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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549




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FORM 10-K

(Mark One)



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

For the fiscal year ended December 31,
2004

OR



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

Commission File Number 0-24425

King Pharmaceuticals, Inc.

(Exact name of registrant as specified in its
charter)


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

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

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

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

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

None


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

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

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

The aggregate market value of the voting and
non-voting common equity held by non-affiliates computed by
reference to the price at which the common equity was last sold,
or the average bid and asked price of such common equity as of
June 30, 2004 was $2,756,397,796. The number of shares of
Common Stock, no par value, outstanding at March 14, 2005
was 241,723,694.

Documents Incorporated by Reference:

Portions of the Proxy Statement for the
2005

Annual Meeting of Shareholders (to be
filed)


Part III




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Explanatory Statement



| |                                                          
| | ---------------------------------------------------------
| | Restatement of previously issued financial
    statements

We have restated our previously issued financial
statements for the years 2002 and 2003, including interim
periods in 2003, and the first two quarters of 2004, primarily
to reflect the correction of methodological errors related to
our reserve for product returns.

After experiencing an unusually high level of
product returns during late 2003 and the first three quarters of
2004, we decided to conduct a thorough evaluation of our returns
reserve before formally closing the third quarter of 2004.
Accordingly, on October 28, 2004, we publicly announced
that we were conducting a review of our returns reserve and that
our preliminary financial results for the third quarter of 2004
were subject to change as a result of the review. We
subsequently delayed the filing of our Quarterly Report on
Form 10-Q for the quarter ended September 30, 2004,
which we are filing contemporaneously with this Annual Report on
Form 10-K.

In connection with our now-completed review, we
have concluded that the recent large returns were primarily the
result of our entry into inventory management agreements, which
we refer to as IMAs, with our largest wholesalers,
together with several product-specific developments. However, we
have also determined that our methodology for reserving for
product returns from the first quarter of 2000 through the
second quarter of 2004 contained errors, with the result that
estimated product returns were not recorded in the period
required under generally accepted accounting principles, which
we refer to as GAAP. Also in connection with our
review, we concluded that certain other immaterial items should
have been recognized in earlier periods.

For a discussion of the restatement adjustments,
see Item 7. Managements Discussion and Analysis
of Financial Condition and Results of Operations 
Restatement of Financial Statements and Note 2 to the
audited consolidated financial statements.

All amounts referenced in this Annual Report for
2002 and 2003, including interim periods in 2003, and the first
two quarters of 2004 reflect the relevant amounts on a restated
basis. We will not amend our Annual Reports on Form 10-K
for the years ended December 31, 2002 or 2003, or our
Quarterly Reports on Form 10-Q for quarterly periods from
January 1, 2002 through June 30, 2004. The previously
issued financial statements for 2002, 2003, and the first two
quarters of 2004 should no longer be relied upon.

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PART I



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

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

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

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



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

Through a national sales force consisting of
approximately 1,050 approved positions, and through
marketing alliances, we market our branded pharmaceutical
products to general/family practitioners, internal medicine
physicians, cardiologists, endocrinologists, psychiatrists,
neurologists, pain specialists, sleep specialists, and hospitals
across the United States and in Puerto Rico.

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

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



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

2



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| |   |                                     
| | - | ------------------------------------
| |  | developing new dosages; and         
|
| |  | developing new product formulations.

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

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

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



| |   |                                                                             
| | - | ----------------------------------------------------------------------------
| |  | cardiovascular (including Altace®,
    Corzide®, Procanbid® and Thalitone®),
|
| |  | endocrinology (including Levoxyl®,
    Cytomel® and Triostat®),             
|
| |  | neuroscience (including Sonata® and
    Skelaxin®),                         
|
| |  | critical care (including Thrombin-JMI®,
    Synercid® and Brevital®),       
|
| |  | anti-infectives (including Bicillin®,
    Cortisporin® and Neosporin®)and   
|
| |  | respiratory (including Intal® and
    Tilade®).                             

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

The following summarizes net revenues by
operating segment (in thousands) all of which are derived from
activities within the United States and Puerto Rico.

|                              |       |                                  |         |            |  |      |           |           |  |   |           |           | 
|----------------------------- | ----- | -------------------------------- | ------- | ---------- |  | ---- | --------- | --------- |  | - | --------- | --------- | 
|                              |       |                                 
|                              |       | For the Years Ended December 31,
|                              |       |                                 
|                              |       | 2002                             |         | 2003       |  |     
|                              |       | (restated)                       |         | (restated) |  | 2004
|                              |       |                                  |         |            |  |     
|Branded pharmaceuticals       |       | $                                | 992,520 |            |  | $    | 1,272,350 |           |  | $ | 1,076,517 |          
|Meridian Medical Technologies |       |                                  |        |            |  |      | 124,157   |           |  |   | 123,329   |          
|Royalties                     |       |                                  | 58,375  |            |  |      | 68,365    |           |  |   | 78,473    |          
|Contract manufacturing        |       |                                  | 35,936  |            |  |      | 27,289    |           |  |   | 26,046    |          
|Other                         |       |                                  | 1,193   |            |  |      | 628       |           |  |   | (1        | )        
|                              |       |                                  |         |            |  |      |           |           |  |   |           |          
|                              | Total |                                  | $       | 1,088,024  |  |      | $         | 1,492,789 |  |   | $         | 1,304,364 | 
|                              |       |                                  |         |            |  |      |           |           |  |   |           |          

Key Historical Milestones

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

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

On August 31, 2000, we acquired Jones Pharma
Incorporated in an all stock transaction accounted for as a
pooling of interests valued at approximately $2.4 billion.
We exchanged approximately 98.4 million shares (post
subsequent stock splits) of King common stock for all of the
outstanding shares of Jones. Each share of Jones was exchanged
for 1.5 shares (post subsequent stock splits) of King
common stock. In addition, outstanding Jones stock options were
converted at the same exchange ratio to purchase approximately
5.4 million shares (post subsequent stock splits) of King
common stock. In the fourth quarter of 2004, Jones merged into
King Research and Development, one of our wholly owned
subsidiaries.

On December 30, 2002, we licensed or
acquired the rights to three branded pharmaceutical products
from Aventis for the initial cash payment of
$197.5 million, plus $3.8 million of expenses. The
products involved include rights in the United States, Puerto
Rico, and Canada to Intal® and Tilade®, inhaled
anti-inflammatory agents for the management of asthma. We also
obtained worldwide rights, excluding Japan, to Synercid®,
an injectable antibiotic indicated for treatment of
vancomycin-resistant enterococcus faecium and treatment of some
complicated skin and skin structure infections. In addition to
the initial cash payment, we paid $10.3 million in December
2003 as a milestone payment due to the continued recognition of
Synercid® as an effective treatment for
vancomycin-resistant enterococcus faecium. As additional
consideration for Synercid®, we have agreed to remaining
potential milestone payments to Aventis totaling
$64.8 million.

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

On June 12, 2003, we acquired the primary
care business of Elan Corporation, plc, and that of some of its
subsidiaries, in the United States and Puerto Rico, including
the rights to Sonata® and Skelaxin® and rights
pertaining to potential new formulations of these products,
together with Elans United States primary care field sales
force. Product rights subject to the agreement include those
related to Sonata®, a nonbenzodiazepine treatment for
insomnia, and Skelaxin®, a muscle relaxant, in the United
States, its territories and possessions, and Puerto Rico. Under
the terms of the agreement, Elans sale of Skelaxin®
included related New Drug Applications, which we refer to as
NDA, copyrights, trademarks, patents and rights
pertaining to potential new formulations of Skelaxin®.
Elans sale of Sonata® included its rights to the
product, as well as certain related copyrights. We also acquired
certain intellectual property, regulatory, and other assets
relating to Sonata® directly from Wyeth. Under the terms of
the agreement, we secured an exclusive license to the
intellectual property rights in this territory of both Wyeth and
Elan to the extent they relate to new formulations of
Sonata®, other than for use in animals. The total

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estimated purchase price of $814.4 million
includes the cost of acquisition, assumed liabilities and a
portion of contingent liabilities. The purchase price also
includes the transfer of inventory with a value of approximately
$40.4 million. In addition to the initial purchase price,
we paid $25.0 million during January 2004 as a milestone
payment to Elan relating to the ongoing exclusivity of
Skelaxin®. We also will pay royalties on the current
formulation of Skelaxin® from the date of closing.


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

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

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

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

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

On August 12, 2004, we entered into a
collaborative agreement with Palatin Technologies, Inc. to
jointly develop and, on obtaining necessary regulatory
approvals, commercialize Palatins PT,-141 for the
treatment of male and female sexual dysfunction. Pursuant to the
terms of the agreement, Palatin has granted King a co-exclusive
license with Palatin to PT-141 in North America and an exclusive
right to collaborate in the licensing or sublicensing of PT-141
with Palatin outside North America. PT-141 is the first compound
in a new drug class called melanocortin receptor agonists under
development to treat sexual dysfunction. This new chemical
entity is being evaluated in Phase II clinical trials
studying the efficacy and safety profile of varying doses of
this novel compound in men experiencing erectile dysfunction,
which we refer to as ED, and women experiencing
female sexual dysfunction, which we refer to as FSD.
We paid Palatin approximately $20.0 million on entering
into the collaborative agreement, which included a
$3.4 million equity investment in Palatin. Additionally, we
may pay potential milestone payments to Palatin of up to
$100.0 million for achieving certain ED and FSD development
and regulatory approval targets. After regulatory approval and
commercialization of PT-141, we may also pay potential milestone
payments to Palatin of up to $130.0 million upon achieving
specified annual North American net sales thresholds.

On September 17, 2004, we received FDA
approval of our sNDA covering infant formulations of our nerve
gas antidote AtroPen®. This is the first time that infant
formulations of this homeland security product have been
approved for use in the United States. AtroPen® utilizes
our auto-injector technology.

In December 2004, we completed the Phase IV
clinical trial to determine the safety and effectiveness of
Altace® in the treatment of hypertension (high blood
pressure) in children. We refer to this trial as
TOPHAT (Treatment of Pediatric Hypertension with
Altace Trial).

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Industry

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

The industry is affected by the following:



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

Branded Pharmaceuticals

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



| |   |                                                                             
| | - | ----------------------------------------------------------------------------
| |  | cardiovascular (including Altace®,
    Corzide®, Thalitone® and Procanbid®),
|
| |  | endocrinology (including Levoxyl®,
    Cytomel® and Triostat®),             
|
| |  | neuroscience (including Sonata® and
    Skelaxin®),                         
|
| |  | critical care (including Thrombin-JMI®,
    Synercid® and Brevital®),       
|
| |  | anti-infective (including Bicillin®,
    Cortisporin® and Neosporin®), and  
|
| |  | respiratory (including Intal® and
    Tilade®).                             

Our branded pharmaceutical products are generally
in high volume therapeutic categories and are well known for
their indications (for example, Altace®, Skelaxin®,
Sonata® and Levoxyl®). Branded pharmaceutical products
represented 82.5% and 85.2% of total net revenues for each of
the years ended December 31, 2004 and 2003.

Cardiovascular.Altace®, an ACE inhibitor, is our
primary product within this category. In August 1999, the
results of the Heart Outcomes Prevention Evaluation trial, which
we refer to as the HOPE trial, were released. The
HOPE trial determined that Altace® significantly reduces
the rates of stroke, myocardial infarction (heart attack) and
death from cardiovascular causes in a broad range of high-risk

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cardiovascular patients. On October 4, 2000,
the FDA approved our sNDA. This approval permits the promotion
of Altace® to reduce the risk of stroke, myocardial
infarction (heart attack) and death from cardiovascular causes
in patients 55 and over either with a history of coronary artery
disease, stroke or peripheral vascular disease or with diabetes
and one other cardiovascular risk factor (hypertension, elevated
total cholesterol levels, low HDL levels, cigarette smoking or
documented microalbuminuria). Corzide® is a combination
beta blocker and thiazide diuretic indicated for the management
of hypertension. Corgard® is a beta-blocker indicated for
the management of hypertension as well as long-term management
of patients with angina pectoris. Procanbid® is a branded
pharmaceutical product used to treat arrhythmia. Thalitone®
is a hypertension diuretic tablet indicated for the management
of hypertension. These products are marketed primarily to
primary care physicians and cardiologists.


Endocrinology.We
have a number of leading branded pharmaceutical products in this
category, including Levoxyl®, Cytomel® and
Triostat®, which are indicated for the treatment of thyroid
disorders. These products are marketed primarily to primary care
physicians and endocrinologists.

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

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

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

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

7



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Some of our branded prescription products are
described below:

|                         |  |                                            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|------------------------ |  | ------------------------------------------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                         |  | Company Acquired From                      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Product                  |  | and Date of Acquisition                    |  | Product Description and Indication                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                         |  |                                            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|CardiovascularAltace®(1) |  | Aventis
    (December 1998)                |  | A hard-shell capsule for oral administration
    indicated for the treatment of hypertension and reduction of the
    risk of stroke, myocardial infarction (heart attack) and death
    from cardiovascular causes in patients 55 and over either with a
    history of coronary artery disease, stroke or peripheral
    vascular disease or with diabetes and one other cardiovascular
    risk factor (such as elevated cholesterol levels or cigarette
    smoking). Altace® is also indicated in stable patients who
    have demonstrated clinical signs of congestive heart failure
    after sustaining acute myocardial infarction.
|                        
|Thalitone®(2)            |  | Horus Global HealthNet
    (December 1996) |  | A hypertension-diuretic tablet indicated for the
    management of hypertension, either alone or in combination with
    other antihypertensive drugs, and for adjunctive therapy edema
    associated with congestive heart failure and various forms of
    renal dysfunction.                                                                                                                                                                                                                                                                                                                                                             
|                        
|Procanbid®               |  | Pfizer
    (February 1998)                 |  | A procainamide extended-release tablet indicated
    for the treatment of documented ventricular arrhythmia, such as
    sustained ventricular tachycardia, that, in the judgment of a
    physician, are life-threatening.                                                                                                                                                                                                                                                                                                                                                                                                                  
|                        
|Corzide®                 |  | Bristol-Myers Squibb
    (August 2001)     |  | A combination beta blocker and thiazide diuretic
    tablet indicated for the management of hypertension.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                        
|Corgard®(3)              |  | Bristol-Myers Squibb
    (August 2001)     |  | A beta-blocker tablet, indicated for the
    management of hypertension as well as long term management of
    patients with angina pectoris.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|                        
|Adrenalin®               |  | Pfizer
    (February 1998)                 |  | A sterile solution made from the active principle
    of the adrenal medulla used to relieve respiratory distress and
    hypersensitivity reactions and restore cardiac rhythm in cardiac
    arrest due to various causes.                                                                                                                                                                                                                                                                                                                                                                                                                 

8



---



##### 



|              |  |                                        |  |                                                                                                                                                                                                           
|------------- |  | -------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|              |  | Company Acquired From                  |  |                                                                                                                                                                                                           
|Product       |  | and Date of Acquisition                |  | Product Description and Indication                                                                                                                                                                        
|              |  |                                        |  |                                                                                                                                                                                                           
|Endocrinology |  |                                        |  |                                                                                                                                                                                                           
|Levoxyl®      |  | Jones
    (August 2000)                |  | Color-coded, potency marked tablets indicated for
    thyroid hormone replacement or supplemental therapy for
    hypothyroidism.                                                                         
|             
|Cytomel®      |  | Jones
    (August 2000)                |  | A tablet indicated in the medical treatment of
    hypothyroidism. The only commercially available thyroid hormone
    tablet containing T(3) as a single entity.                                         
|             
|Triostat®     |  | Jones
    (August 2000)                |  | A sterile non-pyrogenic aqueous solution for
    intravenous administration indicated in the treatment of
    myxedema coma/precoma.                                                                      
|             
|Tapazole®     |  | Jones
    (August 2000)                |  | A tablet indicated in the medical treatment of
    hyperthyroidism.                                                                                                                                       
|             
|Florinef®     |  | Bristol-Myers Squibb
    (August 2001) |  | A partial replacement tablet therapy for primary
    and secondary adrenocortical insufficiency in Addisons
    disease and for the treatment of salt-losing adrenogenital
    syndrome.                 
|             
|Neuroscience  |  |                                       
|Sonata®       |  | Elan
    (June 2003)                   |  | A nonbenzodiazepine capsule treatment for
    insomnia.                                                                                                                                                   
|             
|Skelaxin®     |  | Elan
    (June 2003)                   |  | A muscle relaxant tablet indicated for the relief
    of discomforts associated with acute, painful musculoskeletal
    conditions.                                                                       
|             
|Critical Care |  |                                        |  |                                                                                                                                                                                                           
|Thrombin-JMI® |  | Jones
    (August 2000)                |  | A chromatographically purified topical
    (bovine) thrombin solution indicated as an aid to
    hemostasis whenever oozing blood and minor bleeding from
    capillaries and small venules is accessible.
|             
|Synercid®     |  | Aventis
    (December 2002)            |  | An injectable antibiotic indicated for treatment
    of certain complicated skin and skin structure infections.                                                                                           
|             
|Brevital®     |  | Jones
    (August 2000)                |  | An anesthetic solution for intravenous use in
    adults and for rectal and intramuscular use only in pediatric
    patients.                                                                             

9



---



##### 



|               |  |                                     |  |                                                                                                                                                                                                                                                                                                                                                                                
|-------------- |  | ----------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|               |  | Company Acquired From               |  |                                                                                                                                                                                                                                                                                                                                                                                
|Product        |  | and Date of Acquisition             |  | Product Description and Indication                                                                                                                                                                                                                                                                                                                                             
|               |  |                                     |  |                                                                                                                                                                                                                                                                                                                                                                                
|              
|Anti-Infective |  |                                     |  |                                                                                                                                                                                                                                                                                                                                                                                
|Bicillin®      |  | Wyeth
    (July 2000)               |  | A penicillin-based antibiotic suspension for deep
    muscular injection indicated for the treatment of infections due
    to penicillin-G-susceptible microorganisms that are susceptible
    to serum levels common to this particular dosage form.                                                                                                                          
|              
|Cortisporin®   |  | GlaxoSmithKline
    (March 1997)    |  | A full line of prescription antibiotic and
    anti-inflammatory formulations of ophthalmic ointments and
    suspensions, otic solutions and suspensions, and topical creams
    and ointments indicated for the treatment of corticosteroid-
    responsive dermatoses with secondary infections.                                                                            
|Viroptic®      |  | GlaxoSmithKline
    (May 1997)      |  | A sterile ophthalmic solution indicated for the
    treatment of ocular Herpes simplex virus, idoxuridine-resistant
    Herpes and vidarabine-resistant Herpes. Viroptic® is also
    indicated for use in pediatric patients, ages six and above.                                                                                                                             
|              
|Neosporin®(4)  |  | GlaxoSmithKline
    (November 1997) |  | A prescription strength ophthalmic ointment and
    solution indicated for the topical treatment of ocular
    infections. It is also formulated as a prescription strength
    genito-urinary concentrated sterile irrigant indicated for
    short-term use as a continuous irrigant or rinse to help prevent
    infections associated with the use of indwelling catheters.
|              
|Polysporin®(4) |  | GlaxoSmithKline
    (November 1997) |  | A prescription strength wide range antibacterial
    sterile ointment indicated for the topical treatment of
    superficial ocular infections.                                                                                                                                                                                                                                
|              
|Chloromycetin® |  | Pfizer
    (February 1998)          |  | A broad spectrum antibiotic for bacterial
    infections that are not responsive to other antibiotics or when
    other antibiotics are contraindicated.                                                                                                                                                                                                                       
|              
|Septra®        |  | GlaxoSmithKline
    (November 1997) |  | An antibiotic tablet, suspension and infusion
    indicated for the treatment of infectious diseases, including
    urinary tract infections, pneumonia, enteritis and ear
    infections in adults and children.                                                                                                                                                              

10



---



##### 



|             |  |                             |  |                                                                                                                                                                                                                                                                                              
|------------ |  | --------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|             |  | Company Acquired From       |  |                                                                                                                                                                                                                                                                                              
|Product      |  | and Date of Acquisition     |  | Product Description and Indication                                                                                                                                                                                                                                                           
|             |  |                             |  |                                                                                                                                                                                                                                                                                              
|            
|Coly-MycinM® |  | Pfizer
    (February 1998)  |  | An antibiotic sterile parenteral indicated for
    the treatment of acute or chronic infections due to sensitive
    strains of certain gram-negative bacteria and a sterile aqueous
    suspension for the treatment of superficial bacterial infections
    of the external auditory canal.
|            
|Silvadene®   |  | Aventis
    (December 1998) |  | A topical antimicrobial cream indicated as an
    adjunct for the prevention and treatment of wound sepsis in
    patients with second-and third-degree burns.                                                                                                                               
|            
|Respiratory  |  |                             |  |                                                                                                                                                                                                                                                                                              
|Intal®       |  | Aventis
    (December 2002) |  | An oral multi-dose inhaler of a non- steroidal
    anti-inflammatory agent for the preventive management of asthma.                                                                                                                                                                          
|Tilade®      |  | Aventis
    (December 2002) |  | An oral multi-dose inhaler of a non- steroidal
    anti-inflammatory agent for the preventive management of asthma.                                                                                                                                                                          






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

Net sales of many of our branded prescription
products for the year ended December 31, 2004 are set forth
in the tables below.

|               |            |               |  |             |       |               |  |        |  |               |     |  |  |  |              |  |  |   |      | 
|-------------- | ---------- | ------------- |  | ----------- | ----- | ------------- |  | ------ |  | ------------- | --- |  |  |  | ------------ |  |  | - | ---- | 
|Cardiovascular |            | Net sales     |  | Respiratory |       | Net sales     |  | Other  |  | Net sales    
|               |            |               |  |             |       |               |  |        |  |              
|               |            | (in millions) |  |             |       | (in millions) |  |        |  | (in millions)
|               | Altace®    |               |  | $           | 347.3 |               |  | Intal® |  | $             | 6.5 |  |  |  | Delestrogen® |  |  | $ | 7.4  | 
|               | Corzide®   |               |  |             | 4.4   |               |  | Other  |  |               | 3.0 |  |  |  | Menest®      |  |  |   | 5.3  | 
|               | Corgard®   |               |  |             | 6.3   |               |  |        |  |               |     |  |  |  | Aplisol®     |  |  |   | 12.6 | 
|               | Procanbid® |               |  |             | 4.0   |               |  |        |  |               |     |  |  |  | Tigan®       |  |  |   | 3.6  | 
|               | Other      |               |  |             | 1.3   |               |  |        |  |               |     |  |  |  | Other        |  |  |   | 5.9  | 

|              |           |               |  |                 |       |               |  |  |            |  |  |   |      |   |  |  |  |  |  |  |  | 
|------------- | --------- | ------------- |  | --------------- | ----- | ------------- |  |  | ---------- |  |  | - | ---- | - |  |  |  |  |  |  |  | 
|Endocrinology |           | Net sales     |  | Anti-infectives |       | Net sales     |  |  |            | 
|              |           |               |  |                 |       |               |  |  |            | 
|              |           | (in millions) |  |                 |       | (in millions) |  |  |            | 
|              | Levoxyl®  |               |  | $               | 104.8 |               |  |  | Synercid®  |  |  | $ | 16.8 |   |  |  |  |  |  |  |  | 
|              | Cytomel®  |               |  |                 | 21.4  |               |  |  | Bicillin®  |  |  |   | 32.2 |   |  |  |  |  |  |  |  | 
|              | Triostat® |               |  |                 | 3.1   |               |  |  | Neosporin® |  |  |   | 7.1  |   |  |  |  |  |  |  |  | 
|              | Tapazole® |               |  |                 | 3.0   |               |  |  | Other      |  |  |   | (3.4 | ) |  |  |  |  |  |  |  | 

11



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##### 



|             |           |               |  |               |       |               |  |  |               |  |  |   |       |  |  |  |  |  |  |  |  | 
|------------ | --------- | ------------- |  | ------------- | ----- | ------------- |  |  | ------------- |  |  | - | ----- |  |  |  |  |  |  |  |  | 
|Neuroscience |           | Net sales     |  | Critical Care |       | Net sales     |  |  |               | 
|             |           |               |  |               |       |               |  |  |               | 
|             |           | (in millions) |  |               |       | (in millions) |  |  |               | 
|             | Skelaxin® |               |  | $             | 238.6 |               |  |  | Thrombin-JMI® |  |  | $ | 174.6 |  |  |  |  |  |  |  |  | 
|             | Sonata®   |               |  | $             | 60.4  |               |  |  | Brevital®     |  |  |   | 8.8   |  |  |  |  |  |  |  |  | 
|             |           |               |  |               |       |               |  |  | Ketalar®      |  |  |   | 1.5   |  |  |  |  |  |  |  |  | 
|             |           |               |  |               |       |               |  |  | Other         |  |  |   | 0.4   |  |  |  |  |  |  |  |  | 

Meridian Medical Technologies

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

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

Our Meridian segment also has pharmaceutical
products that are presently sold primarily to the DoD under an
Industrial Base Maintenance Contract which is terminable by the
DoD at its convenience. These products include AtroPen® and
ComboPen® which are nerve agent antidotes. AtroPen® is
an atropine-filled auto-injector and ComboPen® consists of
an atropine-filled auto-injector and a pralidoxime-filled
auto-injector. Other products sold to the DoD include a
diazepam-filled auto-injector for the treatment of seizures and
a morphine-filled auto-injector for pain management.
Additionally, in January 2004, Meridian began selling a new
auto-injector to the DoD called the Antidote Treatment Nerve
Agent Auto-injector. This auto-injector product, also a nerve
agent antidote, utilizes a dual chambered auto-injector and
injection process to administer atropine and pralidoxime,
providing an improved, more efficient means of delivering these
nerve agent antidotes.

Royalties

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

Royalties received by us from sales of
Adenocard® and Adenoscan® outside of the United States
and Canada are shared equally with Fujisawa. Fujisawa, on its
own behalf and ours, obtained a license to additional
intellectual property rights for intravenous adenosine in
cardiac imaging and the right to use intravenous adenosine as a
cardioprotectant in combination with thrombolytic therapy,
balloon angioplasty and coronary bypass surgery and secured
intellectual property rights to extend the exclusivity of

12



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##### 



Adenoscan® until March 2015. For additional
information on our royalty agreements, please see the section
below entitled Intellectual Property.


Contract Manufacturing

We utilize a portion of our excess manufacturing
capacity to provide third-party contract manufacturing. We
currently provide contract manufacturing for many pharmaceutical
and biotechnology companies, including Pfizer, Centocor, Inc.,
Santen Incorporated and Hoffman-LaRoche Inc. Many of the
products that we contract manufacture are difficult to
manufacture and, therefore, do not attract significant
competition. Contract manufacturing as a percentage of total
revenues equaled approximately 2.0% for the year ended
December 31, 2004. We believe contract manufacturing
provides the following benefits:



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

Sales and Marketing

Our commercial operations organization, which
includes sales and marketing, is based in Princeton, New Jersey.
We have a national sales force consisting of approximately 1,050
approved positions. We distribute our branded pharmaceutical
products primarily through wholesale pharmaceutical
distributors. These products are ordinarily dispensed to the
public through pharmacies by prescription. Our marketing and
sales promotions for branded pharmaceutical products principally
target general/family practitioners, internal medicine
physicians, cardiologists, endocrinologists, neurologists,
psychiatrists, pain specialists, sleep specialists and hospitals
through detailing and sampling to encourage physicians to
prescribe more of our products. The sales force is supported and
supplemented by co-promotion arrangements, telemarketing and
direct mail, as well as through advertising in trade
publications and representation at regional and national medical
conventions. Our telemarketing and direct mailing efforts are
performed primarily by using a computer sampling system which we
developed to distribute samples to physicians. We identify and
target physicians through data available from IMS America, Ltd.
and Scott-Levin, suppliers of prescriber prescription data. We
intend to seek new markets in which to promote our product lines
and will continue expansion of our field sales force as product
growth, product acquisitions or product approvals warrant. We
seek new international markets for product lines for which we
have international rights. The marketing and distribution of
these products in foreign countries generally require the prior
registration of the products in those countries. We generally
seek to enter into distribution agreements with companies with
established marketing and distribution capabilities to
distribute the products in foreign countries since we do not
have a distribution mechanism in place for distribution outside
the United States and Puerto Rico.

Similar to other pharmaceutical companies, our
principal customers are wholesale pharmaceutical distributors.
The wholesale distributor network for pharmaceutical products
has in recent years been subject to increasing consolidation,
which has increased our, and other industry participants,
customer concentration. In addition, the number of independent
drug stores and small chains has decreased as retail
consolidation has occurred. For the year ended December 31,
2004, approximately 70% of our sales were attributable to three
key wholesalers: Cardinal/Bindley (29.0%), Amerisource Bergen
Corporation (15.0%) and McKesson Corporation (26.0%).

Manufacturing

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

13



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##### 



We can produce a broad range of dosage
formulations, including sterile solutions, lyophylized
(freeze-dried) products, injectables, tablets and capsules,
creams and ointments, suppositories and powders. We believe our
manufacturing capabilities allow us to capture higher margins
and pursue product line extensions more efficiently. We
manufacture a portion of the finished dosage form of
Altace® at our Bristol facility. However, currently many of
our product lines, including Skelaxin®, Sonata®,
Delestrogen®, Corgard®, Intal®, Tilade®,
Synercid® and Cortisporin® are manufactured for us by
third parties. As of December 31, 2004, capacity
utilization was approximately 30% at the Bristol facility,
approximately 20% at the Rochester facility, approximately 100%
at the Middleton facility, approximately 65% at the
St. Petersburg facility and approximately 75% at the
St. Louis facility. With the exception of the Middleton and
St. Petersburg facilities, we believe our facilities
provide us with substantial manufacturing capacity for future
growth. Thrombin-JMI® is the only product we manufacture at
our Middleton facility. We are currently working to expand our
capacity for Thrombin-JMI®; a portion of such expansion
should be completed in the fourth quarter of 2005. We intend to
transfer, when advantageous, production of acquired branded
pharmaceutical products and their product line extensions to our
manufacturing facilities as soon as practicable after regulatory
requirements and contract manufacturing requirements are
satisfied.

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

We require a supply of quality raw materials and
components to manufacture and package drug products for us and
for third parties with which we have contracted. Generally we
have not had difficulty obtaining raw materials and components
from suppliers in the past. Currently, we rely on more than 500
suppliers to deliver the necessary raw materials and components.

Research and Development

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

We invest in research and development because we
believe it is important to our long-term growth. We presently
employ approximately 76 people in research and development,
which include pre-clinical and toxicology experts, medical
affairs personnel, statisticians and project managers.

In the conduct of our research and development,
we utilize a project management model that provides us with
substantial flexibility, with a goal of maximizing efficiency
and minimizing internal fixed costs. Utilizing this model, we
supplement our internal efforts by collaborating with
independent research organizations, including educational
institutions and research-based pharmaceutical and biotechnology
companies, and contracting with others for the performance of
research in their facilities. We use the services of physicians,
hospitals, medical schools, universities, and other research
organizations worldwide to conduct clinical trials to establish
the safety and effectiveness of new products. We seek
investments in external research and technologies that hold the
promise to complement and strengthen our own research efforts.
These investments can take many forms, including in-licensing
arrangements, co-development and co-marketing agreements, joint
ventures, and the acquisition of products in development.

