For the Years Ended December 31,2007


2006


2005(In thousands)Net cash provided by operating activities

$
672,649


$
465,627


$
519,508    58




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##### Table of Contents



® ®
        2007


2006


2005(In thousands)Accounts receivable, net of allowance

$
80,106


$
(41,746
)

$
(43,407
)Inventories


55,056



48,275



46,349Prepaid expenses and other current assets


(43,555
)


(45,796
)


(47,544
)Accounts payable


(16,276
)


(8,568
)


(7,713
)Accrued expenses and other liabilities


(33,408
)


(50,458
)


(52,544
)Income taxes payable


(9,009
)


8,479



22,161Deferred revenue


(4,680
)


(6,886
)


(9,092
)Other assets


(3,470
)


(20,173
)


(4,471
)Deferred taxes


(91,229
)


(39,010
)


(68,047
)Total changes from operating assets and liabilities and deferred
    taxes

$
(66,465
)

$
(155,883
)

$
(164,308
)     Investing
    Activities
  For the Years Ended December 31,2007


2006


2005(In thousands)Net cash used in investing activities

$
(776,251
)

$
(436,315
)

$
(683,007
)   ®
   59




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##### Table of Contents



® ®
      Financing
    Activities
  2007


2006


2005(In thousands)Net cash provided by financing activities

$
9,834


$
54,451


$
857   1 4 3 4
  Certain
    Indebtedness and Other Matters
  1 4 1 4
    3 4
 60




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##### Table of Contents



Form S-3 and/or
  Impact
    of Inflation
    Critical
    Accounting Policies and Estimates
       61




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##### Table of Contents




    Intangible assets, goodwill, and other long-lived
    assets.  When we acquire product rights in
    conjunction with either business or asset acquisitions, we
    allocate an appropriate portion of the purchase price to
    intangible assets, goodwill and other long-lived assets. The
    purchase price is allocated to product rights and trademarks,
    patents, acquired research and development, if any, and other
    intangibles using the assistance of valuation consultants. We
    estimate the useful lives of the assets by factoring in the
    characteristics of the products such as: patent protection,
    competition by products prescribed for similar indications,
    estimated future introductions of competing products, and other
    issues. The factors that drive the estimate of the life of the
    asset are inherently uncertain. However, patents have specific
    legal lives over which they are amortized. Conversely,
    trademarks and product rights have no specific legal lives.
    Trademarks and product rights will continue to be an asset to us
    after the expiration of the patent, as their economic value is
    not tied exclusively to the patent. We believe that by
    establishing separate lives for the patent versus the trademark
    and product rights, we are in essence using an accelerated
    method of amortization for the product as a whole. This results
    in greater amortization in earlier years when the product is
    under patent protection, as we are amortizing both the patent
    and the trademark and product rights, and less amortization when
    the product faces potential generic competition, as the
    amortization on the patent is eliminated. Because we have no
    discernible evidence to show a decline in cash flows for
    trademarks and product rights, or for patents, we use the
    straight-line method of amortization for both intangibles.     62




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##### Table of Contents



GrossCarrying


Accumulated


Net BookAmount


Amortization


Value(In thousands)BrandedAvinza®

$
285,700


$
22,380


$
263,320Skelaxin®


275,663



138,254



137,409Sonata®


61,961



61,646



315Neuroscience


623,324



222,280



401,044Hospital


119,031



40,343



78,688Intal®


34,033



28,196



5,837Other acute care


98,342



33,231



65,111Acute care


132,375



61,427



70,948Altace®


156,744



127,057



29,687Other legacy products


128,517



72,277



56,240Legacy products


285,261



199,334



85,927Total Branded


1,159,991



523,384



636,607Meridian Auto-Injector


178,821



35,732



143,089Royalties


3,718



2,440



1,278Contract manufacturing










All other










Total intangible assets

$
1,342,530


$
561,556


$
780,974     Trademarks, product


Net BookPatents


rights and other


Value(In thousands)BrandedAvinza®

$
263,320


$



$
263,320Skelaxin®






137,409



137,409Sonata®


315







315Neuroscience


263,635



137,409



401,044Hospital


33,253



45,435



78,688Intal®






5,837



5,837Other acute care






65,111



65,111Acute care






70,948



70,948Altace®






29,687



29,687Other legacy products






56,240



56,240Legacy products






85,927



85,927Total Branded


296,888



339,719



636,607Meridian Auto-Injector






143,089



143,089Royalties


974



304



1,278Contract manufacturing










All other










Total intangible assets

$
297,862


$
483,112


$
780,974  63




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##### Table of Contents



Year Ended


Year EndedDecember 31,


December 31,2007


2006Amortization





AmortizationImpairments


Expense


Impairments


Expense(In thousands)


(In thousands)BrandedAvinza®

$



$
22,380


$



$
Skelaxin®






17,427







15,548Sonata®






270







12,883Neuroscience






40,077







28,431Hospital


968



10,730







11,072Intal®


27,693



5,722



44,466



7,611Other acute care


1,566



4,667



3,376



7,928Acute care


29,259



10,389



47,842



15,539Altace®


146,444



52,278







27,542Other legacy products






10,384







15,662Legacy products


146,444



62,662







43,204Total Branded


176,671



123,858



47,842



98,246Meridian Auto-Injector






8,001







7,474Royalties






279







44Contract manufacturing














All other














Total

$
176,671


$
132,138


$
47,842


$
105,764     Remaining Life at December 31, 2007Trademark &Patent


Product RightsAltace®






3 monthsSkelaxin®






6 yearsAvinza®


9 years 11 months



Intal®






1 year   
    Inventories.  Our inventories are valued at the
    lower of cost or market value. We evaluate our entire inventory
    for short-dated or slow-moving product and inventory commitments
    under supply agreements based on projections of future demand
    and market conditions. For those units in inventory that are so
    identified, we estimate their market value or net sales value
    based on current realization trends. If the projected net
    realizable value is less than cost, on a product basis, we make
    a provision to reflect the lower value of that inventory. This
    methodology recognizes projected inventory losses at the time
    such losses are evident rather than at the time goods are
    actually sold. We maintain supply agreements with some of our
    vendors which contain minimum purchase requirements. We estimate
    future inventory requirements based on current facts and trends.
    Should our minimum purchase requirements under supply agreements
    or if our estimated future inventory requirements exceed actual
    inventory quantities that we will be able to sell to our
    customers, we record a charge in costs of revenues.
    Accruals for rebates, returns and
    chargebacks.  We establish accruals for returns,
    chargebacks, Medicaid, Medicare and commercial rebates in the
    same period we recognize the related sales. The accruals reduce
    revenues and are included in accrued expenses. At the time a
    rebate or chargeback 64




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##### Table of Contents



payment is made or a product return is received, which occurs
    with a delay after the related sale, we record a reduction to
    accrued expenses and, at the end of each quarter, adjust accrued
    expenses for differences between estimated and actual payments.
    Due to estimates and assumptions inherent in determining the
    amount of returns, chargebacks and rebates, the actual amount of
    product returns and claims for chargebacks and rebates may be
    different from our estimates.      
    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. For additional
    information, please see Note 2, Summary of
    Significant Accounting Policies, in Part IV,
    Item 15(a)(1), Exhibits and Financial Statement
    Schedules.  Recently
    Issued Accounting Standards
  Accounting for Uncertainty in Income Taxes Accounting for Income Taxes
 65




---



##### Table of Contents



Fair Value Measurements
  The Fair Value Option for
    Financial Assets and Financial Liabilities
  No. 07-3, Accounting for Nonrefundable Advance Payments for Goods or
    Services Received for Use in Future Research and Development
    Activities 07-3). 07-3 07-03, 07-03 07-3
  07-01, Accounting for Collaborative Arrangements 07-01). 07-01 07-01 07-01
  Business Combinations
  Noncontrolling Interests
    in Consolidated Financial Statements, an amendment of ARB
    No. 51
 66




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##### Table of Contents



Item 7A.
    Quantitative
    and Qualitative Disclosures About Market Risk    Interest
    Rate Risk
    Investment
    Risk
      Item 8.
    Financial
    Statements and Supplementary Data  page F-1.
  Item 9.
    Changes
    in Accountants and Disagreements with Accountants on Accounting
    and Financial Disclosure    Item 9A.
    Controls
    and Procedures  Evaluation
    of Disclosure Controls and Procedures
   67




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##### Table of Contents



Rule 13a-15(b) Rule 13a-15(e))
    Managements
    Report on Internal Control over Financial
    Reporting
  Rule 13a-15(f).
  Internal Control  Integrated
    Framework
    Changes
    in Internal Control over Financial Reporting
    Item 9B.
    Other
    Information   PART III  Form 10-K
 68




---



##### Table of Contents



PART IV  Item 15.
    Exhibits
    and Financial Statement Schedules  Documents filed as a part of this report:
    Page NumberReport of Independent Registered Public
    Accounting Firm


F-1Consolidated Balance Sheets as of
    December 31, 2007 and 2006


F-3Consolidated Statements of Income for the years
    ended December 31, 2007, 2006 and 2005


F-4Consolidated Statements of Shareholders
    Equity and Other Comprehensive Income for the years ended
    December 31, 2007, 2006 and 2005


F-5Consolidated Statements of Cash Flows for the
    years ended December 31, 2007, 2006 and 2005


F-6Notes to Consolidated Financial Statements


F-7(2) Financial Statement Schedule Valuation
    and Qualifying Accounts


S-1       (b)
    Exhibits    ExhibitNumber

Description3
.1(1)

Third Amended and Restated Charter of King Pharmaceuticals, Inc.3
.2(2)

Amended and Restated Bylaws of King Pharmaceuticals, Inc.4
.1(2)

Specimen Common Stock Certificate4
.2(2)

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
.1(3)

Amended and Restated Co-Promotion Agreement, dated as of
    July 5, 2006, by and between King Pharmaceuticals, Inc. and
    Wyeth10
.2(4)

Indenture, dated as of March 29, 2006, among King
    Pharmaceuticals, Inc., certain Subsidiary Guarantors and The
    Bank of New York, as trustee, relating to Kings
    11/4%
    Convertible Notes due 202610
.3(4)

Registration Rights Agreement dated as of March 29, 2006
    between King Pharmaceuticals, Inc., certain Subsidiary
    Guarantors and the initial purchasers of Kings
    11/4%
    Convertible Notes due 202610
.4(5)

