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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, 2006ORo

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

54-1684963(State or other jurisdiction
    of
    incorporation or organization)

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

37620(Zip Code)    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. þ
  Rule 12b-2
 þ o 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 2007 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


33Item 2.

Properties


33Item 3.

Legal
    Proceedings


34Item 4.

Submission of
    Matters to a Vote of Security Holders


34PART II


34Item 5.

Market for Common
    Equity and Related Stockholder Matters


34Item 6.

Selected Financial
    Data


36Item 7.

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


37Item 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


68Item 15.

Exhibits and
    Financial Statement Schedules


68Ex-21.1 Subisdiaries 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,
    manufacturing,
    packaging,
    quality control and assurance,
    distribution,
    sales and marketing,
    business development, and
    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;
    producing different package sizes; 2




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
    developing new dosage forms; and
    developing new product formulations.    Business
    Segments
    
    cardiovascular/metabolic,
    neuroscience,
    hospital/acute care, and
    other.  ®
    For the Years Ended December 31,2006


2005


2004Branded pharmaceuticals

$
1,724,701


$
1,542,124


$
1,076,517Meridian Medical Technologies


164,760



129,261



123,329Royalties


80,357



78,128



78,474Contract manufacturing


16,501



22,167



26,045Other


2,181



1,201



(1
)Total

$
1,988,500


$
1,772,881


$
1,304,364     Recent
    Developments
  ® ®
  tm ® tm ®
 3




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tm  tm tm tm tm tm
  ® ® Co-Promotion ® ®
  ® ®
  ®
    tm tm tm
   4




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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 companies and challenges to patent
    protection and sales exclusivity;
    more frequent product liability litigation;
    increased governmental scrutiny of the healthcare sector,
    including issues of patient safety, cost, efficacy and
    reimbursement/insurance matters; and
    the cost of advertising and marketing, including
    direct-to-consumer
    advertising on television and in print.  Branded
    Pharmaceuticals Segment
    
    cardiovascular/metabolic (including
    Altace®,
    Corzide®,
    Corgard®,
    Levoxyl®
    and
    Cytomel®),
    neuroscience (including
    Skelaxin®,
    Avinza®
    and
    Sonata®),
    hospital/acute care (including
    Thrombin-JMI®,
    Bicillin®,
    Synercid®
    and
    Intal®), and
    other.  ® ® ® ® ®
  Cardiovascular/Metabolic. ® ® ® ®
 5




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® ® ® ® ® ® ®
  Neuroscience. ® ® ® ® ® ® ® ®
  Hospital/Acute Care. ® ® ® ® ® ® ®
  Other.
    Product

Product Description and Indication  Cardiovascular/MetabolicAltace®(1)
    
    A hard-shell capsule for oral administration indicated for the
    treatment of hypertension and reduction of the risk of stroke,
    myocardial infarction (heart attack) and death from
    cardiovascular causes in patients 55 and over with either a
    history of coronary artery disease, stroke or peripheral
    vascular disease or with diabetes and one other cardiovascular
    risk factor (such as elevated cholesterol levels or cigarette
    smoking).
    Altace®
    is also indicated in stable patients who have demonstrated
    clinical signs of congestive heart failure after sustaining
    acute myocardial infarction.Corzide®
    
    A beta-blocker diuretic combination tablet, indicated for the
    management of hypertension.Corgard®(2)
    
    A beta-blocker tablet, indicated for the management of
    hypertension as well as long-term management of patients with
    angina pectoris.Levoxyl®
    
    Color-coded, potency-marked tablets indicated for thyroid
    hormone replacement or supplemental therapy for hypothyroidism. 6




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Cytomel®
    
    A tablet indicated in the medical treatment of hypothyroidism.
    The only commercially available thyroid hormone tablet
    containing T(3) as a single entity.NeuroscienceSkelaxin®
    
    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/Acute CareThrombin-JMI®
    
    A chromatographically purified topical (bovine) thrombin
    solution indicated as an aid to hemostasis whenever oozing blood
    and minor bleeding from capillaries and small venules is
    accessible.Synercid®
    
    An injectable antibiotic indicated for treatment of certain
    complicated skin and skin structure infections.Bicillin®
    
    A penicillin-based antibiotic suspension for deep muscular
    injection indicated for the treatment of infections due to
    penicillin-G-susceptible
    microorganisms that are susceptible to serum levels common to
    this particular dosage form.Intal®
    
    An oral multi-dose inhaler of a non-steroidal anti-inflammatory
    agent for the preventive management of asthma.Brevital®
    
    An anesthetic solution for intravenous use in adults and only
    for rectal and intramuscular use in pediatric patients.OtherMenest®
    
    A film-coated esterified estrogen tablet for the treatment of
    vasomotor symptoms of menopause, atrophic vaginitis, kraurosis
    valvae, female hypogonadism, female castration, primary ovarian
    failure, breast cancer and prostatic carcinoma.Delestrogen®
    
    An injectable estrogen replacement therapy.Aplisol®
    
    Aids in the detection of infections with mycobacterium
    tuberculosis.Neosporin®(3)
    
    A prescription strength ophthalmic ointment and solution
    indicated for the topical treatment of ocular infections. It is
    also formulated as a prescription strength genito-urinary
    concentrated sterile irrigant indicated for short-term use as a
    continuous irrigant or rinse to help prevent infections
    associated with the use of indwelling catheters.    (1)
    
    We acquired licenses for the exclusive rights in the United
    States under various patents to the active ingredient in
    Altace®.(2)
    
    We acquired a license to
    Corgard®
    in the United States.(3)
    
    We have exclusive licenses to manufacture and market
    prescription formulations of
    Neosporin®. 7




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Net Sales(In millions)Cardiovascular/MetabolicAltace®

$
653.0Levoxyl®


111.8Cytomel®


42.0Corgard®


9.6Corzide®


6.1NeuroscienceSkelaxin®

$
415.2Sonata®


85.8Hospital/Acute CareThrombin-JMI®

$
246.5Bicillin®


42.8Intal®


15.0Synercid®


14.7Brevital®


6.0OtherAplisol®

$
18.6Neosporin®


9.1Menest®


9.1Delestrogen®


8.9   Meridian
    Medical Technologies Segment
    ® ®
  ® ®
  ® ® ® ®
 8




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®
  Royalties
    Segment
  ® ® ® ® ® ® ® ® ® ®
  ® ®
  ®
  Contract
    Manufacturing Segment
    Other
    Segment
  tm
  Sales and
    Marketing
   9




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Manufacturing
    ® ® ® ® ® ® ® ®
  ®
      ® ® ® ®
 10




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Research
    and Development
              
    Remoxytm,
    an investigational drug for the treatment of severe to chronic
    pain, which is currently in Phase III clinical trials;
    Binodenoson, our next generation cardiac pharmacologic
    stress-imaging agent, which is currently in Phase III
    clinical trials;
    Vanquixtm,
    a diazepam-filled auto-injector for the treatment of acute,
    repetitive epileptic seizures, which is currently in
    Phase III clinical trials;
    Bremelanotide, an investigational drug for the treatment of ED
    and FSD, which is currently in late Phase II clinical
    trials; 11




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
    MRE0094, an investigational drug for the topical treatment of
    chronic diabetic neuropathic foot ulcers, which is currently in
    Phase II clinical trials; and
    T-62, an investigational drug for the treatment of neuropathic
    pain, for which we have completed Phase I clinical trials.    
    a novel formulation involving ramipril for which an NDA is
    pending;
    an
    Altace®/diuretic
    combination product which is currently in Phase III
    clinical trials;
    a program to evaluate the safety and efficacy of
    Altace®
    in children; and
    a new formulation of metaxalone.    Government
    Regulation
         12




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Environmental
    Matters
   13




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Competition
  General
    Generic
    Substitutes
    30-month Hatch-Waxman 30-month Therapeutic
    Equivalence Evaluations 30-month
  30-month
  Intellectual
    Property
  Patents,
    Licenses and Proprietary Rights
    ® ® ® ®
 14




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® method-of-use
  ®
  ®
  ® ®
  ®
    ® ®
  tm ® ®
    ® ® ® ®
  Trademarks
   15




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Backlog
  ®
    Executive
    Officers
  Name

Age


Position with the CompanyBrian A. Markison


47



President and Chief Executive OfficerJoseph Squicciarino


50



Chief Financial OfficerStephen J. Andrzejewski


41



Chief Commercial OfficerFrederick
    Brouillette, Jr.


55



Corporate Compliance OfficerEric J. Bruce


50



Chief Technical Operations OfficerDr. Eric G. Carter


55



Chief Science OfficerJames W. Elrod


46



General CounselJames E. Green


47



Executive Vice President, Corporate Affairs   Brian A. Markison
  Joseph Squicciarino
  Stephen J. Andrzejewski ®
  Frederick Brouillette, Jr.
 16




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Eric J. Bruce
  Eric G. Carter
  James W. Elrod
  James E. Green
  Employees
   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 three of our largest products,
    Altace®,
    Skelaxin®
    and
    Sonata®,
    and the patent relating to
    Adenoscan®,
    or if we are unable to secure or enforce our rights under other
    patents, trademarks, trade secrets or other intellectual
    property, additional competitors could enter the market, and
    sales of these products may decline materially.
  Approved Drug Products with Therapeutic Equivalence
    Evaluations
  
    Cobalt Pharmaceuticals, Inc. (Cobalt), a
    generic drug manufacturer, filed an ANDA with the FDA seeking
    permission to market a generic version of
    Altace®
    and filed a Paragraph IV certification alleging invalidity
    of a patent held by us related to
    Altace®.
    Aventis Pharma Deutschland GmbH (Aventis) and we
    filed suit in March 2003, in the District Court for the District
    of Massachusetts to enforce our rights under that patent. The
    parties submitted a joint stipulation of dismissal in April
    2006, and the court granted dismissal. We have received a
    request for information from the U.S. Federal Trade
    Commission (FTC) in connection with the dismissal
    without prejudice of our patent infringement litigation against
    Cobalt under the Hatch-Waxman Act of 1984. We are cooperating
    with the FTC in this investigation.
    Lupin Ltd.(Lupin) filed an ANDA with the FDA
    seeking permission to market a generic version of
    Altace®
    and filed a Paragraph IV certification challenging the validity
    and infringement of a patent related to
    Altace®,
    and seeking to market its generic version of
    Altace®
    before expiration of that patent. In July 2005, we filed civil
    actions for infringement of the patent against Lupin. In July
    2006, the validity of the patent was upheld. Lupin filed a
    notice of appeal in July 2006. Pursuant to the current schedule,
    appellate briefing will be completed in March 2007.
    Eon Labs, Inc.(Eon Labs), CorePharma, LLC
    (CorePharma) and Mutual Pharmaceutical Co.
    (Mutual), Inc. have each filed an ANDA with the FDA
    seeking permission to market a generic version of
    Skelaxin®
    400 mg tablets. Additionally, Eon Labs ANDA seeks
    permission to market a generic version of
    Skelaxin®
    800 mg tablets. Each has also filed Paragraph IV
    certifications against patents related to
    Skelaxin®
    and are alleging noninfringement, invalidity and
    unenforceability of those patents. A patent infringement suit
    was filed against Eon Labs in January 2003; against CorePharma
    in March 2003; and against Mutual in March 2004 concerning their
    proposed 400 mg products. Additionally, we filed a separate
    suit against Eon Labs in December 2004 concerning its proposed
    800 mg product. In May 2006 the Mutual case was suspended
    pending the outcome of the FDA activity described below. In June
    2006, the Eon Labs cases were consolidated with the CorePharma
    case.  ®
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® ®
  ® ®
  
    Sicor Pharmaceuticals, Inc.(Sicor), a
    generic drug manufacturer, filed an ANDA with the FDA seeking
    permission to market a generic version of
    Adenoscan®.
    It also filed a Paragraph IV certification alleging
    invalidity of a patent related to
    Adenoscan®
    and non-infringement of certain claims of that patent. We and
    Astellas Pharma US, Inc., the exclusive licensee of certain
    rights under the patent, filed suit in May 2005 against Sicor
    and its parents/affiliates Sicor, Inc.,
    Teva Pharmaceuticals USA, Inc. (Teva) and Teva
    Pharmaceutical Industries, Ltd., to enforce our rights under the
    patent. In May 2006, Sicor stipulated to infringement of the
    asserted claims of the patent. Trial in this action began on
    February 12, 2007.
    Tevafiled an ANDA with the FDA seeking permission to
    market a generic version of
    Sonata®,
    as well as a Paragraph IV certification challenging the
    validity and enforceability of a patent related to Sonata which
    expires in June 2008. We filed suit against Teva to enforce our
    rights under that patent. In September 2006, the parties filed a
    stipulation with the Court in which Teva admitted infringement
    of the patent. In October 2006, Teva filed a summary judgment
    motion which the Court denied in January 2007.         19




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® ®
  Six of
    our products plus royalty payments presently account for 84.0%
    of our revenues from continuing operations and a decrease in
    sales or royalty income in the future would have a material
    adverse effect on our results of operations.
  In
    General. ® ® ® ® ® ® ® ®
  Product Competition.
  ®
  ®
  ®
  ®
  ®
      EpiPen. ®
 20




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® ®
  If we
    cannot implement our strategy to grow our business through
    increased sales, acquisitions, development and in-licensing, our
    business or competitive position in the pharmaceutical industry
    may suffer.
          