Drug development is time-consuming, expensive and
risky. Only a small percentage of chemical compounds discovered
by researchers prove to be both medically effective and safe
enough to become an approved medicine. The process from
discovery to regulatory approval typically takes 10 to
15 years or

14



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##### 



longer. Drug candidates can fail at any stage of
the process, and even late-stage product candidates sometimes
fail to receive regulatory approval.


Our development projects involving currently
marketed compounds include the following:



| |   |                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------
| |  | an Altace®/ diuretic combination product; and                                                                                      
|
| |  | a new formulation of Intal®, for the
    long-term management of asthma, utilizing the environmentally
    friendly propellant HFA.

Other compounds in development include the
following:



| |   |                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------
| |  | binodenoson, our next generation cardiac
    pharmacologic stress-imaging agent;                           
|
| |  | PT-141, an investigational new drug for the
    treatment of ED and FSD;                                   
|
| |  | T-62, an investigational drug for the treatment
    of neuropathic pain; and                               
|
| |  | MRE0094, an investigational drug for the topical
    treatment of chronic diabetic neuropathic foot ulcers.

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

Our research and development expenses were $28.2
million in 2002, $44.1 million in 2003 and
$67.9 million in 2004, excluding research and development
in-process at the time of acquisition. In-process research and
development expenses were $12.0 million for the year ended
December 31, 2002, $194.0 million for the year ended
December 31, 2003 and $16.3 million for the year ended
December 31, 2004.

Government Regulation

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

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

When we acquire the right to market an existing
approved pharmaceutical product, both we and the former
application holder are required to submit certain information to
the FDA. This information, if adequate, results in the transfer
to us of marketing rights to the pharmaceutical products. We are
also required to discuss with the FDA any changes in certain
conditions in the approved application as set forth in the
FDAs regulations. Our business strategy includes acquiring
branded pharmaceutical products and

15



---



##### 



transferring, when advantageous, their
manufacture to our manufacturing facilities as soon as
practicable after regulatory requirements are satisfied. In
order to transfer manufacturing of the acquired branded
products, we must demonstrate, by filing information with the
FDA, that we can manufacture the product in accordance with
current Good Manufacturing Practices, which we refer to as
cGMPs, and the specifications and conditions of the
approved marketing application. For changes requiring prior
approval, there can be no assurance that the FDA will grant such
approval in a timely manner, if at all.


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

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

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

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

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

The distribution of pharmaceutical products is
subject to the Prescription Drug Marketing Act, which we refer
to as PDMA, a part of the FDC Act, which regulates
distribution activities at both the federal and state level.
Under the PDMA and its implementing regulations, states are
permitted to require registration of manufacturers and
distributors who provide pharmaceuticals even if these
manufacturers or distributors have no place of business within
the state. States are also permitted to adopt regulations
limiting the distribution of product samples to licensed
practitioners. The PDMA also imposes extensive

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licensing, personnel record keeping, packaging,
quantity, labeling, product handling and facility storage and
security requirements intended to prevent the sale of
pharmaceutical product samples or other diversions.


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

The Rochester facility was inspected by the FDA
in November/December 2004. During this inspection, the FDA made
cGMP observations in a written report provided to us. This
written report is known as an FDA Form 483 or
simply as a 483. The observations in a 483 are
reported to the manufacturer in order to assist the manufacturer
in complying with the FDC Act and the regulations enforced by
the FDA. Often a pharmaceutical manufacturer receives a 483
after an inspection. While no law or regulation requires us to
respond to a 483, we provided the FDA with a written response to
the 483 related to the November/December 2004 inspection of the
Rochester facility, including action plans to address the
observations. The 483 from November/December 2004 does not
require us to delay or discontinue the production of any
products made at the Rochester facility.

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

Environmental Matters

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

Under the Comprehensive Environmental Response,
Compensation, and Liability Act, which we refer to as
CERCLA, the EPA can impose liability for the entire
cost of cleanup of contaminated properties upon each or any of
the current and former site owners, site operators or parties
who sent waste to the site, regardless of fault or the legality
of the original disposal activity. In addition, many states,
including Tennessee, Michigan, Wisconsin, Florida and Missouri,
have statutes and regulatory authorities similar to CERCLA and
to the EPA. We have entered into hazardous waste hauling
agreements with licensed third parties to properly dispose of
hazardous wastes. We cannot assure you that we will not be found
liable under CERCLA or other applicable state statutes or
regulations for the costs of undertaking a clean up at a site to
which our wastes were transported.

Competition

General

We compete with other pharmaceutical companies
for products and product line acquisitions. Competitors include
Biovail Corporation, Forest Laboratories, Inc., Galen Holdings,
plc, Shire Pharmaceuticals Group plc, Medicis Pharmaceutical
Corporation, Watson Pharmaceuticals, Inc., and other

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


Generic
Substitutes

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

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

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

Intellectual Property



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

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

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

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

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

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

We have exclusive licenses expiring in June 2036
for the prescription formulations of Neosporin® and
Polysporin®. These licenses are subject to early
termination in the event we fail to meet specified quality
control standards, including cGMP regulations with respect to
the products, or commit a material breach of other terms and
conditions of the licenses which would have a significant
adverse effect on the uses of the licensed products retained by
the licensor, which would include among other things, marketing
products under these trade names outside the prescription field.

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

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

We receive royalties on sales of Adenoscan®,
a product that we successfully developed. Adenoscan® has
patent coverage that extends to March 2015.

In addition to the intellectual property for the
currently marketed products described above, we also have
acquired intellectual property related to various products
currently under development. For example, we own all issued
patents on T-62 and related backup compounds currently under
development for the treatment for neuropathic pain. In
connection with our collaborative agreement with Palatin
Technologies, Inc., we have acquired a co-exclusive license to
intellectual property rights related to PT-141, currently being
developed for the treatment of male and female sexual
dysfunction. Furthermore, in connection with the development of
MRE0094, we have acquired exclusive licenses to composition and
method patents related to adenosine receptor agonists for the
topical treatment of chronic diabetic foot ulcers. Also, we

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have acquired exclusive rights to patents related
to binodenoson, the pharmacologic stress agent specific to the
adenosine receptor necessary for increased cardiac blood flow.


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

Trademarks

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

Backlog

As of March 8, 2005, we had no material
backlog.

Employees

As of February 28, 2005, we employed 2,746
full-time and 12 part-time persons. Approximately
212 employees of the Rochester facility are covered by a
collective bargaining agreement with the Paper, Allied
Industrial, Chemical & Energy Workers, International Union
(PACE), Local No. 60178, which expires on February 28,
2008. Approximately 304 employees of the St. Louis facility
are covered by a collective bargaining agreement with the
International Brotherhood of Teamsters, Chauffeurs, Warehousemen
and Helpers of America Union, Local No. 688, which expires
February 28, 2008. We believe our employee relations are
good.

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RISK FACTORS

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

Risks Related to our Business



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

As previously reported, in March 2003 the SEC
initiated a formal investigation of King relating to, among
other topics, sales of our products to VitaRx and Prison Health
Services, our best price lists, the pricing of our
pharmaceutical products provided to governmental Medicaid
agencies, the accrual and payment of rebates on the product
Altace®, the products Fluogen® and Lorabid®, the
King Benevolent Fund, Inc., our calculations related to Medicaid
rebates, and the Audit Committees internal review of
issues raised by the SEC investigation. As also previously
reported, on November 13, 2003, we received a subpoena
duces tecum from the Office of Inspector General at the
Department of Health and Human Services requesting the
production of documents relating to some of the matters being
investigated by the SEC and to our sales, marketing and other
business practices for Altace®, Aplisol® and
Levoxyl®. More recently, we have reviewed with the staff of
the SEC the circumstances giving rise to the restatement of
previously issued financial statements as discussed in
Note 2 to our audited consolidated financial statements.

In connection with our determination that we
underpaid amounts due to Medicaid and other government pricing
programs from 1998 through 2002, we have continued to engage in
discussions with representatives of the U.S. Securities and
Exchange Commission, the United States Attorney for the Eastern
District of Pennsylvania, the Department of Justice, the
National Association of Medicaid Fraud Control Units, the Office
of Inspector General of the Department of Health and Human
Services, the Department of Veterans Affairs, the Centers for
Medicare & Medicaid Services, and the Public Health
Service. Our objective in these discussions has been to achieve
a comprehensive settlement relating to all the matters being
investigated by or discussed with all the governmental
authorities.

We have not yet reached any agreements or
understandings with respect to the terms of such a settlement,
and we cannot assure you that we will ever be able to reach such
an agreement. Based on the status of the discussions to date,
however, we now believe that it is reasonably likely that we
will be able to achieve a comprehensive settlement with all
relevant governmental parties on the terms described in the
section entitled Managements Discussion and Analysis
of Financial Condition and Results of Operations under the
heading Governmental Investigations and Securities
Litigation.

Our ability to achieve a settlement on these or
other terms is subject to substantial uncertainties. Our
discussions to date have been conducted with the staffs of
various agencies and other governmental authorities. We do not
yet have any agreements or understandings with any of them. Even
if we were to reach such an agreement or understanding with
staff personnel, it would be subject to the approval of numerous
more senior representatives of the governmental parties,
including the members of the U.S. Securities and Exchange
Commission, the United States Attorney for the Eastern District
of Pennsylvania, senior officials in the Departments of Justice,
Health and Human Services and Veterans Affairs, and senior
officials in most or all of the States. We expect that our
agreements with the various governmental parties will also
require that the governmental parties reach numerous agreements
among themselves, and that the consummation of our agreement
with each governmental party would be dependent on consummation
of

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our agreements with other governmental parties.
We also expect that some aspects of a comprehensive settlement
would require court approval.


In light of these uncertainties, we stress that
we may not be able to reach a settlement with the governmental
parties, whether on the terms described above or at all. As a
result, the ultimate amount that we will actually have to pay to
resolve these matters could be materially more than the amount
accrued to date, and the terms could otherwise be materially
less favorable than those described above. Because of these
uncertainties and the complexity of completing a comprehensive
resolution, we are not yet able to estimate with reasonable
confidence the amount of time that will be required to enter
into and consummate comprehensive settlement agreements.

The possible settlement described above would not
apply to the related pending class actions and derivative suits
or any other claims by private plaintiffs. While we deny any
liability, we are unable to predict the outcome of the class
actions and derivative suits or reasonably estimate the range of
loss, if any.

For additional information, please see this
section entitled Risk Factors under the heading
If we fail to comply with our reporting and payment
obligations under the Medicaid rebate program or other
governmental pricing programs, we could be subject to additional
reimbursements, penalties, sanctions and fines which could have
a material adverse effect on our business, and the section
entitled Managements Discussion and Analysis of
Financial Condition and Results of Operations under the
heading Governmental Investigations and Securities
Litigation.

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

On August 12, 2004, the United States
District Court for the Eastern District of Tennessee ruled on
defendants motions to dismiss. The Court dismissed all
claims as to Jones Pharma, Inc., a predecessor to one of
our wholly owned subsidiaries, King Research and Development,
Inc., and as to defendants Dennis Jones and Henry Richards. The
Court also dismissed certain claims as to five other individual
defendants. The Court denied the motions to dismiss in all other
respects. Following the Courts ruling, on
September 20, 2004, we and the other remaining defendants
filed answers to plaintiffs consolidated amended
complaint. Discovery and other proceedings in the case are
continuing, and no trial date has been set.

Seven purported shareholder derivative complaints
have also been filed in federal and state courts in Tennessee
alleging a breach of fiduciary duty, among other things, by some
of our officers and directors. On October 26, 2004, all of
the defendants named in this action filed an answer to the
amended consolidated derivative and class action complaint.
Discovery in this action has commenced. No trial date has been
set.

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Another purported class action complaint was
filed on August 16, 2004 in Tennessee state court against
us and the members of our board of directors. This new case
largely asserts substantially the same claims and seeks the same
relief as the class action claim that was recently added to the
state derivative action described above. Defendants in that
action filed a motion to dismiss on November 30, 2004; that
motion is pending and no hearing date has been set.

Additionally, a class action complaint was filed
in the United States District Court for the Eastern District of
Tennessee under the Employee Retirement Income Security Act,
which we refer to as ERISA. As amended, the
complaint alleges that we and certain of our executive officers,
former executive officers, directors, former directors and an
employee violated fiduciary duties that they allegedly owed our
401(k) Retirement Savings Plans participants and
beneficiaries under ERISA. The allegations underlying this
action are similar in many respects to those in the class action
litigation described above. The defendants filed a motion to
dismiss the ERISA action on March 5, 2004. The District
Court Judge referred the motion to a Magistrate Judge for a
report and recommendation. On December 8, 2004, the
Magistrate Judge held a hearing on this motion, and, on
December 10, 2004, he recommended that the District Court
Judge dismiss the action. The District Court Judge accepted the
recommendation and dismissed the case on February 4, 2005.

We intend to defend all of these lawsuits
vigorously but are unable currently to predict the outcome or
reasonably estimate the range of potential loss, if any. If any
governmental sanctions are imposed, or if we were not to prevail
in the pending litigation, neither of which we can predict or
reasonably estimate at this time, our business, financial
condition, results of operations and cash flows could be
materially adversely affected. Responding to the governmental
investigations, resolving the amounts owed to governmental
agencies in connection with the underpayments and defending us
in the pending litigation has resulted, and is expected to
continue to result, in a significant diversion of
managements attention and resources and the payment of
additional professional fees.



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

Cobalt Pharmaceuticals, Inc., a generic drug
manufacturer located in Mississauga, Ontario, Canada, filed an
ANDA with the FDA seeking permission to market a generic version
of Altace®. The following U.S. patents are listed for
Altace® in the FDAs Orange Book: United States Patent
Nos. 4,587,258 (the 258 patent), and 5,061,722 (the
722) patent, two composition of matter patents related to
Altace®, and United States Patent No. 5,403,856, (the
856 patent), a method-of-use patent related to
Altace®, with expiration dates of January 2005, October
2008, and April 2012, respectively. Under the Hatch-Waxman Act,
any generic manufacturer may file an ANDA with a certification,
known as a Paragraph IV certification,
challenging the validity or infringement of a patent listed in
the FDAs Orange Book four years after the pioneer company
obtains approval of its NDA. Cobalt has filed a
Paragraph IV certification alleging invalidity of the
722 patent, and we filed suit on March 14, 2003 in
the District Court for the District of Massachusetts to enforce
our rights under that patent. Pursuant to the Hatch-Waxman Act,
the filing of that suit provides us an automatic stay of FDA
approval of Cobalts ANDA for 30 months from no
earlier than February 5, 2003. In March 2004, Cobalt
stipulated to infringement of the 722 patent. Should the
court find in favor of a Cobalt summary judgment motion on the
validity of the 722 patent, we would not receive the full
benefit of that 30 month stay. Subsequent to filing our
original complaint, we amended our complaint to add an
allegation of infringement of the 856 patent. The
856 patent covers one of Altace®s three
indications for use. In response to the amended complaint,
Cobalt informed the FDA that it no longer seeks approval to
market its proposed product for the indication covered by the
856 patent. On this basis, the court granted Cobalt
summary judgment of non-infringement of the 856 patent.
The courts decision does not affect Cobalts
infringement of the 722 patent. We intend to vigorously
enforce our rights under the 722 and 856 patents.

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Eon Labs, Inc., CorePharma, LLC and Mutual
Pharmaceutical Co., Inc. have each filed an ANDA with the FDA
seeking permission to market a generic version of Skelaxin®
400 mg tablets. Additionally, Eon Labs ANDA seeks
permission to market a generic version of Skelaxin® 800 mg
tablets. United States Patent Nos. 6,407,128 (the 128
patent) and 6,683,102 (the 102 patent) two method-of-use
patents relating to Skelaxin®, are listed in the FDAs
Orange Book and do not expire until December 3, 2021. Eon
Labs and CorePharma have each filed Paragraph IV
certifications against the 128 patent and the 102
patent alleging noninfringement and invalidity of these patents.
Mutual has filed a Paragraph IV certification against the
102 patent alleging noninfringement and invalidity of that
patent. We filed a patent infringement suit against Eon Labs on
January 2, 2003 in the District Court for the Eastern District
of New York; CorePharma on March 7, 2003 in the District
Court for the District of New Jersey (subsequently transferred
to the District Court for the Eastern District of New York); and
Mutual on March 12, 2004 in the District Court for the
Eastern District of Pennsylvania concerning their proposed 400
mg products. Additionally, we filed a separate suit against Eon
Labs on December 17, 2004, concerning its proposed 800 mg
product. Pursuant to the Hatch-Waxman Act, the filing of the
suit against CorePharma provides us with an automatic stay of
FDA approval of CorePharmas ANDA for 30 months from
no earlier than January 24, 2003. Also pursuant to the
Hatch-Waxman Act, the filing of the suits against Eon Labs
provides us with an automatic stay of FDA approval of Eon
Labs ANDA for its proposed 400 mg and 800 mg products for
30 months from no earlier than November 18, 2002, and
November 3, 2004, respectively. We intend to vigorously
enforce our rights under the 128 and 102 patents to
the full extent of the law.

On March 9, 2004, we received a copy of a
letter from the FDA to all ANDA applicants for Skelaxin®
stating that the use listed in the FDAs Orange Book for
the 128 patent may be deleted from the ANDA
applicants product labeling. We believe that this decision
is arbitrary, capricious, and inconsistent with the FDAs
previous position on this issue. We filed a Citizen Petition on
March 18, 2004 (supplemented on April 15, 2004 and on
July 21, 2004), requesting the FDA to rescind that letter,
require generic applicants to submit Paragraph IV
certifications for the 128 patent, and prohibit the
removal of information corresponding to the use listed in the
Orange Book. King concurrently filed a Petition for Stay of
Action requesting the FDA to stay approval of any generic
metaxalone products until the FDA has fully evaluated our
Citizen Petition.

On March 12, 2004, the FDA sent a letter to
us explaining that our proposed labeling revision, which
includes references to additional clinical studies relating to
food, age, and gender effects, was approvable and only required
certain formatting changes. On April 5, 2004, we submitted
amended labeling text that incorporated those changes. On
April 5, 2004, Mutual filed a Petition for Stay of Action
requesting the FDA to stay approval of our proposed labeling
revision until the FDA has fully evaluated and ruled upon our
Citizen Petition, as well as all comments submitted in response
to that petition. Discussions with the FDA concerning
appropriate labeling are ongoing. CorePharma, Mutual and we have
filed responses and supplements to the pending Citizen Petition.

If our Citizen Petition is rejected, there is a
substantial likelihood that a generic version of Skelaxin®
will enter the market, and our business, financial condition,
results of operations and cash flows could be materially
adversely affected.

We may not be successful in securing or
maintaining proprietary patent protection for other of our
products or for products and technologies we develop or license.
In addition, our competitors may develop products, including
generic products, similar to ours using methods and technologies
that are beyond the scope of our intellectual property
protection, which could reduce our sales.

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

24



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



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

We have restated our previously issued financial
statements for the fiscal years 2002 and 2003, including interim
periods in 2003, and the first two quarters of 2004. We may in
the future be subject to class action suits, other litigation or
regulatory proceedings or actions arising in relation to the
restatement of our prior period financial statements. Any
expenses incurred in connection with this potential litigation
or regulatory proceeding or action not covered by available
insurance or any adverse resolution of this potential litigation
or regulatory proceeding or action could have a material adverse
effect on our business, results of operations, cash flows and
financial condition. Further, any litigation or regulatory
proceeding or action may be time consuming, and it may distract
our management from the conduct of our business.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Management has concluded that we did not
    have a sufficient number of finance and accounting resources
    performing supervisory review and monitoring activities as of
    year-end 2004 and, accordingly, that we did not maintain
    effective controls over the period-end financial reporting
    process. We cannot assure you that we will be able to remediate
    this material weakness and conclude that our internal control
    over financial reporting is effective as of the end of 2005 or
    that the material weakness will not result in material
    misstatements of our financial statements.

Under the Sarbanes-Oxley Act of 2002 and the
rules issued thereunder, management is required to conduct an
evaluation of the effectiveness of its internal control over
financial reporting as of each year-end. The Company is also
required to include in its Annual Reports on Form 10-K a
report on managements assessment of the effectiveness of
our internal control over financial reporting. Our registered
public accounting firm also issues an audit report on
managements assessment and our internal controls over
financial reporting.

As described in Item 7.
Managements Discussion and Analysis of Financial Condition
and Results of Operations, we have restated our previously
issued financial statements for the years 2002 and 2003,
including interim periods in 2003, and the first two quarters of
2004, primarily to reflect the correction of methodological
errors related to our reserve for product returns. The Public
Company Accounting Oversight Boards auditing standards
provide that a restatement is a strong indicator of a material
weakness. Considering this guidance, we evaluated the
methodological errors that resulted in the restatement and
concluded that the restatement resulted from a material weakness
in our internal control over financial reporting as of
September 30, 2004. Management has concluded that the
material weakness that existed as of the end of the third
quarter of 2004 has been remediated.

Management has also concluded that, as a result
of the loss of certain finance personnel, the challenges of
hiring new personnel while a merger was pending and the resource
requirements to address the restatement of our financial
statements, we did not have a sufficient number of finance and
accounting resources performing supervisory review and
monitoring activities. We are in the process of addressing this
material weakness by actively recruiting additional managerial
level finance and accounting resources. Although this material
weakness as of year-end did not result in any audit adjustments
or material misstatements of our financial statements as of
year-end, it did result in certain errors during 2004 that were
not detected by the period-end monitoring activities.

We cannot assure you that management will not
identify one or more additional significant deficiencies or
material weaknesses in our internal control over financial
reporting during 2005, that the steps we take to address any
significant deficiencies or material weaknesses will be
successful, that a significant deficiency or material weakness
will not result in material errors before it is remediated, that
management will be able to complete its assessment of internal
control over financial reporting in a timely

25



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fashion in 2005, or that management will be able
to conclude on the basis of its evaluation that our internal
control over financial reporting was effective as of the end of
2005.




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

Altace®, Skelaxin®, Thrombin-JMI®,
Sonata®, Levoxyl® and royalty revenues for the last
twelve months ended December 31, 2004 accounted for 26.6%,
18.3%, 13.4%, 4.6%, 8.0% and 6.0% of our total revenues from
continuing operations, respectively, or 76.9% in total. We
believe that these sources of revenue may constitute a
significant portion of our revenues for the foreseeable future.
Accordingly, any factor adversely affecting sales of any of
these products or products for which we receive royalty payments
could have a material adverse effect on our business, financial
condition, results of operations and cash flows.



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

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



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

As of December 31, 2004, we had
$1.4 billion of net intangible assets and goodwill.
Intangible assets primarily include the net book value of
various product rights, trademarks, patents and other intangible
rights. If future sales of a product decline significantly, it
could result in an impairment of the declining products
net book value, resulting in a non-cash impairment charge.
Demand for some of our non-key products, including Intal®,
Tilade® and Corzide®, declined over the past year at a
rate which triggered a review of the intangible assets
associated with these products. The net intangible assets
associated with these three products totals approximately $161.0
million. Any impairment of the net book value of any product or
combination of products, depending on the size of the product or
products, could result in a material adverse effect on our
business, financial condition and results of operations. In
evaluating goodwill for impairment, we estimate the fair value
of our individual business reporting units on a discounted cash
flow basis.



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

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

26



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



| |   |                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | engaged in the development of binodenoson, a
    myocardial pharmacologic stress imaging agent;                                                       
|
| |  | engaged in the development of PT-141, an
    investigational new drug for the treatment of ED and FSD;                                                
|
| |  | engaged in the development of T-62, an
    investigational drug for the treatment of neuropathic pain;                                                
|
| |  | engaged in the development of MRE0094, an
    investigational drug for the topical treatment of chronic
    diabetic foot ulcers;                     
|
| |  | engaged in the development of a new inhaler for
    Intal® using the alternative propellant HFA for which the
    FDA has issued an approvable letter;
|
| |  | engaged in the development of an
    Altace®/diuretic combination product; and                                                                        
|
| |  | engaged in the development of a diazepam-filled
    auto-injector.                                                                                    

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



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

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

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



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

and thereby have a negative impact on the sales
of our newly developed or licensed products. The inability to
effect acquisitions or licenses of additional branded products
in development and FDA-approved products could limit the overall
growth of our business. Furthermore, even if we obtain rights to
a pharmaceutical product or acquire a company, we may not be
able to generate sales sufficient to create a profit or
otherwise avoid a loss. Technological developments or the
FDAs approval of new products or of new therapeutic
indications for existing products may make our existing products
or those products we are licensing or developing obsolete or may
make them more difficult to market successfully, which could
have a material adverse effect on our business, financial
condition, results of operations and cash flows.



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

The integration of acquisitions into our business
requires significant management attention and may require the
further expansion of our sales force. In order to manage our
acquisitions effectively, we must maintain adequate operational,
financial and management information systems and motivate and
effectively

27



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manage an increasing number of employees. Our
acquisitions have significantly expanded our product offerings,
operations and number of employees. Our future success will also
depend in part on our ability to retain or hire qualified
employees to operate our expanding facilities efficiently in
accordance with applicable regulatory standards. If we cannot
integrate our acquisitions successfully, these changes and
acquisitions could have a material adverse effect on our
business, financial condition, results of operations and cash
flows.




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

Although most of our revenue is generated by
products not subject to competition from generic products, there
is no proprietary protection for most of our branded
pharmaceutical products, and generic substitutes for many of
these products are sold by other pharmaceutical companies. Even
our products that currently have no generic substitute could
face generic competition if generics are developed by other
companies and approved by the FDA. The entry of generic
substitutes for any of our products could adversely affect our
business, financial condition, results of operations and cash
flows. In addition, governmental and other pressure to reduce
pharmaceutical costs may result in physicians prescribing
products for which there are generic substitutes. Also, our
branded products for which there is no generic form available
may face competition from different therapeutic agents used for
the same indications for which our branded products are used.
Increased competition from the sale of generic pharmaceutical
products or from different therapeutic agents used for the same
indications for which our branded products are used may cause a
decrease in revenue from our branded products and could have a
material adverse effect on our business, financial condition,
results of operations and cash flows.

On June 23, 2004, the FDA approved the sNDAs
filed by Alara and Jerome under § 355(b)(2) of the FDC
Act, 21 U.S.C. § 355 et seq. seeking to market
their currently approved products (Levo-T® and
Unithroid®, respectively) as bioequivalent and
therapeutically equivalent (i.e., AB-Rated)
to our Levoxyl®. On July 14, 2004, the FDA approved an
sANDA filed by Mylan under 21 U.S.C. § 355(j), seeking
to market Mylans currently approved levothyroxine sodium
tablets as AB-Rated to Levoxyl®. Due to the availability of
levothyroxine sodium products that are AB-Rated to Levoxyl®
in the marketplace, net sales of Levoxyl® are likely to
continue to decline. This decline could materially adversely
affect our business, financial condition, results of operations
and cash flows.

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

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

28



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




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

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

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



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

We manufacture many of our products in facilities
we own and operate. These products include Altace®,
Levoxyl® and Thrombin-JMI®, which together represent
approximately 48.0% of our revenues for the last twelve months
ended December 31, 2004. Many of our production processes
are complex and require specialized and expensive equipment. Any
unforeseen delays or interruptions in our manufacturing
operations may reduce our profit margins and revenues. If we are
unable to resume manufacturing, after interruption, we may not
be able to distribute our products as planned. Furthermore,
growing demand for our products could exceed our ability to
supply the demand. If such situations occur, it may be necessary
for us to seek alternative manufacturers which could adversely
impact our ability to produce and distribute our products. We
cannot assure you that we would be able to utilize third-party
manufacturers for our products in a timely manner or at all. In
addition, our manufacturing output may decline as a result of
power outages, supply shortages, accidents, natural disasters or
other disruptions of the manufacturing process. Even though we
carry business interruption insurance policies, we may suffer
losses as a result of business interruptions that exceed the
coverage available under our insurance policies.

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

We have begun construction of facilities to
produce Bicillin® at our Rochester facility. The third
party manufacturer that produced Bicillin® for us recently
closed its plant. If our inventory of Bicillin® is not

29



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sufficient to sustain demand during the period we
are constructing our Bicillin® manufacturing facility, or
if we experience delays in obtaining regulatory authorizations
or experience production difficulties at our Bicillin®
manufacturing facility, sales of this product may be reduced or
the market for the product may be permanently diminished, either
of which could have a material adverse affect on our business,
financial condition, results of operations and cash flows. For
the last twelve months ended December 31, 2004, net sales
of Bicillin® were $32.2 million representing 2.5% of
total revenues.


We require a supply of quality raw materials and
components to manufacture and package pharmaceutical products
for us and for third parties with which we have contracted.
Currently, we rely on over 500 suppliers to deliver the
necessary raw materials and components. Some of the contracts we
have for the supply of raw materials have short terms, and there
is no assurance that we will be able to secure extension of the
terms of such agreements. However, if we are unable to obtain
sufficient quantities of any of the raw materials or components
required to produce and package our products, we may not be able
to distribute our products as planned.

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



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

We develop products and product line extensions
through research and development and through contractual
relationships with third parties that develop new products,
including new product formulations, on our behalf. Our reliance
on third parties for the development of some of our products
exposes us to risks which could cause delays in the development
of new products or reformulated products or could cause other
problems beyond our control. These third-party developers



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

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



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

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

The Rochester facility was inspected by the FDA
in November/ December 2004. When an FDA inspector completes an
authorized inspection of a manufacturing facility, the inspector
typically provides the owner/operator of the facility with a
written report listing the inspectors observations of
objectionable conditions and practices. This written report is
known as an FDA Form 483 or simply as a
483. The observations in a 483 are reported to the
manufacturer in order to assist the manufacturer in complying
with the FDC Act and the regulations enforced by the FDA. Often
a pharmaceutical manufacturer receives a 483 after an inspection
and our Rochester facility received a 483 following the
November/ December 2004 inspection. While no law or regulation
requires us to respond to a 483, we have submitted a written
response detailing our plan of action with respect to each of
the observations made on the 483

30



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##### 



and our commitment to correct any objectionable
practice or condition. The risk to us of a 483, if left
uncorrected, could include, among other things, the imposition
of civil monetary penalties, the commencement of actions to
seize or prohibit the sale of unapproved or non-complying
products, or the cessation of manufacturing operations at the
Rochester facility that are not in compliance with cGMPs. While
we believe the receipt of the 483 will not have a material
adverse effect on our business, financial condition, results of
operations and cash flows, we cannot assure you that future
inspections may not result in adverse regulatory actions which
could have a material adverse effect on our business, financial
condition, results of operations and cash flows.