1998 King Pharmaceuticals, Inc. Non-Employee Director Stock
    Option Plan10
.5(2)*

1997 Incentive and Nonqualified Stock Option Plan for Employees
    of King Pharmaceuticals, Inc.10
.6(5)*

1989 Incentive Stock Option Plan of Jones Medical Industries,
    Inc.10
.7(5)*

Jones Medical Industries, Inc. 1994 Incentive Stock Plan10
.8(5)*

Jones Medical Industries, Inc. 1997 Incentive Stock Plan10
.9(6)*

King Pharmaceuticals, Inc. 401(k) Retirement Savings Plan10
.10(7)*

The Medco Research, Inc. 1989 Stock Option and Stock
    Appreciation Rights Plan, as amended through July 29, 199810
.11(8)

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 Bookrunner10
.12(9)*

Offer Letter to Brian A. Markison, dated July 15, 200410
.13(10)*

King Pharmaceuticals, Inc. Severance Pay Plan: Tier I
    (Effective March 15, 2005) 69




---



##### Table of Contents



ExhibitNumber

Description10
.14(11)*

Offer letter to Joseph Squicciarino dated May 25, 200510
.15(11)*

Offer letter to Eric J. Bruce dated May 19, 200510
.16(12)*

Form of Restricted Stock Certificate and Restricted Stock Grant
    Agreement10
.17(12)*

Form of Option Certificate and Nonstatutory Stock Option
    Agreement10
.18(13)

Settlement Agreement, dated as of October 31, 2005, among
    the United States of America acting through the entities named
    therein, King Pharmaceuticals, Inc. and Monarch Pharmaceuticals,
    Inc.10
.19(13)

Settlement Agreement, dated as of October 31, 2005, among
    the state of Massachusetts, King Pharmaceuticals, Inc. and
    Monarch Pharmaceuticals, Inc. and general description of the
    other state settlement agreements10
.20(13)

Corporate Integrity Agreement, dated as of October 31,
    2005, between the Office of Inspector General of the Department
    of Health and Human Services and King Pharmaceuticals, Inc.10
.21(14)*

King Pharmaceuticals, Inc. Incentive Plan10
.22(15)

Compensation Policy for Non-Employee Directors10
.23(16)

Collaboration Agreement by and between King Pharmaceuticals,
    Inc. and Pain Therapeutics, Inc., dated as of November 9,
    200510
.24(16)

License Agreement by and between King Pharmaceuticals, Inc. and
    Pain Therapeutics, Inc., dated as of December 29, 200510
.25(16)

License Agreement, by and between King Pharmaceuticals, Inc. and
    Mutual Pharmaceutical Company, Inc., dated as of
    December 6, 200510
.26(17)

First Amendment, dated as of March 22, 2006, to the Credit
    Agreement, dated as of April 23, 2002, among King
    Pharmaceuticals, Inc., the Lenders and Credit Suisse First
    Boston, Cayman Islands Branch, as Administrative Agent10
.27(18)

Generic Distribution Agreement by and between King
    Pharmaceuticals, Inc. and Cobalt Pharmaceuticals, Inc., dated as
    of February 12, 200610
.28(18)

Product Supply Agreement by and among King Pharmaceuticals,
    Inc., Selamine Limited, Robin Hood Holdings Limited and Arrow
    Pharm Malta Limited, dated as of February 12, 200610
.29(18)

Ramipril Application License Agreement by and among King
    Pharmaceuticals, Inc., Arrow International Limited and Robin
    Hood Holdings Limited, dated as of February 12, 200610
.30(18)

Ramipril Patent License Agreement by and among King
    Pharmaceuticals, Inc., Selamine Limited and Robin Hood Holdings
    Limited, dated as of February 12, 200610
.31(18)

Amended and Restated U.S. Product Manufacturing Agreement by and
    between King Pharmaceuticals, Inc. and Sanofi-Aventis
    Deutschland GmbH, dated as of February 27, 200610
.32(18)

First Amendment to the U.S. Product Agreement by and between
    King Pharmaceuticals, Inc. and Sanofi-Aventis U.S. LLC, dated as
    of February 27, 200610
.33(18)*

Form of Long-Term Performance Unit Award Agreement 
    One Year Performance Cycle10
.34(18)*

Form of Long-Term Performance Unit Award Agreement 
    Three Year Performance Cycle10
.35(19)

Promotion Agreement, dated June 27, 2006, by and between
    King Pharmaceuticals, Inc. and Depomed, Inc.10
.36(19)

Form of Restricted Unit Certificate and Restricted Unit Grant
    Agreement10
.37(20)

Purchase Agreement, by and between Ligand Pharmaceuticals
    Incorporated, King Pharmaceuticals, Inc. and King
    Pharmaceuticals Research and Development, Inc., dated as of
    September 6, 200610
.38(21)

Entry into Loan Agreement between King Pharmaceuticals, Inc. and
    Ligand Pharmaceuticals Incorporated, dated October 12, 200610
.39(22)

Settlement Agreement, dated July 31, 2006, between King
    Pharmaceuticals, Inc., the Affected Current and Former Officers
    and Directors and the Plaintiffs in the Consolidated
    Class Action10
.40(22)

Form of Restricted Unit Certificate and Restricted Unit Grant
    Agreement10
.41(23)

Amendment No. 1 to Purchase Agreement, Contract Sales Force
    Agreement and Confidentiality Agreement by and between Ligand
    Pharmaceuticals Incorporated, King Pharmaceuticals, Inc. and
    King Pharmaceuticals Research and Development, Inc., dated as of
    January 3, 2007, effective as of November 30, 2006 70




---



##### Table of Contents



ExhibitNumber

Description10
.42(23)

Side Letter between King Pharmaceuticals, Inc., King
    Pharmaceuticals Research and Development, Inc. and Ligand
    Pharmaceuticals Incorporated dated December 29, 200610
.43(24)*

2006 Executive Management Incentive Award10
.44(25)

Amendment No. 2 to Purchase Agreement, by and between King
    Pharmaceuticals, Inc., King Pharmaceuticals Research and
    Development, Inc. and Ligand Pharmaceuticals Incorporated,
    effective as of February 26, 200710
.45(26)*

Form of Option and Nonstatutory Stock Option Agreement10
.46(26)*

Form of Restricted Stock Certificate and Restricted Stock Grant
    Agreement10
.47(26)*

Form Of Long-Term Performance Unit Award
    Agreement  One Year Performance Cycle10
.48(26)*

Form Of Long-Term Performance Unit Award
    Agreement  Three Year Performance Cycle10
.49(27)*

2007 Executive Management Incentive Award10
.50(28)*

Form of Retention Grant Agreement10
.51(28)

Form of Restricted Stock Unit Certificate and Restricted Stock
    Unit Grant Agreement10
.52(28)*

Form Of Long-Term Performance Unit Award
    Agreement  One Year Performance Cycle10
.53(28)*

Form Of Long-Term Performance Unit Award
    Agreement  Three Year Performance Cycle10
.54(28)

Compensation Policy for Non-Employee Directors10
.55(1)

Credit Agreement dated as of April 19, 2007 among King
    Pharmaceuticals, Inc.; the Lenders (as defined therein); Credit
    Suisse, Cayman Islands Branch, as Administrative Agent,
    Collateral Agent and Swingline Lender; Bank of America, N.A. and
    UBS Securities LLC, as Cosyndication Agents; Citigroup Global
    Markets Inc., Wachovia Bank, National Association and The Royal
    Bank of Scotland plc, as Codocumentation Agents; U.S. Bank
    National Association as Managing Agent; and the Issuing Banks
    (as defined therein).10
.56(29)

Asset Purchase Agreement by and among King Pharmaceuticals,
    Inc., Monarch Pharmaceuticals, Inc., Parkedale Pharmaceuticals,
    Inc., King Pharmaceuticals Research and Development, Inc., and
    JHP Pharmaceuticals, LLC dated as of July 14, 2007.10
.57(30)*

King Pharmaceuticals, Inc. Amended and Restated Severance Pay
    Plan: Tier I.10
.58(31)

License, Development and Commercialization Agreement, dated
    October 30, 2007, between King Pharmaceuticals Research and
    Development, Inc. and Acura Pharmaceuticals, Inc.10
.59(31)*

King Pharmaceuticals, Inc. Deferred Compensation Plan10
.60(32)

Amended and Restated King Pharmaceuticals, Inc. Non-Employee
    Directors Deferred Compensation Plan10
.61(32)*

Form of Restricted Stock Certificate and Restricted Stock Grant
    Agreement14
.1(33)

Corporate Code of Conduct and Ethics21
.1

Subsidiaries of the Registrant23
.1

Consent of PricewaterhouseCoopers LLP31
.1

Certificate of Chief Executive Officer Pursuant to
    Section 302 of the Sarbanes-Oxley Act of 200231
.2

Certificate of Chief Financial Officer Pursuant to
    Section 302 of the Sarbanes-Oxley Act of 200232
.1

Certificate of Chief Executive Officer Pursuant to
    Section 906 of the Sarbanes-Oxley Act of 200232
.2

Certificate of Chief Financial Officer Pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002     *
    
    Denotes management contract or compensatory plan or arrangement.
    