    Remoxytm,
    an investigational drug for the treatment of moderate to severe
    chronic pain;
    binodenoson, a myocardial pharmacologic stress imaging agent;
    Vanquixtm,
    a diazepam-filled auto-injector;
    bremelanotide (which we previously referred to as PT-141), an
    investigational drug for the treatment of erectile dysfunction
    and female sexual dysfunction;
    MRE0094, an investigational drug for the topical treatment of
    chronic diabetic foot ulcers;
    T-62, an investigational drug for the treatment of neuropathic
    pain;
    a new inhaler for
    Intal®
    using the alternative propellant hydrofluoroalkane
    (HFA) for which the FDA has issued an approvable
    letter;
    a potential new formulation of metaxalone;
    a novel formulation of ramipril for which an NDA is pending;
    an
    Altace®/diuretic
    combination product; and
    a program to evaluate the safety and efficacy of
    Altace®
    in children.   21




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
    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.    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.
   22




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We
    have entered into agreements with manufacturers
    and/or
    distributors of generic pharmaceutical products with whom we are
    presently engaged, or have 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
    We
    could be required to pay significant sums in connection with the
    derivative litigation or the continuing SEC investigation, or
    the SEC could impose other sanctions on us.
         23




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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.
          Unfavorable
    results in pending and future claims and litigation matters
    could have an adverse impact on us.
    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.
  ® ® ® ® ® ® ®
 24




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® ® ® ®
  ® ® ® ® ® ® ®
  ® ® and/or ® ®
  Sales
    of
    Thrombin-JMI®
    may be affected by the perception of risks associated with some
    of the raw materials used in its manufacture; if we are unable
    to successfully 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.
  ® ® ® ®
  ® ® ® ® ®
 25




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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.
      If we
    are unable to obtain approval of an HFA propellant for
    Intal®,
    our sales of this product could be adversely
    affected.
  ® ® ® ®
 26




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Our
    relationships with the U.S. Department of Defense and other
    government entities subject us to risks associated with doing
    business with the government.
        Our
    shareholder rights plan, charter and bylaws discourage
    unsolicited takeover proposals and could prevent shareholders
    from realizing a premium on their common stock.
    
    a classified Board of Directors;
    the ability of our Board of Directors to designate the terms of
    and issue new series of preferred stock;
    advance notice requirements for nominations for election to our
    Board of Directors; and
    special voting requirements for the amendment of our charter and
    bylaws.   27




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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.
     28




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and/or
            An
    increase in product liability claims or product recalls could
    harm our business.
   29




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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.
   30




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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.
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A WARNING
    ABOUT FORWARD-LOOKING STATEMENTS
        
    the future potential of, including anticipated net sales and
    prescription trends for our branded pharmaceutical products,
    particularly
    Altace®,
    Skelaxin®,
    Thrombin-JMI®,
    Sonata®
    and
    Levoxyl®;
    expectations regarding the enforceability and effectiveness of
    product-related patents, including in particular patents related
    to
    Altace®,
    Skelaxin®,
    Sonata®
    and
    Adenoscan®;
    expected trends and projections with respect to particular
    products, reportable segment and income and expense line items;
    the timeliness and accuracy of wholesale inventory data provided
    by our customers;
    the adequacy of our liquidity and capital resources;
    anticipated capital expenditures;
    the development, approval and successful commercialization of
    Remoxytm,
    an investigational drug for the treatment of
    moderate-to-severe
    chronic pain; binodenoson, our next generation cardiac
    pharmacologic stress-imaging agent; bremelanotide, an
    investigational new drug for the treatment of erectile
    dysfunction and female sexual dysfunction; T-62, an
    investigational drug for the treatment of neuropathic pain;
    MRE0094, an investigational drug for the topical treatment of
    chronic diabetic foot ulcers; the development of a new
    formulation of
    Skelaxin®;
    pre-clinical programs; and product life-cycle development
    projects;
    the development, approval and successful commercialization of a
    diazepam-filled auto-injector, new inhaler for
    Intal®
    using the alternative propellant HFA, and an
    Altace®/diuretic
    combination product;
    our expectation that we will be in a position to launch an
    Altace®
    tablet formulation during the fourth quarter of 2007 or the
    first quarter of 2008;
    the ability to obtain a supply of
    Sonata®
    sufficient to meet market demand;
    our successful execution of our growth strategies;
    anticipated developments and expansions of our business;
    our plans for the manufacture of some of our products, including
    but not limited to, the anticipated expansion of our
    manufacturing capacity for
    Thrombin-JMI®;
    anticipated increases in sales of acquired products or royalty
    revenues; 32




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##### Table of Contents




    the success of our Amended and Restated Co-Promotion Agreement
    with Wyeth;
    the high cost and uncertainty of research, clinical trials and
    other development activities involving pharmaceutical products;
    the development of product line extensions;
    the unpredictability of the duration or future findings and
    determinations of the FDA, including the pending applications
    related to our diazepam-filled auto-injector and a new
    Intal®
    inhaler formulation utilizing HFA, and other regulatory agencies
    worldwide;
    products developed, acquired or in-licensed that may be
    commercialized;
    the intent, belief or current expectations, primarily with
    respect to our future operating performance;
    expectations regarding sales growth, gross margins,
    manufacturing productivity, capital expenditures and effective
    tax rates;
    expectations regarding the outcome of various pending legal
    proceedings including the
    Altace®
    and
    Skelaxin®
    patent challenges, the SEC investigation, other possible
    governmental investigations, securities litigation, and other
    legal proceedings described in this report; and
    expectations regarding our financial condition and liquidity as
    well as future cash flows and earnings.    Item 1B.
    Unresolved
    Staff Comments    Item 2.
    Properties    Location

Principal Purposes

Business Segment(s)Bristol, Tennessee

Manufacturing and Administration

Branded PharmaceuticalsRochester, Michigan

Manufacturing

Branded Pharmaceuticals and
    Contract ManufacturingSt. Louis, Missouri

Manufacturing

Meridian Medical TechnologiesSt. Petersburg, Florida

Manufacturing

Branded PharmaceuticalsMiddleton, Wisconsin

Manufacturing

Branded Pharmaceuticals          33




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##### Table of Contents



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    2006High


LowFirst quarter

$
19.87


$
16.25Second quarter


18.48



15.83Third quarter


17.31



15.93Fourth quarter


17.46



15.74   2005High


LowFirst quarter

$
12.58


$
8.28Second quarter


10.60



7.50Third quarter


16.39



10.11Fourth quarter


17.45



14.22    34




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##### Table of Contents



PERFORMANCE
    GRAPH
  COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
    
  12/01


12/02


12/03


12/04


12/05


12/06King Pharmaceuticals, Inc.


100.00



40.80



36.22



29.43



40.16



37.79Standard & Poors 500
    Stocks


100.00



77.90



100.24



111.15



116.61



135.03NYSE Composite


100.00



81.83



108.16



124.38



136.03



164.60NYSE Stocks (SIC
    2830-2839
    U.S. Companies) Drugs


100.00



78.48



85.44



79.09



76.74



88.39  35




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##### Table of Contents



Item 6.
    Selected
    Financial Data    For the Year Ended December 31,2006


2005


2004


2003


2002(In thousands, except per share data)Statement of Income
    Data:Total revenues

$
1,988,500


$
1,772,881


$
1,304,364


$
1,492,789


$
1,088,024Operating income (loss)(1)(2)


402,546



180,079



(41,264
)


151,952



275,043Income (loss) from continuing
    operations before income taxes, discontinued operations


424,312



178,115



(58,034
)


163,327



248,506Income tax expense (benefit)


135,730



61,485



(7,412
)


65,884



78,033Income (loss) from continuing
    operations


288,582



116,630



(50,622
)


97,443



170,473Income (loss) from discontinued
    operations(3)


367



1,203



(109,666
)


(5,489
)


11,928Net income (loss)

$
288,949


$
117,833


$
(160,288
)

$
91,954


$
182,401Income per common share:Basic:Income (loss) from continuing
    operations

$
1.19


$
0.48


$
(0.21
)

$
0.40


$
0.70Income (loss) from discontinued
    operations






0.01



(0.45
)


(0.02
)


0.05Net income (loss)

$
1.19


$
0.49


$
(0.66
)

$
0.38


$
0.75Diluted:Income (loss) from continuing
    operations

$
1.19


$
0.48


$
(0.21
)

$
0.40


$
0.69Income (loss) from discontinued
    operations






0.01



(0.45
)


(0.02
)


0.05Net income (loss)

$
1.19


$
0.49


$
(0.66
)

$
0.38


$
0.74Dividends declared per share of
    common stock

$
0.00


$
0.00


$
0.00


$
0.00


$
0.00   36




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##### Table of Contents



December 31,2006


2005(In thousands)Balance Sheet Data:Working capital

$
1,055,677


$
276,329Total assets


3,329,531



2,965,242Total debt


400,000



345,000Shareholders equity


2,288,606



1,973,422     (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 have reduced the accrual for these
    fees by this amount in the fourth quarter of 2003 and
    (b) fees under our Co-Promotion Agreement for
    Altace®
    in the fourth quarter of 2003 were reduced on a pre-tax basis by
    an additional $5,698 as a result of the Medicaid accrual
    adjustment recorded in that quarter.(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 2006, we incurred on a
    pre-tax
    basis $24,718 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 26,
    Discontinued Operations, in Part 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
     37




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##### Table of Contents




    Cardiovascular/metabolics (including
    Altace®
    and
    Levoxyl®),
    Neuroscience (including
    Skelaxin®,
    Avinza®
    and
    Sonata®),
    Hospital/acute care (including
    Thrombin-JMI®), and
    Other.  ®
  2006
    Highlights
  Introduction
    
    expanded our portfolio of products;
    took steps to create opportunities to extend the life cycle of
    our
    Altace®
    franchise; and
    advanced projects in our research and development pipeline.    Expanded
    Product Portfolio
  tm ® tm ®
  ® ® ® ® ®
  tm tm tm
 38




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##### Table of Contents



tm tm tm
  Altace
    Franchise
  ® ® ® ® co-promote
  
    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, with the fee not to exceed
    $215.3 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.  ®
  ® ® ®
  in-process
  ®
 39