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

We are currently working to expand our production
capacity for Thrombin-JMI®. We cannot assure you that our
plans to expand our production capacity for Thrombin-JMI®
will be successful and/or timely. If we cannot successfully and
timely expand our production capacity for Thrombin-JMI®,
our ability to increase production of Thrombin-JMI® will be
limited, thereby limiting our unit sales growth for this product.



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

Our results of operations, including, in
particular, product sales revenue, may vary from quarter to
quarter due to many factors. Wholesalers and distributors
represent a substantial portion of our sales. Buying patterns of
our wholesalers and distributors may vary from time to time. In
the event wholesalers and distributors with whom we do business
determine to limit their purchases of our inventory, sales of
our products could be adversely affected. For example, in
advance of an anticipated price increase, many of our customers
may order pharmaceutical products in larger than normal
quantities. The ordering of excess quantities in any quarter
could cause sales of some of our branded pharmaceutical products
to be lower in subsequent quarters than they would have been
otherwise. As part of our ongoing efforts to facilitate improved
management of wholesale inventory levels of our branded
pharmaceutical products, we entered into inventory management
agreements with each of our three key wholesale customers during
the second quarter of 2004. To a great extent, we rely on the
accuracy of the data that each customer provides to us on a
regular basis. Other factors that may affect quarterly results
include expenditures related to the acquisition, sale and
promotion of pharmaceutical products, a changing customer base,
the availability and cost of raw materials, interruptions in
supply by third-party manufacturers, new products introduced by
us or our competitors, the mix of products we sell, sales and
marketing expenditures, product recalls, competitive pricing
pressures and general economic and industry conditions that may
affect customer demand. We cannot assure you that we will be
successful in maintaining or improving our profitability or
avoiding losses in any future period.



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

Similar to other pharmaceutical companies, our
principal customers are primarily wholesale pharmaceutical
distributors. The wholesale distributor network for
pharmaceutical products has in recent years been subject to
increasing consolidation, which has increased our, and other
industry participants, customer concentration.
Accordingly, three key customers account for approximately 70.0%
of our revenues and a significant portion of our accounts
receivable. The insolvency of any of our principal customers
could have a material adverse effect on our business, financial
condition, results of operations and cash flows.

31



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

Our wholly owned subsidiary, King Research and
Development, successor to Jones Pharma Incorporated, is a
defendant in 381 multi-defendant lawsuits involving the
manufacture and sale of dexfenfluramine, fenfluramine and
phentermine, which is usually referred to as
fen/phen. In 1996, Jones acted as a distributor of
Obenix®, a branded phentermine product. Jones also
distributed a generic phentermine product. We believe that
Jones phentermine products have been identified in less
than 100 of the foregoing cases. The plaintiffs in these cases
claim injury as a result of ingesting a combination of these
weight-loss drugs. They seek compensatory and punitive damages
as well as medical care and court-supervised medical monitoring.
The plaintiffs claim liability based on a variety of theories
including but not limited to, product liability, strict
liability, negligence, breach of warranties and
misrepresentation. These suits are filed in various
jurisdictions throughout the United States, and in each of these
suits King Research and Development is one of many defendants,
including manufacturers and other distributors of these drugs.
King Research and Development denies any liability incident to
the distribution of Jones phentermine products and intends
to pursue all defenses available to it. King Research and
Development has tendered defense of these lawsuits to its
insurance carriers for handling and they are currently defending
King Research and Development in these suits. In the event that
insurance coverage is inadequate to satisfy any resulting
liability, King Research and Development will have to resume
defense of these lawsuits and be responsible for the damages, if
any, that are awarded against it.



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

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

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

The FDA expects manufacturers of biological
products to have validated processes capable of removing
extraneous viral contaminants to a high level of assurance. As a
result, many manufacturers of

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




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

During the fourth quarter of 2001 we issued 2
3/4% Convertible Debentures due November 15, 2021 in
an aggregate amount of $345.0 million. The price at which
the debentures are convertible into common stock is $50.16,
subject to adjustments spelled out in the documents governing
the debentures. If the price of our stock has not reached that
amount by November 15, 2006, we may be required to
repurchase all or a portion of the debentures representing the
$345.0 million on November 15, 2006 if some or all of
the holders of the debentures request that we repurchase their
debentures. We cannot assure you that a significant repurchase
requirement at that time would not have a material adverse
effect on our business, financial condition, results of
operations or cash flows.



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

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



| |                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------
| | Our relationship with the DoD and other
    government entities is subject to risks associated with doing
    business with the government.

All U.S. government contracts provide that
they may be terminated for the convenience of the government as
well as for default. Our Meridian Medical Technologies segment
has pharmaceutical products that are presently sold primarily to
the DoD under an Industrial Base Maintenance Contract which we
refer to as IBMC. The current IBMC expires in
September 2005. Although we have reason to believe the DoD will
renew the IBMC based on our relationship over many years, we
cannot assure you that they will. In the event the DoD does not
renew the IBMC, our business, financial condition, results of
operations and cash flows could be materially adversely
affected. Additionally, the unexpected termination of one or
more of our significant government contracts could result in a
material adverse effect on our business, financial condition,
results of operations and cash flows. A surge capability
provision allows for the coverage of defense mobilization
requirements in the event of rapid military deployment. If this
surge capability provision becomes operative, we may be required
to devote more of our Meridian Medical Technologies segment
manufacturing capacity to the production of products for the
government which could result in less manufacturing capacity
being devoted to products in this segment with higher profit
margins. Our supply contracts with the DoD are subject to
post-award audit and potential price determination. These audits
may include a review of our performance on the contract, our
pricing practices, our cost structure and our compliance with
applicable laws, regulations and standards. Any costs

33



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found to be improperly allocated to a specific
contract will not be reimbursed, while costs already reimbursed
must be refunded. Therefore, a post-award audit or price
redetermination could result in an adjustment to our revenues.
From time to time the DoD makes claims for pricing adjustments
with respect to completed contracts. If a government audit
uncovers improper or illegal activities, we may be subject to
civil and criminal penalties and administrative sanctions,
including termination of contracts, forfeitures of profits,
suspension of payments, fines and suspension or disqualification
from doing business with the government.


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



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

Medicaid reporting and payment obligations are
highly complex and in certain respects ambiguous. If we fail to
comply with these obligations, we could be subject to additional
reimbursements, penalties, sanctions and fines which could have
a material adverse effect on our business.

As discussed in this Risk Factors
section under the heading Investigations by the SEC and
Office of Inspector General at the Department of Health and
Human Services, other possible governmental investigations, and
securities and ERISA litigation could have a material adverse
effect on our business, and elsewhere in this report, we
have determined that we underpaid amounts due under Medicaid and
other governmental pricing programs during the period from 1998
to 2002. We have previously accrued $130.4 million in
respect of our estimated underpayments to Medicaid and other
government pricing programs and estimated settlement costs with
all relevant governmental parties. Our ability to achieve a
settlement on these or other terms is subject to substantial
uncertainties.

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



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

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

When feasible, Wyeth must give us six
months written notice of its intent to sell, market or
distribute any product competitive with Altace®. Once we
have been notified in writing of Wyeths intent to market,
sell or distribute a competing product, Wyeth has 90 days to
inform us as to whether it intends to divest its interest in the
competing product. If Wyeth elects not to divest the competing
product or fails to divest the product within one year of
providing notice to us of its plan to divest the competing
product, then both of us must attempt to establish acceptable
terms under which we would co-promote the competing product for
the remaining term of the Co-Promotion Agreement. Alternatively,
we and Wyeth could agree upon

34



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another commercial relationship. If we and Wyeth
are unable to establish acceptable terms, then we have the
option at our discretion to reacquire all the marketing rights
to Altace® and terminate the Co-Promotion Agreement upon
180 days prior written notice to Wyeth. In the event we decided
to reacquire all the marketing rights to Altace® we would
be obligated to pay Wyeth an amount of cash equal to twice the
net sales of Altace® in the United States for the 12-month
period preceding the reacquisition.




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

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



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

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



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

We are highly dependent on the principal members
of our management staff, the loss of whose services might impede
the achievement of our strategic objectives. In connection with
our review of our internal control over financial reporting, we
concluded that as of December 31, 2004, we did not maintain
effective controls over the period-end financial reporting
process because we did not have a sufficient number of finance
and accounting resources performing supervisory review and
monitoring activities as a result of the loss of certain finance
personnel, the challenges of hiring new personnel while a merger
was pending and the resource requirements to address the
restatement of our financial statements. We cannot assure you
that we will be able to attract and retain key personnel in
sufficient numbers, with the requisite skills or on acceptable
terms necessary or advisable to support growth and integration.
The loss of the services of key personnel or the failure to
attract such personnel could have a material adverse effect on
us.



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

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



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

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



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

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



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

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

Risks Related to Our Industry



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

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

Noncompliance with applicable FDA policies or
requirements could subject us to enforcement actions, such as
suspensions of manufacturing or distribution, seizure of
products, product recalls, fines, criminal penalties,
injunctions, failure to approve pending drug product
applications or withdrawal of

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##### 



product marketing approvals. Similar civil or
criminal penalties could be imposed by other government
agencies, such as the DEA, the EPA or various agencies of the
states and localities in which our products are manufactured,
sold or distributed, and could have ramifications for our
contracts with government agencies such as the Veterans
Administration or the Department of Defense. These enforcement
actions could have a material adverse effect on our business,
financial condition, results of operations and cash flows.


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

We manufacture some pharmaceutical products
containing controlled substances and, therefore, are also
subject to statutes and regulations enforced by the DEA and
similar state agencies which impose security, record keeping,
reporting and personnel requirements on us. Additionally, we
manufacture biological drug products for human use and are
subject to regulatory burdens as a result of these aspects of
our business. There are additional FDA and other regulatory
policies and requirements covering issues such as advertising,
commercially distributing, selling, sampling and reporting
adverse events associated with our products with which we must
continuously comply. Noncompliance with any of these policies or
requirements could result in enforcement actions which could
have a material adverse effect on our business, financial
condition, results of operations and cash flows.

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

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

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

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

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

Product recalls or product field alerts may be
issued at our discretion or at the discretion of the FDA, other
government agencies or other companies having regulatory
authority for pharmaceutical product sales. From time to time,
we may recall products for various reasons, including failure of
our products to maintain their stability through their
expiration dates. Any recall or product field alert has the
potential of damaging the reputation of the product. To date,
these recalls have not been significant and have not had a
material adverse effect on our business, financial condition,
results of operations and cash flows. However, we cannot assure
you that the number and significance of recalls will not
increase in the future. Any significant recalls could materially
affect our sales, the prescription trends for the products and
damage the reputation of the products. In these cases, our
business, financial condition, results of operations and cash
flows could be materially adversely affected.



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

Commercial success in producing, marketing and
selling of branded prescription pharmaceutical products depends,
in part, on the availability of adequate reimbursement from
third-party health care payors, such as the government, private
health insurers and managed care organizations. Third-party
payors are increasingly challenging whether to reimburse certain
pharmaceutical products and medical services. For example, many
managed health care organizations limit reimbursement of
pharmaceutical products. These limits may take the form of
formularies with differential co-pay tiers. The resulting
competition among pharmaceutical companies to maximize their
product reimbursement has generally reduced growth in average
selling prices across the industry. We cannot assure you that
our products will be appropriately reimbursed or included on the
formulary lists of managed care organizations or that downward
pricing pressures in the industry generally will not negatively
impact our operations.

The commercial success of some of our products is
dependent, in part, on whether third-party reimbursement is
available for the use of our products by hospitals, clinics,
doctors, pharmacies and patients. Third-party payors include
state and federal governments, under programs such as Medicaid
and other entitlement programs, as well as managed care
organizations, private insurance plans and health maintenance
organizations. Because of the growing size of the patient
population covered by third party reimbursement, it is important
to our business that we market our products to reimbursers that
serve many of these organizations. Payment or reimbursement of
only a portion of the cost of our prescription products could
make our products less attractive, from a net-cost perspective,
to patients, suppliers, retail pharmacies and prescribing
physicians. Managed care organizations and other third-party
payors try to negotiate the pricing of products to control their
costs. Managed care organizations and pharmacy benefit managers
typically develop reimbursement coverage strategies, including
formularies, to reduce their cost for medications. Formularies
can be based on the prices and/or therapeutic benefits of the
available products. Due to their lower costs, generics receive
more favorable reimbursement. The breadth of the

38



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products reimbursed varies considerably from one
managed care organization to another, and many formularies
include alternative and competitive products or therapies for
treatment of particular medical conditions. Denial of a product
from reimbursement can lead to its sharply reduced usage in the
managed care organization patient population. If our products
are not included within an adequate number of formularies or
adequate reimbursement levels are not provided, or if those
policies increasingly favor generic products, our market share
and gross margins could be negatively affected, as could our
overall business and financial condition.


We have addressed our contract relationship with
managed care organizations in an effort to increase the
attractiveness of reimbursements for our products. We take
reserves for the estimated amounts of rebates we will pay to
managed care organizations each quarter. Any increased usage of
our products through Medicaid or managed care programs will
increase the amount of rebates that we owe. We cannot assure you
that our products will be included on the formulary lists of
managed care organizations or that adverse reimbursement issues
will not have a material effect on our business, financial
condition, results of operations or cash flows.



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

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

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



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

From time to time studies or clinical trials on
various aspects of pharmaceutical products are conducted by
academics or others, including government agencies, the results
of which, when published, may have dramatic effects on the
markets for the pharmaceutical products that are the subject of
the study. The publication of negative results of studies or
clinical trials related to our products or the therapeutic areas
in which our products compete could adversely affect our sales,
the prescription trends for our products and the reputation of
our products. One example of these types of studies is the
Womens Health Initiative, an ongoing clinical trial
conducted by the National Institutes of Health, which released
data in July 2002. This data indicated that an increase in
certain health risks may result from the long-

39



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term use of a competitors combination
hormone therapy for women. News of this data and the perception
it created negatively affected the entire combination hormone
replacement therapy and the oral estrogen replacement therapy
markets, which includes our products Menest® and
Delestrogen®. In the event of the publication of negative
results of studies or clinical trials related to our branded
pharmaceutical products or the therapeutic areas in which our
products compete, our business, financial condition, results of
operations and cash flows could be materially adversely
affected. Additionally, potential write-offs of the intangible
assets associated with the affected products could materially
adversely affect our results of operations.




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

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

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



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

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



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

We also compete with pharmaceutical companies in
marketing and selling pharmaceutical products. The selling
prices of pharmaceutical products typically decline as
competition increases. Further, other

40



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


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



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

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

Our largest product Altace® competes in a
very competitive and highly genericized market with other
cardiovascular therapies.

Our product Skelaxin® competes in a highly
genericized market with other muscle relaxants.

Our product Sonata® competes with other
insomnia treatments, including in particular Ambien®, a
product of Sanofi-Aventis S.A. Additionally, other potential
competitive insomnia products are in development and could enter
the market over the next couple of years.

Our product Levoxyl® competes in a
competitive and highly genericized market with other
levothyroxine sodium products.

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



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

Many of our branded pharmaceutical products have
either a strong market niche or competitive position. Some of
our branded pharmaceutical products face competition from
generic substitutes. For example, the FDA approved for sale
generic substitutes for Florinef® in March 2002 and in
January 2003, for Cortisporin® ophthalmic suspension in
April 2003, and for Levoxyl® in June 2004.

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

41



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these efforts, the failure of which could have a
material adverse effect on our business, financial condition,
results of operations and cash flows.


A Warning About Forward-Looking
Statements

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

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

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



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the future potential of, including anticipated
    net sales and prescription trends for our branded pharmaceutical
    products, particularly Altace®, Skelaxin®,
    Thrombin-JMI®, Sonata® and Levoxyl®;                                                                                                                                                                                                                                                                               
|
| |  | expectations regarding the enforceability and
    effectiveness of product-related patents, including in
    particular patents related to Altace® and Skelaxin®;                                                                                                                                                                                                                                                                                                                         
|
| |  | expected trends and projections with respect to
    particular products, reportable segment and income and expense
    line items;                                                                                                                                                                                                                                                                                                                                                        
|
| |  | the adequacy of our liquidity and capital
    resources;                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | anticipated capital expenditures;                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | the development and approval of binodenoson, our
    next generation cardiac pharmacologic stress-imaging agent;
    PT-141, an investigational new drug for the treatment of
    erectile dysfunction and female sexual dysfunction; T-62, an
    investigational drug for the treatment of neuropathic pain;
    MRE0094, an investigational drug for the topical treatment of
    chronic diabetic foot ulcers; pre-clinical programs; and product
    life-cycle development projects;
|
| |  | the development and approval of a diazepam-filled
    auto-injector, new inhaler for Intal® and Tilade®
    using the alternative propellant HFA, and an Altace®/
    diuretic combination product;                                                                                                                                                                                                                                                                                       
|
| |  | our successful execution of our growth strategies;                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | anticipated developments and expansions of our
    business;                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | our plans for the manufacture of some of our
    products, including but not limited to, the anticipated
    expansion of our manufacturing capacity for Thrombin-JMI®;                                                                                                                                                                                                                                                                                                                   
|
| |  | anticipated increases in sales of acquired
    products or royalty revenues;                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | the success of our Co-Promotion Agreement with
    Wyeth;                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | the high cost and uncertainty of research,
    clinical trials and other development activities involving
    pharmaceutical products;                                                                                                                                                                                                                                                                                                                                                    
|
| |  | the development of product line extensions;                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | the unpredictability of the duration or future
    findings and determinations of the FDA, including the pending
    applications related to our diazepam-filled auto-injector and a
    new Intal® inhaler formulation utilizing HFA, and other
    regulatory agencies worldwide;                                                                                                                                                                                                       
|
| |  | the products which we expect to offer;                                                                                                                                                                                                                                                                                                                                                                                                                                                    

42



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##### 





| |   |                                                                                                                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the intent, belief or current expectations,
    primarily with respect to our future operating performance;                                                                                                                                                                                                                            
|
| |  | expectations regarding sales growth, gross
    margins, manufacturing productivity, capital expenditures and
    effective tax rates;                                                                                                                                                                                                  
|
| |  | expectations regarding the outcome of various
    pending legal proceedings including the Altace® and
    Skelaxin® patent challenges, the SEC and Office of
    Inspector General investigations, other possible governmental
    investigations, securities litigation, and other legal
    proceedings described in this report; and
|
| |  | expectations regarding our financial condition
    and liquidity as well as future cash flows and earnings.                                                                                                                                                                                                                            

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

Item 2.Properties

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

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

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

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

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

Item 3.Legal
Proceedings

SEC
Investigation and Securities Litigation

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

43



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##### 



previously issued financial statements as
discussed in Note 2 to our audited consolidated financial
statements.


In connection with our determination that we
underpaid amounts due to Medicaid and other government pricing
programs from 1998 through 2002, we have continued to engage in
discussions with representatives of the SEC, the United States
Attorney for the Eastern District of Pennsylvania, the
Department of Justice, the National Association of Medicaid
Fraud Control Units, the Office of Inspector General of the
Department of Health and Human Services, the Department of
Veterans Affairs, the Centers for Medicare & Medicaid
Services, and the Public Health Service. Our objective in these
discussions has been to achieve a comprehensive settlement
relating to all the matters being investigated by or discussed
with all the governmental authorities.

We have not yet reached any agreements or
understandings with respect to the terms of such a settlement
and may not ever be able to reach such an agreement. However,
based on the status of the discussions to date, we now believe
that it is reasonably likely that we will be able to achieve a
comprehensive settlement with all relevant governmental parties
on the following terms:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We have previously accrued $130.4 million in
    respect of our estimated underpayments to Medicaid and other
    government pricing programs, and estimated settlement costs with
    all relevant governmental parties. This amount includes
    $65.4 million accrued for estimated underpayments to
    Medicaid and other government pricing programs and an additional
    $65.0 million for estimated settlement costs as an
    operating expense during the second quarter of 2004 to cover
    interest, costs, fines, penalties and all other additional
    amounts. Our current expectation is that the aggregate cost to
    settle with the governmental authorities should not materially
    exceed the amounts already accrued.                                                                                                                    
|
| |  | With respect to the matters being investigated by
    or discussed with the staff of the SEC, we currently anticipate
    that we would settle, without admitting or denying, one or more
    charges that we failed to maintain adequate books and records
    and internal controls. We anticipate that the action to be
    settled could also include one or more charges that our public
    filings contained material misstatements or omissions relating
    to our financial results for some or all of the periods for
    which results have been restated as discussed under
    Managements Discussion and Analysis of Financial
    Condition and Results of Operations under the heading
    Restatement of Previously Issued Financial
    Statements. We do not anticipate being required to restate
    any results for periods prior to 2002.
|
| |  | We expect that we will be required to enter into
    a Corporate Integrity Agreement with the Department of Health
    and Human Services, which would require us to submit to audits
    relating to our Medicaid rebate calculations over a five-year
    period. We do not expect that the resolution of the pending
    investigations will result in any prohibitions on our sales to
    Medicaid or any related state or Federal program, nor do we
    expect any other material restriction on our ability to conduct
    our business, although we will be required to incur consultant
    fees and other expenses in order to comply with the Corporate
    Integrity Agreement.                                                                                                                                                                         
|
| |  | We do not expect that any criminal charges will
    be asserted against the Company or against any present or former
    director, officer or employee in connection with the matters
    being investigated.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

Our ability to achieve a settlement on these or
other terms is subject to substantial uncertainties. Our
discussions to date have been conducted with the staffs of
various agencies and other governmental authorities. We do not
yet have any agreements or understandings with any of them. Even
if we were to reach such an agreement or understanding with
staff personnel, it would be subject to the approval of numerous
more senior representatives of the governmental parties,
including the members of the U.S. Securities and Exchange
Commission, the United States Attorney for the Eastern District
of Pennsylvania, senior officials in the Departments of Justice,
Health and Human Services and Veterans Affairs, and senior
officials in most or all of the States. We expect that our
agreements with the various governmental parties will also
require that those governmental parties reach numerous
agreements among themselves, and that

44



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the consummation of our agreement with each
governmental party would be dependent on consummation of our
agreements with other governmental parties. We also expect that
some aspects of a comprehensive settlement would require court
approval.


In light of these uncertainties, we stress that
we may not be able to reach a settlement with the governmental
parties, whether on the terms described above or at all. As a
result, the ultimate amount that we will actually have to pay to
resolve these matters could be materially more than the amount
accrued to date, and the terms could otherwise be materially
less favorable than those described above. Because of these
uncertainties and the complexity of completing a comprehensive
resolution, we are not yet able to estimate with reasonable
confidence the amount of time that will be required to enter
into and consummate comprehensive settlement agreements.

The possible settlement described above would not
apply to the related pending class actions and derivative suits,
or any other claims by private plaintiffs. While we deny any
liability, we are unable to predict the outcome of the class
actions and derivative suits or reasonably estimate the range of
loss, if any.

For additional information, please see the
section entitled Managements Discussion and Analysis
of Financial Condition and Results of Operations under the
heading Governmental Investigations and Securities
Litigation.

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

On August 12, 2004, the United States
District Court for the Eastern District of Tennessee ruled on
defendants motions to dismiss. The Court dismissed all
claims as to Jones Pharma, Inc., a predecessor to one of our
wholly owned subsidiaries, King Research and Development, Inc.,
and as to defendants Dennis Jones and Henry Richards. The Court
also dismissed certain claims as to five other individual
defendants. The Court denied the motions to dismiss in all other
respects. Following the Courts ruling, on
September 20, 2004, we and the other remaining defendants
filed answers to plaintiffs consolidated amended
complaint. Discovery and other proceedings in the case are
continuing, and no trial date has been set.

Seven purported shareholder derivative complaints
have also been filed in federal and state courts in Tennessee
alleging a breach of fiduciary duty, among other things, by some
of our officers and directors. On October 26, 2004, all of
the defendants named in this action filed a partial answer to
the amended consolidated derivative and class action complaint.
Discovery in this action has commenced. No trial date has been
set.

45



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##### 



Another purported class action complaint was
filed on August 16, 2004 in Tennessee state court against
us and the members of our board of directors. This new case
largely asserts substantially the same claims and seeks the same
relief as the class action claim that was recently added to the
state derivative action described above. Defendants in that
action filed a motion to dismiss on November 30, 2004; that
motion is pending and no hearing date has been set.

Additionally, a class action complaint was filed
in the United States District Court for the Eastern District of
Tennessee under ERISA. As amended, the complaint alleges that we
and certain of our executive officers, former executive
officers, directors, former directors and an employee violated
fiduciary duties that they allegedly owed our 401(k) Retirement
Savings Plans participants and beneficiaries under ERISA.
The allegations underlying this action are similar in many
respects to those in the class action litigation described
above. The defendants filed a motion to dismiss the ERISA action
on March 5, 2004. The District Court Judge referred the
motion to a Magistrate Judge for a report and recommendation. On
December 8, 2004, the Magistrate Judge held a hearing on
this motion, and, on December 10, 2004, he recommended that
the District Court Judge dismiss the action. The District Court
Judge accepted the recommendation and dismissed the case on
February 4, 2005.

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

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

Altace®
Patent Challenge

Cobalt has filed an ANDA with the FDA seeking
permission to market a generic version of Altace®. The
following U.S. patents are listed for Altace® in the
FDAs Orange Book: United States Patent
Nos. 4,587,258, the 258 patent, and 5,061,722,
the 722 patent, two composition of matter patents
related to Altace®, and United States Patent
No. 5,403,856, the 856 patent, a method-of-use patent
related to Altace®, with expiration dates of January 2005,
October 2008, and April 2012, respectively. Under the
Hatch-Waxman Act, any generic manufacturer may file an ANDA with
a Paragraph IV certification, challenging the validity or
infringement of a patent listed in the FDAs Orange Book
four years after the pioneer company obtains approval of its
NDA. Cobalt has filed a Paragraph IV certification alleging
invalidity of the 722 patent, and we filed suit on
March 14, 2003 in the District Court for the District of
Massachusetts to enforce our rights under that patent. Pursuant
to the Hatch-Waxman Act, the filing of that suit provides us an
automatic stay of FDA approval of Cobalts ANDA for
30 months from no earlier than February 5, 2003. In
March 2004, Cobalt stipulated to infringement of the 722
patent. Should the court find in favor of a Cobalt summary
judgment motion on the 722 patent, we would not
receive the full benefit of that 30 month stay. Subsequent
to filing our original complaint, we amended our complaint to
add an allegation of infringement of the 856 patent. The
856 patent covers one of Altace®s three
indications for use. In response to the amended complaint,
Cobalt informed the FDA that it no longer seeks approval to
market its proposed product for the indication covered by the
856 patent. On this basis, the court granted Cobalt
summary judgment of non-infringement of the 856 patent.
The courts decision does not affect Cobalts
infringement of the 722 patent. We intend to vigorously
enforce our rights under the 722 and
856 patents.



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

Eon Labs, CorePharma and Mutual have each filed
an ANDA with the FDA seeking permission to market a generic
version of Skelaxin® 400 mg tablets. Additionally, Eon
Labs ANDA seeks permission to

46



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##### 



market a generic version of Skelaxin®
800 mg tablets. United States Patent Nos. 6,407,128,
the 128 patent, and 6,683,102, the 102 patent, two
method-of-use patents relating to Skelaxin®, are listed in
the FDAs Orange Book and do not expire until
December 3, 2021. Eon Labs and CorePharma have each filed
Paragraph IV certifications alleging noninfringement and
invalidity of the 128 and 102 patents. Mutual
has filed a Paragraph IV certification alleging
noninfringement and invalidity of the 102 patent. We filed
a patent infringement suit against Eon Labs on January 2,
2003 in the District Court for the Eastern District of New York;
CorePharma on March 7, 2003 in the District Court for the
District of New Jersey (subsequently transferred to the District
Court for the Eastern District of New York); and Mutual on
March 12, 2004 in the District Court for the Eastern
District of Pennsylvania concerning their proposed 400 mg
products. Additionally, we filed a separate suit against Eon
Labs on December 17, 2004 in the District Court for the
Eastern District of New York, concerning its proposed
800 mg product. Pursuant to the Hatch-Waxman Act, the
filing of the suit against CorePharma provides us with an
automatic stay of FDA approval of CorePharmas ANDA for
30 months from no earlier than January 24, 2003. Also
pursuant to the Hatch-Waxman Act, the filing of the suits
against Eon Labs provides us with an automatic stay of FDA
approval of Eon Labs ANDA for its proposed 400 mg and
800 mg products for 30 months from no earlier than
November 18, 2002, and November 3, 2004, respectively.
We intend to vigorously enforce our rights under the
128 and 102 patents to the full extent of the
law.


On March 9, 2004, we received a copy of a
letter from the FDA to all ANDA applicants for Skelaxin®
stating that the use listed in the FDAs Orange Book for
the 128 patent may be deleted from the ANDA
applicants product labeling. We believe that this decision
is arbitrary, capricious, and inconsistent with the FDAs
previous position on this issue. We filed a Citizen Petition on
March 18, 2004 (supplemented on April 15, 2004 and on
July 21, 2004), requesting the FDA to rescind that letter,
require generic applicants to submit Paragraph IV
certifications for the 128 patent, and prohibit the
removal of information corresponding to the use listed in the
Orange Book, King concurrently filed a Petition for Stay of
Action requesting the FDA to stay approval of any generic
metaxalone products until the FDA has fully evaluated our
Citizen Petition.

On March 12, 2004, the FDA sent a letter to
us explaining that our proposed labeling revision, which
includes references to additional clinical studies relating to
food, age, and gender effects, was approvable and only required
certain formatting changes. On April 5, 2004, we submitted
amended labeling text that incorporated those changes. On
April 5, 2004, Mutual filed a Petition for Stay of Action
requesting the FDA to stay approval of our proposed labeling
revision until the FDA has fully evaluated and ruled upon our
Citizen Petition, as well as all comments submitted in response
to that petition. Discussions with the FDA concerning
appropriate labeling are ongoing. CorePharma, Mutual and we have
filed responses and supplements to the pending Citizen Petition.

If our Citizen Petition is rejected, there is a
substantial likelihood that a generic version of Skelaxin®
will enter the market, and our business, financial condition,
results of operations and cash flows could be materially
adversely affected.