    Portions of this Exhibit have been omitted and filed separately
    with the Securities and Exchange Commission as part of an
    application for confidential treatment pursuant to the
    Securities Exchange Act of 1934. 71




---



##### Table of Contents



(1)
    
    Incorporated by reference to Kings Quarterly Report on
    Form 10-Q
    filed August 7, 2007.(2)
    
    Incorporated by reference to Kings Registration Statement
    on
    Form S-1
    (Registration
    No. 333-38753)
    filed October 24, 1997.(3)
    
    Incorporated by reference to Kings Quarterly Report on
    Form 10-Q
    filed November 9, 2006.(4)
    
    Incorporated by reference to Kings Current Report on
    Form 8-K
    filed March 30, 2006.(5)
    
    Incorporated by reference to Kings Registration Statement
    on
    Form S-8
    filed September 6, 2000.(6)
    
    Incorporated by reference to Kings Registration Statement
    on
    Form S-8
    filed February 26, 1999.(7)
    
    Incorporated by reference to Kings Registration Statement
    on
    Form S-8
    filed March 9, 2000.(8)
    
    Incorporated by reference to Kings Quarterly Report on
    Form 10-Q
    filed May 15, 2002.(9)
    
    Incorporated by reference to Kings Quarterly Report on
    Form 10-Q
    filed March 21, 2005.(10)
    
    Incorporated by reference to Kings Current Report on
    Form 8-K
    filed March 21, 2005.(11)
    
    Incorporated by reference to Kings Quarterly Report on
    Form 10-Q
    filed August 9, 2005.(12)
    
    Incorporated by reference to Kings Quarterly Report on
    Form 10-Q
    filed November 9, 2005.(13)
    
    Incorporated by reference to Kings Current Report on
    Form 8-K
    filed November 4, 2005.(14)
    
    Incorporated by reference to Kings Definitive Proxy
    Statement, filed April 28, 2005, related to the 2005 annual
    meeting of shareholders.(15)
    
    Incorporated by reference to Kings Current Report on
    Form 8-K
    filed August 8, 2006.(16)
    
    Incorporated by reference to Kings Annual Report on
    Form 10-K
    filed March 3, 2006.(17)
    
    Incorporated by reference to Kings Current Report on
    Form 8-K
    filed March 28, 2006.(18)
    
    Incorporated by reference to Kings Quarterly Report on
    Form 10-Q
    filed May 10, 2006.(19)
    
    Incorporated by reference to Kings Quarterly Report on
    Form 10-Q
    filed August 9, 2006.(20)
    
    Incorporated by reference to Kings Current Report on
    Form 8-K
    filed September 12, 2006.(21)
    
    Incorporated by reference to Kings Current Report on
    Form 8-K
    filed October 18, 2006.(22)
    
    Incorporated by reference to Kings Quarterly Report on
    Form 10-Q
    filed November 9, 2006.(23)
    
    Incorporated by reference to Kings Current Report on
    Form 8-K
    filed January 5, 2007.(24)
    
    Incorporated by reference to Kings Current Report on
    Form 8-K
    filed February 27, 2006.(25)
    
    Incorporated by reference to Kings Current Report on
    Form 8-K
    filed March 2, 2007.(26)
    
    Incorporated by reference to Kings Current Report on
    Form 8-K
    filed March 27, 2007.(27)
    
    Incorporated by reference to Kings Quarterly Report on
    Form 10-Q
    filed May 10, 2006.(28)
    
    Incorporated by reference to Kings Current Report on
    Form 8-K
    filed May 21, 2007.(29)
    
    Incorporated by reference to Kings Current Report on
    Form 8-K
    filed July 19, 2007.(30)
    
    Incorporated by reference to Kings Current Report on
    Form 8-K
    filed October 22, 2007.(31)
    
    Incorporated by reference to Kings Current Report on
    Form 8-K
    filed November 5, 2007.(32)
    
    Incorporated by reference to Kings Current Report on
    Form 8-K
    filed December 5, 2007.(33)
    
    Incorporated by reference to Kings Current Report on
    Form 8-K
    filed December 8, 2005. 72




---



##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM     Internal Control  Integrated
    Framework
     F-1




---



##### Table of Contents



F-2




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
 CONSOLIDATED
    BALANCE SHEETS
    as of December 31, 2007 and 2006
    (In thousands, except share data)  2007


2006ASSETSCurrent assets:Cash and cash equivalents

$
20,009


$
113,777Investments in debt securities


1,344,980



890,185Marketable securities


1,135



Accounts receivable, net of allowance of $5,297 and $5,437


183,664



265,467Inventories


110,308



215,458Deferred income tax assets


100,138



81,991Income tax receivable


20,175



Prepaid expenses and other current assets


39,245



106,595Total current assets


1,819,654



1,673,473Property, plant and equipment, net


257,093



307,036Intangible assets, net


780,974



851,391Goodwill


129,150



121,152Marketable securities






11,578Deferred income tax assets


343,700



271,554Other assets (includes restricted cash of $16,480 and $15,968)


96,251



93,347Total assets

$
3,426,822


$
3,329,531LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable

$
76,481


$
77,158Accrued expenses


376,604



510,137Income taxes payable






30,501Total current liabilities


453,085



617,796Long-term debt


400,000



400,000Other liabilities


62,980



23,129Total liabilities


916,065



1,040,925Commitments and contingencies (Note 19)Shareholders equity:Preferred stock, 15,000,000 shares authorized, no shares
    issued or outstanding






Common stock, no par value, 600,000,000 shares authorized,
    245,937,709 and 243,151,223 shares issued and outstanding


1,283,440



1,244,986Retained earnings


1,225,360



1,043,902Accumulated other comprehensive income (loss)


1,957



(282
)Total shareholders equity


2,510,757



2,288,606Total liabilities and shareholders equity

$
3,426,822


$
3,329,531    F-3




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
 CONSOLIDATED
    STATEMENTS OF INCOME 
    for the years ended December 31, 2007, 2006 and 2005
    (In thousands, except share data)  2007


2006


2005Revenues:Net sales

$
2,054,293


$
1,908,143


$
1,694,753Royalty revenue


82,589



80,357



78,128Total revenues


2,136,882



1,988,500



1,772,881Operating costs and expenses:Costs of revenues, exclusive of depreciation, amortization and
    impairments shown below


566,534



419,808



322,985Selling, general and administrative, exclusive of co-promotion
    fees


511,303



496,215



409,451Mylan transaction costs










3,898Co-promotion fees


179,731



217,750



223,134Total selling, general and administrative


691,034



713,965



636,483Research and development


149,425



143,596



74,015Research and development  in process upon acquisition


35,310



110,000



188,711Total research and development


184,735



253,596



262,726Depreciation and amortization


173,863



147,549



147,049Asset impairments


223,025



47,842



221,054Restructuring charges


70,178



3,194



4,180Gain on sale of products










(1,675
)Total operating costs and expenses


1,909,369



1,585,954



1,592,802Operating income


227,513



402,546



180,079Other income (expense):Interest income


42,491



32,152



18,175Interest expense


(7,818
)


(9,857
)


(11,931
)Loss on investment


(11,591
)






(6,182
)Gain on early extinguishment of debt






628



Other, net


223



(1,157
)


(2,026
)Total other income (expense)


23,305



21,766



(1,964
)Income from continuing operations before income taxes


250,818



424,312



178,115Income tax expense


67,600



135,730



61,485Income from continuing operations


183,218



288,582



116,630Discontinued operations (Note 27):(Loss) income from discontinued operations


(369
)


572



1,876Income tax (benefit) expense


(132
)


205



673Total (loss) income from discontinued operations


(237
)


367



1,203Net income

$
182,981


$
288,949


$
117,833Income per common share:Basic: Income from continuing operations

$
0.75


$
1.19


$
0.48Income from discontinued operations


0.00



0.00



0.01Net income

$
0.75


$
1.19


$
0.49Diluted: Income from continuing operations

$
0.75


$
1.19


$
0.48Income from discontinued operations


0.00



0.00



0.01Net income

$
0.75


$
1.19


$
0.49    F-4




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
 CONSOLIDATED
    STATEMENTS OF SHAREHOLDERS EQUITY
    AND OTHER COMPREHENSIVE INCOME (LOSS)
    for the years ended December 31, 2005, 2006 and 2007
    (In thousands, except share data)  AccumulatedOtherCommon Stock


Unearned


Retained


ComprehensiveShares


Amount


Compensation


Earnings


Income (Loss)


TotalBalance, December 31, 2004


241,706,583


$
1,210,647


$



$
637,120


$
1,023


$
1,848,790Comprehensive income:Net income














117,833







117,833Net unrealized gain on marketable securities, net of tax of
    $2,148


















4,042



4,042Foreign currency translation


















(78
)


(78
)Total comprehensive income






















121,797Issuance of stock-based compensation






10,742



(10,742
)










Stock based compensation expense










1,978











1,978Issuance of share-based compensation


690,692



















Exercise of stock options


96,141



857















857Balance, December 31, 2005


242,493,416


$
1,222,246


$
(8,764
)

$
754,953


$
4,987


$
1,973,422Adoption of Statement of Financial Accounting Standard 123(R)






(8,764
)


8,764











Comprehensive income:Net income














288,949







288,949Net unrealized loss on marketable securities, net of tax of
    $2,761


















(5,067
)


(5,067
)Foreign currency translation


















(202
)


(202
)Total comprehensive income






















283,680Stock-based compensation expense






24,718















24,718Exercise of stock options


477,228



6,786















6,786Issuance of share-based compensation


180,579



















Balance, December 31, 2006


243,151,223


$
1,244,986


$



$
1,043,902


$
(282
)

$
2,288,606Comprehensive income:Net income














182,981







182,981Reclassification of unrealized losses on marketable securities
    to earnings, net of tax of $377


















615



615Foreign currency translation


















1,624



1,624Total comprehensive income






















185,220Adoption of Financial Accounting Standards Board Interpretation
    No. 48














(1,523
)






(1,523
)Stock-based compensation expense






27,652















27,652Exercise of stock options


723,197



10,802















10,802Issuance of share-based awards


2,063,289



















Balance, December 31, 2007


245,937,709


$
1,283,440


$



$
1,225,360


$
1,957


$
2,510,757    F-5




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
 CONSOLIDATED
    STATEMENTS OF CASH FLOWS
    for the years ended December 31, 2007, 2006 and 2005
    (In thousands) 2007


2006


2005Cash flows from operating activities of continuing operations:Net income

$
182,981


$
288,949


$
117,833Loss (income) from discontinued operations


237



(367
)


(1,203
)Adjustments to reconcile net income to net cash provided by
    operating activities:Depreciation and amortization


173,863



147,549



147,049Amortization of deferred financing costs


2,057



2,874



3,096Deferred income taxes


(91,229
)


(39,010
)


(68,047
)Impairment of intangible assets


176,671



47,842



221,054Loss (gain) on sale of assets


46,354







(1,675
)Inventory write-down


79,807







In-process research and development charges


35,310



110,000



188,711Gain on early extinguishment of debt






(628
)


Loss on investment


11,591







6,182Other non-cash items, net


2,591



573



791Stock based compensation


27,652



24,718



1,978Changes in operating assets and liabilities net of effects from
    acquisitions:Accounts receivable


80,106



(41,746
)


(43,407
)Inventories


55,056



48,275



46,349Prepaid expenses and other current assets


(43,555
)