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##### Table of Contents



Research
    and Development Pipeline
  tm tm tm
  tm tm
  ® tm ®
     40




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##### Table of Contents



OPERATING
    RESULTS
    For the Years Ended December 31,2006


2005


2004(In thousands)Total RevenuesBranded pharmaceuticals

$
1,724,701


$
1,542,124


$
1,076,517Meridian Medical Technologies


164,760



129,261



123,329Royalties


80,357



78,128



78,474Contract manufacturing


16,501



22,167



26,045Other


2,181



1,201



(1
)Total revenues

$
1,988,500


$
1,772,881


$
1,304,364Cost of Revenues, exclusive of
    depreciation, amortization and impairmentsBranded pharmaceuticals

$
317,677


$
222,924


$
251,568Meridian Medical Technologies


74,576



62,958



59,296Royalties


9,748



9,003



10,878Contract manufacturing


17,636



27,055



31,207Other cost of revenues


171



1,045



(11
)Total cost of revenues

$
419,808


$
322,985


$
352,938     For the Years Ended December 31,2006


2005


2004(In thousands)Gross Sales

$
2,461,588


$
2,240,852


$
2,017,296Commercial Rebates


188,652



192,203



203,405Medicare Part D Rebates


54,221







Medicaid Rebates


27,219



78,753



135,545Chargebacks


102,876



99,057



114,995Returns


14,832



5,012



183,066Trade Discounts/Other


84,720



91,090



62,739$
1,989,068


$
1,774,737


$
1,317,546Discontinued Operations


568



1,856



13,182Net Sales

$
1,988,500


$
1,772,881


$
1,304,364   ®
  ®
   41




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##### Table of Contents



® ® ® ® ®
    Accrual
    for Rebates, including Administrative Fees:
  2006


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

$
126,240


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


282,603



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


(12,511
)


(24,008
)Rebates paid


(342,567
)


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

$
53,765


$
126,240       ®
     42




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##### Table of Contents



Accrual
    for Returns:
  2006


2005(In thousands)Balance at January 1

$
50,902


$
122,863Current provision


14,832



5,012Actual returns


(23,733
)


(76,973
)Ending balance at December 31

$
42,001


$
50,902     ®
   43




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##### Table of Contents



® ®
  Accrual
    for Chargebacks:
  2006


2005(In thousands)Balance at January 1

$
13,153


$
27,953Current provision


102,876



99,057Actual chargebacks


(102,090
)


(113,857
)Ending balance at December 31

$
13,939


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


2006 vs. 2005


2005 vs. 20042006


2005


2004


$


%


$


%(In thousands)Branded
    pharmaceutical
    revenue:Altace®

$
652,962


$
554,353


$
347,292


$
98,609



17.8
%

$
207,061



59.6
%Skelaxin®


415,173



344,605



238,563



70,568



20.5



106,042



44.5Thrombin-JMI®


246,520



220,617



174,570



25,903



11.7



46,047



26.4Levoxyl®


111,771



139,513



104,749



(27,742
)


(19.9
)


34,764



33.2Sonata®


85,809



83,162



60,365



2,647



3.2



22,797



37.8Other


212,466



199,874



150,978



12,592



6.3



48,896



32.4Total revenue

$
1,724,701


$
1,542,124


$
1,076,517


$
182,577



11.8
%

$
465,607



43.3
%Cost of Revenues,
    exclusive of depreciation, amortization and impairments

$
317,677


$
222,924


$
251,568


$
94,753



42.5
%

$
(28,644
)


(11.4
)%     ®
  ® ® ®
 44




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##### Table of Contents



Sales
    of Key Products
  Altace®
  ® ® ® ®
  ® ® ® ®
  ®
  Skelaxin®
  ® ® ® ®
  ® ® ® ®
  ®
  Thrombin-JMI®
  ® ®
  ®
  Levoxyl®
  ® ® ®
 45




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##### Table of Contents



®
  ® ®
  Sonata®
  ® ® ® ® ® ® ® ® ®
  ® ® ® ®
  ®
  Other
      Cost
    of Revenues
  ®
 46




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##### Table of Contents




    a charge during 2004 of approximately $46.0 million for the
    write-off of excess inventory which was partially attributable
    to reduced unit sales of products during 2004 as a result of
    wholesale inventory reductions;
    differences in special items which benefited 2005 compared to
    2004 as discussed below.        
    We recorded a charge in 2004 in the amount of $8.9 million
    for our purchase commitments for some of our smaller products
    for which commitments exceeded expected demand. With the
    termination of some of these purchase commitment contracts in
    2005, we had a benefit of approximately $6.1 million which
    reduced our cost of revenues from branded pharmaceutical product.
    We incurred a charge of $4.6 million in 2004 primarily
    related to the voluntary recall of certain lots of
    Levoxyl®.
    Product returned as a result of this voluntary recall was less
    than originally estimated. Accordingly, cost of revenues from
    branded pharmaceutical products in 2005 was reduced by
    approximately $2.5 million.  ®
  Meridian
    Medical Technologies Segment
  ChangeFor the Years Ended December 31,


2006-2005


2005-20042006


2005


2004


$


%


$


%(In thousands)Meridian Medical Technologies
    revenue

$
164,760


$
129,261


$
123,329


$
35,499



27.5
%

$
5,932



4.8
%Cost of Revenues, exclusive of
    depreciation, amortization and impairments


74,576



62,958



59,296



11,618



18.5



3,662



6.2$
90,184


$
66,303


$
64,033


$
23,881



36.0
%

$
2,270



3.5
%   ® ® ® ®
 47




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##### Table of Contents



Royalties
    Segment
  ChangeFor the Years Ended December 31,


2006-2005


2005-20042006


2005


2004


$


%


$


%(In thousands)Royalty revenue

$
80,357


$
78,128


$
78,474


$
2,229



2.9
%

$
(346
)


(0.4
)%Cost of Revenues, exclusive of
    depreciation, amortization and impairments


9,748



9,003



10,878



745



8.3



(1,875
)


(17.2
)$
70,609


$
69,125


$
67,596


$
1,484



2.1
%

$
1,529



2.3
%   ® ®
  Contract
    Manufacturing Segment
  ChangeFor the Years Ended December 31,


2006-2005


2005-20042006


2005


2004


$


%


$


%(In thousands)Contract manufacturing revenue

$
16,501


$
22,167


$
26,045


$
(5,666
)


(25.6
)%

$
(3,878
)


(14.9
)%Cost of Revenues, exclusive of
    depreciation, amortization and impairments


17,636



27,055



31,207



(9,419
)


(34.8
)


(4,152
)


(13.3
)$
(1,135
)

$
(4,888
)

$
(5,162
)

$
3,753



76.8
%

$
274



5.3
%      48




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##### Table of Contents



Operating
    Costs and Expenses
  ChangeFor the Years Ended December 31,


2006-2005


2005-20042006


2005


2004


$


%


$


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

$
419,808


$
322,985


$
352,938


$
96,823



30.0
%

$
(29,953
)


(8.5
)%Selling, general and administrative


713,965



636,483



595,441



77,482



12.2



41,042



6.9Research and development


253,596



262,726



84,239



(9,130
)


(3.5
)


178,487



>100.0
%Depreciation and amortization


147,549



147,049



162,115



500



<1.0



(15,066
)


(9.3
)Intangible asset impairment


47,842



221,054



149,592



(173,212
)


(78.4
)


71,462



47.8Restructuring charges


3,194



4,180



10,827



(986
)


(23.6
)


(6,647
)


(61.4
)Gain on sale of products






(1,675
)


(9,524
)


1,675



100.0



7,849



82.4Total operating costs and expenses

$
1,585,954


$
1,592,802


$
1,345,628


$
(6,848
)


(0.4
)%

$
247,174



18.4
%   Selling,
    General and Administrative Expenses
  ChangeFor the Years Ended December 31,


2006-2005


2005-20042006


2005


2004


$


%


$


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

$
496,215


$
409,451


$
409,775


$
86,764



21.2
%

$
(324
)


(0.1
)%Medicaid related charge










65,000











(65,000
)


(100.0
)Mylan transaction costs






3,898



9,062



(3,898
)


(100.0
)


(5,164
)


(57.0
)Co-promotion fees


217,750



223,134



111,604



(5,384
)


(2.4
)


111,530



99.9Total selling, general and
    administrative

$
713,965


$
636,483


$
595,441


$
77,482



12.2
%

$
41,042



6.9
%     ® ® ®
   49




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##### Table of Contents



® ® ®
    
    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 18,
    Commitments and Contingencies, in Part IV,
    Item 15(a)(1), Exhibits and Financial Statement
    Schedules.
    Charges of $0.1 million, $19.8 million, and
    $19.8 million during 2006, 2005 and 2004, respectively,
    primarily due to professional fees related to the now-completed
    investigation of our company by the HHS/OIG, the partially
    completed investigation by the SEC, and private plaintiff
    securities litigation. During 2006, we received payment from our
    insurance carriers for the recovery of legal fees in the amount
    of $6.8 million related to the securities litigation. This
    recovery has been reflected as a reduction of professional fees
    in 2006. For additional information, please see Note 18,
    Commitments and Contingencies, in Part IV,
    Item 15(a)(1), Exhibits and Financial Statement
    Schedules.
    Charges in the amount of $3.9 million and $9.1 million
    in 2005 and 2004, respectively, for professional fees and
    expenses related to the terminated merger agreement with Mylan
    Laboratories, Inc.
    A charge of $65.0 million related to Medicaid in the first
    half of 2004 to cover estimated interest, costs, fines,
    penalties and all other settlement costs in addition to the
    $65.4 million charge that we accrued in 2003 for estimated
    underpayments to Medicaid and other government pricing programs.
    For additional information, please see Settlement of
    Governmental Pricing Investigation in Note 18,
    Commitments and Contingencies, in Part IV,
    Item 15(a)(1), Exhibits and Financial Statement
    Schedules. 50




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##### Table of Contents



Research
    and Development Expense
  For the Years Ended


ChangeDecember 31,


2006-2005


2005-20042006


2005


2004


$


$(In thousands)Research and development

$
143,596


$
74,015


$
67,939


$
69,581


$
6,076Research and
    development  in-  process upon acquisition


110,000



188,711



16,300



(78,711
)


172,411Total research and development

$
253,596


$
262,726


$
84,239


$
(9,130
)

$
178,487       
    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 novel formulation of ramipril
    in January 2006. 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. We expect to be in a position to launch the new
    formulation during the fourth quarter of 2007 or the first
    quarter of 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 abuse-deterrent opiod painkillers.
    Remoxytm
    is an investigational drug in late-stage clinical development by
    Pain Therapeutics for the treatment of
    moderate-to-severe
    chronic pain. We are responsible for all research and
    development expenses related to this alliance, which could total
    $100.0 million. The value of the in-process research and
    development project was expensed on the date of acquisition as
    it had not received regulatory approval and had no alternative
    future use.
    Remoxytm
    is in Phase III of clinical development. If Phase III
    clinical development is successful, 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 the outcome of our
    Phase III clinical trial and the ability to successfully
    manufacture the product. If the project is not successfully
    completed, it could have a material effect on our cash flows and
    results of operations.
    A charge of $35.0 million during 2005 for our acquisition
    of in-process research and development due to our co-exclusive
    license agreement with Mutual Pharmaceutical Company whereby we
    obtained a license to certain intellectual property relating to
    metaxalone. The intellectual property licensed to us relates to
    the potential for improved dosing and administration of
    metaxalone. The value of the in-process research and development
    project was expensed on the date of acquisition as it had not
    received 51




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##### Table of Contents



regulatory approval and had no alternative future use. We are in
    the process of evaluating a potential new formulation of
    Skelaxin®.
    The success of the project will depend on additional
    in vitro and in vivo work in a clinical setting. The costs
    and the time-line of the potential project are being evaluated.
    The in-process research and development is part of the branded
    pharmaceutical segment.  
    A charge of $16.3 million during 2004 for our acquisition
    of in-process research and development associated with our entry
    into a strategic alliance with Palatin to develop and
    commercialize bremelanotide.  Depreciation
    and Amortization Expense
  ®
  ®
  Other
    Operating Expenses
    