Prefest®Patent Challenge

Barr has filed an ANDA, which included a
Paragraph IV certification, with the FDA seeking permission
to market a generic version of Prefest®. United States
Patent No. 5,108,995, (the 995 patent, a utility
patent with method of treatment claims relating to
Prefest®, and United States Patent No. 5,382,573, the
573 patent, a utility patent with pharmaceutical
preparation claims relating to Prefest®, were issued on
April 28, 1992, and January 17, 1995, respectively.
The 995 patent and the 573 patent are both
listed in the FDAs Orange Book and do not expire until
April 28, 2009, and January 17, 2012, respectively. On
October 15, 2003, we received notice of Barrs
Paragraph IV certification, which alleges noninfringement
and invalidity of the 995 patent and the
573 patent. On November 26, 2003, we filed a
complaint against Barr in the Southern District of New York for
infringement of the 995 and 573 patents. Pursuant to
the Hatch-Waxman Act, the filing of that suit provides us an
automatic stay of FDA approval of Barrs ANDA for
30 months from no earlier than October 15, 2003. On
June 8, 2004, the U.S. Patent and Trademark Office
issued United States Patent No. 6,747,019 (the 019
patent). The 019

47



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##### 



patent relates to pharmaceutical preparations,
pharmaceutical packages and methods of treating a female in need
of hormone replacement therapy by administering a specific dose
combination of estrogen and progestin. We have certified that
the 019 patent covers the Prefest® product and,
therefore the patent has been listed in the Orange Book. On
June 30, 2004, we received a Notice Letter from Barr
concerning its amended Paragraph IV certification to its
ANDA for Prefest®. The Notice Letter outlines Barrs
assertions of invalidity and noninfringement of the 019
patent. On July 9, 2004, we filed a complaint in the
Southern District of New York for infringement of the 019
patent. On November 22, 2004, we sold all of our rights in
Prefest® for approximately $15,000. As a result of this
transaction, the lawsuit was dismissed on January 11, 2005.


Thimerosal/Vaccine
Related Litigation

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

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

Kings product liability insurance carrier
has been given proper notice of all of these matters and defense
counsel are vigorously defending our interests. We have filed
motions to dismiss due to, among other things, lack of product
identity in plaintiffs complaints. In 2001, King and
Parkedale were dismissed on this basis in a similar case. We
intend to defend these lawsuits vigorously but are unable to
currently predict the outcome or reasonably estimate the range
of potential loss, if any.

Hormone
Replacement Therapy

We have been named as a defendant in four
lawsuits involving the manufacture and sale of hormone
replacement therapy drugs. Numerous pharmaceutical companies
have also been sued. These cases have been filed in Alabama,
Pennsylvania, Ohio and Mississippi. The plaintiffs allege that
King and other defendants failed to conduct adequate
pre-approval research and post-approval surveillance to
establish the safety of the long-term hormone therapy regimen,
thus misleading consumers when marketing their products.
Plaintiffs claims include allegations of negligence,
strict liability, breach of implied warranty, breach of express
warranty, fraud and misrepresentation. We intend to defend these
lawsuits vigorously but are unable currently to predict the
outcome or reasonably estimate the range of potential loss, if
any.

Average
Wholesale Pricing Litigation

In August 2004, King and Monarch Pharmaceuticals,
Inc., a wholly owned subsidiary of King, were named as
defendants along with 44 other pharmaceutical manufacturers in
an action brought by the City of New York, which we refer to as
NYC, in federal court in the state of New York. NYC
claims that the defendants fraudulently inflated their Average
Wholesale Prices and fraudulently failed to accurately report
their Best Prices and their Average
Manufacturers Prices and failed to pay proper rebates
pursuant to federal law. Additional claims allege violations of
federal and New York statutes, fraud and unjust enrichment. For
the period from 1992 to the present, NYC is requesting money
damages, civil penalties, declaratory and injunctive relief,
restitution, disgorgement of profits, and treble and punitive
damages.

In August 2004, a defendant in the NYC action
sought to have the action transferred to the United States
District Court for the District of Massachusetts and combined
with existing multi-district litigation, entitled In re
Average Wholesale Pricing Litigation, being heard by that
court. A conditional transfer order was issued during September
2004 indicating that the action is subject to transfer for
pretrial

48



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##### 



proceedings to the United States District Court
for the District of Massachusetts. We intend to defend this
lawsuit vigorously but are unable currently to predict the
outcome or reasonably estimate the range of loss, if any.


We also have been named as a defendant along with
other pharmaceutical manufacturers in four other lawsuits
containing allegations of fraudulently inflating average
wholesale prices. These lawsuits have been filed in federal
courts in New York and Massachusetts, and in state courts in New
York and Alabama, all of which we will seek to have transferred
to the United States District Court for the District of
Massachusetts and combined with the existing multi-district
litigation.

Fen/Phen
Litigation

Many distributors, marketers and manufacturers of
anorexigenic drugs have been subject to claims relating to the
use of these drugs. Generally, the lawsuits allege that the
defendants (1) misled users of the products with respect to
the dangers associated with them, (2) failed to adequately
test the products, and (3) knew or should have known about
the negative effects of the drugs, and should have informed the
public about the risks of such negative effects. The actions
generally have been brought by individuals in their own right
and have been filed in various state and federal jurisdictions
throughout the United States. They seek, among other things,
compensatory and punitive damages and/or court-supervised
medical monitoring of persons who have ingested the product. We
are one of many defendants in no more than 6 lawsuits that claim
damages for personal injury arising from our production of the
anorexigenic drug phentermine under contract for GlaxoSmithKline.

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

In addition, King Research and Development,
successor to Jones and a wholly-owned subsidiary of King, is a
defendant in 381 multi-defendant lawsuits involving the
manufacture and sale of dexfenfluramine, fenfluramine, and
phentermine. These suits have been filed in various
jurisdictions throughout the United States, and in each of these
suits, King Research and Development is one of many defendants,
including manufacturers and other distributors of these drugs.
Although Jones did not at any time manufactured dexfenfluramine,
fenfluramine, or phentermine, Jones was a distributor of a
generic phentermine product, and, after its acquisition of Abana
Pharmaceuticals, was a distributor of Obenix®, its branded
phentermine product. The plaintiffs in these cases claim injury
as a result of ingesting a combination of these weight-loss
drugs and are seeking compensatory and punitive damages as well
as medical care and court supervised medical monitoring. The
plaintiffs claim liability based on a variety of theories
including but not limited to product liability, strict
liability, negligence, breach of warranty, and misrepresentation.

King Research and Development denies any
liability incident to the distribution of Obenix® or
Jones generic phentermine product and intends to pursue
all defenses available to it. King Research and Development has
tendered defense of these lawsuits to its insurance carriers for
handling and they are currently defending King Research and
Development in these suits. The manufacturers of fenfluramine
and dexfenfluramine have settled many of these cases. In the
event King Research and Developments insurance coverage is
inadequate to satisfy any resulting liability, King Research and
Development will have to resume defense of these lawsuits and be
responsible for the damages, if any, that are awarded against it.

49



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##### 



While we cannot predict the outcome of these
suits, we believe that the claims against King Research and
Development are without merit and intend to vigorously pursue
all defenses available to it. We are unable to disclose an
aggregate dollar amount of damages claimed because many of these
complaints are multi-party suits and do not state specific
damage amounts. Rather, these claims typically state damages as
may be determined by the court or similar language and state no
specific amount of damages against King Research and
Development. Additionally, we cannot reasonably estimate
potential losses related to lawsuits.

Other Legal
Proceedings

Our Rochester facility was one of six Pfizer
facilities subject to a consent decree issued by the U.S.
District Court of New Jersey in August 1993 as a result of FDA
concerns about compliance issues within Pfizer facilities in the
period before the decree was entered. We acquired the Parkedale
facility from Pfizer in February 1998. The Parkedale facility is
currently manufacturing pharmaceutical products subject to the
consent decree which prohibits the manufacture and delivery of
specified drug products unless, among other things, the products
conform to cGMPs and are produced in accordance with approved
drug applications. We intend, when appropriate, to petition for
relief from the consent decree.

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

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

None

50



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##### 



PART II



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

The following table sets forth the range of high
and low sales prices per share of our common stock for the
periods indicated. Our common stock is listed on the New York
Stock Exchange, where our stock trades under the symbol
KG. There were approximately 1,150 shareholders on
March 15, 2005, based on the number of record holders of
the common stock.

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

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

On March 15, 2005, the closing price of our
common stock as reported on the New York Stock Exchange was
$9.71.

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

51



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##### 



Item 6.  Selected Financial
Data

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

|                                                                                                                                                                          |                                                                                                                                    |                                       |         |         |         |            |         |            |         |      |           |      |           |   |           |       |           |   |           |       |           | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------- | ------- | ------- | ------- | ---------- | ------- | ---------- | ------- | ---- | --------- | ---- | --------- | - | --------- | ----- | --------- | - | --------- | ----- | --------- | 
|                                                                                                                                                                          |                                                                                                                                    |                                      
|                                                                                                                                                                          |                                                                                                                                    | For the year ended December 31,      
|                                                                                                                                                                          |                                                                                                                                    |                                      
|                                                                                                                                                                          |                                                                                                                                    |                                       |         | 2002    |         | 2003       |         |           
|                                                                                                                                                                          |                                                                                                                                    | 2000(1)                               |         | 2001(1) |         | (restated) |         | (restated) |         | 2004
|                                                                                                                                                                          |                                                                                                                                    |                                       |         |         |         |            |         |            |         |     
|                                                                                                                                                                          |                                                                                                                                    |                                      
|                                                                                                                                                                          |                                                                                                                                    | (in thousands, except per share data)
|Statement of Income Data:                                                                                                                                                 |                                                                                                                                    |                                       |         |         |         |            |         |            |         |      |           |      |           |   |           |       |           |   |           |      
|Net sales                                                                                                                                                                 |                                                                                                                                    | $                                     | 560,282 |         |         | $          | 802,380 |            |         | $    | 1,029,649 |      |           | $ | 1,424,424 |       |           | $ | 1,225,890 |      
|Royalty revenue                                                                                                                                                           |                                                                                                                                    |                                       | 41,474  |         |         |            | 46,774  |            |         |      | 58,375    |      |           |   | 68,365    |       |           |   | 78,474    |      
|                                                                                                                                                                          |                                                                                                                                    |                                       |         |         |         |            |         |            |         |      |           |      |           |   |           |       |           |   |           |      
|                                                                                                                                                                          |                                                                                                                                    | Total revenues                        |         |         | 601,756 |            |         |            | 849,154 |      |           |      | 1,088,024 |   |           |       | 1,492,789 |   |           |       | 1,304,364 | 
|                                                                                                                                                                          |                                                                                                                                    |                                       |         |         |         |            |         |            |         |      |           |      |           |   |           |       |           |   |           |      
|Operating income (loss)(5)                                                                                                                                                |                                                                                                                                    |                                       | 171,823 |         |         |            | 351,379 |            |         |      | 275,043   |      |           |   | 151,952   |       |           |   | (41,264   | )    
|Interest income                                                                                                                                                           |                                                                                                                                    |                                       | 11,875  |         |         |            | 10,975  |            |         |      | 22,395    |      |           |   | 6,849     |       |           |   | 5,974     |      
|Interest expense                                                                                                                                                          |                                                                                                                                    |                                       | (36,974 | )       |         |            | (12,684 | )          |         |      | (12,419   | )    |           |   | (13,396   | )     |           |   | (12,588   | )    
|Valuation (charge) benefit 
    convertible notes receivable                                                                                                             |                                                                                                                                    |                                       |        |         |         |            |        |            |         |      | (35,629   | )    |           |   | 18,551    |       |           |   | (2,887    | )    
|Write-down on investment                                                                                                                                                  |                                                                                                                                    |                                       |        |         |         |            |        |            |         |      |          |      |           |   |          |       |           |   | (6,520    | )    
|Extinguishment of debt expense(4)                                                                                                                                         |                                                                                                                                    |                                       | (20,348 | )       |         |            | (22,903 | )          |         |      |          |      |           |   |          |       |           |   |          |      
|Other income (expenses), net                                                                                                                                              |                                                                                                                                    |                                       | 3,333   |         |         |            | 6,313   |            |         |      | (884      | )    |           |   | (629      | )     |           |   | (749      | )    
|                                                                                                                                                                          |                                                                                                                                    |                                       |         |         |         |            |         |            |         |      |           |      |           |   |           |       |           |   |           |      
|Income (loss) from continuing operations before
    income taxes, discontinued operations, extraordinary item and
    cumulative effect of change in accounting principle |                                                                                                                                    |                                       | 129,709 |         |         |            | 333,080 |            |         |      | 248,506   |      |           |   | 163,327   |       |           |   | (58,034   | )    
|Income tax expense (benefit)                                                                                                                                              |                                                                                                                                    |                                       | 63,906  |         |         |            | 123,829 |            |         |      | 78,033    |      |           |   | 65,884    |       |           |   | (7,412    | )    
|                                                                                                                                                                          |                                                                                                                                    |                                       |         |         |         |            |         |            |         |      |           |      |           |   |           |       |           |   |           |      
|Income (loss) from continuing operations                                                                                                                                  |                                                                                                                                    |                                       | 65,803  |         |         |            | 209,251 |            |         |      | 170,473   |      |           |   | 97,443    |       |           |   | (50,622   | )    
|Income (loss) from discontinued operations(6)                                                                                                                             |                                                                                                                                    |                                       | 8,059   |         |         |            | 9,230   |            |         |      | 11,928    |      |           |   | (5,489    | )     |           |   | (109,666  | )    
|                                                                                                                                                                          |                                                                                                                                    |                                       |         |         |         |            |         |            |         |      |           |      |           |   |           |       |           |   |           |      
|Income (loss) before extraordinary item and
    cumulative effect of change in accounting principle                                                                       |                                                                                                                                    |                                       | 73,862  |         |         |            | 218,481 |            |         |      | 182,401   |      |           |   | 91,954    |       |           |   | (160,288  | )    
|Extraordinary item, net of income taxes(2)                                                                                                                                |                                                                                                                                    |                                       | (9,353  | )       |         |            |        |            |         |      |          |      |           |   |          |       |           |   |          |      
|                                                                                                                                                                          |                                                                                                                                    |                                       |         |         |         |            |         |            |         |      |           |      |           |   |           |       |           |   |           |      
|                                                                                                                                                                          |                                                                                                                                    |                                       | 64,509  |         |         |            | 218,481 |            |         |      | 182,401   |      |           |   | 91,954    |       |           |   | (160,288  | )    
|Cumulative effect of change in accounting
    principle(3)                                                                                                                |                                                                                                                                    |                                       |        |         |         |            | (545    | )          |         |      |          |      |           |   |          |       |           |   |          |      
|                                                                                                                                                                          |                                                                                                                                    |                                       |         |         |         |            |         |            |         |      |           |      |           |   |           |       |           |   |           |      
|Net income (loss)                                                                                                                                                         |                                                                                                                                    | $                                     | 64,509  |         |         | $          | 217,936 |            |         | $    | 182,401   |      |           | $ | 91,954    |       |           | $ | (160,288  | )    
|                                                                                                                                                                          |                                                                                                                                    |                                       |         |         |         |            |         |            |         |      |           |      |           |   |           |       |           |   |           |      
|Income per common share:                                                                                                                                                  |                                                                                                                                    |                                       |         |         |         |            |         |            |         |      |           |      |           |   |           |       |           |   |           |      
|Basic:                                                                                                                                                                    |                                                                                                                                    |                                       |         |         |         |            |         |            |         |      |           |      |           |   |           |       |           |   |           |      
|                                                                                                                                                                          | Income from continuing operations before
    extraordinary item and cumulative effect of change in accounting
    principle        |                                       | $       | 0.30    |         |            | $       | 0.90       |         |      | $         | 0.70 |           |   | $         | 0.40  |           |   | $         | (0.21 | )        
|                                                                                                                                                                          | Income (loss) from discontinued operations                                                                                         |                                       |         | 0.04    |         |            |         | 0.04       |         |      |           | 0.05 |           |   |           | (0.02 | )         |   |           | (0.45 | )        
|                                                                                                                                                                          | Extraordinary item                                                                                                                 |                                       |         | (0.04   | )       |            |         |           |         |      |           |     |           |   |           |      |           |   |           |       |          
|                                                                                                                                                                          |                                                                                                                                    |                                       |         |         |         |            |         |            |         |      |           |      |           |   |           |       |           |   |           |      
|                                                                                                                                                                          |                                                                                                                                    | $                                     | 0.30    |         |         | $          | 0.94    |            |         | $    | 0.75      |      |           | $ | 0.38      |       |           | $ | (0.66     | )    
|                                                                                                                                                                          |                                                                                                                                    |                                       |         |         |         |            |         |            |         |      |           |      |           |   |           |       |           |   |           |      
|Diluted:                                                                                                                                                                  |                                                                                                                                    |                                       |         |         |         |            |         |            |         |      |           |      |           |   |           |       |           |   |           |      
|                                                                                                                                                                          | Income (loss) from continuing operations before
    extraordinary item and cumulative effect of change in accounting
    principle |                                       | $       | 0.29    |         |            | $       | 0.89       |         |      | $         | 0.69 |           |   | $         | 0.40  |           |   | $         | (0.21 | )        
|                                                                                                                                                                          | Income (loss) from discontinued operations                                                                                         |                                       |         | 0.04    |         |            |         | 0.04       |         |      |           | 0.05 |           |   |           | (0.02 | )         |   |           | (0.45 | )        
|                                                                                                                                                                          | Extraordinary item                                                                                                                 |                                       |         | (0.04   | )       |            |         |           |         |      |           |     |           |   |           |      |           |   |           |       |          
|                                                                                                                                                                          |                                                                                                                                    |                                       |         |         |         |            |         |            |         |      |           |      |           |   |           |       |           |   |           |      
|                                                                                                                                                                          |                                                                                                                                    | $                                     | 0.29    |         |         | $          | 0.93    |            |         | $    | 0.74      |      |           | $ | 0.38      |       |           | $ | (0.66     | )    
|                                                                                                                                                                          |                                                                                                                                    |                                       |         |         |         |            |         |            |         |      |           |      |           |   |           |       |           |   |           |      

52



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##### 



|                     |  |              |           |      |  |   |           | 
|-------------------- |  | ------------ | --------- | ---- |  | - | --------- | 
|                     |  |             
|                     |  | December 31,
|                     |  |             
|                     |  | 2003         |           |     
|                     |  | (restated)   |           | 2004
|                     |  |              |           |     
|Balance Sheet Data:  |  |              |           |      |  |   |           | 
|Working capital      |  | $            | 241,762   |      |  | $ | 438,133   | 
|Total assets         |  |              | 3,201,530 |      |  |   | 2,924,156 | 
|Total debt           |  |              | 345,097   |      |  |   | 345,000   | 
|Shareholders equity |  |              | 2,004,491 |      |  |   | 1,848,790 | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Errors that arose in 2000 and 2001 have not been
    recorded as charges in 2000 and 2001 because their effects are
    immaterial to those years. Instead, they have been recorded as
    part of an adjustment to the opening balance of retained
    earnings (January 1, 2002) in the 2002 financial
    statements. See Item 7. Managements Discussion
    and Analysis of Financial Condition and Results of
    Operations under the heading Restatement of
    previously issued financial statements.                                                                                                                                                                                                             
|(2) | Reflects an asset impairment charge related to
    discontinuing the production and distribution of Fluogen®
    in the amount of $9,353 (net of taxes of $5,612) during 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|(3) | Reflects the cumulative effect of a change in
    accounting principle of $545 (net of taxes of $325) due to the
    adoption of SFAS No. 133 Accounting for Derivative
    Instruments and Hedging Activities, during the first
    quarter of 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(4) | Reflects early extinguishment of debt expense in
    connection with the repayment of some of our debt instruments
    during 2000 and 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|(5) | Results for 2003 reflect a $15,212 reduction in
    the co-promotion fees paid to our Altace® co-promotion
    colleague as a result of 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.
|(6) | Reflects the classification of Nordette® and
    Prefest® product lines as discontinued operations. See
    Note 27 to our audited consolidated financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

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

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

I. OVERVIEW

Introduction

We are a vertically integrated pharmaceutical
company that develops, manufactures, markets and sells branded
prescription pharmaceutical products. We seek to capitalize on
opportunities in the pharmaceutical industry through the
development, including through in-licensing arrangements and
acquisitions, of novel branded prescription pharmaceutical
products in attractive markets and the strategic acquisition of
branded products that can benefit from focused promotion and
marketing and product life-cycle management.

During 2004, we implemented many changes at King
Pharmaceuticals designed to re-establish a firm foundation on
which to build the future success of our company. These changes
included the recruitment of new key leadership to enhance our
executive management team, which included the appointment of
Brian A. Markison as our President and Chief Executive Officer.
With new leadership in place, we worked diligently during 2004
to rebase our operations and identify our strengths and
weaknesses. We achieved a

53



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##### 



number of significant accomplishments in
furtherance of this goal, including: relocating our Commercial
Operations organization to New Jersey; expanding our Business
Development group; reprioritizing our Research and Development
portfolio; and implementing new processes and policies to
enhance financial controls, institutionalize cost control and
improve production planning. While our actions to financially
rebase our company necessarily negatively affected our financial
results in 2004, it is important to note that we continued to
generate solid cash flow.


Commercial Operations

We have significantly restructured our Commercial
Operations organization. This process began with the hiring of
Steve Andrzejewski as Corporate Head of Commercial Operations,
with responsibility for our sales, marketing and managed care
activities. Since then, we have worked to right-size our sales
force and improve compensation to attract talent and reward top
performers. Additionally, we strengthened our marketing, market
research, and administrative structure. With our enhanced
commercial operations capability, we plan to maximize the
potential of our currently marketed products as a
revenue-generating platform to fund product development and
external business development.

Business Development

Business Development should continue to play a
major role in our future growth strategy. With the addition of
new talent and new acquisition criteria, we are working to
strengthen our product portfolio. By diligently adding products
with significant growth potential and divesting underperforming
assets, we seek to improve our long-term prospects.

Research and Development

During 2004, we reprioritized our research and
development portfolio, with an enhanced focus on projects with
the greatest probability to deliver long-term value. Our
research and development activities involve the development of
chemical compounds, including new chemical entities, to provide
us with strategic pipeline opportunities for the
commercialization of new branded prescription pharmaceutical
products. In addition to developing these chemical compounds, we
pursue means of enhancing the value of existing products through
new uses and formulations that may provide additional benefits
to patients, and improvements in the quality and efficiency of
our manufacturing processes.



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

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

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

54



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##### 



PT-141

On August 12, 2004, we entered into a
collaborative agreement with Palatin Technologies, Inc. to
jointly develop and, on obtaining necessary regulatory
approvals, commercialize Palatins PT-141 for the treatment
of male and female sexual dysfunction. PT-141 is the first
compound in a new drug class called melanocortin receptor
agonists under development to treat sexual dysfunction. This new
chemical entity is being evaluated in Phase II clinical
trials studying the efficacy and safety profile of varying doses
of this novel compound in men experiencing ED and women
experiencing FSD.

Although the current ED market is primarily
served by PDE-5 inhibitors which target the vascular system, a
substantial unmet medical need for alternative sexual
dysfunction therapies exists. Many patients are contraindicated
for, or non-responsive to, PDE-5 inhibitors. For example,
PDE-5 inhibitors are contraindicated in patients taking
nitrates, which are prescribed primarily for the treatment of
cardiovascular disease. Current clinical data indicates that
PT-141 should not have any drug interactions with nitrates. For
additional information regarding PT-141, please see the section
below entitled Strategic Developments.



| |                                    
| | -----------------------------------
| | Sonata®Modified Release Formulation

Pursuant to an agreement between us and Elan,
Elan commenced a Phase II clinical trial program for the purpose
of developing a modified release formulation of Sonata® MR
in March 2004. However, the Phase II clinical trial results
showed that the Sonata® MR formulations that Elan
developed did not meet contractually required specifications.
After several months of review, we concluded that it was not
possible for Elan to develop a Sonata® MR formulation
meeting the contractually required specifications. Accordingly,
we decided to discontinue the Sonata® MR clinical
program and intend to terminate the agreement with Elan.
Although we believe we are entitled to terminate the agreement,
we can provide no assurance that we will effectively terminate
the agreement and, if we do, under what terms. The agreement
currently requires us to pay up to an additional
$60.0 million if Elan achieves certain milestones in
connection with the development of a reformulated version of
Sonata® and $15.0 million as a milestone payment if
annual net sales of a reformulated version of Sonata®
exceed $100.0 million, plus costs associated with the
development of a reformulated version of Sonata®.

MRE0094

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



| |    
| | ---
| | T62

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

55



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##### 





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

During the fourth quarter of 2004, we completed
the Phase IV clinical trial to determine the safety and
effectiveness of Altace® in the treatment of hypertension
(high blood pressure) in children. We refer to this important
trial as TOPHAT (Treatment of Pediatric Hypertension
with Altace Trial). Additionally, we are working to develop an
Altace®/diuretic combination product.

Cash Flow

Although our total revenues decreased 12.6% in
2004, primarily as a result of our aggressive reduction of
wholesale inventory levels of our products, our cash from
operations totaled $260.9 million during the year.
Accordingly, cash and cash equivalents, not including restricted
cash, grew to $342.1 million as of December 31, 2004
from $146.1 million at the end of 2003.

Restatement of previously issued financial
statements

We have restated our previously issued financial
statements for the years 2002 and 2003, including interim
periods in 2003, and the first two quarters of 2004, primarily
to reflect the correction of methodological errors related to
our reserve for product returns.

After experiencing an unusually high level of
product returns during late 2003 and the first three quarters of
2004, we decided to conduct a thorough evaluation of our returns
reserve before formally closing the third quarter of 2004.
Accordingly, on October 28, 2004, we publicly announced
that we were conducting such a review and that our preliminary
financial results for the third quarter of 2004 were subject to
change as a result of the review. We subsequently delayed the
filing of our Quarterly Report on Form 10-Q for the quarter
ended September 30, 2004, which we are filing
contemporaneously with this Annual Report on Form 10-K.

In connection with our now-completed review, we
have concluded that the recent large returns were primarily the
result of our entry into IMAs, with our largest wholesalers,
together with several product specific developments. However, we
also determined that our methodology for reserving for product
returns from the first quarter of 2000 through the second
quarter of 2004 contained errors, with the result that estimated
product returns were not recorded in the period required under
GAAP. Also in connection with our review, we concluded that
certain other immaterial items should have been recognized in
earlier periods.

The errors described above resulted from policies
adopted in good faith and after discussion with our independent
auditors. These errors are unrelated to the ongoing
investigations of us by the SEC and the OIG.

All amounts referenced in this Annual Report for
2002 and 2003, including interim periods in 2003, and the first
two quarters of 2004 reflect the relevant amounts on a restated
basis. We will not amend our Annual Reports on Form 10-K
for the years ended December 31, 2002 or 2003, or our
Quarterly Reports on Form 10-Q for quarterly periods from
January 1, 2002 through June 30, 2004. The previously
issued financial statements for 2002, 2003, and the first two
quarters of 2004 should no longer be relied upon.



| |                                                
| | -----------------------------------------------
| | Returns reserve and other restatement
    items

Returns reserve.GAAP requires that we reserve for expected product returns when
recognizing sales to wholesalers and other customers, who have
the right to return products for specified periods. From the
first quarter of 2000 through the second quarter of 2002, we
used the replacement cost method to value our reserve for
product returns. Under that method, our reserve for future
product returns was valued at the cost to manufacture
replacement product. We discontinued use of the replacement cost
method effective July 1, 2002, and began valuing our
returns reserve at the sales value of returned products. In
connection with the recent review of our returns reserve,
management has concluded that use of the replacement cost method
constituted an error. From the third quarter of 2002 through the
second quarter

56



---



##### 



of 2004, we accrued for product returns based in
part on our estimate of inventory in the wholesale and retail
distribution channels. Management has concluded that this
methodology also contained an error, because it did not take
into account the shelf life of our products in the wholesale
distribution channels. As a result of these conclusions, we have
adopted revised policies and procedures for establishing
reserves for product returns. The revised methodology is
described in the section entitled Managements
Discussion and Analysis of Financial Condition and Results of
Operations under the heading Critical Accounting
Policies.


Previously disclosed immaterial Medicaid
errors.The restatement has not
resulted in any change in the amounts of previously reported
errors in respect of Medicaid and other governmental pricing
programs. The restatement has, however, changed how the
immaterial Medicaid errors are reflected in the 2002 financial
statements. We have previously disclosed immaterial Medicaid
errors that had arisen during 1998 through 2001 and recorded
those amounts in the fourth quarter of 2002. As described below,
as part of the restatement, all immaterial errors, including
those Medicaid errors, which arose prior to 2002 and that were
previously recorded as charges in 2002 have been removed as
charges from the 2002 income statement. The aggregate amount of
those immaterial errors is instead recorded as part of the
adjustment to the opening balance (January 1, 2002) of
retained earnings in the restated 2002 financial statements.

Other immaterial
items.In the course of our returns
review, we determined that in some instances our estimates of
inventory in the distribution channel did not properly reflect
relevant data in our possession, and that we thereby
inadvertently under-accrued for estimated future chargeback
amounts. Chargebacks are credits issued to wholesalers (who
purchase at published wholesale prices) when they resell our
products to a customer entitled to a discount pursuant to the
customers agreement with us. The wholesaler allows its
customer to purchase at the discounted price, and then the
wholesaler recovers the amount of the discount from us via a
chargeback.

Following our determination that we would restate
our financial statements for 2002, 2003 and the first two
quarters of 2004, we also determined that we would correct for
other known miscellaneous immaterial errors made in the
application of GAAP that arose during those periods. Our
restated financial statements reflect each of these items in the
period in which it actually arose.

Use of estimates in restatement items.Investors should be aware that the
amounts being restated are largely estimates, including most
importantly estimates of future product returns. GAAP requires
that we reserve for expected product returns when recognizing
sales to wholesalers and other customers, who have the right to
return products for specified periods. Because we identified
flaws in the methodology we had used to generate our prior
estimates of expected product returns, for purposes of the
restatement we have prepared new estimates by retroactively
applying our revised methodology commencing January 1,
2000. We believe that the new estimates are reasonable and
appropriate for inclusion in the restated financial statements.
Nevertheless, estimates require considerable judgment and are
subject to inherent imprecision. Our new estimates may or may
not be the same as those that we actually would have generated
during earlier periods if we had in fact been using our revised
methodology during those periods.