(45,796
)


(47,544
)Other assets


(3,470
)


(20,173
)


(4,471
)Accounts payable


(16,276
)


(8,568
)


(7,713
)Accrued expenses and other liabilities


(33,408
)


(50,458
)


(52,544
)Deferred revenue


(4,680
)


(6,886
)


(9,092
)Income taxes


(9,009
)


8,479



22,161Net cash provided by operating activities of continuing
    operations


672,649



465,627



519,508Cash flows from investing activities of continuing operations:Purchases of investments in debt securities


(2,744,575
)


(1,705,517
)


(1,175,159
)Proceeds from maturity and sale of investments in debt securities


2,289,780



1,309,995



829,926Transfer (to)/from restricted cash


(512
)


128,561



(73,629
)Acquisition of
    Avinza®


(296,437
)






Purchases of property, plant and equipment


(49,602
)


(45,816
)


(53,290
)Purchases of product rights and intellectual property


(98,942
)


(85,795
)


(217,311
)Proceeds from sale of marketable securities










6,453Proceeds from sale of assets


86,287







Loan to Ligand


37,750



(37,750
)


Other investing activities






7



3Net cash used in investing activities of continuing operations


(776,251
)


(436,315
)


(683,007
)Cash flows from financing activities of continuing operations:Proceeds from exercise of stock options, net


10,656



7,338



857Excess tax benefits from stock-based compensation


705



484



Proceeds from issuance of long-term debt






400,000



Payments on long-term debt






(342,691
)


Debt issuance costs


(1,527
)


(10,680
)


Net cash provided by financing activities of continuing
    operations


9,834



54,451



857(Decrease) increase in cash and cash equivalents


(93,768
)


83,763



(162,642
)Cash and cash equivalents, beginning of year


113,777



30,014



192,656Cash and cash equivalents, end of year

$
20,009


$
113,777


$
30,014Supplemental disclosure of cash paid for: Interest

$
6,047


$
8,200


$
10,552Supplemental disclosure of cash paid for: Taxes

$
171,924


$
163,901


$
107,178    F-6




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
 (in
    thousands, except share and per share data)
  1.
    The
    Company  ®
    ® ®
  2.
    Summary
    of Significant Accounting Policies  Use of Estimates.
        Revenue recognition. agreed-upon
  Intangible Assets and Goodwill.
 F-7




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Accruals for rebates, returns, and
    chargebacks.
      Shipping and Handling Costs.
  Cash and Cash Equivalents.
 F-8




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Restricted Cash.
  Investments in Debt Securities. Accounting for Certain
    Investments in Debt and Equity Securities,
      Marketable Securities.
  Accounts Receivable and Allowance for Doubtful
    Accounts.
  Inventories. first-in,
  Income Taxes.
 F-9




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Litigation.
  Financial Instruments and Derivatives.
    Property, Plant and Equipment.
      Research and Development Costs.
  Deferred Financing Costs.
  Insurance.
 F-10




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Advertising.
  Promotional Fees to Wyeth. ® ® ® ® ® ® ®
  Stock Compensation. Share-Based
    Payment Accounting for Stock Based Compensation
  3.
    Invalidation
    of
    Altace®
    Patent  ® en banc 180-day ® 180-day ® ®
  ® ® ® ® ® ® ® ® ®
 F-11




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  4.
    Change in
    Estimate    ®
     F-12




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  ®
    5.
    Marketable
    Securities    December 31,


2007


2007


December 31,


December 31,


2006


2006


December 31,2007


Gross


Gross


2007


2006


Gross


Gross


2006Cost


Unrealized


Unrealized


Fair


Cost


Unrealized


Unrealized


FairBasis


Gains


Losses


Value


Basis


Gains


Losses


ValuePalatin common stock

$
1,135










$
1,135


$
12,242






$
664


$
11,578     tm
  Consolidation of
    Variable Interest Entities, an Interpretation of Accounting
    Research Bulletin No. 51 (ARB No. 51) (FIN 46-R, Consolidated Financial
    Statements
  6.
    Receivables    2007


2006Trade

$
159,362


$
242,522Royalty


21,753



20,444Other


2,549



2,501Total Receivables

$
183,664


$
265,467  F-13




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    7.
    Concentrations
    of Credit Risk    2007


2006Customer A


25
%


32
%Customer B


26
%


28
%Customer C


14
%


10
%     2007


2006


2005Customer A


35
%


32
%


27
%Customer B


27
%


29
%


28
%Customer C


13
%


13
%


14
%   8.
    Inventory    2007


2006Raw materials

$
129,781


$
141,227Work-in process


27,590



21,857Finished goods (including $3,901 and $6,813 of sample inventory,
    respectively)


61,324



65,967218,695



229,051Less inventory valuation allowance


(108,387
)


(13,593
)$
110,308


$
215,458   ® ® ® ® ® ®
 F-14




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  ®
  9.
    Property,
    Plant and Equipment    2007


2006Land

$
12,072


$
15,855Buildings and improvements


123,063



136,167Machinery and equipment


213,522



270,373Capital projects in progress


62,638



46,542411,295



468,937Less accumulated depreciation


(154,202
)


(161,901
)$
257,093


$
307,036       ®
  ®
    10.
    Acquisitions,
    Dispositions, Co-Promotions and Alliances   F-15




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  ® tm ® ®
  tm tm
  tm
  ® ®
    December 31,2006Accounts receivable, net

$
1,528Inventories


12,881Total current assets

$
14,409Property, plant and equipment

$
62,654Intangible assets


61,078Noncurrent assets

$
123,732  F-16




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
            ® ® ® ®
   F-17




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  ®
  
    If calendar year net sales are less than $200,000 the royalty
    payment will be 5% of all net sales.
    If calendar year net sales are greater than $200,000 then the
    royalty payment will be 10% of all net sales up to $250,000,
    plus 15% of net sales greater than $250,000.  ® ® ®
    Intangible assets

$
285,700Goodwill


7,997Inventory


2,800$
296,497     TM ® TM ®
  ® ®
 F-18




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Intangible assets

$
23,985Inventory


618Fixed assets


3$
24,606   Auto-Injector
  ®
    ®
  ® ® ® ®
 F-19




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    
    For 2006, 15% of
    Altace®
    net sales up to $165,000, 42.5% of
    Altace®
    net sales in excess of $165,000 and less than or equal to
    $465,000, and 52.5% of
    Altace®
    net sales that are in excess of $465,000 and less than or equal
    to $585,000.
    For 2007, 30% of
    Altace®
    net sales, with the fee not to exceed $178,500.
    For 2008, 22.5% of
    Altace®
    net sales, with the fee not to exceed $134,000.
    For 2009, 14.2% of
    Altace®
    net sales, with the fee not to exceed $84,500.
    For 2010, 25% of
    Altace®
    net sales, with the fee not to exceed $5,000.  ® ®
      tm tm tm tm tm
   F-20




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  tm
  ® ®
  ® ® ® ® ® ®
  11.
    Intangible
    Assets and Goodwill    2007


2006Gross





GrossCarrying


Accumulated


Carrying


AccumulatedAmount


Amortization


Amount


AmortizationTrademarks and product rights

$
890,117


$
407,290


$
1,152,433


$
371,410Patents


450,274



152,412



272,833



202,873Other intangibles


2,139



1,854



9,459



9,051Total intangible assets

$
1,342,530


$
561,556


$
1,434,725


$
583,334     Fiscal Year Ended December 31,

Amount2008

$
113,4942009


76,9242010


76,6382011


76,6382012


76,638  F-21




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  ®
  ® ® ®
  ® ® ® ® ® ® ® ® ®
  ® ® ® ® ®
  ® ® ® ®
  ® ® ®
 F-22




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  ®
  ® ® ® ® ® ®
  ® and/or
    Branded


MeridianSegment


Segment


TotalGoodwill at December 31, 2007

$
20,740


$
108,410


$
129,150Goodwill at December 31, 2006

$
12,742


$
108,410


$
121,152   12.
    Lease
    Obligations    2008

$
11,8462009


11,8122010


10,1412011


10,1392012


10,423Thereafter


18,006     13.
    Accrued
    Expenses    2007


2006Rebates

$
117,199


$
105,620Accrued co-promotion fees


32,720



60,191Product returns


32,860



42,001Chargebacks


11,120



13,939Elan settlement






50,128Arrow accrual (see Note 10)






50,000Other


182,705



188,258$
376,604


$
510,137   ® ®
 F-23




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  ®
  14.
    Long-Term
    Debt    2007


2006Convertible senior notes(a)

$
400,000


$
400,000Convertible debentures(b)






Senior secured revolving credit facility(c)






Total long-term debt


400,000



400,000Less current portion






Long-term portion

$
400,000


$
400,000     (a)
    
    During the first quarter of 2006, the Company issued $400,000 of
    11/4% Convertible
    Senior Notes due April 1, 2026 (Notes). The
    Notes are unsecured obligations and are guaranteed by each of
    the Companys domestic subsidiaries on a joint and several
    basis. The Notes accrue interest at an initial rate of
    11/4%.
    Beginning with the six-month interest period that commences on
    April 1, 2013, the Company will pay additional interest
    during any six-month interest period if the average trading
    price of the Notes during the five consecutive trading days
    ending on the second trading day immediately preceding the first
    day of such six-month period equals 120% or more of the
    principal amount of the Notes. Interest is payable on April 1
    and October 1 of each year, beginning October 1, 2006.On or after April 5, 2013, the Company may redeem for cash
    some or all of the Notes at any time at a price equal to 100% of
    the principal amount of the Notes to be redeemed, plus any
    accrued and unpaid interest, and liquidated damages, if any, to
    but excluding the date fixed for redemption. Holders may require
    the Company to purchase for cash some or all of their Notes on
    April 1, 2013, April 1, 2016 and April 1, 2021,
    or upon the occurrence of a fundamental change (such as a change
    of control or a termination of trading), at 100% of the
    principal amount of the Notes to be purchased, plus any accrued
    and unpaid interest, and liquidated damages, if any, to but
    excluding the purchase date.Prior to April 1, 2012, the Notes are convertible under the
    following circumstances: if the price of the Companys common stock reaches a
    specified threshold during specified periods, if the Notes have been called for redemption, or if specified corporate transactions or other specified
    events occur.The Notes are convertible at any time on and after April 1,
    2012, until the close of business on the business day
    immediately preceding maturity. Subject to certain exceptions,
    the Company will deliver cash and shares of the Companys
    common stock, as follows: (i) an amount in cash equal to
    the lesser of (a) the principal amount of Notes surrendered
    for conversion and (b) the product of the conversion rate
    and the average price of the Companys common stock (the
    conversion value), and (ii) if the conversion
    value is greater than the principal amount, a specified amount
    in cash or shares of the Companys common stock, at the
    Companys election. The initial conversion price is
    approximately $20.83 per share of common stock. If certain
    corporate transactions occur on or prior to April 1, 2013,
    the Company will increase the conversion rate in certain
    circumstances. F-24