    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®.
    An intangible asset impairment charge in 2004 of
    $149.6 million, which primarily related to our decision to
    discontinue the
    Sonata®
    MR development program and a greater than expected decline in
    prescriptions for
    Florinef®
    and
    Tapazole®
    due to the availability of generics for these products. 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.
    A restructuring charge of $3.2 million during 2006 for
    separation payments that primarily arose in connection with our
    decision to transfer the production of
    Levoxyl®
    from our St. Petersburg, Florida facility to the Bristol,
    Tennessee facility by the end of 2008. Restructuring charges of
    $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 and
    $10.8 million in 2005 and 2004, respectively, primarily as
    a result of separation agreements with several of our
    executives, the relocation of our sales and marketing operations
    from Bristol, Tennessee to New Jersey and our decision to
    discontinue some relatively insignificant products associated
    with Meridian Medical Technologies business.
    Income of $1.7 million and $9.5 million in 2005 and
    2004, respectively, primarily due to a gain on our divestiture
    of our
    Anusol-HC®
    and
    Proctocort®
    product lines and a gain on the termination of our co-promotion
    and license agreements with Novavax, Inc. regarding
    Estrasorbtm
    and the repurchase by Novavax of all of its convertible notes
    which we held.  ® and/or
 52




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##### Table of Contents



® ® ® ®
  ®
    NON-OPERATING
    ITEMS
  For the Years Ended December 31,2006


2005


2004(In thousands)Interest income

$
32,152


$
18,175


$
5,974Interest expense


(9,857
)


(11,931
)


(12,588
)Valuation charge 
    convertible notes receivable










(2,887
)Loss on investment






(6,182
)


(6,520
)Gain on early extinguishment of
    debt


628







Other, net


(1,157
)


(2,026
)


(749
)Income tax expense (benefit)


135,730



61,485



(7,412
)Discontinued operations


367



1,203



(109,666
)   Other
    Income (Expense)
      
    Income of $0.6 million during 2006 resulting from the early
    retirement of our
    23/4% Convertible
    Debentures due November 15, 2021.
    Charges of $6.2 million and $6.5 million in 2005 and
    2004, respectively, in order to write-down our investment in
    Novavax common stock to fair value during each of those years.
    During the third quarter of 2005, we sold our investment in
    Novavax.
    A charge of $2.9 million during 2004 to reflect a change in
    the valuation allowance for the convertible notes receivable
    from Novavax. Novavax repurchased the convertible notes from us
    in July 2004.  Income
    Tax Expense (Benefit)
   53




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##### Table of Contents



Discontinued
    Operations
  ® ® ® ®
  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


103,390



17,786



32,953



32,900



19,751Unconditional purchase obligations


445,984



238,796



133,477



28,279



45,432Interest on long-term debt


31,306



5,000



10,000



10,000



6,306Total

$
980,680


$
261,582


$
176,430


$
71,179


$
471,489     ® ® ®
 54




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##### Table of Contents



® ®
  Liquidity
    and Capital Resources
  General
    ® ® ® ®
  ®
  
    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 million, plus 15% of net sales greater than
    $250.0 million.  ® ®
  ® Co-Promotion ® ® ®
 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 tm tm tm tm tm
  ® ®
  ® ®
  in-process
  ®
   56




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##### Table of Contents



®
  tm tm moderate-to-severe tm tm tm
    ® ® ® ®
  Settlement
    of Governmental Pricing Investigation
     57




---



##### Table of Contents



Form 8-K
  SEC
    Investigation
      Securities
    Litigation
  and/or
 58




---



##### Table of Contents



Patent
    Challenges
  ® ® ® ® ® ® ® ®
 59




---



##### Table of Contents



Cash
    Flows
  Operating
    Activities
  For the Years Ended December 31,2006


2005


2004Net cash provided by operating
    activities

$
465,627


$
519,508


$
260,907             2006


2005


2004Accounts receivable, net of
    allowance

$
(41,746
)

$
(43,407
)

$
57,978Inventories


48,275



46,349



(15,205
)Prepaid expenses and other current
    assets


(45,796
)


(47,544
)


(16,161
)Accounts payable


(8,568
)


(7,713
)


9,197Accrued expenses and other
    liabilities


(50,458
)


(52,544
)


43,566Income taxes payable


8,479



22,161



(78,708
)Deferred revenue


(6,886
)


(9,092
)


(9,091
)Other assets


(20,173
)


(4,471
)


(3,483
)Deferred taxes


(39,010
)


(68,047
)


(17,083
)Total changes from operating
    assets and liabilities and deferred taxes

$
(155,883
)

$
(164,308
)

$
(28,990
)   Investing
    Activities
  For the Years Ended December 31,2006


2005


2004Net cash used in investing
    activities

$
(436,315
)

$
(683,007
)

$
(154,071
)   ®
 60




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##### Table of Contents



®
    ®
    Financing
    Activities
  2006


2005


2004Net cash provided by financing
    activities

$
54,451


$
857


$
4,580   1 4 3 4
  Certain
    Indebtedness and Other Matters
  1 4 1 4
   61




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##### Table of Contents



3 4
    Form S-3 and/or
  Impact
    of Inflation
    Critical
    Accounting Policies and Estimates
       62




---



##### 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.     63




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##### Table of Contents



Accumulated


Net BookCost


Amortization


Value(In thousands)BrandedAltace®

$
276,150


$
85,224


$
190,926Other Cardiovascular/metabolic


80,770



45,413



35,357Cardiovascular/metabolic


356,920



130,637



226,283Intal®


61,726



22,474



39,252Other Hospital/acute care


188,018



58,337



129,681Hospital/acute care


249,744



80,811



168,933Skelaxin®


203,015



48,179



154,836Sonata®


23,146



23,146



Neuroscience


226,161



71,325



154,836Other


144,674



62,029



82,645Total Branded


977,499



344,802



632,697Meridian Medical
    Technologies


172,464



24,484



147,980Royalties


2,470



2,124



346Contract
    manufacturing










All other










Total trademark and product rights

$
1,152,433


$
371,410


$
781,023     Year Ended





Year EndedDecember 31, 2006





December 31, 2005Amortization


Life





AmortizationImpairments


Expense


(Years)


Impairments


Expense(In thousands)





(In thousands)BrandedAltace®





$
15,010



20


$



$
13,352Other Cardiovascular/metabolic






7,283







43,243



7,672Cardiovascular/metabolic






22,293







43,243



21,024Intal®


44,466



7,611



11







6,047Other Hospital/acute care


3,376



13,635







5,970



9,414Hospital/acute care


47,842



21,246







5,970



15,461Skelaxin®






15,548



13.5







15,548Sonata®










2.5



157,975



9,117Neuroscience






15,548







157,975



24,665Other






8,197











7,823Total Branded


47,842



67,284







207,188



68,973Meridian Medical
    Technologies






7,284











5,165Royalties






42











42Contract
    manufacturing


















All other


















Total trademark and product rights

$
47,842


$
74,610






$
207,188


$
74,180  64




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##### Table of Contents



Remaining Life at December 31, 2006Trademark &Patent


Product RightsAltace®


2 years 4 months



12 yearsSkelaxin®






10 yearsSonata®






Intal®






7 years   
    Inventories.  Our inventories are valued at the
    lower of cost or market value. We evaluate our entire inventory
    for short-dated or slow-moving product and inventory commitments
    under supply agreements based on projections of future demand
    and market conditions. For those units in inventory that are so
    identified, we estimate their market value or net sales value
    based on current realization trends. If the projected net
    realizable value is less than cost, on a product basis, we make
    a provision to reflect the lower value of that inventory. This
    methodology recognizes projected inventory losses at the time
    such losses are evident rather than at the time goods are
    actually sold. We maintain supply agreements with some of our
    vendors which contain minimum purchase requirements. We estimate
    future inventory requirements based on current facts and trends.
    Should our minimum purchase requirements under supply agreements
    or if our estimated future inventory requirements exceed actual
    inventory quantities that we will be able to sell to our
    customers, we record a charge in costs of revenues.
    Accruals for rebates, returns, and
    chargebacks.  We establish accruals for returns,
    chargebacks, 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 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 65




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##### Table of Contents



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 15(a)(1),
    Exhibits and Financial Statement Schedules.  Recently
    Issued Accounting Standards
    Accounting for Uncertainty in Income Taxes  an
    interpretation of FASB Statement No. 109
   66




---



##### 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
    Rule 13a-15(b) Rule 13a-15(e))
    Managements
    Report on Internal Control over Financial
    Reporting
  Rule 13a-15(f).
 67




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##### Table of Contents



Internal Control  Integrated
    Framework
    Changes
    in Internal Control over Financial Reporting
    Item 9B.
    Other
    Information   PART III  Form 10-K
 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, 2006 and 2005


F-3Consolidated Statements of Income
    (Loss) for the years ended December 31, 2006, 2005 and 2004


F-4Consolidated Statements of
    Shareholders Equity and Other Comprehensive Income (Loss)
    for the years ended December 31, 2006, 2005 and 2004


F-5Consolidated Statements of Cash
    Flows for the years ended December 31, 2006, 2005 and 2004


F-6Notes to Consolidated Financial
    Statements


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


S-1    68




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##### Table of Contents



Exhibits
    ExhibitNumber

Description3
.1(1)

Second 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)

Co-Promotion Agreement, dated as
    of June 22, 2000, between American Home Products
    Corporation and King Pharmaceuticals, Inc.10
.2(3)

Asset Purchase Agreement, dated as
    of June 22, 2000, between American Home Products
    Corporation and King Pharmaceuticals, Inc.10
.3(4)

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

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
.5(5)

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
.6(6)*

1998 King Pharmaceuticals, Inc.
    Non-Employee Director Stock Option Plan10
.7(2)*

1997 Incentive and Nonqualified
    Stock Option Plan for Employees of King Pharmaceuticals, Inc.10
.8(6)*

1989 Incentive Stock Option Plan
    of Jones Medical Industries, Inc.10
.9(6)*

Jones Medical Industries, Inc.
    1994 Incentive Stock Plan10
.10(6)*

Jones Medical Industries, Inc.
    1997 Incentive Stock Plan10
.11(7)*

King Pharmaceuticals, Inc. 401(k)
    Retirement Savings Plan10
.12(8)*

The Medco Research, Inc. 1989
    Stock Option and Stock Appreciation Rights Plan, as amended
    through July 29, 199810
.13(9)

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
.14(10)*

King Pharmaceuticals, Inc.
    Non-Employee Directors Deferred Compensation Plan10
.15(11)*

Offer Letter to Brian A. Markison,
    dated July 15, 200410
.16(11)

Collaborative Development and
    Marketing Agreement dated August 12, 2004 by and between
    Palatin Technologies, Inc. and King Pharmaceuticals, Inc.10
.17(11)*

Separation and Non-Disclosure
    Agreement dated July 13, 2004 by and between King
    Pharmaceuticals, Inc. and Jefferson J. Gregory10
.18(11)*

Severance and Non-Disclosure
    Agreement dated May 7, 2004 by and between King
    Pharmaceuticals, Inc. and Kyle P. Macione10
.19(12)*

King Pharmaceuticals, Inc.
    Severance Pay Plan: Tier I (Effective March 15, 2005)10
.20(13)*

Offer letter to Joseph
    Squicciarino dated May 25, 200510
.21(13)*

Offer letter to Eric J. Bruce
    dated May 19, 200510
.22(13)*

2005 Executive Management
    Incentive Award10
.23(13)*

Salary Amendments For Certain
    Executive Officers10
.24(13)*

King Pharmaceuticals, Inc.
    Executive Deferred Compensation Plan10
.25(14)*

Form of Restricted Stock
    Certificate and Restricted Stock Grant Agreement10
.26(14)*