57



---



##### 



Restated Income Statement Amounts

The table below sets forth the effect of the
adjustments for the year ended December 31, 2002:

|                                                                 |                                                                         |                                                   |         |           |           |            |         |            |         |             |        |        |        |   |        |        |        |   |         |           |           | 
|---------------------------------------------------------------- | ----------------------------------------------------------------------- | ------------------------------------------------- | ------- | --------- | --------- | ---------- | ------- | ---------- | ------- | ----------- | ------ | ------ | ------ | - | ------ | ------ | ------ | - | ------- | --------- | --------- | 
|                                                                 |                                                                         | 2002                                              |         | Returns   |           | Immaterial |         | Other      |         |            
|                                                                 |                                                                         | As Originally                                     |         | Reserve   |           | Medicaid   |         | Immaterial |         | 2002       
|                                                                 |                                                                         | Reported                                          |         | Errors    |           | Errors     |         | Items      |         | As Restated
|                                                                 |                                                                         |                                                   |         |           |           |            |         |            |         |            
|Revenues:                                                        |                                                                         |                                                   |         |           |           |            |         |            |         |             |        |        |        |   |        |        |        |   |         |          
|                                                                 | Net sales                                                               |                                                   | $       | 1,030,119 |           |            | $       | (12,851    | )       |             | $      | 21,654 |        |   | $      | (9,273 | )      |   | $       | 1,029,649 |          
|                                                                 | Royalty revenue                                                         |                                                   |         | 58,375    |           |            |         |           |         |             |        |       |        |   |        |       |        |   |         | 58,375    |          
|                                                                 |                                                                         |                                                   |         |           |           |            |         |            |         |             |        |        |        |   |        |        |        |   |         |          
|                                                                 |                                                                         | Total revenues                                    |         |           | 1,088,494 |            |         |            | (12,851 | )           |        |        | 21,654 |   |        |        | (9,273 | ) |         |           | 1,088,024 | 
|                                                                 |                                                                         |                                                   |         |           |           |            |         |            |         |             |        |        |        |   |        |        |        |   |         |          
|Operating costs and expenses:                                    |                                                                         |                                                   |         |           |           |            |         |            |         |             |        |        |        |   |        |        |        |   |         |          
|                                                                 | Cost of revenues, exclusive of depreciation shown
    below             |                                                   |         | 291,098   |           |            |         | (50        | )       |             |        | 350    |        |   |        | (141   | )      |   |         | 291,257   |          
|                                                                 |                                                                         |                                                   |         |           |           |            |         |            |         |             |        |        |        |   |        |        |        |   |         |          
|                                                                 | Selling, general and administrative, exclusive of
    co-promotion fees |                                                   |         | 174,666   |           |            |         |           |         |             |        |       |        |   |        | (430   | )      |   |         | 174,236   |          
|                                                                 | Co-promotion fees                                                       |                                                   |         | 186,657   |           |            |         | (577       | )       |             |        |       |        |   |        | (2,908 | )      |   |         | 183,172   |          
|                                                                 |                                                                         |                                                   |         |           |           |            |         |            |         |             |        |        |        |   |        |        |        |   |         |          
|                                                                 |                                                                         | Total selling, general and administrative expense |         |           | 361,323   |            |         |            | (577    | )           |        |        |       |   |        |        | (3,338 | ) |         |           | 357,408   | 
|                                                                 |                                                                         |                                                   |         |           |           |            |         |            |         |             |        |        |        |   |        |        |        |   |         |          
|                                                                 | Research and development                                                |                                                   |         | 28,184    |           |            |         |           |         |             |        |       |        |   |        |       |        |   |         | 28,184    |          
|                                                                 | Research and development-in process upon
    acquisition                |                                                   |         | 12,000    |           |            |         |           |         |             |        |       |        |   |        |       |        |   |         | 12,000    |          
|                                                                 |                                                                         |                                                   |         |           |           |            |         |            |         |             |        |        |        |   |        |        |        |   |         |          
|                                                                 |                                                                         | Total research and development                    |         |           | 40,184    |            |         |            |        |             |        |        |       |   |        |        |       |   |         |           | 40,184    | 
|                                                                 |                                                                         |                                                   |         |           |           |            |         |            |         |             |        |        |        |   |        |        |        |   |         |          
|                                                                 | Depreciation and amortization                                           |                                                   |         | 51,377    |           |            |         |           |         |             |        |       |        |   |        |       |        |   |         | 51,377    |          
|                                                                 | Intangible asset impairment                                             |                                                   |         | 66,844    |           |            |         |           |         |             |        |       |        |   |        |       |        |   |         | 66,844    |          
|                                                                 | Merger, restructuring and other nonrecurring
    charges                |                                                   |         | 5,911     |           |            |         |           |         |             |        |       |        |   |        |       |        |   |         | 5,911     |          
|                                                                 |                                                                         |                                                   |         |           |           |            |         |            |         |             |        |        |        |   |        |        |        |   |         |          
|                                                                 |                                                                         | Total operating costs and expenses                |         |           | 816,737   |            |         |            | (627    | )           |        |        | 350    |   |        |        | (3,479 | ) |         |           | 812,981   | 
|                                                                 |                                                                         |                                                   |         |           |           |            |         |            |         |             |        |        |        |   |        |        |        |   |         |          
|                                                                 | Operating income (loss)                                                 |                                                   |         | 271,757   |           |            |         | (12,224    | )       |             |        | 21,304 |        |   |        | (5,794 | )      |   |         | 275,043   |          
|                                                                 |                                                                         |                                                   |         |           |           |            |         |            |         |             |        |        |        |   |        |        |        |   |         |          
|Total other (expense) income                                     |                                                                         |                                                   | (26,537 | )         |           |            |        |            |         |             |       |        |        |   |       |        |        |   | (26,537 | )        
|                                                                 |                                                                         |                                                   |         |           |           |            |         |            |         |             |        |        |        |   |        |        |        |   |         |          
|Income (loss) from continuing operations before
    income taxes |                                                                         |                                                   | 245,220 |           |           |            | (12,224 | )          |         |             | 21,304 |        |        |   | (5,794 | )      |        |   | 248,506 |          
|Income tax expense (benefit)                                     |                                                                         |                                                   | 76,774  |           |           |            | (4,680  | )          |         |             | 8,159  |        |        |   | (2,220 | )      |        |   | 78,033  |          
|                                                                 |                                                                         |                                                   |         |           |           |            |         |            |         |             |        |        |        |   |        |        |        |   |         |          
|Income (loss) from continuing operations                         |                                                                         |                                                   | 168,446 |           |           |            | (7,544  | )          |         |             | 13,145 |        |        |   | (3,574 | )      |        |   | 170,473 |          
|                                                                 |                                                                         |                                                   |         |           |           |            |         |            |         |             |        |        |        |   |        |        |        |   |         |          
|Discontinued operations:                                         |                                                                         |                                                   |         |           |           |            |         |            |         |             |        |        |        |   |        |        |        |   |         |          
|                                                                 | Income (loss) from discontinued operations,
    including expected loss |                                                   |         | 22,443    |           |            |         | (2,476     | )       |             |        | 459    |        |   |        | (1,461 | )      |   |         | 18,965    |          
|                                                                 | Income tax expense (benefit)                                            |                                                   |         | 8,369     |           |            |         | (948       | )       |             |        | 176    |        |   |        | (560   | )      |   |         | 7,037     |          
|                                                                 |                                                                         |                                                   |         |           |           |            |         |            |         |             |        |        |        |   |        |        |        |   |         |          
|                                                                 |                                                                         | Total income (loss) from discontinued operations  |         |           | 14,074    |            |         |            | (1,528  | )           |        |        | 283    |   |        |        | (901   | ) |         |           | 11,928    | 
|                                                                 |                                                                         |                                                   |         |           |           |            |         |            |         |             |        |        |        |   |        |        |        |   |         |          
|Net income (loss)                                                |                                                                         | $                                                 | 182,520 |           |           | $          | (9,072  | )          |         | $           | 13,428 |        |        | $ | (4,475 | )      |        | $ | 182,401 |          
|                                                                 |                                                                         |                                                   |         |           |           |            |         |            |         |             |        |        |        |   |        |        |        |   |         |          
|Income (loss) per common share:                                  |                                                                         |                                                   |         |           |           |            |         |            |         |             |        |        |        |   |        |        |        |   |         |          
|Basic income (loss) per common share                             |                                                                         | $                                                 | 0.75    |           |           | $          | (0.04   | )          |         | $           | 0.05   |        |        | $ | (0.01  | )      |        | $ | 0.75    |          
|                                                                 |                                                                         |                                                   |         |           |           |            |         |            |         |             |        |        |        |   |        |        |        |   |         |          
|Diluted income (loss) per common share                           |                                                                         | $                                                 | 0.74    |           |           | $          | (0.04   | )          |         | $           | 0.05   |        |        | $ | (0.01  | )      |        | $ | 0.74    |          
|                                                                 |                                                                         |                                                   |         |           |           |            |         |            |         |             |        |        |        |   |        |        |        |   |         |          

58



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##### 



The table below sets forth the effect of the
adjustments for the year ended December 31, 2003:

|                                                                 |                                                                         |                                                   |         |           |           |            |         |             |         |   |        |        |       |   |         |           |           |  
|---------------------------------------------------------------- | ----------------------------------------------------------------------- | ------------------------------------------------- | ------- | --------- | --------- | ---------- | ------- | ----------- | ------- | - | ------ | ------ | ----- | - | ------- | --------- | --------- | -
|                                                                 |                                                                         | 2003                                              |         | Returns   |           | Other      |         |            
|                                                                 |                                                                         | As Originally                                     |         | Reserve   |           | Immaterial |         | 2003       
|                                                                 |                                                                         | Reported                                          |         | Errors    |           | Items      |         | As Restated
|                                                                 |                                                                         |                                                   |         |           |           |            |         |            
|Revenues:                                                        |                                                                         |                                                   |         |           |           |            |         |             |         |   |        |        |       |   |         |          
|                                                                 | Net sales                                                               |                                                   | $       | 1,440,888 |           |            | $       | (17,401     | )       |   | $      | 937    |       |   | $       | 1,424,424 |          
|                                                                 | Royalty revenue                                                         |                                                   |         | 68,365    |           |            |         |            |         |   |        |       |       |   |         | 68,365    |          
|                                                                 |                                                                         |                                                   |         |           |           |            |         |             |         |   |        |        |       |   |         |          
|                                                                 |                                                                         | Total revenues                                    |         |           | 1,509,253 |            |         |             | (17,401 | ) |        |        | 937   |   |         |           | 1,492,789 |  
|                                                                 |                                                                         |                                                   |         |           |           |            |         |             |         |   |        |        |       |   |         |          
|Operating costs and expenses:                                    |                                                                         |                                                   |         |           |           |            |         |             |         |   |        |        |       |   |         |          
|                                                                 | Cost of revenues, exclusive of depreciation shown
    below             |                                                   |         | 381,794   |           |            |         | (54         | )       |   |        | 4,101  |       |   |         | 385,841   |          
|                                                                 |                                                                         |                                                   |         |           |           |            |         |             |         |   |        |        |       |   |         |          
|                                                                 | Selling, general and administrative, exclusive of
    co-promotion fees |                                                   |         | 293,834   |           |            |         |            |         |   |        | (1,750 | )     |   |         | 292,084   |          
|                                                                 | Co-promotion fees                                                       |                                                   |         | 193,350   |           |            |         | 2,558       |         |   |        | 2,590  |       |   |         | 198,498   |          
|                                                                 |                                                                         |                                                   |         |           |           |            |         |             |         |   |        |        |       |   |         |          
|                                                                 |                                                                         | Total selling, general and administrative expense |         |           | 487,184   |            |         |             | 2,558   |   |        |        | 840   |   |         |           | 490,582   |  
|                                                                 |                                                                         |                                                   |         |           |           |            |         |             |         |   |        |        |       |   |         |          
|                                                                 | Research and development                                                |                                                   |         | 44,078    |           |            |         |            |         |   |        |       |       |   |         | 44,078    |          
|                                                                 | Research and development-in process upon
    acquisition                |                                                   |         | 194,000   |           |            |         |            |         |   |        |       |       |   |         | 194,000   |          
|                                                                 |                                                                         |                                                   |         |           |           |            |         |             |         |   |        |        |       |   |         |          
|                                                                 |                                                                         | Total research and development                    |         |           | 238,078   |            |         |             |        |   |        |        |      |   |         |           | 238,078   |  
|                                                                 |                                                                         |                                                   |         |           |           |            |         |             |         |   |        |        |       |   |         |          
|                                                                 | Depreciation and amortization                                           |                                                   |         | 113,745   |           |            |         |            |         |   |        |       |       |   |         | 113,745   |          
|                                                                 | Intangible asset impairment                                             |                                                   |         | 124,616   |           |            |         |            |         |   |        |       |       |   |         | 124,616   |          
|                                                                 | (Gain) loss on sale of products                                         |                                                   |         | (12,025   | )         |            |         |            |         |   |        |       |       |   |         | (12,025   | )        
|                                                                 |                                                                         |                                                   |         |           |           |            |         |             |         |   |        |        |       |   |         |          
|                                                                 |                                                                         | Total operating costs and expenses                |         |           | 1,333,392 |            |         |             | 2,504   |   |        |        | 4,941 |   |         |           | 1,340,837 |  
|                                                                 |                                                                         |                                                   |         |           |           |            |         |             |         |   |        |        |       |   |         |          
|                                                                 | Operating income (loss)                                                 |                                                   |         | 175,861   |           |            |         | (19,905     | )       |   |        | (4,004 | )     |   |         | 151,952   |          
|                                                                 |                                                                         |                                                   |         |           |           |            |         |             |         |   |        |        |       |   |         |          
|Total other (expense) income                                     |                                                                         |                                                   | 10,975  |           |           |            |        |             |         |   | 400    |        |       |   | 11,375  |          
|                                                                 |                                                                         |                                                   |         |           |           |            |         |             |         |   |        |        |       |   |         |          
|Income (loss) from continuing operations before
    income taxes |                                                                         |                                                   | 186,836 |           |           |            | (19,905 | )           |         |   | (3,604 | )      |       |   | 163,327 |          
|Income tax expense (benefit)                                     |                                                                         |                                                   | 74,889  |           |           |            | (7,624  | )           |         |   | (1,381 | )      |       |   | 65,884  |          
|                                                                 |                                                                         |                                                   |         |           |           |            |         |             |         |   |        |        |       |   |         |          
|Income (loss) from continuing operations                         |                                                                         |                                                   | 111,947 |           |           |            | (12,281 | )           |         |   | (2,223 | )      |       |   | 97,443  |          
|                                                                 |                                                                         |                                                   |         |           |           |            |         |             |         |   |        |        |       |   |         |          
|Discontinued operations:                                         |                                                                         |                                                   |         |           |           |            |         |             |         |   |        |        |       |   |         |          
|                                                                 | Income (loss) from discontinued operations,
    including expected loss |                                                   |         | (9,747    | )         |            |         | (413        | )       |   |        | 1,389  |       |   |         | (8,771    | )        
|                                                                 | Income tax expense (benefit)                                            |                                                   |         | (3,656    | )         |            |         | (157        | )       |   |        | 531    |       |   |         | (3,282    | )        
|                                                                 |                                                                         |                                                   |         |           |           |            |         |             |         |   |        |        |       |   |         |          
|                                                                 |                                                                         | Total income (loss) from discontinued operations  |         |           | (6,091    | )          |         |             | (256    | ) |        |        | 858   |   |         |           | (5,489    | )
|                                                                 |                                                                         |                                                   |         |           |           |            |         |             |         |   |        |        |       |   |         |          
|Net income (loss)                                                |                                                                         | $                                                 | 105,856 |           |           | $          | (12,537 | )           |         | $ | (1,365 | )      |       | $ | 91,954  |          
|                                                                 |                                                                         |                                                   |         |           |           |            |         |             |         |   |        |        |       |   |         |          
|Basic income (loss) per common share                             |                                                                         | $                                                 | 0.44    |           |           | $          | (0.05   | )           |         | $ | (0.01  | )      |       | $ | 0.38    |          
|                                                                 |                                                                         |                                                   |         |           |           |            |         |             |         |   |        |        |       |   |         |          
|Diluted income (loss) per common share                           |                                                                         | $                                                 | 0.44    |           |           | $          | (0.05   | )           |         | $ | (0.01  | )      |       | $ | 0.38    |          
|                                                                 |                                                                         |                                                   |         |           |           |            |         |             |         |   |        |        |       |   |         |          

For information on the effect of the restatement
on interim periods in 2003 and 2004, see Note 26 to our
financial statements.

59



---



##### 



The aggregate amount of immaterial errors that
arose prior to 2002, including the immaterial Medicaid errors
that were previously disclosed and recorded as charges in 2002
and which have been removed as charges from the 2002 income
statement, have been recorded as an adjustment to the opening
balance (January 1, 2002) of retained earnings in the 2002
financial statements, as set forth below.

|                                     |                        |                                   |   |         |         |  
|------------------------------------ | ---------------------- | --------------------------------- | - | ------- | ------- | -
|                                     |                        | January 1, 2002                  
|                                     |                        |                                  
|Opening balance of retained earnings |                        |                                   |   |        
|                                     | As originally reported |                                   | $ | 546,721 |        
|                                     |                        | Immaterial returns reserve errors |   |         | (10,395 | )
|                                     |                        | Immaterial Medicaid errors        |   |         | (13,428 | )
|                                     |                        | Other immaterial items            |   |         | 155     |  
|                                     |                        |                                   |   |        
|                                     | As restated            |                                   | $ | 523,053 |        
|                                     |                        |                                   |   |        

We have not restated our financial statements for
periods prior to 2002 because the errors that arose in those
periods were not material to any previously reported financial
statements. Set forth below is a summary of the immaterial
errors included in the adjustment to retained earnings.

Summary of Immaterial Errors Included in
Adjustment to January 1, 2002 Retained Earnings

(In thousands)


(Unaudited)


|                                          |                                   |                          |   |        |   |      |   |        |   |  |   |         |  
|----------------------------------------- | --------------------------------- | ------------------------ | - | ------ | - | ---- | - | ------ | - |  | - | ------- | -
|                                          |                                   |                         
|                                          |                                   | Years Ended December 31,
|                                          |                                   |                         
|                                          |                                   | 1999                     |   |       
|                                          |                                   | and prior                |   | 2000   |   | 2001
|                                          |                                   |                          |   |        |   |     
|Net Sales                                 |                                   |                          |   |        |   |      |   |        |   |  |   |        
|                                          | Immaterial returns reserve errors |                          | $ | (686   | ) |      | $ | (5,048 | ) |  | $ | (9,785  | )
|                                          | Immaterial Medicaid errors(1)     |                          | $ | (8,942 | ) |      | $ | (5,641 | ) |  | $ | (7,071  | )
|                                          | Other immaterial items            |                          | $ |       |   |      | $ |       |   |  | $ |        |  
|Operating income                          |                                   |                          |   |        |   |      |   |        |   |  |   |        
|                                          | Immaterial returns reserve errors |                          | $ | (681   | ) |      | $ | (4,987 | ) |  | $ | (10,625 | )
|                                          | Immaterial Medicaid errors(1)     |                          | $ | (8,828 | ) |      | $ | (5,512 | ) |  | $ | (6,964  | )
|                                          | Other immaterial items            |                          | $ |       |   |      | $ | 2,826  |   |  | $ | (2,576  | )
|Net income from continuing
    operations |                                   |                          |   |        |   |      |   |        |   |  |   |        
|                                          | Immaterial returns reserve errors |                          | $ | (420   | ) |      | $ | (3,077 | ) |  | $ | (6,556  | )
|                                          | Immaterial Medicaid errors(1)     |                          | $ | (5,446 | ) |      | $ | (3,401 | ) |  | $ | (4,297  | )
|                                          | Other immaterial items            |                          | $ |       |   |      | $ | 1,693  |   |  | $ | (1,538  | )
|Net income                                |                                   |                          |   |        |   |      |   |        |   |  |   |        
|                                          | Immaterial returns reserve errors |                          | $ | (420   | ) |      | $ | (3,235 | ) |  | $ | (6,740  | )
|                                          | Immaterial Medicaid errors(1)     |                          | $ | (5,446 | ) |      | $ | (3,544 | ) |  | $ | (4,438  | )
|                                          | Other immaterial items            |                          | $ |       |   |      | $ | 1,693  |   |  | $ | (1,538  | )
|Diluted earnings per share                |                                   |                          |   |        |   |      |   |        |   |  |   |        
|                                          | Immaterial returns reserve errors |                          | $ | n/a    |   |      | $ | (0.02  | ) |  | $ | (0.03   | )
|                                          | Immaterial Medicaid errors(1)     |                          | $ | n/a    |   |      | $ | (0.02  | ) |  | $ | (0.02   | )
|                                          | Other immaterial items            |                          |   | n/a    |   |      | $ | 0.01   |   |  | $ | (0.01   | )



---



| |     |                                                                                                                                                                                                                                                                                                                                
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Consists solely of immaterial errors relating to
    Medicaid and other governmental pricing programs previously
    disclosed in our Annual Report on Form 10-K for the year
    ended December 31, 2002. The restatement has not resulted
    in any changes in the amounts of those previously reported
    Medicaid errors.

60



---



##### 



Restated Balance Sheet Amounts

The table below sets forth the effect of the
adjustments on the balance sheet as of December 31, 2002:

|                                          |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |           |           | 
|----------------------------------------- | ----------------------------------------- | ------------------------------------------ | --------- | --------- | --------- | ---------- | - | ----------- | ------- | - | ----- | ------ | ------ | - | --------- | --------- | --------- | 
|                                          |                                           | 2002                                       |           | Returns   |           | Other      |   |            
|                                          |                                           | As Originally                              |           | Reserve   |           | Immaterial |   | 2002       
|                                          |                                           | Reported                                   |           | Errors    |           | Items      |   | As Restated
|                                          |                                           |                                            |           |           |           |            |   |            
|Assets                                    |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|Current Assets:                           |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|                                          | Cash and cash equivalents                 |                                            | $         | 588,225   |           |            |   |             |         |   |       |        |        |   | $         | 588,225   |          
|                                          | Restricted cash                           |                                            |           |          |           |            |   |             |         |   |       |        |        |   |           |          |          
|                                          | Marketable securities                     |                                            |           | 227,263   |           |            |   |             |         |   |       |        |        |   |           | 227,263   |          
|                                          | Accounts receivable, net                  |                                            |           | 159,987   |           |            |   |             |         |   |       |        |        |   |           | 159,987   |          
|                                          | Inventories                               |                                            |           | 162,606   |           |            |   |             |         |   |       |        |        |   |           | 162,606   |          
|                                          | Deferred income tax assets                |                                            |           | 106,168   |           |            | $ | 12,082      |         |   | $     | 4,669  |        |   |           | 122,919   |          
|                                          | Prepaid expenses and other current assets |                                            |           | 12,906    |           |            |   |             |         |   |       |        |        |   |           | 12,906    |          
|                                          | Assets related to discontinued operations |                                            |           | 4,547     |           |            |   |             |         |   |       |        |        |   |           | 4,547     |          
|                                          |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|                                          |                                           | Total current assets                       |           |           | 1,261,702 |            |   |             | 12,082  |   |       |        | 4,669  |   |           |           | 1,278,453 | 
|Property, plant and equipment, net        |                                           |                                            | 217,114   |           |           |            |   |             |         |   |       |        |        |   | 217,114   |          
|Goodwill                                  |                                           |                                            | 12,742    |           |           |            |   |             |         |   |       |        |        |   | 12,742    |          
|Intangible assets, net                    |                                           |                                            | 1,011,240 |           |           |            |   |             |         |   |       |        |        |   | 1,011,240 |          
|Other assets                              |                                           |                                            | 39,531    |           |           |            |   |             |         |   |       |        |        |   | 39,531    |          
|Deferred income tax assets                |                                           |                                            |          |           |           |            |   |             |         |   |       |        |        |   |          |          
|Assets related to discontinued operations |                                           |                                            | 208,331   |           |           |            |   |             |         |   |       |        |        |   | 208,331   |          
|                                          |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|                                          |                                           | Total assets                               |           | $         | 2,750,660 |            |   | $           | 12,082  |   |       | $      | 4,669  |   |           | $         | 2,767,411 | 
|                                          |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|                                         
|Liabilities and Shareholders
    Equity  |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|Current liabilities:                      |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|                                          | Accounts payable                          |                                            | $         | 49,889    |           |            |   |             |         |   | $     | (680   | )      |   | $         | 49,209    |          
|                                          | Accrued expenses                          |                                            |           | 297,528   |           |            | $ | 31,546      |         |   |       | 7,686  |        |   |           | 336,760   |          
|                                          | Income taxes payable                      |                                            |           | 21,247    |           |            |   |             |         |   |       |        |        |   |           | 21,247    |          
|                                          | Notes payable                             |                                            |           |          |           |            |   |             |         |   |       |        |        |   |           |          |          
|                                          | Current portion of long term debt         |                                            |           | 1,300     |           |            |   |             |         |   |       |        |        |   |           | 1,300     |          
|                                          |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|                                          |                                           | Total current liabilities                  |           |           | 369,964   |            |   |             | 31,546  |   |       |        | 7,006  |   |           |           | 408,516   | 
|Long-term debt                            |                                           |                                            | 345,093   |           |           |            |   |             |         |   |       |        |        |   | 345,093   |          
|Deferred income tax liabilities           |                                           |                                            | 33,596    |           |           |            |   |             |         |   | 1,986 |        |        |   | 35,582    |          
|Other liabilities                         |                                           |                                            | 70,824    |           |           |            |   |             |         |   |       |        |        |   | 70,824    |          
|                                          |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|                                          |                                           | Total liabilities                          |           |           | 819,477   |            |   |             | 31,546  |   |       |        | 8,992  |   |           |           | 860,015   | 
|                                          |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|Commitments and contingencies             |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|Shareholders equity:                     |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|                                          | Preferred stock                           |                                            |           |          |           |            |   |             |         |   |       |        |        |   |           |          |          
|                                          | Common stock                              |                                            |           | 1,201,897 |           |            |   |             |         |   |       |        |        |   |           | 1,201,897 |          
|                                          | Retained earnings                         |                                            |           | 729,241   |           |            |   | (19,464     | )       |   |       | (4,323 | )      |   |           | 705,454   |          
|                                          | Accumulated other comprehensive income    |                                            |           | 45        |           |            |   |             |         |   |       |        |        |   |           | 45        |          
|                                          |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|                                          |                                           | Total shareholders equity                 |           |           | 1,931,183 |            |   |             | (19,464 | ) |       |        | (4,323 | ) |           |           | 1,907,396 | 
|                                          |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|                                          |                                           | Total liabilities and shareholders equity |           | $         | 2,750,660 |            |   | $           | 12,082  |   |       | $      | 4,669  |   |           | $         | 2,767,411 | 
|                                          |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          

61



---



##### 



The table below sets forth the effect of the
adjustments as of December 31, 2003:

|                                          |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |           |           | 
|----------------------------------------- | ----------------------------------------- | ------------------------------------------ | --------- | --------- | --------- | ---------- | - | ----------- | ------- | - | ----- | ------ | ------ | - | --------- | --------- | --------- | 
|                                          |                                           | 2003                                       |           | Returns   |           | Other      |   |            
|                                          |                                           | As Originally                              |           | Reserve   |           | Immaterial |   | 2003       
|                                          |                                           | Reported                                   |           | Errors    |           | Items      |   | As Restated
|                                          |                                           |                                            |           |           |           |            |   |            
|Assets                                    |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|Current Assets:                           |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|                                          | Cash and cash equivalents                 |                                            | $         | 146,053   |           |            |   |             |         |   |       |        |        |   | $         | 146,053   |          
|                                          | Restricted cash                           |                                            |           | 133,969   |           |            |   |             |         |   |       |        |        |   |           | 133,969   |          
|                                          | Marketable securities                     |                                            |           |          |           |            |   |             |         |   |       |        |        |   |           |          |          
|                                          | Accounts receivable, net                  |                                            |           | 246,417   |           |            |   |             |         |   |       |        |        |   |           | 246,417   |          
|                                          | Inventories                               |                                            |           | 260,886   |           |            |   |             |         |   |       |        |        |   |           | 260,886   |          
|                                          | Deferred income tax assets                |                                            |           | 124,930   |           |            | $ | 19,864      |         |   | $     | 3,685  |        |   |           | 148,479   |          
|                                          | Prepaid expenses and other current assets |                                            |           | 30,036    |           |            |   |             |         |   |       |        |        |   |           | 30,036    |          
|                                          | Assets related to discontinued operations |                                            |           | 4,012     |           |            |   |             |         |   |       |        |        |   |           | 4,012     |          
|                                          |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|                                          |                                           | Total current assets                       |           |           | 946,303   |            |   |             | 19,864  |   |       |        | 3,685  |   |           |           | 969,852   | 
|Property, plant and equipment, net        |                                           |                                            | 257,659   |           |           |            |   |             |         |   |       |        |        |   | 257,659   |          
|Goodwill                                  |                                           |                                            | 121,355   |           |           |            |   |             |         |   |       |        |        |   | 121,355   |          
|Intangible assets, net                    |                                           |                                            | 1,552,492 |           |           |            |   |             |         |   |       |        |        |   | 1,552,492 |          
|Other assets                              |                                           |                                            | 76,117    |           |           |            |   |             |         |   | 400   |        |        |   | 76,517    |          
|Deferred income tax assets                |                                           |                                            | 19,307    |           |           |            |   |             |         |   | (153  | )      |        |   | 19,154    |          
|Assets related to discontinued operations |                                           |                                            | 204,501   |           |           |            |   |             |         |   |       |        |        |   | 204,501   |          
|                                          |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|                                          |                                           | Total assets                               |           | $         | 3,177,734 |            |   | $           | 19,864  |   |       | $      | 3,932  |   |           | $         | 3,201,530 | 
|                                          |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|                                         
|Liabilities and Shareholders
    Equity  |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|Current liabilities:                      |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|                                          | Accounts payable                          |                                            | $         | 83,078    |           |            |   |             |         |   | $     | (1,430 | )      |   | $         | 81,648    |          
|                                          | Accrued expenses                          |                                            |           | 506,033   |           |            | $ | 51,864      |         |   |       | 8,807  |        |   |           | 566,704   |          
|                                          | Income taxes payable                      |                                            |           | 79,641    |           |            |   |             |         |   |       |        |        |   |           | 79,641    |          
|                                          | Notes payable                             |                                            |           |          |           |            |   |             |         |   |       |        |        |   |           |          |          
|                                          | Current portion of long term debt         |                                            |           | 97        |           |            |   |             |         |   |       |        |        |   |           | 97        |          
|                                          |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|                                          |                                           | Total current liabilities                  |           |           | 668,849   |            |   |             | 51,864  |   |       |        | 7,377  |   |           |           | 728,090   | 
|Long-term debt                            |                                           |                                            | 345,000   |           |           |            |   |             |         |   |       |        |        |   | 345,000   |          
|Deferred income tax liabilities           |                                           |                                            |          |           |           |            |   |             |         |   |       |        |        |   |          |          
|Other liabilities                         |                                           |                                            | 121,705   |           |           |            |   |             |         |   | 2,244 |        |        |   | 123,949   |          
|                                          |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|                                          |                                           | Total liabilities                          |           |           | 1,135,554 |            |   |             | 51,864  |   |       |        | 9,621  |   |           |           | 1,197,039 | 
|                                          |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|Commitments and contingencies             |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|Shareholders equity:                     |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|                                          | Preferred stock                           |                                            |           |          |           |            |   |             |         |   |       |        |        |   |           |          |          
|                                          | Common stock                              |                                            |           | 1,205,970 |           |            |   |             |         |   |       |        |        |   |           | 1,205,970 |          
|                                          | Retained earnings                         |                                            |           | 835,097   |           |            |   | (32,000     | )       |   |       | (5,689 | )      |   |           | 797,408   |          
|                                          | Accumulated other comprehensive income    |                                            |           | 1,113     |           |            |   |             |         |   |       |        |        |   |           | 1,113     |          
|                                          |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|                                          |                                           | Total shareholders equity                 |           |           | 2,042,180 |            |   |             | (32,000 | ) |       |        | (5,689 | ) |           |           | 2,004,491 | 
|                                          |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|                                          |                                           | Total liabilities and shareholders equity |           | $         | 3,177,734 |            |   | $           | 19,864  |   |       | $      | 3,932  |   |           | $         | 3,201,530 | 
|                                          |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          

62



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Wholesale Inventory Reductions

During late 2003, we became aware of the need to
improve our visibility of wholesale inventory levels of our
branded pharmaceutical products. As a result, in April 2004 we
successfully entered into IMAs with each of our three key
wholesale customers covering all of our branded products for the
purpose of improving our visibility and reducing the level of
wholesale inventories of our products. As we anticipated,
entering into the inventory management agreements adversely
affected net sales of some of our branded pharmaceutical
products during 2004, as we aggressively reduced wholesale
inventory levels of these products.