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   The Company has reserved 23,732,724 shares of common stock
    in the event the Notes are converted into shares of the
    Companys common stock.In connection with the issuance of the Notes, the Company
    incurred approximately $10,680 of deferred financing costs that
    are being amortized over seven years.(b)
    
    During the fourth quarter of 2001, the Company issued $345,000
    of
    23/4% Convertible
    Debentures due November 15, 2021 (Debentures).
    On March 29, 2006, the Company repurchased $165,000 of the
    Debentures prior to maturity for $163,350, resulting in a gain
    of $1,650. In addition, the Company wrote off deferred financing
    costs of $628 relating to the repurchased Debentures. On
    June 2, 2006, the Company completed a tender offer,
    repurchasing $175,743 of the Debentures at a purchase price of
    $175,084, resulting in a gain of $659. In addition, the Company
    wrote off financing costs of $1,053 relating to the repurchased
    Debentures. On May 16, 2006, the interest rate on the
    Debentures was reset to 3.5%. On November 20, 2006 the
    Company redeemed the remaining Debentures of $4,257 at a price
    of 100% of the principal amount plus accrued interest.(c)
    
    On April 23, 2002, the Company established a $400,000
    five-year Senior Secured Revolving Credit Facility which was
    scheduled to mature in April 2007 (the 2002 Credit
    Facility). On April 19, 2007, this facility was
    terminated and replaced with a new $475,000 five-year Senior
    Secured Revolving Credit Facility which matures in April 2012
    (the 2007 Credit Facility). The 2007 Credit Facility
    is collateralized by a pledge of 100% of the equity of most of
    the Companys domestic subsidiaries and by a pledge of 65%
    of the equity of the Companys foreign subsidiaries. The
    Companys obligations under this facility are
    unconditionally guaranteed on a senior basis by four of the
    Companys subsidiaries, King Pharmaceuticals Research and
    Development, Inc., Monarch Pharmaceuticals, Inc., Meridian
    Medical Technologies, Inc., and Parkedale Pharmaceuticals, Inc.
    The 2007 Credit Facility accrues interest either, at the
    Companys option, (a) at 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 0.5% (based on a leverage ratio), or
    (b) at the applicable LIBOR rate plus an applicable spread
    ranging from 0.875% to 1.50% (based on a leverage ratio). In
    addition, the lenders under the 2007 Credit Facility are
    entitled to customary facility fees based on (x) unused
    commitments under the facility and (y) letters of credit
    outstanding. The facility provides availability for the issuance
    of up to $30,000 in letters of credit. The Company incurred
    $1,527 of deferred financing costs in connection with the
    establishment of this facility, which the Company will amortize
    over five years, the life of the facility. This facility
    requires the Company to maintain a minimum net worth of no less
    than $1,500,000 plus 50% of the Companys consolidated net
    income for each fiscal quarter after April 19, 2007,
    excluding any fiscal quarter for which consolidated income is
    negative; an EBITDA (earnings before interest, taxes,
    depreciation and amortization) 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. As of December 31, 2007, the
    Company has complied with these covenants.       F-25




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  15.
    Other
    Liabilities    2007


2006Deferred revenue from co-promotion revenue fees

$
9,359


$
14,038Income taxes payable


42,353



Non-qualified deferred compensation


4,739



2,392Other


6,529



6,699$
62,980


$
23,129   16.
    Financial
    Instruments    Cash and Cash Equivalents, Accounts Receivable and Accounts
    Payable.
  Marketable Securities and Investments in Debt
    Securities.
  Long-Term Debt.
  17.
    Income
    Taxes    2007


2006


2005CurrentFederal

$
144,655


$
169,130


$
124,799State


5,453



4,575



5,076Total current

$
150,108


$
173,705


$
129,875DeferredFederal

$
(83,690
)

$
(36,281
)

$
(72,458
)State


1,182



(1,694
)


4,068Total deferred

$
(82,508
)

$
(37,975
)

$
(68,390
)Total expense

$
67,600


$
135,730


$
61,485  F-26




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    2007


2006


2005Federal statutory tax rate


35
%


35.0
%


35.0
%State income taxes, net of federal benefit


2.7



0.7



5.1Charitable donations






(0.9
)


(5.4
)Domestic Manufacturing Deduction


(3.7
)


(1.2
)


(1.6
)Tax-exempt interest income


(5.4
)


(2.0
)


(2.2
)Other


(1.6
)


0.4



3.6Effective tax rate


27.0
%


32.0
%


34.5
%     2007


2006Accrued expenses and reserves

$
98,483


$
83,723Net operating losses


1,824



3,048Intangible assets


353,250



275,798Charitable contribution carryover


3,576



22,274Other


31,812



10,596Total deferred tax assets


488,945



395,439Valuation allowance


(9,094
)


(8,085
)Net deferred tax assets


479,851



387,354Property, plant and equipment


(20,069
)


(26,755
)Other


(15,944
)


(7,054
)Total deferred tax liabilities


(36,013
)


(33,809
)Net deferred tax asset

$
443,838


$
353,545      F-27




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Liability ForUnrecognizedTax BenefitsBalance at January 1, 2007

$
36,748Additions based on tax positions of the current year


5,279Additions for tax positions of prior years


51Reduction for expiration of applicable Statute of Limitations


(7,568
)Balance at December 31, 2007

$
34,510     non-U.S. income
 F-28




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     18.
    Benefit
    Plans    19.
    Commitments
    and Contingencies  Fen/Phen
    Litigation
  In re Fen-Phen
    Litigation. and/or
  ®
  ®
 F-29




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Thimerosal
    /Childrens Vaccine Litigation
      Hormone
    Replacement Therapy
  In re: Prempro Products Liability Litigation
 F-30




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Average
    Wholesale Price Litigation
  In re: Pharmaceutical Industry
    Average Wholesale Pricing Litigation
       F-31




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Settlement
    of Governmental Pricing Investigation
          SEC
    Investigation
    Securities
    and Derivative Litigation
   F-32




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  and/or
            Other
    Legal Proceedings
  ® ® Approved Drug Products With Therapeutic
    Equivalence Evaluations
 F-33




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  30-month ® 30-day
    ® ® KSR International
    Co. v. Teleflex Inc. en banc
  ®
 F-34




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    ®
  ®
  ® ® ® ®
  30-month 30-month 30-month ®
 F-35




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  ®
  ® ® ® ®
  ® ® ® ®
  ® ®
  ® ® ®
  ®
 F-36




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  ® ® ® ® ® 45-day
  ®
   F-37




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Other
    Contingencies
    2008

$
151,4992009


54,8862010


38,9382011


13,4082012


10,590Thereafter


34,820Total

$
304,141     ® ® ®
  ® ®
  ® ®
  ® ®
  20.
    Segment
    Information   F-38




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  ®
      For the Years Ended December 31,2007


2006


2005Total revenues:Branded pharmaceuticals

$
1,857,813


$
1,724,701


$
1,542,124Meridian Auto-Injector


183,860



164,760



129,261Royalties


82,589



80,357



78,128Contract manufacturing(1)


707,667



555,362



601,404All other


3,419



2,181



1,201Eliminations(1)


(698,466
)


(538,861
)


(579,237
)Consolidated total revenues

$
2,136,882


$
1,988,500


$
1,772,881Segment profit:Branded pharmaceuticals

$
1,390,306


$
1,407,024


$
1,319,200Meridian Auto-Injector


107,810



90,185



66,303Royalties


72,431



70,609



69,125Contract manufacturing


(233
)


(1,135
)


(4,888
)All other


34



2,009



156Other operating costs and expenses


(1,342,835
)


(1,166,146
)


(1,269,817
)Other income (expense)


23,305



21,766



(1,964
)Income from continuing operations before tax

$
250,818


$
424,312


$
178,115   F-39




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  As of December 31,2007


2006Total assets:Branded pharmaceuticals

$
3,097,153


$
2,994,580Meridian Auto-Injector


299,098



294,455Royalties


30,562



21,626Contract manufacturing


9



18,870All other






Consolidated total assets

$
3,426,822


$
3,329,531     (1)
    
    Contract manufacturing revenues include $698,466, $538,861 and
    $579,237 of intercompany sales for the years ended
    December 31, 2007, 2006 and 2005, respectively.    For the Years Ended December 31,2007


2006


2005Total revenues:Neuroscience

$
627,244


$
500,982


$
427,767Hospital


292,380



274,136



241,498Acute care


77,678



63,776



72,694Legacy:Cardiovascular/metabolic


809,888



829,166



749,352Other


50,623



56,641



50,813Consolidated branded pharmaceutical revenues

$
1,857,813


$
1,724,701


$
1,542,124     21.
    Stock-Based
    Compensation  Share-Based Payment Transition Election Related to
    Accounting for Tax Effects of Share-Based Payment Awards
   F-40




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Accounting for Stock Based Compensation
      2005Net income:As reported

$
117,833Add: Stock based employee compensation included in net income


1,220Less: Stock based employee compensation for all awards


7,942Pro forma

$
111,111Basic income per share:As reported

$
0.49Pro forma

$
0.46Diluted income per share:As reported

$
0.49Pro forma

$
0.46     Restricted
    Stock Awards, Restricted Stock Units and Long-Term Performance
    Unit Awards
       F-41




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
         F-42




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    WeightedAverageGrant-DateShares


Fair ValueRestricted Stock Awards:Nonvested balance at December 31, 2006


819,242


$
16.46Granted


2,064,210



12.72Vested


(56,184
)


16.05Forfeited


(69,332
)