Form of Option Certificate and
    Nonstatutory Stock Option Agreement10
.27(15)

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
.28(15)

Settlement Agreement, dated as of
    October 31, 2005, among the state of Massachusetts, King
    Pharmaceuticals, Inc. and Monarch Pharmaceuticals, Inc. and
    general description of the other state settlement agreements 69




---



##### Table of Contents



ExhibitNumber

Description10
.29(15)

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
.30(16)*

Retirement and Consulting
    Agreement, dated as of April 1, 2005, and Waiver, Release
    and Non-Solicitation, Noncompete and Nondisclosure Agreement,
    dated as of May 12, 2005, by and between King
    Pharmaceuticals, Inc. and James R. Lattanzi10
.31(17)*

First Amendment to Retirement and
    Consulting Agreement, dated as of November 4, 2005, by and
    between the Company and James R. Lattanzi10
.32(18)*

King Pharmaceuticals, Inc.
    Incentive Plan10
.33(19)*

Compensation Policy for
    Non-Employee Directors10
.34(20)*

Waiver, Release and
    Non-Solicitation, NonCompete and Nondisclosure Agreement, dated
    as of November 1, 2005, by and between King
    Pharmaceuticals, Inc. and John A. A. Bellamy10
.35(20)*

Addendum to the Waiver, Release
    and Non-Solicitation, Noncompete and Nondisclosure Agreement,
    dated as of December 20, 2005, by and between King
    Pharmaceuticals, Inc. and John A. A. Bellamy10
.36(20)

Collaboration Agreement by and
    between King Pharmaceuticals, Inc. and Pain Therapeutics, Inc.,
    dated as of November 9, 200510
.37(20)

License Agreement by and between
    King Pharmaceuticals, Inc. and Pain Therapeutics, Inc., dated as
    of December 29, 200510
.38(20)

License Agreement, by and between
    King Pharmaceuticals, Inc. and Mutual Pharmaceutical Company,
    Inc., dated as of December 6, 200510
.39(20)*

Severance letter to John A. A.
    Bellamy dated October 14, 200510
.40(21)*

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
.41(22)

Generic Distribution Agreement by
    and between King Pharmaceuticals, Inc. and Cobalt
    Pharmaceuticals, Inc., dated as of February 12, 200610
.42(22)

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
.43(22)

Ramipril Application License
    Agreement by and among King Pharmaceuticals, Inc., Arrow
    International Limited and Robin Hood Holdings Limited, dated as
    of February 12, 200610
.44(22)

Ramipril Patent License Agreement
    by and among King Pharmaceuticals, Inc., Selamine Limited and
    Robin Hood Holdings Limited, dated as of February 12, 200610
.45(22)

Dismissal Agreement by and among
    King Pharmaceuticals, Inc., Cobalt Pharmaceuticals, Inc. and
    Aventis Pharma Deutschland GmbH, dated as of February 27,
    200610
.46(22)

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
.47(22)

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
.48(22)*

Form of Long-Term Performance Unit
    Award Agreement  One Year Performance Cycle10
.49(22)*

Form of Long-Term Performance Unit
    Award Agreement  Three Year Performance Cycle10
.50(23)

Promotion Agreement, dated
    June 27, 2006, by and between King Pharmaceuticals, Inc.
    and Depomed, Inc.10
.51(23)*

Form of Restricted Unit
    Certificate and Restricted Unit Grant Agreement10
.52(24)

Purchase Agreement, by and between
    Ligand Pharmaceuticals Incorporated, King Pharmaceuticals, Inc.
    and King Pharmaceuticals Research and Development, Inc., dated
    as of September 6, 200610
.53(25)

Entry into Loan Agreement between
    King Pharmaceuticals, Inc. and Ligand Pharmaceuticals
    Incorporated, dated October 12, 200610
.54(26)*

Salary Amendments For Certain
    Executive Officers10
.55(27)

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
.56(27)*

Form of Restricted Unit
    Certificate and Restricted Unit Grant Agreement 70




---



##### Table of Contents



ExhibitNumber

Description10
.57(28)

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, 200610
.58(28)

Side Letter between King
    Pharmaceuticals, Inc. and Ligand Pharmaceuticals Incorporated
    dated December 29, 200610
.59(29)*

Salary Amendment For Chief
    Financial Officer10
.60(30)*

2006 Executive Management
    Incentive Award14
.1(31)

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.(1)
    
    Incorporated by reference to Kings Quarterly Report on
    Form 10-Q
    filed August 9, 2006.(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 Current Report on
    Form 8-K
    filed June 30, 2000.(4)
    
    Incorporated by reference to Kings Quarterly Report on
    Form 10-Q
    filed November 9, 2006.(5)
    
    Incorporated by reference to Kings Current Report on
    Form 8-K
    filed March 30, 2006.(6)
    
    Incorporated by reference to Kings Registration Statement
    on
    Form S-8
    filed September 6, 2000.(7)
    
    Incorporated by reference to Kings Registration Statement
    on
    Form S-8
    filed February 26, 1999.(8)
    
    Incorporated by reference to Kings Registration Statement
    on
    Form S-8
    filed March 9, 2000.(9)
    
    Incorporated by reference to Kings Quarterly Report on
    Form 10-Q
    filed May 15, 2002.  (10)
    
    Incorporated by reference to Kings Annual Report on
    Form 10-K
    for the year ended December 31, 2003.(11)
    
    Incorporated by reference to Kings Quarterly Report on
    Form 10-Q
    filed March 21, 2005.(12)
    
    Incorporated by reference to Kings Current Report on
    Form 8-K
    filed March 21, 2005.(13)
    
    Incorporated by reference to Kings Quarterly Report on
    Form 10-Q
    filed August 9, 2005.(14)
    
    Incorporated by reference to Kings Quarterly Report on
    Form 10-Q
    filed November 9, 2005.(15)
    
    Incorporated by reference to Kings Current Report on
    Form 8-K
    filed November 4, 2005.(16)
    
    Incorporated by reference to Kings Amendment No. 1 to
    Quarterly Report on
    Form 10-Q
    filed February 15, 2006.(17)
    
    Incorporated by reference to Kings Amendment No. 2 to
    Current Report on
    Form 8-K/A
    filed February 15, 2006.(18)
    
    Incorporated by reference to Kings Definitive Proxy
    Statement, filed April 28, 2005, related to the 2005 annual
    meeting of shareholders.(19)
    
    Incorporated by reference to Kings Current Report on
    Form 8-K
    filed August 8, 2006.(20)
    
    Incorporated by reference to Kings Annual Report on
    Form 10-K
    filed March 3, 2006.(21)
    
    Incorporated by reference to Kings Current Report on
    Form 8-K
    filed March 28, 2006. 71




---



##### Table of Contents



(22)
    
    Incorporated by reference to Kings Quarterly Report on
    Form 10-Q
    filed May 10, 2006.(23)
    
    Incorporated by reference to Kings Quarterly Report on
    Form 10-Q
    filed August 9, 2006.(24)
    
    Incorporated by reference to Kings Current Report on
    Form 8-K
    filed September 12, 2006.(25)
    
    Incorporated by reference to Kings Current Report on
    Form 8-K
    filed October 18, 2006.(26)
    
    Incorporated by reference to Kings Current Report on
    Form 8-K
    filed November 6, 2006.(27)
    
    Incorporated by reference to Kings Quarterly Report on
    Form 10-Q
    filed November 9, 2006.(28)
    
    Incorporated by reference to Kings Current Report on
    Form 8-K
    filed January 5, 2007.(29)
    
    Incorporated by reference to Kings Current Report on
    Form 8-K
    filed January 16, 2007.(30)
    
    Incorporated by reference to Kings Current Report on
    Form 8-K
    filed February 27, 2006.(31)
    
    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
       Consolidated
    financial statements and financial statement schedule
      Internal
    control over financial reporting
  Internal Control  Integrated Framework Internal Control 
    Integrated Framework
   F-1




---



##### Table of Contents



F-2




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  CONSOLIDATED
    BALANCE SHEETS
 as of
    December 31, 2006 and 2005
 (In thousands, except share data)
 2006


2005ASSETSCurrent assets:Cash and cash equivalents

$
113,777


$
30,014Investments in debt securities


890,185



494,663Restricted cash






130,400Accounts receivable, net of
    allowance of $5,437 and $12,280


265,467



223,581Inventories


215,458



228,063Deferred income tax assets


81,991



81,777Prepaid expenses and other current
    assets


106,595



59,291Total current assets


1,673,473



1,247,789Property, plant and equipment, net


307,036



302,474Goodwill


121,152



121,152Intangible assets, net


851,391



967,194Marketable securities


11,578



18,502Other assets (includes restricted
    cash of $15,968 and $14,129)


93,347



77,099Deferred income tax assets


271,554



231,032Total assets

$
3,329,531


$
2,965,242LIABILITIES AND
    SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable

$
77,158


$
84,539Accrued expenses


510,137



519,620Income taxes payable


30,501



22,301Current portion of long term debt






345,000Total current liabilities


617,796



971,460Long-term debt


400,000



Other liabilities


23,129



20,360Total liabilities


1,040,925



991,820Commitments and contingencies
    (Note 18)Shareholders equity:Preferred stock,
    15,000,000 shares authorized, no shares issued or
    outstanding






Common stock, no par value,
    600,000,000 shares authorized, 243,151,223 and
    242,493,416 shares issued and outstanding


1,244,986



1,222,246Unearned compensation






(8,764
)Retained earnings


1,043,902



754,953Accumulated other comprehensive
    (loss) income


(282
)


4,987Total shareholders equity


2,288,606



1,973,422Total liabilities and
    shareholders equity

$
3,329,531


$
2,965,242    F-3




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  CONSOLIDATED
    STATEMENTS OF INCOME (LOSS)
 for the
    years ended December 31, 2006, 2005 and 2004
 (In thousands, except share data)
  2006


2005


2004Revenues:Net sales

$
1,908,143


$
1,694,753


$
1,225,890Royalty revenue


80,357



78,128



78,474Total revenues


1,988,500



1,772,881



1,304,364Operating costs and expenses:Costs of revenues, exclusive of
    depreciation, amortization and impairments shown below


419,808



322,985



352,938Selling, general and
    administrative, exclusive of co-promotion fees


496,215



409,451



409,775Medicaid related charge










65,000Mylan transaction costs






3,898



9,062Co-promotion fees


217,750



223,134



111,604Total selling, general and
    administrative


713,965



636,483



595,441Research and development


143,596



74,015



67,939Research and
    development  in process upon acquisition


110,000



188,711



16,300Total research and development


253,596



262,726



84,239Depreciation and amortization


147,549



147,049



162,115Intangible asset impairment


47,842



221,054



149,592Restructuring charges


3,194



4,180



10,827Gain on sale of products






(1,675
)


(9,524
)Total operating costs and expenses


1,585,954



1,592,802



1,345,628Operating income (loss)


402,546



180,079



(41,264
)Other income (expense):Interest income


32,152



18,175



5,974Interest expense


(9,857
)


(11,931
)


(12,588
)Valuation charge 
    convertible notes receivable










(2,887
)Loss on investment






(6,182
)


(6,520
)Gain on early extinguishment of debt


628







Other, net


(1,157
)


(2,026
)


(749
)Total other income (expense)


21,766



(1,964
)


(16,770
)Income (loss) from continuing
    operations before income taxes


424,312



178,115



(58,034
)Income tax expense (benefit)


135,730



61,485



(7,412
)Income (loss) from continuing
    operations


288,582



116,630



(50,622
)Discontinued operations
    (Note 26):Income (loss) from discontinued
    operations, including loss on impairment