During the fourth quarter of 2004 we began
working to amend our IMAs with our key wholesale customers with
the objective of further reducing their inventory of our
products. As a result, the average wholesale inventory level of
our key products was further reduced during the fourth quarter
of 2004. We anticipate the substantial completion of wholesale
channel inventory reductions of our key products by the end of
the first quarter of 2005.

As of December 31, 2004, the wholesale
inventory levels of our four key branded pharmaceutical
products, Altace®, Skelaxin®, Sonata® and
Levoxyl®, based on data obtained through our inventory
management agreements with our three largest customers and IMS
America prescription data, were on average at a level of
slightly less than 1.6 months of demand. We believe this
level of approximately 1.6 months of end-user demand
represents gross sales of approximately $256.0 million.

Sales of Key Products

Altace®

Net sales of Altace® equaled
$347.3 million for the year ended December 31, 2004, a
35% decrease from $536.9 million during 2003, while total
prescriptions increased 9% to 13.1 million during 2004 in
comparison to the prior year according to NDC monthly
prescription data. Our lower net sales of Altace® during
2004 was due to wholesale inventory reductions and increased
rebates and chargebacks, the combined effect of which was
modestly offset by price increases.

We estimate that if net sales of Altace®
during 2004 had reflected actual end-user demand for the
product, Altace® net sales would have equaled approximately
$530.0 million. Although we anticipate some continued
wholesale inventory reductions of Altace® during the first
quarter of 2005, we believe that net sales of this product
during the following three quarters of 2005 should more closely
reflect demand-based sales. For additional information and a
description of the effect of wholesale channel inventory on net
sales, please see the section above entitled Wholesale
Inventory Reductions.

Based on Altaces unique indication,
positive clinical data and prescription trends, we anticipate
continued prescription growth for this product during 2005.
Altace®s differentiating indication is based on
evidence from the heart outcome prevention evaluation (HOPE
clinical trial), which proved that Altace 10mg reduces the risk
of cardiovascular events such as heart attack, stroke and
cardiovascular death in high risk patients, 55 years of age
or older. For additional information regarding Altace®,
please see under the heading Altace® Patent
Challenge in the section below entitled Other
Developments.

Thrombin-JMI®

Net sales of Thrombin-JMI® totaled
$174.6 million in 2004, a 24.3% increase from
$140.4 million during the prior year. This increase was
primarily due to price increases, as total net units of
Thrombin-JMI® sold decreased (10.3)% during 2004 compared
to the prior year. While we are near maximum capacity at our
facility in Madison, Wisconsin, which will limit our ability to
increase unit sales of Thrombin-JMI® during 2005, we are
currently working to expand our production capacity for
Thrombin-JMI®. We anticipate that we should complete a
portion of this expanded capacity during the fourth quarter of
2005.

63



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##### 



Skelaxin®

During 2004, net sales of Skelaxin® totaled
$238.6 million. We acquired this product from Elan on
June 12, 2003. Wholesale inventories of this product were
reduced during 2004. We estimate that if net sales of
Skelaxin® during 2004 had reflected actual end-user demand
for the product, Skelaxin® net sales would have equaled
approximately $280.0 million. We believe that net sales of
this product during 2005 should more closely reflect
demand-based sales. For additional information and a description
of the effect of wholesale channel inventory on net sales,
please see the section above entitled Wholesale Inventory
Reductions.

As previously disclosed, the Skelaxin®
patents are the subject of multiple challenges. Moreover, during
March 2004 the FDA sent a letter to all ANDA applicants for
Skelaxin® suggesting that critical information in the
products official packaging circular could be deleted from
the labeling proposed by ANDA applicants and that the ANDA
applicants could then obtain approval of their ANDA without
completing the standard Paragraph IV certification process.
We believe that removing the critical language from any
metaxalone label could pose serious issues for patients and
practitioners. Accordingly, we believe that before approving the
applicants ANDA the FDA should require any Skelaxin®
ANDA applicant to include the critical language in its label and
complete the standard Paragraph IV certification process.
Under the current circumstances, the continued exclusivity of
Skelaxin® is unpredictable and we cannot assure that the
product will remain exclusive for any length of time. For
additional information regarding Skelaxin®, please see
under the heading Skelaxin® Patent Challenge in
the section below entitled Other Developments.

The new, convenient 800 mg dose of Skelaxin®
has been well-received by physicians. The formulation offers
patients the benefits of muscle pain relief without the
complication of sedation, allowing them to pursue normal,
everyday activities.

Sonata®

Net sales of Sonata® equaled
$60.4 million in 2004. We acquired this product from Elan
in June 2003. We estimate that if net sales of Sonata®
during 2004 had reflected actual end-user demand for the
product, Sonata® net sales would have equaled approximately
$90.0 million. Although we anticipate some continued
wholesale inventory reductions of Sonata® during the first
quarter of 2005, we believe that net sales of this product
during the following three quarters of 2005 should more closely
reflect demand-based sales.

Physicians have reacted positively to
Sonatas positioning for patients who have difficulty
falling asleep. Because of its shorter half-life, we believe
that patients experience a faster onset of action and have
little or no hang-over effect in the morning. We
believe the 2005 first quarter launch of the unit dose package
should more competitively position Sonata in the hospital
environment.

Levoxyl®

Levoxyl® net sales were $104.8 million
for the year ended December 31, 2004, a 16.2% decrease from
$125.1 million during the prior year. This decrease was
primarily due to the entry of generic competition for the
product in June 2004, an increase in the amount of our rebates
for the product in order to better address the entry of generic
competition, and the continued reduction in wholesale
inventories of Levoxyl®. As a result, total net units of
Levoxyl® sold decreased (8.9)% for the year ended
December 31, 2004 in comparison to the prior year. Total
prescriptions decreased approximately 12% from 2003 to 2004,
according to NDC monthly prescription data.

Entry of Generic Competition for
Levoxyl®

On August 14, 1997, the U.S. Food and
Drug Administration, which we refer to as the FDA,
announced in the Federal Register (62 FR 43535) that orally
administered levothyroxine sodium drug products are new drugs.
The notice stated that manufacturers who wish to continue to
market these

64



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##### 



products must submit applications as required by
the FDC Act by August 14, 2000. On April 26, 2000, the
FDA issued a second Federal Register notice extending the
deadline for filing these applications until August 14,
2001. On May 25, 2001, the FDA approved our New Drug
Application, which we refer to in this report as an
NDA, for Levoxyl®, our levothyroxine sodium
product.


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

We filed a Citizen Petition with the FDA on
March 28, 2003 requesting that the FDA refrain from
approving or accepting for filing any Abbreviated New Drug
Application, which we refer to as ANDA, or
supplemental Abbreviated New Drug Application, which we refer to
as sANDA, for levothyroxine sodium drug products
until adequate standards for establishing bioequivalence for
levothyroxine sodium drug products are adopted in accordance
with FDA procedures. A manufacturer of another major
levothyroxine sodium product and professional endocrinology
societies submitted similar and/or related comments to the FDA.

Mylan and KV Pharmaceutical Company each filed an
ANDA with the FDA seeking permission to market a generic version
of Levoxyl®. No earlier than April 30, 2003, we
received notice of Mylans Paragraph IV certification,
which alleges noninfringement of the 581 patent. On
June 24, 2003, we received notice of KVs
Paragraph IV certification, which alleges noninfringement
and invalidity of the 581 patent. We have filed separate
suits against Mylan and KV alleging infringement of the
581 patent.

On June 23, 2004, the FDA denied our Citizen
Petition and approved supplemental New Drug Applications, which
we refer to as an sNDA, filed by Alara
Pharmaceuticals, Inc. and Jerome Stevens Pharmaceutical, Inc.
under § 355(b)(2) of the Federal Food, Drug and Cosmetic
Act, 21 U.S.C. § 355 et seq.seeking to market
their currently approved products (Levo-T® and
Unithroid®, respectively) as bioequivalent and
therapeutically equivalent (i.e., AB-Rated)
to our Levoxyl®. Neither Alara nor Jerome submitted a
patent certification (under 21 U.S.C. §355(b)(2)(A))
against our 581 patent, despite its listing in the Orange
Book as applicable to Levoxyl®. In response, we filed an
action in the U.S. District Court for the District of
Columbia against the FDA seeking preliminary and permanent
injunctive relief in the form of an order directing the FDA to
withdraw its approval of the two sNDAs. Alara intervened in the
action. In an order dated July 8, 2004, however, the Court
denied our request for a temporary restraining order and a
preliminary injunction on the basis that we could not
demonstrate a likelihood of success on the merits of our claim.
In view of the Courts Order, the parties stipulated to a
dismissal of the lawsuit.

On July 14, 2004, the FDA approved an sANDA
filed by Mylan under 21 U.S.C. § 355(j), seeking to
market Mylans currently approved levothyroxine sodium
tablets as AB-Rated to Levoxyl®. As with Alara and Jerome
Stevens, the FDA did not require Mylan to certify against our
581 patent because Unithroid®, not Levoxyl®, is
the listed drug referred to in Mylans original ANDA. In
view of the FDAs decision to designate other levothyroxine
sodium products as AB-Rated to Levoxyl® and in further view
of the merger with Mylan that was pending at that time, the KV
suit was dismissed pursuant to our application for dismissal,
and the Mylan suit was suspended.

Levothyroxine sodium is a drug recognized to have
a narrow toxic to therapeutic ratio with significant clinical
consequences of excessive or inadequate treatment. The American
Thyroid Association, the Endocrine Society, and the American
Association of Clinical Endocrinologists have all raised
concerns regarding patients being switched among a number of
levothyroxine sodium preparations. Accordingly, these
organizations have advised physicians caring for patients on
levothyroxine sodium therapy to encourage their patients to ask
to remain on their current levothyroxine sodium preparation.
Nevertheless, sales of Levoxyl® were materially adversely
affected in the third quarter of 2004 and will most likely
continue to decline in future periods.

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Strategic Developments



| |       
| | ------
| | PT-141

On August 12, 2004, we entered into a
collaborative agreement with Palatin Technologies, Inc. to
jointly develop and, on obtaining necessary regulatory
approvals, commercialize Palatins PT-141 for the treatment
of male and female sexual dysfunction. Pursuant to the terms of
the agreement, Palatin has granted King a co-exclusive license
with Palatin to PT-141 in North America and an exclusive right
to collaborate in the licensing or sublicensing of PT-141 with
Palatin outside North America.

PT-141 is the first compound in a new drug class
called melanocortin receptor agonists under development to treat
sexual dysfunction. This new chemical entity is being evaluated
in Phase II clinical trials studying the efficacy and
safety profile of varying doses of this novel compound in men
experiencing ED and women experiencing FSD.

Although the current ED market is primarily
served by PDE-5 inhibitors which target the vascular system, a
substantial unmet medical need for alternative sexual
dysfunction therapies exists. Many patients are contraindicated
for, or non-responsive to, PDE-5 inhibitors. For example, PDE-5
inhibitors are contraindicated in patients taking nitrates,
which are prescribed primarily for the treatment of
cardiovascular disease. Current clinical data indicates that
PT-141 should not have any drug interactions with nitrates. We
paid Palatin approximately $20.0 million on entering into
the collaborative agreement, which included a $3.8 million
equity investment in Palatin. Additionally, we may pay potential
milestone payments to Palatin of up to $100.0 million for
achieving certain ED and FSD development and regulatory approval
targets. After regulatory approval and commercialization of
PT-141, we may also pay potential milestone payments to Palatin
of up to $130.0 million upon achieving specified annual
North American net sales thresholds.

Other Developments



| |                                                          
| | ---------------------------------------------------------
| | Governmental Investigations and Securities
    Litigation

For a discussion regarding the governmental
investigations and securities litigation, please see under the
heading Governmental Investigations and Securities
Litigation in the section below entitled Liquidity
and Capital Resources.



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

Cobalt Pharmaceuticals, Inc. filed an ANDA with
the FDA seeking permission to market a generic version of
Altace®. The following U.S. patents are listed for
Altace® in the FDAs Approved Drug Products with
Therapeutic Equivalence Evaluations, which is known as the
Orange Book: U.S. Patent Nos. 4,587,258, the
258 patent, and 5,061,722, the 722 patent,
two composition of matter patents related to Altace®, and
U.S. Patent No. 5,403,856, the 856 patent, a
method-of-use patent related to Altace®, with expiration
dates of January 2005, October 2008, and April 2012,
respectively. Under the Hatch-Waxman Act, any generic
manufacturer may file an ANDA with Paragraph IV
certification challenging the validity or infringement of a
patent listed in the FDAs Orange Book four years after the
pioneer company obtains approval of its NDA. Cobalt has filed a
Paragraph IV certification alleging invalidity of the
722 patent, and we filed suit on March 14, 2003
in the District Court for the District of Massachusetts to
enforce our rights under that patent. Pursuant to the
Hatch-Waxman Act, the filing of that suit provides us an
automatic stay of FDA approval of Cobalts ANDA for
30 months from no earlier than February 5, 2003.
Should the court find in favor of a Cobalt summary judgment
motion on the 722 patent, however, we would not
receive the full benefit of that 30 month stay. Subsequent
to filing our original complaint, we amended our complaint to
add an allegation of infringement of the 856 patent. The
856 patent covers one of Altace®s three
indications for use. In response to the amended complaint,
Cobalt informed the FDA that it no longer seeks approval to
market its proposed product for the indication covered by the
856 patent. On this basis, the court granted Cobalt
summary judgment of non-

66



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##### 



infringement of the 856 patent. The
courts decision does not affect Cobalts infringement
of the 722 patent. We intend to vigorously enforce our
rights under the 722 and 856 patents.




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

Eon Labs, Inc., CorePharma, LLC and Mutual
Pharmaceutical Company have each filed an ANDA with the FDA
seeking permission to market a generic version of Skelaxin®
400 mg tablets. Additionally, Eon Labs ANDA seeks
permission to market a generic version of Skelaxin® 800 mg
tablets. United States Patent Nos. 6,407,128, the
128 patent, and 6,683,102, the 102 patent
two method-of-use patents relating to Skelaxin®, are listed
in the FDAs Orange Book and do not expire until
December 3, 2021. Eon Labs and CorePharma have each filed
Paragraph IV certifications alleging noninfringement and
invalidity of the 128 and 102 patents. Mutual
has filed a Paragraph IV certification alleging
noninfringement and invalidity of the 102 patent. We filed
a patent infringement suit against Eon Labs on January 2,
2003 in the District Court for the Eastern District of New York;
CorePharma on March 7, 2003 in the District Court for the
District of New Jersey (subsequently transferred to the District
Court for the Eastern District of New York); and Mutual on
March 12, 2004 in the District Court for the Eastern
District of Pennsylvania concerning their proposed 400 mg
products. Additionally, we filed a separate suit against Eon
Labs on December 17, 2004 in the District Court for the
Eastern District of New York, concerning its proposed 800 mg
product. Pursuant to the Hatch-Waxman Act, the filing of the
suit against CorePharma provides us with an automatic stay of
FDA approval of CorePharmas ANDA for 30 months from
no earlier than January 24, 2003. Also pursuant to the
Hatch-Waxman Act, the filing of the suits against Eon Labs
provides us with an automatic stay of FDA approval of Eon
Labs ANDA for its proposed 400 mg and 800 mg products for
30 months from no earlier than November 18, 2002, and
November 3, 2004, respectively. We intend to vigorously
enforce our rights under the 128 and 102
patents to the full extent of the law.

On March 9, 2004, we received a copy of a
letter from the FDA to all ANDA applicants for Skelaxin®
stating that the use listed in the FDAs Orange Book for
the 128 patent may be deleted from the ANDA
applicants product labeling. We believe that this decision
is arbitrary, capricious, and inconsistent with the FDAs
previous position on this issue. We filed a Citizen Petition on
March 18, 2004 (supplemented on April 15, 2004 and on
July 21, 2004), requesting the FDA to rescind that letter,
require generic applicants to submit Paragraph IV
certifications for the 128 patent, and prohibit the
removal of information corresponding to the use listed in the
Orange Book. We concurrently filed a Petition for Stay of Action
requesting the FDA to stay approval of any generic metaxalone
products until the FDA has fully evaluated our Citizen Petition.

On March 12, 2004, the FDA sent a letter to
us explaining that our proposed labeling revision, which
includes references to additional clinical studies relating to
food, age, and gender effects, was approvable and only required
certain formatting changes. On April 5, 2004, we submitted
amended labeling text that incorporated those changes. On
April 5, 2004, Mutual filed a Petition for Stay of Action
requesting the FDA to stay approval of our proposed labeling
revision until the FDA has fully evaluated and ruled upon our
Citizen Petition, as well as all comments submitted in response
to that petition. Discussions with the FDA concerning
appropriate labeling are ongoing. CorePharma, Mutual and we have
filed responses and supplements to the pending Citizen Petition.

If our Citizen Petition is rejected, there is a
substantial likelihood that a generic version of Skelaxin®
will enter the market, and our business, financial condition,
results of operations and cash flows could be materially
adversely affected.



| |             
| | ------------
| | Mylan Merger

On July 26, 2004, we entered into a merger
agreement with Mylan Laboratories Inc. and a wholly-owned
subsidiary of Mylan, pursuant to which Mylan agreed to acquire
King in a stock-for-stock transaction. On February 27,
2005, we announced that we and Mylan had mutually agreed to
terminate that agreement. As of March 1, 2005 both we and
Mylan would have had a right to terminate the merger

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##### 



agreement and, following discussions, the
companies were not able to agree on terms for a revised
transaction.




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

Our Rochester facility manufactures products for
us and various third-party manufacturers. As of
December 31, 2004, the net carrying value of the property,
plant, and equipment at the Rochester facility was
$86.9 million. Overall production volume at this facility
has declined. We currently have plans to transfer to this
facility the manufacture of some of our branded prescription
pharmaceutical products that are currently manufactured for us
by third parties. This should increase production and overall
profitability at our Rochester facility. Management currently
believes that these long-term assets are not impaired based on
estimated undiscounted future cash flows. However, if production
volumes continue to decline and/or if we are not successful in
transferring additional production to the facility, we may have
to write-off a portion of the property, plant and equipment
associated with the facility.

Demand for some of our non-key products,
including but not limited to Intal®, Tilade® and
Corzide®, declined over the past year at a rate which
triggered a review of the intangible assets associated with
these products. The net intangible assets reviewed for possible
impairment totals approximately $1,407.0 million. We
believe that these intangible assets are not currently impaired
based on estimated undiscounted cash flows associated with these
assets. However, if demand for the products associated with
these intangible assets declines below current expectations, we
may have to write off a portion or all of these intangible
assets.



| |             
| | ------------
| | Divestitures

Anusol-HC®and
Proctocort®. On June 30, 2004, we sold the
Anusol-HC® and Proctocort® product lines, along with
inventory, to Salix Pharmaceuticals, Inc. for approximately
$13.4 million. As part of the transaction, we will
manufacture the Anusol-HC® and Proctocort® product
lines for Salix for two years.

Womens Health Products.Ongoing research, referred to as the
Womens Health Initiative, is being conducted by the
National Institutes of Health. Data from the trial released in
July 2002 indicated that an increase in certain health risks may
result from the long-term use of a competitors combination
hormone replacement therapy for women. News of this data and the
perception it created negatively affected the entire combination
hormone therapy and the oral estrogen therapy markets including
some of our products. Prescriptions for some of our other
womens health products have also continued to decline over
the past few years primarily due to the availability of
generics. During the first quarter of 2004, our Board of
Directors approved managements decision to market for
divestiture many of our womens health products. On
November 22, 2004, we sold all of our rights in
Prefest® for approximately $15.0 million. On
December 23, 2004, we sold all of our rights in
Nordette® for approximately $12.0 million.

As an extension of our strategic decision to
divest many of our womens health products, in July 2004 we
terminated our co-promotion and license agreements with Novavax
regarding EstrasorbTM. As part of the transaction,
Novavax reacquired all rights to EstrasorbTM as well
as all rights to other womens health products that Novavax
may successfully develop utilizing its micellar nanoparticle
technology. Additionally, Novavax repurchased all of its
convertible notes which we held, acquired a portion of our
womens health field sales force, and received
approximately $8.0 million from us to provide support for
marketing and promotion. In return, Novavax paid us
$22.0 million and issued us approximately 3.8 million
shares of Novavax common stock. As a result of this transaction,
we own approximately 4.1 million shares of Novavax common
stock, representing approximately 10% of the outstanding common
stock of Novavax. These shares are currently restricted and we
are required to hold these shares until July 2005.

68



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##### 



II.  RESULTS OF OPERATIONS

Summary

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

|                              |       |                                  |         |            |  |      |           |           |  |   |           |           | 
|----------------------------- | ----- | -------------------------------- | ------- | ---------- |  | ---- | --------- | --------- |  | - | --------- | --------- | 
|                              |       |                                 
|                              |       | For the Years Ended December 31,
|                              |       |                                 
|                              |       | 2002                             |         | 2003       |  |     
|                              |       | (restated)                       |         | (restated) |  | 2004
|                              |       |                                  |         |            |  |     
|Branded pharmaceuticals       |       | $                                | 992,520 |            |  | $    | 1,272,350 |           |  | $ | 1,076,517 |          
|Meridian Medical Technologies |       |                                  |        |            |  |      | 124,157   |           |  |   | 123,329   |          
|Royalties                     |       |                                  | 58,375  |            |  |      | 68,365    |           |  |   | 78,473    |          
|Contract manufacturing        |       |                                  | 35,936  |            |  |      | 27,289    |           |  |   | 26,046    |          
|Other                         |       |                                  | 1,193   |            |  |      | 628       |           |  |   | (1        | )        
|                              |       |                                  |         |            |  |      |           |           |  |   |           |          
|                              | Total |                                  | $       | 1,088,024  |  |      | $         | 1,492,789 |  |   |           | 1,304,364 | 
|                              |       |                                  |         |            |  |      |           |           |  |   |           |          



| |                                                                          
| | -------------------------------------------------------------------------
| | Year Ended December 31, 2004 Compared to
    Year Ended December 31, 2003



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

Total net revenue decreased $188.4 million,
or 12.6%, to $1,304.4 million in 2004 from
$1,492.8 million in 2003, due primarily to lower net sales
from our branded pharmaceutical segment during 2004.

Net sales from branded pharmaceutical products
decreased $195.9 million, or 15.4%, to
$1,076.5 million in 2004 from $1,272.4 million in
2003. We do not expect this downward trend to continue in 2005.
This decrease was primarily due to lower sales volume due to
some wholesale inventory reductions of our products, partially
offset by some price increases. For a discussion regarding our
wholesale inventory reductions, please see the Wholesale
Inventory Reductions and Sales of Key Products
sections above.

Revenues from Meridian totaled
$123.3 million in 2004 and $124.2 million in 2003.

Revenues from royalties is derived primarily from
payments we receive based on sales of Adenoscan®. Revenues
from royalties increased $10.1 million, or 14.8%, to
$78.5 million in 2004 from $68.4 million in 2003
primarily due to an increase in sales of Adenoscan®. While
we anticipate continued growth from royalty revenues, we are not
responsible for the marketing of these products and, thus, are
not able to predict whether growth in 2005 will continue, if at
all, at the rate experienced in 2004.

Net revenues from contract manufacturing and
other were $26.0 million in 2004 compared to
$27.3 million in 2003.



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

Total operating costs and expenses increased
$4.8 million, or 0.4%, to $1,345.6 million in 2004
from $1,340.8 million in 2003. Total operating costs and
expenses during these two periods were relatively flat primarily
due to a reduction in the net charge associated with special
items included in total operating costs and expenses during 2004
compared to 2003. Special items are those particular material
income or expense items that our management believes are not
related to our ongoing, underlying business, are not recurring,
or are not generally predictable. These items include, but are
not limited to, merger and restructuring expenses;
non-capitalized expenses associated with acquisitions, such as
in-process research and development charges and one-time
inventory valuation adjustment charges; charges resulting from
the early extinguishments of debt; asset impairment charges;
expenses of drug recalls; and gains and losses resulting from
the divestiture of assets. We believe the identification of
special items enhances an analysis of our ongoing, underlying
business and an analysis of our financial results when comparing
those results to that of a previous or subsequent like period.
However, it should be noted that the determination of whether to
classify an item as a special charge involves judgments by us.

69



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##### 



Cost of revenues decreased $32.9 million, or
8.5%, to $352.9 million in 2004 compared to
$385.8 million in 2003. The decrease was primarily due to a
reduction in the amount of special items affecting cost of
revenues and lower unit sales of our branded pharmaceutical
products in 2004 as compared to 2003. Special items affecting
cost of revenues in 2003 resulted in a net charge equaling
$40.4 million compared to a net charge of
$13.5 million in 2004. Special items included in cost of
revenues during 2004 and 2003 are discussed below.

Cost of revenues from branded pharmaceutical
products decreased $29.0 million, or 10.3%, to
$251.6 million in 2004 from $280.6 million in 2003. The
decrease was primarily due to a reduction in the amount of
special items affecting cost of revenues and lower unit sales of
our branded pharmaceutical products as a result of the wholesale
inventory reductions discussed above. For additional information
and a description of the effect of wholesale channel inventory
on net sales, please see the section above entitled
Wholesale Inventory Reductions. Special items
affecting cost of revenues from branded pharmaceuticals during
2004 and 2003 included the following:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | As a result of declining Lorabid®
    prescriptions, we determined that we will not sell all of the
    Lorabid® inventory that we were required to purchase under
    our supply agreement with Eli Lilly. Accordingly, we recorded a
    $34.0 million charge during 2003 primarily related to our
    purchase commitments for Lorabid® that are in excess of
    expected demand. We recorded a similar charge during 2004 in the
    amount of $8.9 million for our purchase commitments for
    Lorabid® and some other small products that we believe are
    in excess of expected demand.
|
| |  | We incurred charges in the amount of
    $4.6 million in 2004 and $4.3 million in 2003
    primarily related to the voluntary recalls of certain lots of
    Levoxyl®.                                                                                                                                                                                                                                                                                                                                                                                                                            

Cost of revenues from Meridian Medical
Technologies decreased $6.9 million, or 10.4%, to
$59.3 million in 2004 from $66.2 million in 2003 partially
due to product mix and the absence of special items affecting
these costs in 2004 as compared to 2003. The special item
affecting these costs in 2003 was a charge of $2.1 million
relating to the step-up in the cost of Meridians inventory
at the time of acquisition.

Cost of revenues from royalties equaled $10.9
million and $11.2 million in 2004 and 2003, respectively.

Cost of revenues associated with contract
manufacturing and other increased $3.4 million, or 12.2%,
to $31.2 million in 2004 from $27.8 million in 2003
due to higher cost and decreased unit production of products we
manufacture for third parties.

As a percentage of revenues, cost of revenues
equaled 27.1% in 2004 and 25.8% in 2003.

Total selling, general and administrative
expenses, including co-promotion fees paid under our Co-
Promotion Agreement with Wyeth Pharmaceuticals, increased
$104.8 million, or 21.4%, to $595.4 million in 2004
from $490.6 million in 2003. This increase was primarily
attributable to operating expenses associated with the expansion
of our sales and marketing organization, increased expenses
associated with special items, and increased marketing expenses
associated with marketing campaigns for some of our products,
which together were substantially offset by decreases in
co-promotion fees paid under our Co-Promotion Agreement with
Wyeth due to lower sales of Altace® during 2004, as
compared to 2003. Selling, general and administrative expenses
include special items of $24.8 million in 2004 and
$28.9 million in 2003 mostly due to professional fees that
were primarily related to the ongoing investigations of our
company by the SEC and the Office of Inspector General of the
Department of Health and Human Services. During 2005, we
anticipate that total selling, general and administrative
expenses should increase at a substantially reduced rate
compared to that experienced in 2004.

As a percentage of total revenues, total selling,
general, and administrative expense increased to 45.6% in 2004
compared to 32.9% in 2003. The increased percentage in 2004 was
primarily due to lower net sales of branded pharmaceutical
products during 2004 for the reasons discussed above in the
sections entitled Wholesale Inventory Reductions and
Sales of Key Products.

70



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##### 



Depreciation and amortization expense increased
$48.3 million, or 42.4%, to $162.1 million in 2004 from
$113.8 million in 2003. This increase was primarily
attributable to the amortization of the intangible assets
associated with our acquisitions of Sonata® and
Skelaxin® on June 12, 2003. As a percentage of total
revenues, depreciation and amortization expense increased to
12.4% in 2004 compared to 7.6% in 2003. For additional
information regarding amortization, including estimated future
amortization expense, please see Note 10 to our audited
consolidated financial statements.

Total research and development expenses decreased
$153.9 million to $84.2 million in 2004 from $238.1 million
in 2003. This decrease was primarily due to a decrease in
special items resulting in a charge equaling $194.0 million
in 2003 for acquired in-process research and development
associated with our acquisition of Sonata® and
Skelaxin®, partially offset by a special item resulting in
a charge equaling $17.1 million during 2004 for in-process
research and development associated with our entry into a
strategic alliance with Palatin and an increase during 2004 in
expenses associated with ongoing research and development
programs that have progressed to later stages of clinical
development. We anticipate that research and development expense
should equal approximately $100.0 million during 2005.