16.55Nonvested balance at December 31, 2007


2,757,936


$
13.67Restricted Stock Units:Nonvested balance at December 31, 2006


45,168


$
17.26Granted


41,069



20.45Vested


(45,168
)


17.26Forfeited






Nonvested balance at December 31, 2007


41,069


$
20.45Long-Term Performance Unit Awards (one-year performance
    cycle):Nonvested balance at December 31, 2006


1,005,000


$
19.68Granted


1,162,265



19.29Vested


(54,512
)


19.59Forfeited


(184,088
)


19.53Nonvested balance at December 31, 2007


1,928,665


$
19.52Long-Term Performance Unit Awards (three-year performance
    cycle):Nonvested balance at December 31, 2006


97,596


$
29.93Granted


196,889



29.07Vested


(3,269
)


29.90Forfeited


(13,591
)


29.88Nonvested balance at December 31, 2007


277,625


$
29.39     Stock
    Options
   F-43




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    2007


2006


2005Expected volatility


43.7
%


52.4
%


46.52
%Expected term (in years)


6



6



4Risk-free interest rate


4.40
%


4.64
%


4.24
%Expected dividend yield


0.00
%


0.00
%


0.00
%       WeightedAverageWeighted


Remaining


AggregateAverage


Contractual


IntrinsicShares


Exercise Price


Term (Years)


ValueOutstanding options, December 31, 2006,


6,286,127


$
18.72



6.79


$
5,453Granted


400,510



18.87Exercised


(707,566
)


15.55Expired


(840,357
)


23.41Forfeited


(174,284
)


16.10Outstanding options, December 31, 2007


4,964,430


$
18.37



5.72


$
461Exercisable, December 31, 2007


3,516,039


$
18.52



5.77


$
444Expected to vest, December 31, 2007


1,378,488


$
17.99



5.63


$
2         2007Total intrinsic value of stock options exercised

$
1,779Total fair value of RSAs vested

$
985Total fair value of LPUs vested

$
1,288    F-44




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Review
    of Historical Equity-Based Compensation Grants
      22.
    Stockholders
    Equity  Preferred
    Shares
    Accumulated
    Other Comprehensive Income
    2007


2006Net unrealized (losses) gains on marketable securities, net of
    tax

$



$
(615
)Foreign currency translation


1,957



333$
1,957


$
(282
)   23.
    Income
    per Common Share    2007


2006


2005Basic income per common share:Weighted average common shares


242,854,421



242,196,414



241,751,128Diluted income per common share:Weighted average common shares


242,854,421



242,196,414



241,751,128Effect of stock options


402,208



304,004



152,252Effect of dilutive share awards


872,765



298,575



Weighted average common shares


244,129,394



242,798,993



241,903,380    F-45




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  1 4
    24.
    Recently
    Issued Accounting Standards  Accounting for Uncertainty in Income Taxes Accounting for Income
    Taxes
  Fair Value Measurements
  The Fair Value Option for
    Financial Assets and Financial Liabilities
  No. 07-3, Accounting for Nonrefundable Advance Payments for Goods or
    Services Received for Use in Future Research and Development
    Activities 07-3). 07-3 07-03, 07-03 07-3
 F-46




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  07-01, Accounting for Collaborative Arrangements 07-01). 07-01 07-01 07-01
  Business Combinations
  Noncontrolling Interests
    in Consolidated Financial Statements, an amendment of ARB
    No. 51
  25.
    Restructuring
    Activities  ®
 F-47




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    tm
    tm
      ®
   F-48




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Accrued











Accrued











AccruedBalance at


Income








Balance at


Income








Balance atDecember 31,


Statement








December 31,


Statement








December 31,2005


Impact


Payments


Non-Cash


2006


Impact


Payments


Non-Cash


2007Third quarter of 2007 actionEmployee separation payments

$



$



$



$



$



$
35,158


$
(11,491
)

$
(2,523
)

$
21,144Contract termination






















31,333



(30,506
)


(827
)


Accelerated depreciation(1)






















1,036







(1,036
)


Other






















1,026



(146
)






880First quarter of 2007 actionEmployee separation payments






















1,061











1,061Third quarter of 2006 actionEmployee separation payments






3,203



(1,040
)






2,163



1,312











3,475Accelerated depreciation(1)






2,958







(2,958
)






5,954







(5,954
)


Fourth quarter of 2005 actionEmployee separation payments


1,509



(8
)


(980
)






521



287



(34
)






774$
1,509


$
6,153


$
(2,020
)

$
(2,958
)

$
2,684


$
77,167


$
(42,177
)

$
(10,340
)

$
27,334     (1)
    
    Included in depreciation and amortization on the Consolidated
    Statements of Income.  Auto-Injector
  26.
    Quarterly
    Financial Information (unaudited)    First


Second


Third


Fourth2007 By QuarterTotal revenues

$
516,030


$
542,726


$
544,854


$
533,272Operating income (loss)


167,855



88,311



(78,127
)


49,474Net income (loss)


115,913



64,785



(40,538
)


42,821Basic income (loss) per common share(1)

$
0.48


$
0.27


$
(0.17
)

$
0.18Diluted income (loss) per common share(1)

$
0.48


$
0.26


$
(0.17
)

$
0.18   First


Second


Third


Fourth2006 By QuarterTotal revenues

$
484,235


$
499,645


$
491,706


$
512,914Operating income


72,241



164,991



123,185



42,129Net income


50,677



110,903



90,405



36,964Basic income per common share(1)

$
0.21


$
0.46


$
0.37


$
0.15Diluted income per common share(1)

$
0.21


$
0.46


$
0.37


$
0.15     (1)
    
    Quarterly amounts may not total to annual amounts due to the
    effect of rounding on a quarterly basis. F-49




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   27.
    Discontinued
    Operations  ® ®
  ® ® ® ®
    2007


2006


2005Total revenues

$
(370
)

$
568


$
1,856Operating (loss) income


(369
)


572



1,876Net (loss) income


(237
)


367



1,203     28.
    Guarantor
    Financial Statements         F-50




---



##### Table of Contents






KING
    PHARMACEUTICALS, INC.
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
    GUARANTOR SUBSIDIARIES
    CONDENSED CONSOLIDATING BALANCE SHEETS
  December 31, 2007


December 31, 2006Non














NonGuarantor


Guarantor


Eliminating


King





Guarantor


Guarantor


Eliminating


KingKing


Subsidiaries


Subsidiaries


Entries


Consolidated


King


Subsidiaries


Subsidiaries


Entries


ConsolidatedASSETSCurrent assets:Cash and cash equivalents

$
9,718


$
4,645


$
5,646


$



$
20,009


$
101,210


$
8,749


$
3,818






$
113,777Investments in debt securities


1,344,980















1,344,980



890,185















890,185Marketable Securities


1,135















1,135



















Accounts receivable, net


9



182,575



1,080







183,664



3,056



260,353



2,058







265,467Inventories


76,981



33,361



269



(303
)


110,308



176,389



38,814



255







215,458Deferred income tax assets


54,917



45,182



39







100,138



30,051



51,940











81,991Income taxes receivable


18,721



1,454











20,175



















Prepaid expenses and other current assets


28,315



10,926



4







39,245



99,678



6,891



26







106,595Total current assets


1,534,776



278,143



7,038



(303
)


1,819,654



1,300,569



366,747



6,157







1,673,473Property, plant, and equipment, net


125,847



131,246











257,093



109,572



197,464











307,036Intangible assets, net






778,248



2,726







780,974







848,425



2,966







851,391Goodwill






129,150











129,150







121,152











121,152Marketable securities






















11,578















11,578Deferred income tax assets


4,529



339,107



64







343,700



(2,111
)


272,868



797







271,554Other assets


42,315



53,936











96,251



40,142



53,205











93,347Investment in subsidiaries


1,671,776











(1,671,776
)






2,615,029











(2,615,029
)


Total assets


3,379,243


$
1,709,830


$
9,828


$
(1,672,079
)

$
3,426,822


$
4,074,779


$
1,859,861


$
9,920


$
(2,615,029
)

$
3,329,531LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable

$
52,664


$
23,408


$
409


$



$
76,481


$
51,671


$
25,063


$
424


$



$
77,158Accrued expenses


69,849



306,732



23







376,604



134,089



376,051



(3
)






510,137Income taxes payable






















28,045



2,456











30,501Total current liabilities


122,513



330,140



432







453,085



213,805



403,570



421







617,796Long-term debt


400,000















400,000



400,000















400,000Other liabilities


55,227



7,753











62,980



16,243



6,886











23,129Intercompany payable (receivable)


290,443



(291,114
)


671











1,156,125



(1,168,516
)


12,391







Total liabilities


868,183



46,779



1,103







916,065



1,786,173



(758,060
)


12,812







1,040,925Shareholders equity


2,511,060



1,663,051



8,725



(1,672,079
)


2,510,757



2,288,606



2,617,921



(2,892
)


(2,615,029
)


2,288,606Total liabilities and shareholders equity

$
3,379,243


$
1,709,830


$
9,828


$
(1,672,079
)

$
3,426,822


$
4,074,779


$
1,859,861


$
9,920


$
(2,615,029
)

$
3,329,531  F-51




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
 NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  GUARANTOR SUBSIDIARIES
 CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS INCOME
    (LOSS)
  Twelve Months Ended 12/31/2007


Twelve Months Ended 12/31/2006


Twelve Months Ended 12/31/2005Non














Non














NonGuarantor


Guarantor





King





Guarantor


Guarantor





King





Guarantor


Guarantor





KingKing


Subsidiaries


Subsidiaries


Eliminations


Consolidated


King


Subsidiaries


Subsidiaries


Eliminations


Consolidated


King


Subsidiaries


Subsidiaries


Eliminations


ConsolidatedRevenues:Net sales

$
578,050


$
2,049,800


$
437


$
(573,994
)

$
2,054,293


$
431,105


$
1,903,630


$
1,478


$
(428,070
)

$
1,908,143


$
491,613


$
1,691,216



1,049


$
(489,125
)

$
1,694,753Royalty revenue






82,589











82,589







80,357











80,357







78,128











78,128Total revenues


578,050



2,132,389



437



(573,994
)


2,136,882



431,105



1,983,987



1,478



(428,070
)


1,988,500



491,613



1,769,344



1,049



(489,125
)


1,772,881Operating costs and expenses:Cost of revenues


284,626



855,196



403



(573,691
)