572



1,876



(172,750
)Income tax expense (benefit)


205



673



(63,084
)Total income (loss) from
    discontinued operations


367



1,203



(109,666
)Net income (loss)

$
288,949


$
117,833


$
(160,288
)Income per common share:Basic: Income (loss) from
    continuing operations

$
1.19


$
0.48


$
(0.21
)Income (loss) from discontinued
    operations


0.00



0.01



(0.45
)Net income (loss)

$
1.19


$
0.49


$
(0.66
)Diluted: Income (loss) from
    continuing operations

$
1.19


$
0.48


$
(0.21
)Income (loss) from discontinued
    operations


0.00



0.01



(0.45
)Net income (loss)

$
1.19


$
0.49


$
(0.66
)    F-4




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
    CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
    AND OTHER COMPREHENSIVE INCOME (LOSS)
    for the years ended December 31, 2004, 2005 and
    2006
 (In thousands, except share data)
  AccumulatedOtherCommon Stock


Unearned


Retained


ComprehensiveShares


Amount


Compensation


Earnings


Income (Loss)


TotalBalance, January 1, 2004,


241,190,852


$
1,205,970


$



$
797,408


$
1,113


$
2,004,491Comprehensive income:Net loss














(160,288
)






(160,288
)Net unrealized loss on marketable
    securities, net of tax of $43


















(132
)


(132
)Foreign currency translation


















42



42Total comprehensive loss






















(160,378
)Exercise of stock options


515,731



4,677















4,677Balance, 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
)










Unearned compensation amortization










1,978











1,978Issuance of restricted stock awards


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
)

$
2,288,606    F-5




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  CONSOLIDATED
    STATEMENTS OF CASH FLOWS
 for the
    years ended December 31, 2006, 2005 and 2004
 (In thousands)
  2006


2005


2004Cash flows from operating
    activities of continuing operations:Net income (loss)

$
288,949


$
117,833


$
(160,288
)(Income) loss from discontinued
    operations


(367
)


(1,203
)


109,666Adjustments to reconcile net income
    (loss) to net cash provided by operating activities:Depreciation and amortization


147,549



147,049



162,115Amortization of deferred financing
    costs


2,874



3,096



3,145Deferred income taxes


(39,010
)


(68,047
)


(17,083
)Valuation charge on convertible
    notes receivable










2,887Impairment of intangible assets


47,842



221,054



149,592In-process research and development
    charges


110,000



188,711



16,300Gain on early extinguishment of debt


(628
)






Gain on sale of products






(1,675
)


(9,524
)Loss on investment






6,182



6,520Other non-cash items, net


573



791



9,484Stock based compensation


24,718



1,978



Changes in operating assets and
    liabilities:Accounts receivable


(41,746
)


(43,407
)


57,978Inventories


48,275



46,349



(15,205
)Prepaid expenses and other current
    assets


(45,796
)


(47,544
)


(16,161
)Other assets


(20,173
)


(4,471
)


(3,483
)Accounts payable


(8,568
)


(7,713
)


9,197Accrued expenses and other
    liabilities


(50,458
)


(52,544
)


43,566Deferred revenue


(6,886
)


(9,092
)


(9,091
)Income taxes


8,479



22,161



(78,708
)Net cash provided by operating
    activities of continuing operations


465,627



519,508



260,907Cash flows from investing
    activities of continuing operations:Purchases of investments in debt
    securities


(1,705,517
)


(1,175,159
)


(320,849
)Proceeds from maturity and sale of
    investments in debt securities


1,309,995



829,926



274,344Transfer from/(to) restricted cash


128,561



(73,629
)


(2,331
)Purchases of property, plant and
    equipment


(45,816
)


(53,290
)


(55,141
)Acquisition of primary care
    business of Elan










(36,000
)Purchases of product rights


(25,795
)






Palatin collaboration agreement






(10,000
)


(20,000
)Purchases of intangible assets






(18,600
)


(22,200
)Proceeds from sale of marketable
    securities






6,453



Arrow International Limited
    collaboration agreement


(60,000
)






Pain Therapeutic collaboration
    agreement






(153,711
)


Mutual cross-license agreement






(35,000
)


Loan to Ligand


(37,750
)






Proceeds from sale of intangible
    assets










27,458Other investing activities


7



3



648Net cash used in investing
    activities of continuing operations


(436,315
)


(683,007
)


(154,071
)Cash flows from financing
    activities of continuing operations:Proceeds from exercise of stock
    options, net


7,338



857



4,677Excess tax benefits from
    stock-based compensation


484







Proceeds from issuance of long-term
    debt


400,000Payments on long-term debt


(342,691
)






(97
)Debt issuance costs


(10,680
)






Net cash provided by financing
    activities of continuing operations


54,451



857



4,580Cash flows from discontinued
    operations:Net cash provided by operating
    activities of discontinued operations










10,185Net cash provided by investing
    activities of discontinued operations










27,927Increase (decrease) in cash and
    cash equivalents


83,763



(162,642
)


149,528Cash and cash equivalents,
    beginning of year


30,014



192,656



43,128Cash and cash equivalents, end of
    year

$
113,777


$
30,014


$
192,656Supplemental disclosure of cash
    paid for: Interest

$
8,200


$
10,552


$
10,626Taxes

$
163,901


$
107,178


$
90,365    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.
 F-8




---



##### Table of Contents



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




---



##### Table of Contents



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




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  ® ®
  Stock Compensation.
  3.
    Concentrations
    of Credit Risk    2006


2005Customer A


32
%


31
%Customer B


28
%


21
%Customer C


10
%


15
%     2006


2005


2004Customer A


32
%


27
%


25
%Customer B


29
%


28
%


28
%Customer C


13
%


14
%


15
%   4.
    Marketable
    Securities    December 31,


2005


2005


December 31,


December 31,


2006


2006


December 31,2005


Gross


Gross


2005


2006


Gross


Gross


2006Cost


Unrealized


Unrealized


Fair


Cost


Unrealized


Unrealized


FairBasis


Gains


Losses


Value


Basis


Gains


Losses


ValuePalatin common stock

$
12,242


$
6,260






$
18,502


$
12,242






$
664


$
11,578   (FIN 46-R,
 F-11




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    5.
    Change in
    Estimate    ®
  ® ®
   F-12




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  ®
    6.
    Receivables    2006


2005Trade

$
242,522


$
204,355Royalty


20,444



18,540Other


2,501



686Total Receivables

$
265,467


$
223,581   7.
    Inventory    2006


2005Raw materials

$
141,227


$
150,979Work-in process


21,857



14,955Finished goods (including $6,813
    and $6,728 of sample inventory, respectively)


65,967



91,695229,051



257,629Less inventory valuation allowance


(13,593
)


(29,566
)$
215,458


$
228,063   ®
 F-13




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  8.
    Property,
    Plant and Equipment    2006


2005Land

$
15,855


$
15,730Buildings and improvements


136,167



120,221Machinery and equipment


270,373



226,859Capital projects in progress


46,542



62,942468,937



425,752Less accumulated depreciation


(161,901
)


(123,278
)$
307,036


$
302,474       ®
    ®
  9.
    Acquisitions,
    Dispositions, Co-Promotions and Alliances   F-14




---



##### 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.  ® ®
  ® ® ® ®
  
    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.  ® ®
  ®
 F-15




---



##### Table of Contents



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

$
23,985Inventory


618Fixed assets


3$
24,606     ®
      ®
   F-16




---



##### Table of Contents



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




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    tm . tm
    ® ® ® ® ® ® ® ®
  ® ®
 F-18




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    ® ® ® ® ® ®
  10.
    Intangible
    Assets and Goodwill    2006


2005Gross





GrossCarrying


Accumulated


Carrying


AccumulatedAmount


Amortization


Amount


AmortizationTrademarks and product rights

$
1,152,433


$
371,410


$
1,174,028


$
296,801Patents


272,833



202,873



261,277



171,976Other intangibles


9,459



9,051



9,459



8,793Total intangible assets

$
1,434,725


$
583,334


$
1,444,764


$
477,570     Fiscal Year Ended December 31,

Amount2007

$
88,0622008


85,4022009


74,7162010


69,5742011


69,574   ®
  ® ® ® ® ® ® ® ® ® ®
  ® ®
 F-19




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  ® ® ® ®
  ®
  ® ® ® ® ®
  ® ® ® ® ®
  ® ®
  ® ® ® ® ® ®
  ® ® ®
   F-20




---



##### Table of Contents



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


MeridianSegment


Segment


TotalGoodwill at December 31, 2006

$
12,742


$
108,410


$
121,152Goodwill at December 31, 2005

$
12,742


$
108,410


$
121,152Goodwill at December 31, 2004

$
12,742


$
108,410


$
121,152   11.
    Lease
    Obligations    2007

$
17,7862008


16,4702009


16,4832010


16,2312011


16,669Thereafter


19,751     12.
    Accrued
    Expenses    2006


2005Rebates (see Note 18)

$
105,620


$
172,740Accrued co-promotion fees


60,191



78,772Elan settlement (see Note 18)


50,128



Arrow accrual (see Note 9)


50,000



Product returns


42,001



50,902Chargebacks


13,939



13,153Medicaid settlement


28



65,000Other


188,230



139,053$
510,137


$
519,620  F-21




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  13.
    Long-Term
    Debt    2006


2005Convertible senior notes(a)

$
400,000


$
Convertible debentures(b)






345,000Senior secured revolving credit
    facility(c)






Total long-term debt


400,000



345,000Less current portion






345,000Long-term portion

$
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.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. F-22




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   (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 matures
    in April 2007. The facility has been collateralized in general
    by all real estate with a value of $5,000 or more and all
    personal property of the Company and its significant
    subsidiaries. The Companys obligations under the Senior
    Secured Revolving Credit Facility are unconditionally guaranteed
    on a senior basis by significant subsidiaries. The Senior
    Secured Revolving Credit Facility accrues interest at the
    Companys option, at either (a) the base rate (which
    is based on the greater of (1) the prime rate or
    (2) the federal funds rate plus one-half of 1%) plus an
    applicable spread ranging from 0.0% to 0.75% (based on a
    leverage ratio) or (b) the applicable LIBOR rate plus an
    applicable spread ranging from 1.0% to 1.75% (based on a
    leverage ratio). In addition, the lenders under the Senior
    Secured Revolving Credit Facility are entitled to customary
    facility fees based on (a) unused commitments under the
    Senior Secured Revolving Credit Facility and (b) letters of
    credit outstanding. As of December 31, 2006, the Company
    had $1,043 of letters of credit outstanding under this facility.To establish the Senior Secured Revolving Credit Facility, the
    Company incurred $5,067 of deferred financing costs that are
    being amortized over five years, the life of the Senior Secured
    Revolving Credit Facility.The Senior Secured Revolving Credit Facility requires the
    Company to maintain a minimum net worth of no less than
    $1.2 billion plus 50% of the Companys consolidated
    net income for each fiscal quarter after April 23, 2002,
    excluding any fiscal quarter for which consolidated income is
    negative; an EBITDA to interest expense ratio of no less than
    3.00 to 1.00; and a funded debt to EBITDA ratio of no greater
    than 3.50 to 1.00 prior to April 24, 2004 and of no greater
    than 3.00 to 1.00 on or after April 24, 2004. As of
    December 31, 2006, the Company has complied with these
    covenants. F-23




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        14.
    Other
    Liabilities    2006


2005Deferred revenue from co-promotion
    revenue fees

$
14,038


$
16,512Non-qualified deferred compensation


2,392



338Other


6,699



3,510$
23,129


$
20,360   15.
    Financial
    Instruments    Cash and Cash Equivalents, Accounts Receivable and Accounts
    Payable.
  Marketable Securities and Investments in Debt
    Securities.
  Long-Term Debt.
  16.
    Income
    Taxes    2006