In addition to the special items related to cost
of revenues of branded pharmaceutical products, total selling,
general and administrative expense and research and development
expense described above, we incurred other special items
affecting operating costs and expenses resulting in a net charge
totaling $241.3 million during 2004 compared to a net
charge totaling $112.6 million during 2003. These other
special items included the following:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | An intangible asset impairment charge in 2004 of
    $149.6 million, which is primarily related to our decision
    to discontinue the Sonata® MR development program, and
    greater than expected decline in prescriptions for
    Florinef® and Tapazole® due to availability of
    generics for these products. These special items were recorded
    in order to adjust the carrying value of the intangible assets
    on our balance sheet associated with these products so as to
    reflect the estimated fair value of these assets. During the
    year ended December 31, 2003, we incurred an intangible
    asset impairment charge of $124.6 million primarily
    reflecting the reduction in the fair value of the Florinef®
    intangible assets on the approval of a second generic on
    January 21, 2003. The additional intangible asset
    impairment charge pertaining to Florinef® recorded in 2004
    reflects a further reduction in the fair value of the intangible
    assets associated with this product due to a decline in
    prescriptions for the product that is in excess of our original
    estimate.
|
| |  | In 2004, we accrued $65.0 million for
    estimated settlement costs as an operating expense to cover
    interest, fines, penalties and all other amounts in addition to
    the $65.4 million that we previously accrued for estimated
    underpayments to Medicaid and other government pricing programs.
    For additional information, please see the section entitled
    Governmental Investigations and Securities
    Litigation in Liquidity and Capital Resources.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | Restructuring charges in the amount of
    $10.8 million in 2004 as a result of separation agreements
    with several of our executives, the relocation of our sales and
    marketing operations from Bristol, Tennessee to Princeton New
    Jersey and our decision to discontinue some relatively
    insignificant products associated with Meridian Medical
    Technologies business.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | A charge of $9.1 million in 2004 for merger
    related costs associated with our recently terminated merger
    agreement with Mylan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | Income of $9.5 million in 2004 primarily due
    to a gain on the sale of our Anusol-HC® and
    Proctocort® product lines, and a gain on the termination of
    our co-promotion and license agreements with Novavax regarding
    EstrasorbTM and the repurchase by Novavax of all of
    its convertible notes which we held.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | During the year ended December 31, 2003, we
    had income of $12.0 million due to a gain on the sale of
    our animal health products and certain non-income producing
    intangible assets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

71



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##### 





| |                        
| | -----------------------
| | Operating (Loss) Income

We had an operating loss of $41.3 million in
2004 compared to operating income of $152.0 million in
2003. This decrease was primarily due to the special items
described above and lower net sales from our branded
pharmaceutical segment during 2004. While we believe operating
income in 2005 will grow due to increased net sales from our
branded pharmaceutical segment and decreased charges related to
special items, we refer you to the Risk Factors
section in this report where we describe events that could cause
results to materially differ.



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

Interest income equaled $6.0 million in 2004 and
$6.8 million in 2003.

Interest expense was $12.6 million in 2004
compared to $13.4 million in 2003.

Special items affecting other income (expense)
include a charge of $2.9 million in 2004 to reflect an
increase in the valuation allowance for the convertible notes
receivable from Novavax; a charge in the amount of
$6.5 million during 2004 to reflect our determination that
the decline in the fair value of our equity interest in Novavax
as of December 31, 2004 was other than temporary; and
income in the amount of $18.5 million during 2003 to
reflect a decrease 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)

During 2004 we had an income tax benefit rate of
12.8%, which is lower than the federal statutory rate due to the
expected nondeductible Medicaid related charges, state taxes,
and the establishment of a valuation allowance against state
deferred tax assets related to asset impairments. For the year
ended December 31, 2003 we had an effective tax rate of
40.3% which is greater than the federal statutory rate due to
charges related to the establishment of a valuation allowance
against state deferred tax assets for the write-off of acquired
in-process research and development, nondeductibility of
acquired in-process research and development related to the
acquisition of Meridian, and state taxes. We anticipate the
effective tax rate in 2005 to approximate the federal statutory
rate.



| |                                             
| | --------------------------------------------
| | Income (Loss) from Continuing
    Operations

Due to the factors set forth above, we had a loss
from continuing operations of $50.6 million in 2004
compared to income from continuing operations of
$97.4 million in 2003.



| |                        
| | -----------------------
| | Discontinued Operations

During the first quarter of 2004, our Board of
Directors approved managements decision to market for
divestiture some of our womens health products, including
Prefest® and Nordette® which we sold in the fourth
quarter of 2004. These product rights had identifiable cash
flows that were largely independent of the cash flows of other
groups of assets and liabilities and are classified as
discontinued operations in the accompanying financial
statements. Accordingly, all net sales, cost of revenues,
selling, general and administrative costs and amortization
associated with Prefest® and Nordette® are included in
discontinued operations in 2004 and 2003.

During 2004 and 2003, loss from discontinued
operations equaled $172.8 million and $8.8 million, or
$109.7 million and $5.5 million net of income tax
benefit, respectively.



| |                  
| | -----------------
| | Net (Loss) Income

Due to the factors set forth above, we had a net
loss of $160.3 million in 2004 compared to net income of
$91.9 in 2003.

72



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| |                                                                                                    
| | ---------------------------------------------------------------------------------------------------
| | Year Ended December 31, 2003 (Restated)
    Compared to Year Ended December 31, 2002
    (Restated)



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

Total net revenue increased $404.8 million,
or 37.2%, to $1,492.8 million in 2003 from
$1,088.0 million in 2002, due primarily to the acquisition
and growth of branded pharmaceutical products.

Net sales from branded pharmaceutical products
increased $279.9 million, or 28.2%, to
$1,272.4 million in 2003 from $992.5 million in 2002.
This increase was primarily due to our acquisition of
Sonata® and Skelaxin® on June 12, 2003, increased
net sales of some of our branded pharmaceutical products,
particularly Altace® and Thrombin-JMI® and the
acquisition of Intal®, Tilade®, and Synercid® on
December 30, 2002, partially offset by lower sales of
Levoxyl®, our womens health products, Lorabid®,
Cortisporin®, and Florinef®. Net sales from branded
pharmaceutical products for 2002 also reflect a
$12.0 million charge arising from changes in accounting
estimates related to Medicaid and other governmental pricing
programs. During 2002, $0.4 million of these charges are
included in discontinued operations.

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

Revenues from royalties is derived from payments
we receive based on sales of Adenoscan® and
Adenocard®. Revenues from royalties increased
$10.0 million, or 17.1%, to $68.4 million in 2003 from
$58.4 million in 2002 primarily due to an increase in sales
of Adenoscan®.

Revenues from contract manufacturing decreased
$8.6 million, or 24.0%, to $27.3 million in 2003 from
$35.9 million in 2002.



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

Total operating costs and expenses increased
$527.8 million, or 64.9%, to $1,340.8 million in 2003
from $813.0 million in 2002. This increase was primarily
due to special items during 2003 resulting in a net charge
equaling $371.9 million, compared to a net charge totaling
$152.8 million during 2002, operating costs associated with
Meridian which we acquired in January 2003, cost of revenues and
amortization associated with branded pharmaceutical products
acquired during 2003, expenses associated with the expansion of
our sales force during 2003, and cost of revenues associated
with increased unit sales of some of our branded pharmaceutical
products.

Cost of revenues increased $94.5 million, or
32.4%, to $385.8 million in 2003 from $291.3 million
in 2002. The increase was primarily due to costs associated with
sales of branded pharmaceutical products we acquired during
2003, cost of revenues associated with Meridian which we
acquired in January 2003, partially offset by special items
related to inventory in 2002 resulting in a charge equaling
$68.1 million during that year, compared to a charge of
$36.5 million during 2003. Special items included in cost
of revenues during 2002 and 2003 are as follows:



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

73



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##### 





| |   |                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We incurred a charge of $15.2 million relating to
    inventory donations during the fourth quarter of 2002,
    attributable to our decision to divest our rights to
    Lorabid®.                   
|
| |  | We incurred a charge in the amount of $3.0
    million in 2002 primarily related to the voluntary recalls of
    Liqui-Char and Theravac® and products manufactured for us
    by DSM Pharmaceuticals.

Cost of revenues from branded pharmaceutical
products increased $44.8 million, or 19.0%, to
$280.6 million in 2003 from $235.8 million in 2002.
The increase was primarily due to cost of revenues associated
with our acquisitions and an increase in cost of sales related
to Altace®, partially offset by a decrease in the net
charge for special items associated with our inventory of
branded pharmaceutical products as described above.

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

Cost of revenues from royalties increased
$0.7 million, or 6.7%, to $11.2 million in 2003 from
$10.5 million in 2002.

Cost of revenues associated with contract
manufacturing decreased $16.5 million, or 37.8%, to
$27.2 million in 2003 from $43.7 million in 2002 due
to decreased unit production of products we manufacture for
third parties.

As a percentage of revenues, cost of revenues
decreased to 25.8% in 2003 from 26.8% primarily due to a
reduction in the amount of the net charge for special items
related to inventory during 2003 as described above, partially
offset by cost of revenues associated with Meridian which we
acquired in January 2003 and whose products have lower gross
margins.

Total selling, general and administrative
expenses, including co-promotion fees paid under our Co-
Promotion Agreement with Wyeth Pharmaceuticals, increased
$133.2 million, or 37.3%, to $490.6 million in 2003
from $357.4 million in 2002. This increase was primarily
attributable to special items resulting in a net charge equaling
$28.9 million for professional fees that are primarily
related to the ongoing investigations of our company by the SEC
and the Office of Inspector General of the Department of Health
and Human Services, expenses associated with expansion of our
sales force during 2003 and selling, general and administrative
expenses associated with Meridian which we acquired in January
2003. Fees under our Co-Promotion Agreement for Altace®
were reduced by $15.2 million during 2003 as a result of
the accrual adjustments during 2002 and 2003 for amounts due
under Medicaid and other governmental pricing programs for the
years 1998 to 2002. As a percentage of revenues, total selling,
general, and administrative expense was 32.9% in 2003 compared
to 32.8% in 2002.

Depreciation and amortization expense increased
$62.4 million, or 121.4%, to $113.8 million in 2003
from $51.4 million in 2002. This increase was primarily
attributable to the amortization of the intangible assets
associated with our acquisitions of Sonata® and
Skelaxin® on June 12, 2003; Meridian on
January 8, 2003; and Intal®, Tilade® and
Synercid® on December 30, 2002. As a percentage of
total revenues, depreciation and amortization expense increased
to 7.6% in 2003 compared to 4.7% in 2002.

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

In addition to the special items related to
inventory, total selling, general and administrative expense and
research and development expense described above, we incurred
other special items affecting operating

74



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##### 



costs and expenses resulting in a net charge
totaling $112.6 million during 2003 compared to a net
charge totaling $72.7 million in 2002. These other special
items included the following:




| |   |                                                                                                                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | During the year ended December 31, 2003, we
    incurred an intangible asset impairment charge of
    $111.0 million reflecting the reduction in the fair value
    of the Florinef® intangible assets on the approval of a
    second generic on January 21, 2003.                                  
|
| |  | During the year ended December 31, 2003, we
    incurred an intangible asset impairment charge of
    $13.6 million related to three of our smallest branded
    pharmaceutical products and the write-off of certain unutilized
    intangible assets.                                              
|
| |  | During the year ended December 31, 2003, we
    had income of $12.0 million due to a gain on the sale of
    our animal health products and certain non-income producing
    intangible assets.                                                                                                      
|
| |  | During the year ended December 31, 2002, we
    incurred an intangible asset impairment charge of
    $66.8 million related to our decision to divest
    Lorabid®.                                                                                                                                  
|
| |  | During the year ended December 31, 2002, we
    incurred merger, restructuring and executive retirement charges
    of $5.9 million primarily resulting from the consolidation
    of our international division into our operations in Bristol,
    Tennessee, and the retirement of two executives.



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

Operating income decreased $123.0 million,
or 44.7%, to $152.0 million in 2003 from
$275.0 million in 2002. As a percentage of net revenues,
operating income decreased to 10.2% in 2003 from 25.3% in 2002.
This decrease was primarily due to the special items described
above, particularly special charges totaling $194.0 million
for acquired in-process research and development relating to our
acquisition of rights to new formulations of Sonata® and
our acquisition of Meridian, and $111.0 million intangible
asset impairment special charges related to Florinef®.



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

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

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

Our financial results in 2003 include a special
income item in the amount of $18.6 million to reflect the
decrease in the valuation allowance for the convertible notes
receivable from Novavax. Novavax repurchased the convertible
notes from us in 2004.



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

The effective tax rate was 40.3% in 2003 and
31.4% in 2002. The effective tax rate in 2002 was different than
the federal statutory rate of 35.0% primarily due to favorable
adjustments in the overall state tax rate, research and
development tax credits, donations of branded prescription
pharmaceutical products and tax-exempt interest. The effective
tax rate in 2003 was higher then the federal statutory rate
primarily due to state income taxes and non-deductible
in-process research and development charges incurred in
connection with our acquisition of Meridian.



| |                                  
| | ---------------------------------
| | Income from Continuing Operations

Due to the factors set forth above, income from
continuing operations decreased $73.1 million, or 42.9%, to
$97.4 million in 2003 from $170.5 million in 2002.

75



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##### 





| |                        
| | -----------------------
| | Discontinued Operations

During the first quarter of 2004, our Board of
Directors approved managements decision to market for
divestiture some of our womens health products, including
Prefest® and Nordette®. These products were divested
in 2004. These product rights held for sale had identifiable
cash flows that were largely independent of the cash flows of
other groups of assets and liabilities and are classified as
discontinued operations in the accompanying financial
statements. Accordingly, all net sales, cost of revenues,
selling, general and administrative costs and amortization
associated with Prefest® and Nordette® are included in
discontinued operations in 2003 and 2002.

During 2003 and 2002, (loss) income from
discontinued operations equaled $(8.8) million and
$19.0 million, or $(5.5) million and
$11.9 million net of income tax expense, respectively.



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

Due to the factors set forth above, net income
decreased $90.4 million, or 49.6%, to $92.0 million in
2003 from $182.4 million in 2002.

Off Balance Sheet Arrangements, Contractual
Obligations and Commercial Commitments

We do not have any off balance sheet
arrangements, except for operating leases in the normal course
of business as described in Note 12 to our audited
consolidated financial statements included in this report, and
as reflected in the table below.

The following summarizes contractual obligations
and commitments as of December 31, 2004 (in thousands):

|                                   |       |                       |         |           |  |             |         |            |  |            |         |         |  |   |        |         |  |   |    |    | 
|---------------------------------- | ----- | --------------------- | ------- | --------- |  | ----------- | ------- | ---------- |  | ---------- | ------- | ------- |  | - | ------ | ------- |  | - | -- | -- | 
|                                   |       |                      
|                                   |       | Payment Due by Period
|                                   |       |                      
|                                   |       |                       |         | Less Than |  | One to      |         | Four to    |  | More Than 
|                                   |       | Total                 |         | One Year  |  | Three Years |         | Five Years |  | Five Years
|                                   |       |                       |         |           |  |             |         |            |  |           
|Contractual Obligations:           |       |                       |         |           |  |             |         |            |  |            |         |         |  |   |        |         |  |   |    |   
|Long-term debt                     |       | $                     | 345,000 |           |  | $           |        |            |  | $          | 345,000 |         |  | $ |       |         |  | $ |   |   
|Operating leases                   |       |                       | 57,167  |           |  |             | 15,997  |            |  |            | 26,265  |         |  |   | 14,893 |         |  |   | 12 |   
|Unconditional purchase obligations |       |                       | 467,331 |           |  |             | 171,047 |            |  |            | 203,094 |         |  |   | 93,190 |         |  |   |   |   
|                                   |       |                       |         |           |  |             |         |            |  |            |         |         |  |   |        |         |  |   |    |   
|                                   | Total |                       | $       | 869,498   |  |             | $       | 187,044    |  |            | $       | 574,359 |  |   | $      | 108,083 |  |   | $  | 12 | 
|                                   |       |                       |         |           |  |             |         |            |  |            |         |         |  |   |        |         |  |   |    |   

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

We have a supply agreement with Sanofi-Aventis
S.A. to produce ramipril, the active ingredient in Altace®.
This supply agreement is reflected in the unconditional purchase
obligations above. This supply agreement requires us to purchase
certain minimum levels of ramipril. If sales of Altace® do
not increase at the currently anticipated rates, if we are
unable to maintain market exclusivity for Altace® in
accordance with our current expectations, if our product life
cycle management is not successful, or if we do not terminate
the supply agreement at an optimal time for us, we may incur
losses in connection with the purchase commitments under the
supply agreement. In the event we incur losses in connection
with the purchase commitments under the supply agreement, there
may be a material adverse effect upon our results of operations
and cash flows.

We have binding purchase orders for metaxalone,
the active ingredient in Skelaxin®. These purchase orders
are reflected in the unconditional purchase obligations above.
These purchase orders require us to purchase certain minimum
amounts of metaxalone. If sales of Skelaxin® do not
continue as currently anticipated, we may incur losses in
connection with the purchase commitments under these purchase
orders. In the event we incur losses in connection with the
purchase commitments under these purchase orders, there may be a
material adverse effect upon our results of operations and cash
flows.

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We have a supply agreement with Eli Lilly to
produce Lorabid® which is reflected in the unconditional
purchase obligations above. This supply agreement requires us to
purchase certain minimum levels of inventory of Lorabid®
through September 1, 2005. Based on changes in estimated
prescription trends, we believe our minimum purchase commitments
under the supply agreement are greater than that which we will
be able to sell to our customers. As a result, we recorded
charges of $3.6 million during December 2004 and $30.0
million during December 2003 related to the liability
associated with the amount of our purchase commitments in excess
of expected demand. As of December 31, 2004, we have
$0.8 million of additional exposure related to the supply
agreement if prescriptions for Lorabid® continue to decline.

Liquidity and Capital Resources



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

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

As additional consideration for Synercid®,
an injectable antibiotic acquired on December 30, 2002, we
agreed to potential milestone payments. We will pay
Sanofi-Aventis a milestone payment of $18.6 million on
December 31, 2005, if there is continued recognition of
Synercid® as an effective treatment for
vancomycin-resistant enterococcus faecium on that date. An
additional $25.0 million milestone is payable to Aventis if
Synercid® should receive FDA approval to treat methicillin
resistant staphylococcus aureus, or we will pay Aventis a
one-time payment of $5.0 million the first time during any
twelve-month period net sales of Synercid® exceed
$60.0 million, and a one-time payment of $20.0 million
the first time during any twelve-month period net sales of
Synercid® exceed $75.0 million.

On June 12, 2003, we acquired the primary
care business of Elan and of some of its subsidiaries in the
United States and Puerto Rico, which includes the rights to two
branded prescription pharmaceutical products, Sonata® and
Skelaxin®. We will pay royalties on the current formulation
of Skelaxin® from the date of closing.

As discussed above, Elan was working to develop
Sonata® MR pursuant to an agreement we had with them. We
recently decided to discontinue the program to develop Sonata
MR. Accordingly, we intend to terminate the agreement with Elan.
Although we believe we are entitled to terminate the agreement,
we can provide no assurance that we will effectively terminate
the agreement and, if we do, under what terms. The agreement
currently requires us to pay up to an additional
$60.0 million if Elan achieves certain milestones in
connection with the development of a reformulated version of
Sonata® and $15.0 million as a milestone payment if
annual net sales of a reformulated version of Sonata®
exceed $100.0 million, plus costs associated with the
development of a reformulated version of Sonata®.

As discussed in the PT-141 subsection
of the Strategic Developments section, on
August 13, 2004, we entered into a collaborative agreement
with Palatin to jointly develop and, on obtaining necessary
regulatory approvals, commercialize Palatins PT-141 for
the treatment of male and female sexual dysfunction. In
connection with this agreement, we agreed to pay potential
milestone payments to Palatin of up to $100.0 million upon
achieving certain development and regulatory approval targets.
Following regulatory approval and commercialization of PT-141,
we may also pay potential net sales milestone payments to
Palatin of up to $130.0 million.



| |                                                          
| | ---------------------------------------------------------
| | Governmental Investigations and Securities
    Litigation

As previously reported, in March 2003 the SEC
initiated a formal investigation of King relating to, among
other topics, sales of our products to VitaRx and Prison Health
Services, our best price lists, the pricing of our
pharmaceutical products provided to governmental Medicaid
agencies, the accrual and

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payment of rebates on the product Altace®,
the products Fluogen® and Lorabid®, the King
Benevolent Fund, Inc., our calculations related to Medicaid
rebates, and the Audit Committees internal review of
issues raised by the SEC investigation. As also previously
reported, on November 13, 2003, we received a subpoena
duces tecum from the Office of Inspector General at the
Department of Health and Human Services requesting the
production of documents relating to some of the matters being
investigated by the SEC and to our sales, marketing and other
business practices for Altace®, Aplisol®, and
Levoxyl®. More recently, we have reviewed with the staff of
the SEC the circumstances giving rise to the restatement of
previously issued financial statements as discussed under the
heading Restatement of Previously Issued Financial
Statements in this section.


In connection with our determination that we
underpaid amounts due to Medicaid and other government pricing
programs from 1998 through 2002, we have continued to engage in
discussions with representatives of the SEC, the United States
Attorney for the Eastern District of Pennsylvania, the
Department of Justice, the National Association of Medicaid
Fraud Control Units, the Office of Inspector General of the
Department of Health and Human Services, the Department of
Veterans Affairs, the Centers for Medicare & Medicaid
Services, and the Public Health Service. Our objective in these
discussions has been to achieve a comprehensive settlement
relating to all the matters being investigated by or discussed
with all the governmental authorities.

We have not yet reached any agreements or
understandings with respect to the terms of such a settlement
and may not ever be able to reach such an agreement. However,
based on the status of the discussions to date, we now believe
that it is reasonably likely that we will be able to achieve a
comprehensive settlement with all relevant governmental parties
on the following terms:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We have previously accrued $130.4 million in
    respect of our estimated underpayments to Medicaid and other
    government pricing programs, and estimated settlement costs with
    all relevant governmental parties. This amount includes
    $65.4 million accrued for estimated underpayments to
    Medicaid and other government pricing programs, and an
    additional $65.0 million for estimated in the settlement
    costs as an operating expense during the second quarter of 2004
    to cover interest, costs, fines, penalties and all other
    additional amounts. Our current expectation is that the
    aggregate cost to settle with the governmental authorities
    should not materially exceed the amounts already accrued.                      
|
| |  | With respect to the matters being investigated by
    or discussed with the staff of the SEC, we currently anticipate
    that we would settle, without admitting or denying, one or more
    charges that we failed to maintain adequate books and records
    and internal controls. We anticipate that the action to be
    settled could also include one or more charges that our public
    filings contained material misstatements or omissions relating
    to our financial results for some or all of the periods for
    which results have been restated as discussed under the heading
    Restatement of Previously Issued Financial
    Statements in this section. We do not anticipate being
    required to restate any results for periods prior to 2002.
|
| |  | We expect that we will be required to enter into
    a Corporate Integrity Agreement with the Department of Health
    and Human Services, which would require us to submit to audits
    relating to our Medicaid rebate calculations over a five-year
    period. We do not expect that the resolution of the pending
    investigations will result in any prohibitions on our sales to
    Medicaid or any related state or Federal program, nor do we
    expect any other material restriction on our ability to conduct
    our business, although we will be required to incur consultant
    fees and other expenses in order to comply with the Corporate
    Integrity Agreement.                                                                                   
|
| |  | We do not expect that any criminal charges will
    be asserted against the Company or against any present or former
    director, officer or employee in connection with the matters
    being investigated.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

Our ability to achieve a settlement on these or
other terms is subject to substantial uncertainties. Our
discussions to date have been conducted with the staffs of
various agencies and other governmental authorities. We do not
yet have any agreements or understandings with any of them. Even
if we were to

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reach such an agreement or understanding with
staff personnel, it would be subject to the approval of numerous
more senior representatives of the governmental parties,
including the members of the U.S. Securities and Exchange
Commission, the United States Attorney for the Eastern District
of Pennsylvania, senior officials in the Departments of Justice,
Health and Human Services and Veterans Affairs, and senior
officials in most or all of the States. We expect that our
agreements with the various governmental parties will also
require that those governmental parties reach numerous
agreements among themselves, and that the consummation of our
agreement with each governmental party would be dependent on
consummation of our agreements with other governmental parties.
We also expect that some aspects of a comprehensive settlement
would require court approval.


In light of these uncertainties, we stress that
we may not be able to reach a settlement with the governmental
parties, whether on the terms described above or at all. As a
result, the ultimate amount that we will actually have to pay to
resolve these matters could be materially more than the amount
accrued to date, and the terms could otherwise be materially
less favorable than those described above. Because of these
uncertainties and the complexity of completing a comprehensive
resolution, we are not yet able to estimate with reasonable
confidence the amount of time that will be required to enter
into and consummate comprehensive settlement agreements.

The possible settlement described above would not
apply to the related pending class actions and derivative suits,
or any other claims by private plaintiffs. While we deny any
liability, we are unable to predict the outcome of the class
actions and derivative suits or reasonably estimate the range of
loss, if any.

For additional information, please see the
section entitled Risk Factors under the heading
If we fail to comply with our reporting and payment
obligations under the Medicaid rebate program or other
governmental pricing programs, we could be subject to additional
reimbursements, penalties, sanctions and fines which could have
a material adverse effect on our business.

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

On August 12, 2004, the United States
District Court for the Eastern District of Tennessee ruled on
defendants motions to dismiss. The Court dismissed all
claims as to Jones Pharma, Inc., a predecessor to one of our
wholly owned subsidiaries, King Research and Development, Inc.,
and as to defendants Dennis Jones and Henry Richards. The Court
also dismissed certain claims as to five other individual
defendants. The Court denied the motions to dismiss in all other
respects. Following the Courts ruling, on
September 20, 2004, we and the other remaining defendants
filed answers to plaintiffs consolidated amended
complaint. Discovery and other proceedings in the case are
continuing, and no trial date has been set.

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Seven purported shareholder derivative complaints
have also been filed in federal and state courts in Tennessee
alleging a breach of fiduciary duty, among other things, by some
of our officers and directors. On October 26, 2004, all of
the defendants named in this action filed a partial answer to
the amended consolidated derivative and class action complaint.
Discovery in this action has commenced. No trial date has been
set.

Another purported class action complaint was
filed on August 16, 2004 in Tennessee state court against
us and the members of our board of directors. This new case
largely asserts substantially the same claims and seeks the same
relief as the class action claim that was recently added to the
state derivative action described above. Defendants in that
action filed a motion to dismiss on November 30, 2004; that
motion is pending and no hearing date has been set.

Additionally, a class action complaint was filed
in the United States District Court for the Eastern District of
Tennessee under the Employee Retirement Income Security Act
(ERISA). As amended, the complaint alleges that we
and certain of our executive officers, former executive
officers, directors, former directors and an employee violated
fiduciary duties that they allegedly owed our 401(k) Retirement
Savings Plans participants and beneficiaries under ERISA.
The allegations underlying this action are similar in many
respects to those in the class action litigation described
above. The defendants filed a motion to dismiss the ERISA action
on March 5, 2004. The District Court Judge referred the
motion to a Magistrate Judge for a report and recommendation. On
December 8, 2004, the Magistrate Judge held a hearing on
this motion, and, on December 10, 2004, he recommended that
the District Court Judge dismiss the action. The District Court
Judge accepted the recommendation and dismissed the case on
February 4, 2005.

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

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



| |                             
| | ----------------------------
| | Year ended December 31, 2004

We generated net cash from operations of
$260.9 million for the year ended December 31, 2004.
Our net cash provided from operations was primarily the result
of $50.6 in net loss from continuing operations, adjusted for
non-cash charges for depreciation and amortization from
continuing operations of $162.1 million, intangible asset
impairment charges from continuing operations of $149.6 million,
a change in deferred taxes of $17.1 million and changes in
working capital. Changes in working capital include an increase
in inventory of $15.2 million, an increase in accrued
expenses of $41.6 million, an increase in accounts payable of
$9.2 million, a decrease in income taxes payable of
$78.7 million, a decrease in accounts receivable of
$58.0 million, and an increase in prepaid expenses of
$16.1 million.

Investing activities reduced cash flow by
$107.6 million primarily due to milestone payments related
to the acquisition of the primary care business of Elan of
$36.0 million and the purchase of property, plant and
equipment of $55.1 million. The Company also had $27.5 million
of proceeds principally from the sale of product rights offset
by a $20.0 million investment in Palatin and a contingent
consideration payment in 2004 of $21.2 million related to the
acquisition of Synercid®.

Financing activities contributed
$4.6 million to cash flow due to the exercise of employee
stock options.

Discontinued operations provided
$38.1 million in cash flows. This is primarily the result
of selling Nordette® and Prefest® and receiving $27.9
of proceeds. The remaining cash flows were the result of a loss

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from discontinued operations, adjusted for
non-cash depreciation and amortization of $4.4 million, a
change in deferred taxes of $62.2 million, and an
intangible asset impairment charge of $174.7 million.




| |                                            
| | -------------------------------------------
| | Year ended December 31, 2003
    (Restated)

We generated net cash from operations of
$435.7 million for the year ended December 31, 2003.
Our net cash provided from operations was primarily the result
of $97.4 million in net income, adjusted for non-cash
charges for depreciation and amortization of
$114.7 million, the write-off of in-process research and
development of $194.0 million primarily related to the
acquisitions of Meridian and the primary care business of Elan,
and the impairment charge for intangible assets of
$124.6 million primarily related to Florinef®. Working
capital changes reducing cash flow from operations were due
primarily to increases in inventory and accounts receivable
resulting from increased sales. Working capital changes
increasing cash flow from operations were due primarily to
increases in accrued expenses due to the timing of our payments
for rebates.

Cash flows used in investing activities were
$875.0 million primarily due to our purchase of Meridian of
$238.5 million, our purchase of the primary care business
of Elan of $761.7 million, net proceeds from the sale of
investment securities of $227.2 million, transfers to
escrow of $67.7 million and capital expenditures of
$51.2 million.

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

Discontinued operations used $5.4 million in
cash flows. This was primarily the result of a $6.1 million
total loss from discontinued operations, adjusted for non-cash
depreciation and amortization of $10.8 million, a change in
income taxes payable of $3.7 million, and a payment related
to the purchase of Prefest® of $7.0 million.



| |                                            
| | -------------------------------------------
| | Year ended December 31, 2002
    (Restated)

We generated net cash from operations of
$427.2 million for the year ended December 31, 2002.
Our net cash provided from operations was primarily the result
of $170.5 million in net income, adjusted for non-cash
charges for depreciation and amortization of $52.1 million,
the write-off of in-process research and development of
$12.0 million related to our acquisition of Intal®,
the impairment charge for intangible assets of $66.8 million
related to Lorabid®, and the reserve on convertible senior
notes of $35.4 million, partially offset by changes in
working capital and deferred income taxes.

Cash flows used in investing activities were
$463.0 million primarily due to the purchase of intangible
assets of $210.8 million related to our acquisitions of
Intal®, Tilade® and Synercid®, capital
expenditures of $73.6 million, the net purchase of
investment securities of $177.3 million, and the purchase
of Novavax convertible senior notes of $10.0 million.

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

Discontinued operations used $82.5 million
in cash flows. This was primarily the result of
$14.1 million total income from discontinued operations,
adjusted for non-cash depreciation and amortization of
$7.9 million, a change in income taxes payable of
$8.4 million, and the purchase of Prefest® for $111.3
million.



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

As of December 31, 2004, we had
$345.0 million of long-term debt (including current
portion) outstanding, up to $388.4 million available under
our revolving credit facility, and $616.0 million available
under our universal shelf registration.

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On September 20, 2001, we registered a
$1.3 billion universal shelf registration statement on
Form S-3 with the Securities and Exchange Commission. This
universal shelf registration statement allows us to sell any
combination of debt and/or equity securities in one or more
offerings up to a total of $1.3 billion. During November
2001, we completed the sale of 17,992,000 newly issued shares of
common stock for $38.00 per share ($36.67 per share net of
commissions and expenses) resulting in net proceeds of $659.8
million. Additionally, during November 2001, we issued
$345.0 million of 2 3/4% Convertible Debentures due
November 15, 2021 in a private placement. Holders may
require us to repurchase for cash all or part of these
debentures on November 15, 2006, November 15, 2011 or
November 15, 2016 at a price equal to 100% of the principal
amount of the debentures plus accrual interest up to but not
including the date of repurchase.