566,534



155,472



691,399



1,007



(428,070
)


419,808



152,011



659,552



547



(489,125
)


322,985Selling, general and administrative


301,522



389,218



294







691,034



269,512



445,137



(684
)






713,965



218,455



416,328



1,700







636,483Research and development


6,414



178,321











184,735



4,670



248,926











253,596



35,646



227,080











262,726Depreciation and amortization


19,489



154,134



240







173,863



20,818



126,491



240







147,549



15,754



130,620



675







147,049Asset impairments






223,025











223,025







47,842











47,842







212,747



8,307







221,054Restructuring charges


37,729



32,449











70,178



202



2,992











3,194



1,730



2,450











4,180Gain on sale of products










































(64
)


(1,611
)










(1,675
)Total operating costs and expenses


649,780



1,832,343



937



(573,691
)


1,909,369



450,674



1,562,787



563



(428,070
)


1,585,954



423,532



1,647,166



11,229



(489,125
)


1,592,802Operating (loss) income


(71,730
)


300,046



(500
)


(303
)


227,513



(19,569
)


421,200



915







402,546



68,081



122,178



(10,180
)






180,079Other income (expense):Interest income


42,376



106



9







42,491



31,911



239



2







32,152



17,659



516











18,175Interest expense


(7,764
)


(54
)










(7,818
)


(9,694
)


(163
)










(9,857
)


(11,865
)


(66
)










(11,931
)Gain loss on investments


(11,591
)














(11,591
)






















(6,182
)














(6,182
)Gain on early extinguishment of debt






















628















628



















Other, net


(1,093
)


827



489







223



(650
)


(1,022
)


515







(1,157
)


(579
)


(1,016
)


(431
)






(2,026
)Equity in earnings (loss) of subsidiaries


211,051











(211,051
)






315,395











(315,395
)






113,679











(113,679
)


Intercompany interest income (expense)


(8,729
)


8,807



(78
)










(49,739
)


50,287



(548
)










(57,355
)


58,088



(733
)






Total other income (expenses)


224,250



9,686



420



(211,051
)


23,305



287,851



49,341



(31
)


(315,395
)


21,766



55,357



57,522



(1,164
)


(113,679
)


(1,964
)Income (loss) from continuing operations before income taxes


152,520



309,732



(80
)


(211,354
)


250,818



268,282



470,541



884



(315,395
)


424,312



123,438



179,700



(11,344
)


(113,679
)


178,115Income tax (benefit) expense


(30,764
)


97,669



695







67,600



(20,667
)


156,305



92







135,730



5,616



56,874



(1,005
)






61,485Income (loss) from continuing operations


183,284



212,063



(775
)


(211,354
)


183,218



288,949



314,236



792



(315,395
)


288,582



117,822



122,826



(10,339
)


(113,679
)


116,630Discontinued operations:(Loss) income from discontinued operations






(369
)










(369
)






572











572



18



1,858











1,876Income tax (benefit) expense






(132
)










(132
)






205











205



7



666











673Total (loss) income from discontinued operations






(237
)










(237
)






367











367



11



1,192











1,203Net income (loss)

$
183,284


$
211,826


$
(775
)

$
(211,354
)

$
182,981


$
288,949


$
314,603


$
792



(315,395
)

$
288,949


$
117,833


$
124,018


$
(10,339
)

$
(113,679
)

$
117,833  F-52




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
    GUARANTOR SUBSIDIARIES
    CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
  December 31, 2007


December 31, 2006


December 31, 2005Non














Non














NonGuarantor


Guarantor





King





Guarantor


Guarantor





King





Guarantor


Guarantor





KingKing


Subsidiaries


Subsidiaries


Eliminations


Consolidated


King


Subsidiaries


Subsidiaries


Eliminations


Consolidated


King


Subsidiaries


Subsidiaries


Eliminations


ConsolidatedCash flows provided by (used in) operating activities of
    continuing operations

$
50,989


$
620,503


$
1,157


$



$
672,649


$
(20,771
)

$
485,704


$
694


$



$
465,627


$
147,781


$
372,517


$
(790
)

$



$
519,508Cash flows from investing activities of continuing operations:Purchase of investments in debt securities


(2,744,575
)














(2,744,575
)


(1,705,517
)














(1,705,517
)


(1,175,159
)














(1,175,159
)Proceeds from maturity and sale of investments in debt securities


2,289,780















2,289,780



1,309,995















1,309,995



829,926















829,926Transfer (to)/from restricted cash


(512
)














(512
)


128,561















128,561



(75,211
)


1,582











(73,629
)Acquisition of
    Avinza®


(23
)


(296,414
)










(296,437
)






































Purchases of property, plant and equipment


(31,844
)


(17,758
)










(49,602
)


(22,505
)


(23,311
)










(45,816
)


(11,749
)


(41,541
)










(53,290
)Purchases of product rights and intellectual property






(98,942
)










(98,942
)






(85,795
)










(85,795
)


(45,000
)


(170,416
)


(1,895
)






(217,311
)Proceeds from sale of marketable securities










































6,453















6,453Proceeds from sale of assets


8



86,279











86,287







































Loan to Ligand


37,750















37,750



(37,750
)














(37,750
)


















Other investing activities






















6



1











7



1



2











3Net cash used in investing activities of continuing operations


(449,416
)


(326,835
)










(776,251
)


(327,210
)


(109,105
)










(436,315
)


(470,739
)


(210,373
)


(1,895
)






(683,007
)Cash flows from financing activities of continuing operations:Proceeds from exercise of stock options, net


10,656















10,656



7,338















7,338



857















857Excess tax benefits from stock-based compensation


705















705



484















484



















Proceeds from issuance of long-term debt






















400,000















400,000



















Payments on other long-term debt






















(342,691
)














(342,691
)


















Debt issuance costs


(1,527
)














(1,527
)


(10,680
)














(10,680
)


















Intercompany


297,101



(297,772
)


671











367,938



(368,921
)


983











184,452



(188,108
)


3,656







Net cash provided by financing activities of continuing
    operations


306,935



(297,772
)


671







9,834



422,389



(368,921
)


983







54,451



185,309



(188,108
)


3,656







857(Decrease) increase in cash and cash equivalents


(91,492
)


(4,104
)


1,828







(93,768
)


74,408



7,678



1,677







83,763



(137,649
)


(25,964
)


971







(162,642
)Cash and cash equivalents, beginning of year


101,210



8,749



3,818







113,777



26,802



1,071



2,141







30,014



164,451



27,035



1,170







192,656Cash and cash equivalents, end of year

$
9,718


$
4,645


$
5,646


$



$
20,009


$
101,210


$
8,749


$
3,818


$



$
113,777


$
26,802


$
1,071


$
2,141


$



$
30,014  F-53




---



##### Table of Contents





F-54




---



##### Table of Contents





KING
    PHARMACEUTICALS, INC.
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
    GUARANTOR SUBSIDIARIES
    CONDENSED CONSOLIDATING BALANCE SHEETS
  December 31,


December 31,2007


2006Non














NonGuarantor


Guarantor


Eliminating


King





Guarantor


Guarantor


Eliminating


KingKing


Subsidiaries


Subsidiaries


Entries


Consolidated


King


Subsidiaries


Subsidiaries


Entries


Consolidated(Unaudited)(In thousands)ASSETSCurrent assets:Cash and cash equivalents

$
9,718


$
4,649


$
5,642


$



$
20,009


$
101,210


$
8,801


$
3,766


$



$
113,777Investment in Debt Securities


1,344,980















1,344,980



890,185















890,185Marketable securities


1,135















1,135



















Accounts receivable, net


9



182,455



1,200







183,664



3,056



260,353



2,058







265,467Inventories


76,981



21,583



12,047



(303
)


110,308



176,389



29,823



9,246







215,458Deferred income tax assets


54,917



43,824



1,397







100,138



30,051



51,518



422







81,991Income taxes receivable


18,721



1,425



29







20,175



















Prepaid expenses and other current assets


28,315



10,358



572







39,245



99,678



6,578



339







106,595Total current assets


1,534,776



264,294



20,887



(303
)


1,819,654



1,300,569



357,073



15,831







1,673,473Property, plant and equipment, net


125,847



88,228



43,018







257,093



109,572



149,249



48,215







307,036Intangible assets, net






777,964



3,010







780,974







848,107



3,284







851,391Goodwill






128,488



662







129,150







120,490



662







121,152Marketable securities






















11,578















11,578Deferred income tax assets


4,529



340,128



(957
)






343,700



(2,111
)


274,992



(1,327
)






271,554Other assets


42,315



53,936











96,251



40,142



53,161



44







93,347Investments in subsidiaries


1,671,776



54,092







(1,725,868
)






2,615,029



478,744







(3,093,773
)


Total assets

$
3,379,243


$
1,707,130


$
66,620


$
(1,726,171
)

$
3,426,822


$
4,074,779


$
2,281,816


$
66,709


$
(3,093,773
)

$
3,329,531LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable

$
52,664


$
20,304


$
3,513


$



$
76,481


$
51,671


$
22,836


$
2,651


$



$
77,158Accrued expenses


69,849



303,288



3,467







376,604



134,089



373,886



2,162







510,137Income taxes payable






















28,045



2,507



(51
)






30,501Total current liabilities


122,513



323,592



6,980







453,085



213,805



399,229



4,762







617,796Long-term debt


400,000















400,000



400,000















400,000Other long-term liabilities


55,227



4,818



2,935







62,980



16,243



4,675



2,211







23,129Intercompany (receivable) payable


290,443



(284,287
)


(6,156
)










1,156,125



(725,304
)


(430,821
)






Total liabilities


868,183



44,123



3,759







916,065



1,786,173



(321,400
)


(423,848
)






1,040,925Shareholders equity


2,511,060



1,663,007



62,861



(1,726,171
)


2,510,757



2,288,606



2,603,216



490,557



(3,093,773
)


2,288,606Total liabilities and shareholders equity

$
3,379,243


$
1,707,130


$
66,620


$
(1,726,171
)

$
3,426,822


$
4,074,779


$
2,281,816


$
66,709


$
(3,093,773
)

$
3,329,531  F-55




---



##### Table of Contents






KING
    PHARMACEUTICALS, INC.
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
    GUARANTOR SUBSIDIARIES
    CONDENSED CONSOLIDATING STATEMENTS OF INCOME
  Twelve Months Ended 12/31/2007