2005


2004CurrentFederal

$
169,130


$
124,799


$
3,152State


4,575



5,076



6,540Total current

$
173,705


$
129,875


$
9,692DeferredFederal

$
(36,281
)

$
(72,458
)

$
(17,780
)State


(1,694
)


4,068



676Total deferred

$
(37,975
)

$
(68,390
)

$
(17,104
)Total expense (benefit)

$
135,730


$
61,485


$
(7,412
)  F-24




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    2006


2005


2004Federal statutory tax rate


35.0
%


35.0
%


35.0
%State income taxes, net of federal
    benefit


0.7



5.1



(12.4
)Charitable donations


(0.9
)


(5.4
)


25.4Domestic Manufacturing Deduction


(1.2
)


(1.6
)


Tax-exempt interest income


(2.0
)


(2.2
)


0.8Fines and penalties










(39.3
)Other


0.4



3.6



3.3Effective tax rate


32.0
%


34.5
%


12.8
%     2006


2005Accrued expenses and reserves

$
83,723


$
82,837Net operating losses


3,048



3,340Intangible assets


275,798



262,227Charitable contribution carryover


22,274



35,210Other


10,596



2,701Total deferred tax assets


395,439



386,315Valuation allowance


(8,085
)


(9,214
)Net deferred tax assets


387,354



377,101Property, plant and equipment


(26,755
)


(33,538
)Other


(7,054
)


(30,754
)Total deferred tax liabilities


(33,809
)


(64,292
)Net deferred tax asset

$
353,545


$
312,809     17.
    Benefit
    Plans   F-25




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   18.
    Commitments
    and Contingencies  Fen/Phen
    Litigation
  In re
    Fen-Phen Litigation and/or
  ®
  ®
     F-26




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Thimerosal/Childrens
    Vaccine Related Litigation
        Hormone
    Replacement Therapy
  In re: Prempro Products Liability Litigation
 F-27




---



##### 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-28




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Settlement
    of Governmental Pricing Investigation
                SEC
    Investigation
   F-29




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     Securities
    Litigation
  and/or
         F-30




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
         Other
    Legal Proceedings
  ® ® ® ®
  ® ® Approved Drug Products With Therapeutic
    Equivalence Evaluations method-of-use 30-month ®
 F-31




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  non-infringement
    ® ®
  ® ® ®
  ® ® method-of-use ® 30-month 30-month
 F-32




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    ®
  ® ® ®
  ® ® ®
  ® ®
  ® method-of-use ® ® ®
 F-33




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  method-of-use ® ®
  ® ® ®
    Other
    Commitments and Contingencies
    2007

$
238,7962008


104,1502009


29,3272010


14,8532011


13,426Thereafter


45,432Total

$
445,984     ® ® ® and/or
 F-34




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    ® ®
  ® ®
  19.
    Segment
    Information  ®
   F-35




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     For the Years Ended December 31,2006


2005


2004Total revenues:Branded pharmaceuticals

$
1,724,701


$
1,542,124


$
1,076,517Meridian Medical Technologies


164,760



129,261



123,329Royalties


80,357



78,128



78,474Contract manufacturing(1)


555,362



601,404



505,537All other


2,181



1,201



(1
)Eliminations(1)


(538,861
)


(579,237
)


(479,492
)Consolidated total revenues

$
1,988,500


$
1,772,881


$
1,304,364Segment profit:Branded pharmaceuticals

$
1,407,024


$
1,319,200


$
824,949Meridian Medical Technologies


90,185



66,303



64,033Royalties


70,609



69,125



67,596Contract manufacturing


(1,135
)


(4,888
)


(5,162
)All other


2,009



156



10Other operating costs and expenses


(1,166,146
)


(1,269,817
)


(992,690
)Other income (expense)


21,766



(1,964
)


(16,770
)Income (loss) from continuing
    operations before tax

$
424,312


$
178,115


$
(58,034
)   As of December 31,2006


2005Total assets:Branded pharmaceuticals

$
2,988,925


$
2,654,782Meridian Medical Technologies


294,455



261,956Royalties


21,626



20,444Contract manufacturing


24,525



26,840All other






1,220Consolidated total assets

$
3,329,531


$
2,965,242     (1)
    
    Contract manufacturing revenues include $538,861, $579,237 and
    $479,492 of intercompany sales for the years ended
    December 31, 2006, 2005 and 2004, respectively. F-36




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     For the Years Ended December 31,2006


2005


2004Total revenues:Cardiovascular/metabolic

$
829,166


$
749,352


$
494,785Neuroscience


500,982



427,767



298,928Hospital/acute care


337,912



314,192



246,822Other


56,641



50,813



35,982Consolidated branded
    pharmaceutical revenues

$
1,724,701


$
1,542,124


$
1,076,517     20.
    Stock-Based
    Compensation    equity-based Equity-Based
   F-37




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     2005


2004Net income (loss):As reported

$
117,833


$
(160,288
)Add: Stock based employee
    compensation included in net income


1,220



Less: Stock based employee
    compensation for all awards


7,942



5,943Pro forma

$
111,111


$
(166,231
)Basic income (loss) per share:As reported

$
0.49


$
(0.66
)Pro forma

$
0.46


$
(0.69
)Diluted income (loss) per share:As reported

$
0.49


$
(0.66
)Pro forma

$
0.46


$
(0.69
)     Restricted
    Stock Awards, Restricted Stock Units and Long-Term Performance
    Unit Awards
           F-38




---



##### Table of Contents



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


Fair ValueRestricted Stock
    Awards:Nonvested balance at
    December 31, 2005


687,775


$
15.55Granted


229,155



18.82Vested


(48,878
)


15.64Forfeited


(48,810
)


16.33Nonvested balance at
    December 31, 2006


819,242


$
16.46Restricted Stock
    Units:Nonvested balance at
    December 31, 2005





$
Granted


50,918



17.27Vested






Forfeited


(5,750
)


17.39Nonvested balance at
    December 31, 2006


45,168


$
17.26Long-Term Performance Unit
    Awards (one year performance cycle):Nonvested balance at
    December 31, 2005





$
Granted


1,040,180



19.68Vested


(5,568
)


19.68Forfeited


(29,612
)


19.68Nonvested balance at
    December 31, 2006


1,005,000


$
19.68 F-39




---



##### Table of Contents



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


Fair ValueLong-Term Performance Unit
    Awards (three year performance cycle):Nonvested balance at
    December 31, 2005





$
Granted


105,156



29.93Vested


(1,016
)


29.93Forfeited


(6,544
)


29.93Nonvested balance at
    December 31, 2006


97,596


$
29.93     Stock
    Options
      2006


2005


2004Expected volatility


52.4
%


46.52
%


47.26
%Expected term (in years)


6



4



4Risk-free interest rate


4.64
%


4.24
%


2.83
%Expected dividend yield


0.00
%


0.00
%


0.00
%    F-40




---



##### Table of Contents



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


Remaining


AggregateAverage


Contractual


IntrinsicShares


Exercise Price


Term (Years)


ValueOutstanding options,
    December 31, 2005,


7,073,966


$
18.83



7.65


$
8,106Granted


362,965



19.27Exercised


(477,728
)


15.61Expired


(532,788
)


24.07Forfeited


(140,288
)


16.01Outstanding options,
    December 31, 2006


6,286,127


$
18.72



6.79


$
5,453Exercisable, December 31, 2006


4,082,076


$
19.94



5.96


$
4,345Expected to vest,
    December 31, 2006


2,034,339


$
16.47



8.32


$
1,023         2006


2005Total intrinsic value of stock
    options exercised

$
1,220


$
372Total fair value of RSAs vested

$
900


$
50Total fair value of LPUs vested

$
111


$
     Review
    of Historical Equity-Based Compensation Grants
       F-41




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        21.
    Stockholders
    Equity  Preferred
    Shares
    Accumulated
    Other Comprehensive Income
    2006


2005Net unrealized (losses) gains on
    marketable securities, net of tax

$
(438
)

$
4,629Foreign currency translation


156



358$
(282
)

$
4,987   22.
    Income
    per Common Share    2006


2005


2004Basic income per common share:Weighted average common shares


242,196,414



241,751,128



241,475,058Diluted income per common share:Weighted average common shares


242,196,414



241,751,128



241,475,058Effect of stock options


304,004



152,252



Effect of dilutive share awards


298,575







Weighted average common shares


242,798,993



241,903,380



241,475,058   1 4
 F-42




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      23.
    Recently
    Issued Accounting Standards    Accounting for Uncertainty in Income Taxes  an
    interpretation of FASB Statement No. 109
   F-43




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    24.
    Restructuring
    Activities  ®
        Accrued











Accrued











AccruedBalance at


Income








Balance at


Income








Balance atDecember 31,


Statement








December 31,


Statement








December 31,2004


Impact


Payments


Non-Cash


2005


Impact


Payments


Non-Cash


2006Third quarter of 2006
    actionEmployee separation payments

$



$



$



$



$



$
3,203


$
(1,040
)

$



$
2,163Accelerated depreciation(1)






















2,958







(2,958
)


Fourth quarter of 2005
    actionEmployee separation payments






2,267



(758
)






1,509



(8
)


(980
)






5212004 actionEmployee relocation






322



(322
)






















Facility demolition costs


924



(924
)


























Termination of lease






1,733



(1,733
)






















Other






782



(282
)


(500
)


















$
924


$
4,180


$
(3,095
)

$
(500
)

$
1,509


$
6,153


$
(2,020
)

$
(2,958
)

$
2,684     (1)
    
    Included in depreciation and amortization on the Consolidated
    Statements of Income (Loss).   F-44




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   25.
    Quarterly
    Financial Information (unaudited)    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   First


Second


Third


Fourth2005 By QuarterTotal revenues

$
368,625


$
462,939


$
518,032


$
423,285Operating income (loss)


111,553



28,835



187,347



(147,656
)Net income (loss)


70,055



20,497



121,857



(94,576
)Basic income (loss) per common
    share(1)

$
0.29


$
0.08


$
0.50


$
(0.39
)Diluted income (loss) per common
    share(1)

$
0.29


$
0.08


$
0.50


$
(0.39
)     (1)
    
    Quarterly amounts may not total to annual amounts due to the
    effect of rounding on a quarterly basis.  26.
    Discontinued
    Operations  ® ®
  ® ® ® ®
    2006


2005


2004Total revenues

$
568


$
1,856


$
13,182Operating income (loss), including
    expected loss on disposal


572



1,876



(172,750
)Net income (loss)


367



1,203



(109,666
)  F-45




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  27.
    Guarantor
    Financial Statements   F-46




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
    GUARANTOR SUBSIDIARIES
    CONDENSED CONSOLIDATING BALANCE SHEETS
  December 31, 2006


December 31, 2005Non














NonGuarantor


Guarantor


Eliminating


King





Guarantor


Guarantor


Eliminating


KingKing


Subsidiaries


Subsidiaries


Entries


Consolidated


King


Subsidiaries


Subsidiaries


Entries


ConsolidatedASSETSCurrent assets:Cash and cash equivalents

$
101,210


$
8,749


$
3,818






$
113,777


$
26,802


$
1,071


$
2,141


$



$
30,014Investments in debt securities


890,185















890,185



494,663















494,663Restricted cash






















130,400















130,400Accounts receivable, net


3,056



260,353



2,058







265,467



1,221



221,854



506







223,581Inventories


176,389



38,814



255







215,458



195,421



31,877



765







228,063Deferred income tax assets


30,051



51,940











81,991



21,524



60,253











81,777Prepaid expenses and other current
    assets


99,678



6,891



26







106,595



50,724



8,566



1







59,291Total current assets


1,300,569



366,747



6,157







1,673,473



920,755



323,621



3,413







1,247,789Property, plant, and equipment, net


109,572



197,464











307,036



108,712



193,762











302,474Goodwill






121,152











121,152







121,152











121,152Intangible assets, net






848,425



2,966







851,391



44



963,944



3,206







967,194Marketable securities


11,578















11,578



18,502















18,502Other assets


40,142



53,205











93,347



30,225



46,874











77,099Deferred income tax assets


(2,111
)