Twelve Months Ended 12/31/2006


Twelve Months Ended 12/31/2005Non














Non














NonGuarantor


Guarantor





King





Guarantor


Guarantor





King





Guarantor


Guarantor





KingKing


Subsidiaries


Subsidiaries


Eliminations


Consolidated


King


Subsidiaries


Subsidiaries


Eliminations


Consolidated


King


Subsidiaries


Subsidiaries


Eliminations


ConsolidatedRevenues:Net sales

$
578,050


$
2,052,946


$
52,195


$
(628,898
)

$
2,054,293


$
431,105


$
1,909,053


$
53,065


$
(485,080
)

$
1,908,143


$
491,613


$
1,692,483


$
45,972


$
(535,315
)

$
1,694,753Royalty revenue






82,589











82,589







80,357











80,357







78,128











78,128Total revenues


578,050



2,135,535



52,195



(628,898
)


2,136,882



431,105



1,989,410



53,065



(485,080
)


1,988,500



491,613



1,770,611



45,972



(535,315
)


1,772,881Operating costs and expenses:Cost of revenues


284,626



869,982



40,521



(628,595
)


566,534



155,472



711,964



37,452



(485,080
)


419,808



152,011



668,885



37,404



(535,315
)


322,985Selling, general and administrative


301,522



389,170



342







691,034



269,512



443,706



747







713,965



218,455



416,025



2,003







636,483Research and development


6,414



177,910



411







184,735



4,670



248,926











253,596



35,646



227,080











262,726Depreciation and amortization


19,489



147,843



6,531







173,863



20,818



121,564



5,167







147,549



15,754



127,535



3,760







147,049Asset impairments






223,025











223,025







47,842











47,842







212,747



8,307







221,054Restructuring charges


37,729



30,535



1,914







70,178



202



837



2,155







3,194



1,730



1,854



596







4,180Gain on sale of products










































(64
)


(1,026
)


(585
)






(1,675
)Total operating costs and expenses


649,780



1,838,465



49,719



(628,595
)


1,909,369



450,674



1,574,839



45,521



(485,080
)


1,585,954



423,532



1,653,100



51,485



(535,315
)


1,592,802Operating income


(71,730
)


297,070



2,476



(303
)


227,513



(19,569
)


414,571



7,544







402,546



68,081



117,511



(5,513
)






180,079Other income (expense):Interest income


42,376



106



9







42,491



31,911



239



2







32,152



17,659



514



2







18,175Interest expense


(7,764
)


(38
)


(16
)






(7,818
)


(9,694
)


(163
)










(9,857
)


(11,865
)


(58
)


(8
)






(11,931
)Loss on investments


(11,591
)














(11,591
)






















(6,182
)














(6,182
)Gain on early extinguishment of debt






















628















628



















Other, net


(1,093
)


832



484







223



(650
)


(1,012
)


505







(1,157
)


(579
)


(1,027
)


(420
)






(2,026
)Equity in earnings of subsidiaries


211,051



3,854







(214,905
)






315,395



22,331







(337,726
)






113,679



22,829







(136,508
)


Intercompany interest income (expense)


(8,729
)


5,759



2,970











(49,739
)


29,374



20,365











(57,355
)


25,398



31,957







Total other income (expenses)


224,250



10,513



3,447



(214,905
)


23,305



287,851



50,769



20,872



(337,726
)


21,766



55,357



47,656



31,531



(136,508
)


(1,964
)Income (loss) from continuing operations before income taxes


152,520



307,583



5,923



(215,208
)


250,818



268,282



465,340



28,416



(337,726
)


424,312



123,438



165,167



26,018



(136,508
)


178,115Income tax expense (benefit)


(30,764
)


95,566



2,798







67,600



(20,667
)


151,721



4,676







135,730



5,616



43,054



12,815







61,485Income from continuing operations


183,284



212,017



3,125



(215,208
)


183,218



288,949



313,619



23,740



(337,726
)


288,582



117,822



122,113



13,203



(136,508
)


116,630Discontinued operations:(Loss) income from discontinued operations






(369
)










(369
)






572











572



18



1,858











1,876Income tax (benefit) expense






(132
)










(132
)






205











205



7



666











673Total (loss) income from discontinued operations






(237
)










(237
)






367











367



11



1,192











1,203Net income (loss)

$
183,284


$
211,780


$
3,125


$
(215,208
)

$
182,981


$
288,949


$
313,986


$
23,740


$
(337,726
)

$
288,949


$
117,833


$
123,305


$
13,203


$
(136,508
)

$
117,833  F-56




---



##### Table of Contents






KING
    PHARMACEUTICALS, INC.
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
    GUARANTOR SUBSIDIARIES
    CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
  December 31,


December 31,


December 31,2007


2006


2005Non














Non














NonGuarantor


Guarantor





King





Guarantor


Guarantor





King





Guarantor


Guarantor





KingKing


Subsidiaries


Subsidiaries


Eliminations


Consolidated


King


Subsidiaries


Subsidiaries


Eliminations


Consolidated


King


Subsidiaries


Subsidiaries


Eliminations


ConsolidatedCash flows provided by (used in) operating activities of
    continuing operations


50,989



612,273



9,387


$



$
672,649


$
(20,771
)

$
454,237


$
32,161


$



$
465,627


$
147,781


$
340,566


$
31,161


$



$
519,508Cash flows from investing activities of continuing operations:Purchase of investments in debt securities


(2,744,575
)














(2,744,575
)


(1,705,517
)














(1,705,517
)


(1,175,159
)














(1,175,159
)Proceeds from maturity and sale of investments in debt securities


2,289,780















2,289,780



1,309,995















1,309,995



829,926















829,926Transfer (to)/from restricted cash


(512
)














(512
)


128,561















128,561



(75,211
)


1,582











(73,629
)Acquisition of
    Avinza®


(23
)


(296,414
)










(296,437
)






































Purchases of property, plant and equipment


(31,844
)


(16,869
)


(889
)






(49,602
)


(22,505
)


(18,780
)


(4,531
)






(45,816
)


(11,749
)


(38,222
)


(3,319
)






(53,290
)Purchases of product rights and intellectual property






(98,942
)










(98,942
)






(85,795
)










(85,795
)


(45,000
)


(170,416
)


(1,895
)






(217,311
)Proceeds from sale of marketable securities










































6,453















6,453Proceeds from sale of assets


8



86,279











86,287







































Loan to Ligand


37,750















37,750



(37,750
)














(37,750
)


















Other investing activities






















6



1











7



1



2











3Net cash used in investing activities of continuing operations


(449,416
)


(325,946
)


(889
)






(776,251
)


(327,210
)


(104,574
)


(4,531
)






(436,315
)


(470,739
)


(207,054
)


(5,214
)






(683,007
)Cash flows from financing activities of continuing operations:Proceeds from exercise of stock options, net


10,656















10,656



7,338















7,338



857















857Excess tax benefits from stock-based compensation


705















705



484















484



















Proceeds from issuance of long-term debt






















400,000















400,000



















Payments on other long-term debt






















(342,691
)














(342,691
)


















Debt issuance costs


(1,527
)














(1,527
)


(10,680
)














(10,680
)


















Intercompany


297,101



(290,479
)


(6,622
)










367,938



(342,034
)


(25,904
)










184,452



(159,419
)


(25,033
)






Net cash provided by financing activities of continuing
    operations


306,935



(290,479
)


(6,622
)






9,834



422,389



(342,034
)


(25,904
)






54,451



185,309



(159,419
)


(25,033
)






857(Decrease) increase in cash and cash equivalents


(91,492
)


(4,152
)


1,876







(93,768
)


74,408



7,629



1,726







83,763



(137,649
)


(25,907
)


914







(162,642
)Cash and cash equivalents, beginning of year


101,210



8,801



3,766







113,777



26,802



1,172



2,040







30,014



164,451



27,079



1,126







192,656Cash and cash equivalents, end of year

$
9,718


$
4,649


$
5,642


$



$
20,009


$
101,210


$
8,801


$
3,766


$



$
113,777


$
26,802


$
1,172


$
2,040


$



$
30,014  F-57




---



##### Table of Contents





SIGNATURES
      By:
    /s/  Brian
    A. Markison    Chairman of the Board,
    President and Chief Executive Officer
      Signature

Capacity

Date/s/  BRIAN
    A. MARKISONBrian
    A. Markison

Chairman of the Board, President
    and Chief Executive Officer

February 28, 2008/s/  JOSEPH
    SQUICCIARINOJoseph
    Squicciarino

Chief Financial Officer (principal financial and accounting
    officer)

February 28, 2008/s/  TED
    G. WOODTed
    G. Wood

Lead Independent Director

February 28, 2008/s/  EARNEST
    W. DEAVENPORT, JR.Earnest
    W. Deavenport, Jr.

Director

February 28, 2008/s/  ELIZABETH
    M. GREETHAMElizabeth
    M. Greetham

Director

February 28, 2008/s/  PHILIP
    A. INCARNATIPhilip
    A. Incarnati

Director

February 28, 2008/s/  GREGORY
    D. JORDANGregory
    D. Jordan

Director

February 28, 2008/s/  R.
    CHARLES MOYERR.
    Charles Moyer

Director

February 28, 2008/s/  D.
    GREG ROOKERD.
    Greg Rooker

Director

February 28, 2008  II-1




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
 Schedule II.
    Valuation and Qualifying Accounts   Column A

Column B


Column C Additions


Column D


Column EChargedBalances at


Charged to


(Credited)





Balance atBeginning of


Cost and


to Other





End ofDescription

Period


Expenses


Accounts


Deductions(1)


Period(In thousands)Allowance for doubtful accounts, deducted from accounts
    receivable in the balance sheetYear ended December 31, 2007


5,437



950







1,090



5,297Year ended December 31, 2006


12,280



(138
)






6,705



5,437Year ended December 31, 2005


15,348



939







4,007



12,280Valuation allowance for deferred tax assets, deducted from
    deferred income tax assets in the balance sheetYear ended December 31, 2007


8,085



2,248







1,239



9,094Year ended December 31, 2006


9,214



1,040







2,169



8,085Year ended December 31, 2005


3,950



5,264











9,214     (1)
    
    Amounts represent write-offs of accounts. S-1