272,868



797







271,554



(9,483
)


239,452



1,063







231,032Investment in subsidiaries


2,615,029











(2,615,029
)






2,299,835











(2,299,835
)


Total assets

$
4,074,779


$
1,859,861


$
9,920


$
(2,615,029
)

$
3,329,531


$
3,368,590


$
1,888,805


$
7,682


$
(2,299,835
)

$
2,965,242LIABILITIES AND
    SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable

$
51,671


$
25,063


$
424


$



$
77,158


$
60,700


$
23,762


$
77


$



$
84,539Accrued expenses


134,089



376,051



(3
)






510,137



151,125



368,491



4







519,620Income taxes payable


28,045



2,456











30,501



24,123



(1,701
)


(121
)






22,301Current portion of long-term debt






















345,000















345,000Total current liabilities


213,805



403,570



421







617,796



580,948



390,552



(40
)






971,460Long-term debt


400,000















400,000



















Other liabilities


16,243



6,886











23,129



17,371



2,989











20,360Intercompany payable (receivable)


1,156,125



(1,168,516
)


12,391











796,849



(808,256
)


11,407







Total liabilities


1,786,173



(758,060
)


12,812







1,040,925



1,395,168



(414,715
)


11,367







991,820Shareholders equity


2,288,606



2,617,921



(2,892
)


(2,615,029
)


2,288,606



1,973,422



2,303,520



(3,685
)


(2,299,835
)


1,973,422Total liabilities and
    shareholders equity


4,074,779


$
1,859,861


$
9,920


$
(2,615,029
)

$
3,329,531


$
3,368,590


$
1,888,805


$
7,682


$
(2,299,835
)

$
2,965,242  F-47




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
 NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  GUARANTOR SUBSIDIARIES
 CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS INCOME
    (LOSS)
  Twelve Months Ended
    12/31/2006


Twelve Months Ended
    12/31/2005


Twelve Months Ended
    12/31/2004Non














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

$
431,105


$
1,903,630


$
1,478


$
(428,070
)

$
1,908,143


$
491,613


$
1,691,216



1,049


$
(489,125
)

$
1,694,753


$
374,833


$
1,222,515


$
2,030


$
(373,488
)

$
1,225,890Royalty revenue






80,357











80,357







78,128











78,128







78,474











78,474Total revenues


431,105



1,983,987



1,478



(428,070
)


1,988,500



491,613



1,769,344



1,049



(489,125
)


1,772,881



374,833



1,300,989



2,030



(373,488
)


1,304,364Operating costs and expenses:Cost of revenues


155,472



691,399



1,007



(428,070
)


419,808



152,011



659,552



547



(489,125
)


322,985



135,430



590,388



608



(373,488
)


352,938Selling, general and administrative


269,512



445,137



(684
)






713,965



218,455



416,328



1,700







636,483



264,024



330,434



983







595,441Research and development


4,670



248,926











253,596



35,646



227,080











262,726



509



83,730











84,239Depreciation and amortization


20,818



126,491



240







147,549



15,754



130,620



675







147,049



16,925



144,722



468







162,115Intangible asset impairment






47,842











47,842







212,747



8,307







221,054



4,399



145,193











149,592Restructuring charges


202



2,992











3,194



1,730



2,450











4,180



7,646



3,181











10,827Gain on sale of products






















(64
)


(1,611
)










(1,675
)


(4,022
)


(5,502
)










(9,524
)Total operating costs and expenses


450,674



1,562,787



563



(428,070
)


1,585,954



423,532



1,647,166



11,229



(489,125
)


1,592,802



424,911



1,292,146



2,059



(373,488
)


1,345,628Operating (loss) income


(19,569
)


421,200



915







402,546



68,081



122,178



(10,180
)






180,079



(50,078
)


8,843



(29
)






(41,264
)Other income (expense):Interest income


31,911



239



2







32,152



17,659



516











18,175



5,101



873











5,974Interest expense


(9,694
)


(163
)










(9,857
)


(11,865
)


(66
)










(11,931
)


(12,492
)


(96
)










(12,588
)Valuation charge 
    convertible notes receivable










































(2,887
)














(2,887
)Loss on investment






















(6,182
)














(6,182
)


(6,520
)














(6,520
)Gain on early extinguishment of debt


628















628







































Other, net


(650
)


(1,022
)


515







(1,157
)


(579
)


(1,016
)


(431
)






(2,026
)


(820
)


(82
)


153







(749
)Equity in earnings (loss) of
    subsidiaries


315,395











(315,395
)






113,679











(113,679
)






(84,284
)










84,284



Intercompany (expense) interest
    income


(49,739
)


50,287



(548
)










(57,355
)


58,088



(733
)










(33,648
)


33,937



(289
)






Total other income (expenses)


287,851



49,341



(31
)


(315,395
)


21,766



55,357



57,522



(1,164
)


(113,679
)


(1,964
)


(135,550
)


34,632



(136
)


84,284



(16,770
)Income (loss) from continuing
    operations before income taxes


268,282



470,541



884



(315,395
)


424,312



123,438



179,700



(11,344
)


(113,679
)


178,115



(185,628
)


43,475



(165
)


84,284



(58,034
)Income tax (benefit) expense


(20,667
)


156,305



92







135,730



5,616



56,874



(1,005
)






61,485



(25,315
)


18,026



(123
)






(7,412
)Income (loss) from continuing
    operations


288,949



314,236



792



(315,395
)


288,582



117,822



122,826



(10,339
)


(113,679
)


116,630



(160,313
)


25,449



(42
)


84,284



(50,622
)Discontinued operations:Income (loss) from discontinued
    operations






572











572



18



1,858











1,876



40



(172,790
)










(172,750
)Income tax expense (benefit)






205











205



7



666











673



15



(63,099
)










(63,084
)Total income (loss) from
    discontinued operations






367











367



11



1,192











1,203



25



(109,691
)










(109,666
)Net income (loss)

$
288,949


$
314,603


$
792



(315,395
)

$
288,949


$
117,833


$
124,018


$
(10,339
)

$
(113,679
)

$
117,833


$
(160,288
)

$
(84,242
)

$
(42
)

$
84,284


$
(160,288
)  F-48




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
    GUARANTOR SUBSIDIARIES
    CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
  December 31, 2006


December 31, 2005


December 31, 2004Non














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 (used in) provided by
    operating activities of continuing operations

$
(20,771
)

$
485,704


$
694


$



$
465,627


$
147,781


$
372,517


$
(790
)

$



$
519,508


$
(108,888
)

$
371,205


$
(1,410
)

$



$
260,907Cash flows from investing
    activities of continuing operations:Purchase of investments in debt
    securities


(1,705,517
)














(1,705,517
)


(1,175,159
)














(1,175,159
)


(320,849
)














(320,849
)Proceeds from maturity and sale of
    investments in debt securities


1,309,995















1,309,995



829,926















829,926



274,344















274,344Transfer from/(to) restricted cash


128,561















128,561



(75,211
)


1,582











(73,629
)


(1,459
)


(872
)










(2,331
)Purchases of property, plant and
    equipment


(22,505
)


(23,311
)










(45,816
)


(11,749
)


(41,541
)










(53,290
)


(12,034
)


(43,105
)


(2
)






(55,141
)Acquisition of primary care
    business of Elan














































(36,000
)










(36,000
)Purchases of product rights






(25,795
)










(25,795
)






































Palatin collaboration agreement






















(10,000
)














(10,000
)


(20,000
)














(20,000
)Purchases of intangible assets


























(16,705
)


(1,895
)






(18,600
)






(18,942
)


(3,258
)






(22,200
)Proceeds from sale of marketable
    securities






















6,453















6,453



















Arrow International Limited
    Collaboration agreement






(60,000
)










(60,000
)






































Pain Therapeutic collaboration
    agreement


























(153,711
)










(153,711
)


















Mutual cross-license agreement






















(35,000
)














(35,000
)


















Loan to Ligand


(37,750
)














(37,750
)






































Proceeds from sale of intangible
    assets










































27,715



(257
)










27,458Other investing activities


6



1











7



1



2











3



668



(20
)










648Net cash used in investing
    activities of continuing operations


(327,210
)


(109,105
)










(436,315
)


(470,739
)


(210,373
)


(1,895
)






(683,007
)


(51,615
)


(99,196
)


(3,260
)






(154,071
)Cash flows from financing
    activities of continuing operations:Proceeds from exercise of stock
    options, net


7,338















7,338



857















857



4,677















4,677Excess tax benefits from
    stock-based compensation


484















484







































Proceeds from issuance of long-term
    debt


400,000















400,000







































Payments on other long-term debt


(342,691
)














(342,691
)






















(97
)














(97
)Debt issuance costs


(10,680
)














(10,680
)






































Intercompany


367,938



(368,921
)


983











184,452



(188,108
)


3,656











250,935



(254,980
)


4,045







Net cash provided by financing
    activities of continuing operations


422,389



(368,921
)


983







54,451



185,309



(188,108
)


3,656







857



255,515



(254,980
)


4,045







4,580Cash flows from discontinued
    operations:Net cash (used in) provided by
    operating activities of discontinued operations










































3,820



6,365











10,185Net cash provided by (used in)
    investing activities of discontinued operations










































27,927















27,927Increase (decrease) in cash and
    cash equivalents


74,408



7,678



1,677







83,763



(137,649
)


(25,964
)


971







(162,642
)


126,759



23,394



(625
)






149,528Cash and cash equivalents,
    beginning of year


26,802



1,071



2,141







30,014



164,451



27,035



1,170







192,656



37,692



3,641



1,795







43,128Cash and cash equivalents, end of
    year

$
101,210


$
8,749


$
3,818


$



$
113,777


$
26,802


$
1,071


$
2,141


$



$
30,014


$
164,451


$
27,035


$
1,170


$



$
192,656  F-49




---



##### Table of Contents



SIGNATURES
      By:
    /s/  BRIAN
    A. MARKISON   President and Chief Executive Officer
      Signature

Capacity

Date/s/  TED
    G. WOODTed
    G. Wood

Non-Executive Chairman of the Board

February 28, 2007/s/  BRIAN
    A. MARKISONBrian
    A. Markison

President, Chief Executive Officer
    and Director

February 28, 2007/s/  JOSEPH
    SQUICCIARINOJoseph
    Squicciarino

Chief Financial Officer (principal
    financial and accounting officer)

February 28, 2007/s/  EARNEST
    W.
    DEAVENPORT, JR.Earnest
    W. Deavenport, Jr.

Director

February 28, 2007/s/  ELIZABETH
    M. GREETHAMElizabeth
    M. Greetham

Director

February 28, 2007/s/  PHILIP
    A. INCARNATIPhilip
    A. Incarnati

Director

February 28, 2007/s/  GREGORY
    D. JORDANGregory
    D. Jordan

Director

February 28, 2007/s/  R.
    CHARLES MOYERR.
    Charles Moyer

Director

February 28, 2007/s/  D.
    GREG ROOKERD.
    Greg Rooker

Director

February 28, 2007  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, 2006


12,280



(138
)






6,705



5,437Year ended December 31, 2005


15,348



939







4,007



12,280Year ended December 31, 2004


11,055



7,476







3,183



15,348Valuation allowance for deferred
    tax assets, deducted from deferred income tax assets in the
    balance sheetYear ended December 31, 2006


9,214



1,040







2,169



8,085Year ended December 31, 2005


3,950



5,264











9,214Year ended December 31, 2004


6,525











2,575
*


3,950     (1)
    
    Amounts represent write-offs of accounts.*
    
    Valuation account reduced and credited to income. S-1