On April 23, 2002, we established a
$400.0 million five year senior secured revolving credit
facility. The facility has been collateralized in general by all
real estate with a value of $5.0 million or more and all of
our personal property and that of our significant subsidiaries.
Our obligations under the senior secured revolving credit
facility are unconditionally guaranteed on a senior basis by
most of our subsidiaries. The senior secured revolving credit
facility accrues interest at our option, at either (a) the
base rate, which is based on the greater of (1) the prime
rate or (2) the federal funds rate plus one-half of 1%,
plus an applicable spread ranging from 0.0% to 0.75% (based on a
leverage ratio) or (b) the applicable LIBOR rate plus an
applicable spread ranging from 1.0% to 1.75% (based on a
leverage ratio). In addition, the lenders under the senior
secured revolving credit facility are entitled to customary
facility fees based on (a) unused commitments under the
facility and (b) letters of credit outstanding. We incurred
$5.1 million of deferred financing costs, which are being
amortized over five years, the life of the senior secured
revolving credit facility. This facility requires us to maintain
a minimum net worth of no less than $1.2 billion plus 50%
of our consolidated net income for each fiscal quarter after
April 23, 2002, excluding any fiscal quarter for which
consolidated income is negative; an EBITDA to interest expense
ratio of no less than 3.00 to 1.00; and a funded debt to EBITDA
ratio of no greater than 3.50 to 1.00 prior to April 24,
2004 and of no greater than 3.00 to 1.00 on or after
April 24, 2004. As of December 31, 2004, we have
complied with these covenants. As described above, on
June 3 and June 6, 2003, we drew down a total of
$125.0 million under our senior secured revolving credit
facility to fund a portion of our acquisition of Elans
primary care business on June 12, 2003. During the third
quarter of 2003, we repaid the principal balance owed on our
senior secured revolving credit facility and have no outstanding
borrowings as of December 31, 2003. As of December 31,
2004, there were no outstanding borrowings under this facility,
however, we had $10.0 million outstanding for letters of
credit under this facility.



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

Capital expenditures, including capital lease
obligations, were $55.1 million for the year ended
December 31, 2004 and $51.2 million for the year ended
December 31, 2003. The principal capital expenditures for
the year ended December 31, 2004 included property and
equipment purchases, building improvements for facility upgrades
and costs associated with improving our production capabilities,
and costs associated with moving production of some of our
pharmaceutical products to our facilities in St. Louis,
Bristol and Rochester..

We anticipate capital expenditures, including
capital lease obligations, for the year ending December 31,
2005 of approximately $70 million, which will be funded
with cash from operations. The principal capital expenditures
are anticipated to include property and equipment purchases,
building improvements for facility upgrades, costs associated
with improving our production capabilities, and costs associated
with moving production of some of our pharmaceutical products to
our facilities in St. Louis, Bristol and Rochester.



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

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

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

In December 2004, the FASB issued SFAS
No. 123(R), (Share-based Payment) that requires us to
expense costs related to share-based payment transactions with
employees. SFAS No. 123(R) becomes mandatorily effective on
July 1, 2005. We are in the process of evaluating the
impact of this standard.

In November 2004, the FASB issued SFAS
No. 151, (Inventory Costs), an amendment of ARB
No. 43. SFAS No. 151 requires certain abnormal
expenditures to be recognized as expenses in the current period.
It also requires that the amount of fixed production overhead
allocated to inventory be based on the normal capacity of the
production facilities. The standard is effective for the fiscal
year beginning January 1, 2006. We are currently evaluating
the effect that SFAS No. 151 will have on our financial
reporting.



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

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

The preparation of financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period.

Significant estimates for which it is reasonably
possible that a material change in estimate could occur in the
near term include forecasted future cash flows used in testing
for impairments of intangible and tangible assets and loss
accruals for excess inventory and fixed purchase commitments
under our supply contracts. Forecasted future cash flows in
particular require considerable judgment and are subject to
inherent imprecision. In the case of impairment testing, changes
in estimates of future cash flows could result in a material
impairment charge and, whether or not they result in an
immediate impairment charge, could result prospectively in a
reduction in the estimated remaining useful life of tangible or
intangible assets, which could be material to the financial
statements.

Other significant estimates include accruals for
Medicaid and other rebates, returns and chargebacks, allowances
for doubtful accounts and estimates used in applying the revenue
recognition policy and accounting for the Co-Promotion Agreement
with Wyeth.

We are subject to risks and uncertainties that
may cause actual results to differ from the related estimates,
and our estimates may change from time to time in response to
actual developments and new information.



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

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



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



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our product returns accrual is primarily based on
    estimates of future product returns over the period during which
    customers have a right of return which is in turn based in part
    on estimates of the remaining shelf life of our products when
    sold to customers. Future product returns are estimated
    primarily based on historical sales and return rates. We
    estimate our Medicaid rebate and commercial contractual rebate
    accruals based on estimates of usage by rebate-eligible
    customers, estimates of the level of inventory of our products
    in the distribution channel that remain potentially subject to
    those rebates, and the terms of our contractual and regulatory
    rebate obligations. We estimate our chargeback accrual based on
    our estimates of the level of inventory of our products in the
    distribution channel that remain subject to chargebacks, and
    specific contractual and historical chargeback rates.

84



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##### 





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our accruals for returns, chargebacks and rebates
    are adjusted as appropriate for specific known developments that
    may result in a change in our product returns or our rebate and
    chargeback obligations. In the case of product returns, we
    monitor demand levels for our products and the effects of the
    introduction of competing products and other factors on this
    demand. When we identify decreases in demand for products or
    experience higher than historical rates of returns caused by
    unexpected discrete events, we further analyzes these products
    for potential additional supplemental reserves.

Accrual for
Rebates (in thousands):

|                                                              |  |      |          |      |  |   |          |  
|------------------------------------------------------------- |  | ---- | -------- | ---- |  | - | -------- | -
|                                                              |  | 2003 |          | 2004
|                                                              |  |      |          |     
|Balance at January 1, net of prepaid amounts
    (restated)   |  | $    | 147,618  |      |  | $ | 213,893  |  
|Current provision related to sales made in
    current period |  |      | 260,865  |      |  |   | 304,427  |  
|Current provision related to sales made in prior
    periods  |  |      | 3,320    |      |  |   | (1,397   | )
|Product acquisition                                           |  |      | 3,101    |      |  |   |         |  
|Actual rebates                                                |  |      | (201,011 | )    |  |   | (344,762 | )
|                                                              |  |      |          |      |  |   |          |  
|Ending balance, net of prepaid amounts                        |  |      | 213,893  |      |  |   | 172,161  |  
|                                                              |  |      |          |      |  |   |          |  

Accrual for
Returns (in thousands):

|                                |  |      |         |      |  |   |          |  
|------------------------------- |  | ---- | ------- | ---- |  | - | -------- | -
|                                |  | 2003 |         | 2004
|                                |  |      |         |     
|Balance at January 1 (restated) |  | $    | 42,086  |      |  | $ | 82,477   |  
|Current provision               |  |      | 87,594  |      |  |   | 151,099  |  
|Supplemental provision          |  |      | 7,900   |      |  |   | 32,011   |  
|Product acquisition             |  |      | 6,687   |      |  |   |         |  
|Actual returns                  |  |      | (61,790 | )    |  |   | (142,724 | )
|                                |  |      |         |      |  |   |          |  
|Ending balance                  |  | $    | 82,477  |      |  | $ | 122,863  |  
|                                |  |      |         |      |  |   |          |  

Accrual for
Chargebacks (in thousands):

|                                |  |      |         |      |  |   |          |  
|------------------------------- |  | ---- | ------- | ---- |  | - | -------- | -
|                                |  | 2003 |         | 2004
|                                |  |      |         |     
|Balance at January 1 (restated) |  | $    | 16,064  |      |  | $ | 25,349   |  
|Current provision               |  |      | 106,984 |      |  |   | 114,969  |  
|Actual chargebacks              |  |      | (97,699 | )    |  |   | (112,365 | )
|                                |  |      |         |      |  |   |          |  
|Ending balance                  |  | $    | 25,349  |      |  | $ | 27,953   |  
|                                |  |      |         |      |  |   |          |  



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Revenue recognition.Revenue is recognized when title and risk of loss are
    transferred to customers, collection of sales is reasonably
    assured, and we have no further performance obligations. This is
    generally at the time products are received by the customer.
    Accruals for estimated returns, rebates and chargebacks,
    determined based on historical experience, reduce revenues at
    the time of sale and are included in accrued expenses. Medicaid
    and certain other governmental pricing programs involve
    particularly difficult interpretations of relevant statutes and
    regulatory guidance, which are complex and, in certain respects,
    ambiguous. Moreover, prevailing interpretations of these
    statutes and guidance can change over time. Royalty revenue is
    recognized based on a percentage of sales (namely, contractually
    agreed-upon royalty rates) reported by third parties. See
    Note 3, Summary of Significant Accounting Policies, in our
    Notes to Consolidated Financial Statements included
    in this report. For the year ended December 31, 2002, we
    deferred recognition of revenue associated with a purchase of
    our products by the King Benevolent Fund. We have and will
    recognize the deferred revenue as the purchased products are
    distributed by the King Benevolent Fund. See Note 21,
    Related Party Transactions, in our Notes to Consolidated
    Financial Statements included in this report.

85



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##### 





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

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

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

The fair market value of long-term fixed interest
rate debt is subject to interest rate risk. Generally, the fair
market value of fixed interest rate debt will increase as
interest rates rise and decrease as interest rates fall. In
addition, the fair value of our convertible debentures would be
impacted by our stock price. The estimated fair value of our
total long-term debt at December 31, 2004 was
$327.8 million. Fair values were determined from available
market prices, using current interest rates and terms to
maturity. If interest rates were to increase or decrease 1%, the
fair value of our long-term debt would increase or decrease by
approximately $6.1 million.

At December 31, 2004, 2003 and 2002, we did
not hold any derivative financial instruments.



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

Our audited consolidated financial statements and
related notes as of December 31, 2004 and 2003 and for each
of the three years ended December 31, 2004 are included
under Item 15 and begin on page F-1.



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

None.



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



| |                                                                       
| | ----------------------------------------------------------------------
| | Internal Control over Financial Reporting as
    of September 30, 2004

As described in Item 7.
Managements Discussion and Analysis of Financial Condition
and Results of Operations, we have restated our previously
issued financial statements for the years 2002 and 2003,
including interim periods in 2003, and the first two quarters of
2004, primarily to reflect the correction of methodological
errors related to our reserve for product returns.

The Public Company Accounting Oversight
Boards auditing standards provide that a restatement is a
strong indicator of a material weakness. Considering this
guidance, we evaluated the methodological errors that resulted
in the restatement and concluded that the restatement resulted
from a material weakness in our internal control over financial
reporting as of September 30, 2004.

Management has concluded that the material
weakness that existed as of the end of the third quarter of 2004
has been remediated. Our remedial steps included the adoption of
revised methodologies for estimating our product returns.



| |                                                                                             
| | --------------------------------------------------------------------------------------------
| | Managements Report on Internal Control
    Over Financial Reporting as of December 31, 2004

Management is responsible for establishing and
maintaining adequate internal control over financial reporting.
Internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted
accounting principles. All internal control systems have
inherent limitations. Therefore, internal control over financial
reporting, no matter how well-designed, may not prevent or
detect misstatements. Also, controls may become inadequate in
future periods because of changes in conditions, or the degree
of compliance with the policies or procedures may deteriorate.

As required by the Sarbanes-Oxley Act of 2002 and
the rules issued thereunder, management has conducted an
evaluation of the effectiveness of our internal control over
financial reporting as of

86



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##### 



December 31, 2004, based on the framework
and criteria established in Internal Control 
Integrated Framework, issued by the Committee of Sponsoring
Organizations of the Treadway Commission.


As of December 31, 2004, we did not maintain
effective controls over the period-end financial reporting
process because we did not have a sufficient number of finance
and accounting resources performing supervisory review and
monitoring activities as a result of the loss of certain finance
personnel, the challenges of hiring new personnel while a merger
was pending and the resource requirements to address the
restatement of our financial statements described above.

Although this deficiency resulted in certain
errors during 2004 that were not detected by the period-end
monitoring activities, it did not result in any audit
adjustments or material misstatements of our financial
statements as of year-end. However, the significance of a
deficiency in internal control over financial reporting depends
on the potential for a misstatement, not on whether a
misstatement actually occurred. A material weakness is defined
as a significant deficiency or combination of significant
deficiencies, that results in more than a remote
likelihood that a material misstatement of the annual or
interim financial statements will not be prevented or detected.
Considering the above, management has concluded that as of
December 31, 2004 the finance and accounting resource
constraints constituted a material weakness in supervisory
review and monitoring activities in connection with the
period-end financial reporting process. Because of this material
weakness, management has concluded that our internal control
over financial reporting was not effective as of
December 31, 2004.

Our independent registered public accounting
firm, PricewaterhouseCoopers LLP, has audited managements
assessment of the effectiveness of our internal control over
financial reporting as of December 31, 2004 as stated in
their report which appears on page F-1.



| |                                                                          
| | -------------------------------------------------------------------------
| | Remediation of Material Weakness that Existed
    as of December 31, 2004

We are in the process of increasing the number of
finance and accounting resources performing supervisory review
and monitoring activities during the period-end financial
reporting process by actively recruiting additional managerial
level finance and accounting resources.



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

Except as discussed above, there have been no
changes in our internal controls over financial reporting that
occurred during the quarter ended December 31, 2004, that
have materially affected, or are reasonably likely to affect,
our internal control over financial reporting.



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

We maintain disclosure controls and procedures
that are designed to ensure that information required to be
disclosed in the reports we file or submit under the Securities
Exchange Act of 1934, as amended (the Exchange Act),
is recorded, processed, summarized, and reported within the time
periods specified in the SECs rules and forms, and that
such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions
regarding required financial disclosure.

Management, with the participation of the Chief
Executive Officer and Chief Financial Officer, carried out an
evaluation, as required by Rule 13a-15(b) under the
Exchange Act of the effectiveness of the design and operation of
the disclosure controls and procedures (as defined in Exchange
Act Rule 13a-15(e)) as of December 31, 2004.

In making this evaluation, management considered
the material weaknesses discussed above, together with the
remedial steps we have taken. Management also considered its
conclusion stated above that our internal control over financial
reporting was not effective as of December 31, 2004.

Based on this evaluation by management, the Chief
Executive Officer and Chief Financial Officer have concluded
that, as of December 31, 2004, due to the material weakness
as of year end, our disclosure controls and procedures were not
effective at the reasonable assurance level. It should be noted
that no system of controls can provide complete assurance of
achieving its objectives.

87



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##### 



PART III

The information called for by Part III of
Form 10-K (Item 10  Directors and Executive
Officers of the Registrant, Item 11  Executive
Compensation, Item 12  Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder
Matters, Item 13  Certain Relationships and
Related Transactions, and Item 14  Principal
Accounting Fees and Services), is incorporated by reference from
our proxy statement related to our 2005 annual meeting of
shareholders, which will be filed with the SEC not later than
April 30, 2005 (120 days after the end of the fiscal
year covered by this report).

88



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##### 



PART IV

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

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



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

|                                                                                                                                                   |  |             |     | 
|-------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | --- | 
|                                                                                                                                                   |  | Page number
|                                                                                                                                                   |  |            
|Report of Independent Registered Public
    Accounting Firm                                                                                        |  |             | F-1 | 
|Consolidated Balance Sheets as of
    December 31, 2003 and 2004                                                                                   |  |             | F-3 | 
|Consolidated Statements of Income (Loss) for the
    years ended December 31, 2002, 2003 and 2004                                                  |  |             | F-4 | 
|Consolidated Statements of Shareholders
    Equity and Other Comprehensive Income (Loss) for the years ended
    December 31, 2002, 2003 and 2004 |  |             | F-5 | 
|Consolidated Statements of Cash Flows for the
    years ended December 31, 2002, 2003 and 2004                                                     |  |             | F-6 | 
|Notes to Consolidated Financial Statements                                                                                                         |  |             | F-7 | 
|(2) Financial Statement
    Schedule Valuation and Qualifying Accounts                                                                             |  |             | S-1 | 

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

(b) Exhibits

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

|        |       |    |  |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|------- | ----- | -- |  | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |    |  |            
|Number  |       |    |  | Description
|        |       |    |  |            
|        | 3.1(  | 1) |  |            |  | Second Amended and Restated Charter of King
    Pharmaceuticals, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|        | 3.2(  | 1) |  |            |  | Amended and Restated Bylaws of King
    Pharmaceuticals, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|        | 4.1(  | 1) |  |            |  | Specimen Common Stock Certificate.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|        | 4.2(  | 1) |  |            |  | Form of Rights Agreement by and between King
    Pharmaceuticals, Inc. and The Bank of New York (successor in
    interest to Union Planters National Bank).                                                                                                                                                                                                                                                                                                                                                                                                                                              
|        | 10.2( | 2) |  |            |  | Co-Promotion Agreement, dated as of June 22,
    2000, between American Home Products Corporation and King
    Pharmaceuticals, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|        | 10.3( | 2) |  |            |  | Asset Purchase Agreement, dated as of
    June 22, 2000, between American Home Products Corporation
    and King Pharmaceuticals, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|        | 10.4( | 3) |  |            |  | Convertible Notes of Novavax, Inc. to King
    Pharmaceuticals, Inc. dated December 19, 2000,
    September 7, 2001 and June 26, 2002; Note Purchase
    Agreements by and between Novavax, Inc. and King
    Pharmaceuticals, Inc. dated as of December 19, 2000,
    September 7, 2001, and June 26, 2002; Investor Rights
    Agreement by and between Novavax, Inc. and King Pharmaceuticals,
    Inc. dated as of December 19, 2000, as amended; and
    Registration Rights Agreement by and between Novavax, Inc. and
    King Pharmaceuticals, Inc. dated as of December 19, 2000,
    as amended.
|        | 10.5( | 4) |  |            |  | Indenture, dated as of November 1, 2001,
    among King Pharmaceuticals, Inc., certain Subsidiary Guarantors
    and The Bank of New York, as trustee, relating to Kings 2
    3/4% Convertible Debentures due November 15, 2021.                                                                                                                                                                                                                                                                                                                                                                        
|        | 10.6( | 6) |  |            |  | 1998 King Pharmaceuticals, Inc. Non-Employee
    Director Stock Option Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|        | 10.7( | 1) |  |            |  | 1997 Incentive and Nonqualified Stock Option Plan
    for Employees of King Pharmaceuticals, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|        | 10.8( | 4) |  |            |  | King Pharmaceuticals, Inc. 401(k) Retirement
    Savings Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|        | 10.9( | 5) |  |            |  | The Medco Research, Inc. 1989 Stock Option and
    Stock Appreciation Rights Plan, as amended through July 29,
    1998.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

89



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##### 



|        |       |     |  |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|------- | ----- | --- |  | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |     |  |            
|Number  |       |     |  | Description
|        |       |     |  |            
|        | 10.10 | (6) |  |            |  | 1989 Incentive Stock Option Plan of Jones Medical
    Industries, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                       
|        | 10.11 | (6) |  |            |  | Jones Medical Industries, Inc. 1994 Incentive
    Stock Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                
|        | 10.12 | (6) |  |            |  | Jones Medical Industries, Inc. 1997 Incentive
    Stock Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                
|        | 10.13 | (7) |  |            |  | Credit Agreement dated as of April 23, 2002,
    among King Pharmaceuticals, Inc., and the Lenders therein,
    Credit Suisse First Boston, Cayman Islands Branch, as
    Administrative Agent, as Collateral Agent and as Swingline
    Lender, and Bank of America, NA, J.P. Morgan Securities Inc.,
    and UBS Warburg LLC as Co-Syndication Agents, Wachovia Bank
    National Association, as Documentation Agent, Credit Suisse
    First Boston as Sole Lead Arranger and Bookrunner.
|        | 10.14 | (8) |  |            |  | Amended and Restated Asset Purchase Agreement by
    and among Elan Corporation, plc, Elan Pharma International
    Limited, Elan Pharmaceuticals, Inc., Jones Pharma Incorporated
    and Monarch Pharmaceuticals, Inc. dated as of May 19, 2003.                                                                                                                                                                                                                                           
|        | 10.15 | (9) |  |            |  | King Pharmaceuticals, Inc. Non-Employee
    Directors Deferred Compensation Plan.                                                                                                                                                                                                                                                                                                                                                                                                           
|        | 21.1  |     |  |            |  | Subsidiaries of the Registrant.                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|        | 23.1  |     |  |            |  | Consent of PricewaterhouseCoopers LLP.                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|        | 31.1  |     |  |            |  | Certificate of Chief Executive Officer Pursuant
    to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                        
|        | 31.2  |     |  |            |  | Certificate of Chief Financial Officer Pursuant
    to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                        
|        | 32.1  |     |  |            |  | Certificate of Chief Executive Officer Pursuant
    to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                        
|        | 32.2  |     |  |            |  | Certificate of Chief Financial Officer Pursuant
    to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                        



---



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

90



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##### 



REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM

To the Board of Directors and Shareholders of

King Pharmaceuticals, Inc.:


We have completed an integrated audit of King
Pharmaceuticals, Inc.s 2004 consolidated financial
statements and of its internal control over financial reporting
as of December 31, 2004 and audits of its 2003 and 2002
consolidated financial statements in accordance with the
standards of the Public Company Accounting Oversight Board
(United States). Our opinions, based on our audits, are
presented below.

Consolidated financial statements and
financial statement schedule

In our opinion, the consolidated financial
statements listed in the index appearing under
Item 15(a)(1) present fairly, in all material
respects, the financial position of King Pharmaceuticals, Inc.
and its subsidiaries at December 31, 2004 and 2003, and the
results of their operations and their cash flows for each of the
three years in the period ended December 31, 2004 in
conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the
financial statement schedule listed in the index appearing under
Item 15(a)(2) presents fairly, in all material
respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
These financial statements and financial statement schedule are
the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.
We conducted our audits of these statements in accordance with
the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit of financial statements includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

As discussed in Note 2 to the consolidated
financial statements, the Company has restated its previously
issued financial statements for the years ended
December 31, 2003 and 2002.

Internal control over financial
reporting

Also, we have audited managements
assessment, included in Managements Report on Internal
Control Over Financial Reporting as of December 31, 2004
appearing under Item 9A, that King Pharmaceuticals, Inc.
did not maintain effective internal control over financial
reporting as of December 31, 2004, because the Company did
not maintain effective controls over the period-end financial
reporting process because the Company did not have a sufficient
number of finance and accounting resources performing
supervisory review and monitoring activities, based on criteria
established in Internal Control  Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The
Companys management is responsible for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting. Our responsibility is to express opinions
on managements assessment and on the effectiveness of the
Companys internal control over financial reporting based
on our audit.

We conducted our audit of internal control over
financial reporting in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. An audit of internal control over financial reporting
includes obtaining an understanding of internal control over
financial reporting, evaluating managements assessment,
testing and evaluating the design and operating effectiveness of
internal control, and performing such other procedures as we
consider necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.

F-1



---



##### 



A companys internal control over financial
reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A
companys internal control over financial reporting
includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions
of the assets of the company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance
with authorizations of management and directors of the company;
and (iii) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or
disposition of the companys assets that could have a
material effect on the financial statements.

Because of its inherent limitations, internal
control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures
may deteriorate.

A material weakness is a control deficiency, or
combination of control deficiencies, that results in more than a
remote likelihood that a material misstatement of the annual or
interim financial statements will not be prevented or detected.
The following material weakness has been identified and included
in managements assessment. As of December 31, 2004
the Company did not maintain effective controls over the
period-end reporting process because the Company did not have a
sufficient number of finance and accounting resources performing
supervisory review and monitoring activities. Although this
deficiency resulted in certain errors during 2004 that were not
detected by the period-end monitoring activities, it did not
result in any audit adjustments or material misstatements of the
Companys financial statements as of year end. The lack of
a sufficient number of finance and accounting resources
performing supervisory review and monitoring activities during
the period-end financial reporting process is a material
weakness that could result in a material misstatement of annual
and interim financial statements that would not be prevented or
detected. Considering the above, management has concluded that
as of December 31, 2004 the finance and accounting resource
constraints constituted a material weakness in supervisory
review and monitoring activities in connection with the
period-end financial reporting process. This material weakness
was considered in determining the nature, timing, and extent of
audit tests applied in our audit of the December 31, 2004
consolidated financial statements, and our opinion regarding the
effectiveness of the Companys internal control over
financial reporting does not affect our opinion on those
consolidated financial statements.

In our opinion, managements assessment that
King Pharmaceuticals, Inc. did not maintain effective internal
control over financial reporting as of December 31, 2004,
is fairly stated, in all material respects, based on criteria
established in Internal Control  Integrated
Framework issued by the COSO. Also, in our opinion, because
of the effect of the material weakness described above on the
achievement of the objectives of the control criteria, King
Pharmaceuticals, Inc. has not maintained effective internal
control over financial reporting as of December 31, 2004,
based on criteria established in Internal Control 
Integrated Framework issued by the COSO.

PricewaterhouseCoopers LLP

Raleigh, North Carolina


March 15, 2005


F-2



---



##### 



KING PHARMACEUTICALS, INC.

CONSOLIDATED BALANCE SHEETS

as of December 31, 2003 and
2004


(in thousands, except share data)


|                                                                  |                                                                                                                              |                                            |           |           |           |  |           |           |           | 
|----------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | --------- | --------- | --------- |  | --------- | --------- | --------- | 
|                                                                  |                                                                                                                              | 2003                                       |           |          
|                                                                  |                                                                                                                              | (restated)                                 |           | 2004     
|                                                                  |                                                                                                                              |                                            |           |          
|ASSETS                                                            |                                                                                                                              |                                            |           |           |           |  |           |          
|Current assets:                                                   |                                                                                                                              |                                            |           |           |           |  |           |          
|                                                                  | Cash and cash equivalents                                                                                                    |                                            | $         | 146,053   |           |  | $         | 342,086   |          
|                                                                  | Restricted cash                                                                                                              |                                            |           | 133,969   |           |  |           | 97,730    |          
|                                                                  | Marketable securities                                                                                                        |                                            |           |          |           |  |           | 16,498    |          
|                                                                  | Accounts receivable, net of allowance of $11,055
    and $15,348                                                             |                                            |           | 246,417   |           |  |           | 180,963   |          
|                                                                  | Inventories                                                                                                                  |                                            |           | 260,886   |           |  |           | 274,412   |          
|                                                                  | Deferred income tax assets                                                                                                   |                                            |           | 148,479   |           |  |           | 153,979   |          
|                                                                  | Prepaid expenses and other current assets                                                                                    |                                            |           | 30,036    |           |  |           | 61,395    |          
|                                                                  | Assets related to discontinued operations                                                                                    |                                            |           | 4,012     |           |  |           |          |          
|                                                                  |                                                                                                                              |                                            |           |           |           |  |           |          
|                                                                  |                                                                                                                              | Total current assets                       |           |           | 969,852   |  |           |           | 1,127,063 | 
|Property, plant and equipment, net                                |                                                                                                                              |                                            | 257,659   |           |           |  | 280,731   |          
|Goodwill                                                          |                                                                                                                              |                                            | 121,355   |           |           |  | 121,152   |          
|Intangible assets, net                                            |                                                                                                                              |                                            | 1,552,492 |           |           |  | 1,285,961 |          
|Other assets (includes restricted cash of $30,265
    and $2,775) |                                                                                                                              |                                            | 76,517    |           |           |  | 16,318    |          
|Deferred income tax assets                                        |                                                                                                                              |                                            | 19,154    |           |           |  | 92,931    |          
|Assets related to discontinued operations                         |                                                                                                                              |                                            | 204,501   |           |           |  |          |          
|                                                                  |                                                                                                                              |                                            |           |           |           |  |           |          
|                                                                  |                                                                                                                              | Total assets                               |           | $         | 3,201,530 |  |           | $         | 2,924,156 | 
|                                                                  |                                                                                                                              |                                            |           |           |           |  |           |          
|LIABILITIES AND SHAREHOLDERS
    EQUITY                          |                                                                                                                              |                                            |           |           |           |  |           |          
|Current liabilities:                                              |                                                                                                                              |                                            |           |           |           |  |           |          
|                                                                  | Accounts payable                                                                                                             |                                            | $         | 81,648    |           |  | $         | 92,920    |          
|                                                                  | Accrued expenses                                                                                                             |                                            |           | 566,704   |           |  |           | 596,010   |          
|                                                                  | Income taxes payable                                                                                                         |                                            |           | 79,641    |           |  |           |          |          
|                                                                  | Current portion of long term debt                                                                                            |                                            |           | 97        |           |  |           |          |          
|                                                                  |                                                                                                                              |                                            |           |           |           |  |           |          
|                                                                  |                                                                                                                              | Total current liabilities                  |           |           | 728,090   |  |           |           | 688,930   | 
|Long-term debt                                                    |                                                                                                                              |                                            | 345,000   |           |           |  | 345,000   |          
|Other liabilities                                                 |                                                                                                                              |                                            | 123,949   |           |           |  | 41,436    |          
|                                                                  |                                                                                                                              |                                            |           |           |           |  |           |          
|                                                                  |                                                                                                                              | Total liabilities                          |           |           | 1,197,039 |  |           |           | 1,075,366 | 
|                                                                  |                                                                                                                              |                                            |           |           |           |  |           |          
|Commitments and contingencies (Note 19)                           |                                                                                                                              |                                            |           |           |           |  |           |          
|Shareholders equity:                                             |                                                                                                                              |                                            |           |           |           |  |           |          
|                                                                  | Preferred stock, 15,000,000 shares authorized, no
    shares issued or outstanding                                           |                                            |           |          |           |  |           |          |          
|                                                                  | Common stock, no par value, 300,000,000 shares
    authorized, 241,190,852 and 241,706,583 shares issued and
    outstanding |                                            |           | 1,205,970 |           |  |           | 1,210,647 |          
|                                                                  | Retained earnings                                                                                                            |                                            |           | 797,408   |           |  |           | 637,120   |          
|                                                                  | Accumulated other comprehensive income                                                                                       |                                            |           | 1,113     |           |  |           | 1,023     |          
|                                                                  |                                                                                                                              |                                            |           |           |           |  |           |          
|                                                                  |                                                                                                                              | Total shareholders equity                 |           |           | 2,004,491 |  |           |           | 1,848,790 | 
|                                                                  |                                                                                                                              |                                            |           |           |           |  |           |          
|                                                                  |                                                                                                                              | Total liabilities and shareholders equity |           | $         | 3,201,530 |  |           | $         | 2,924,156 | 
|                                                                  |                                                                                                                              |                                            |           |           |           |  |           |          

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

F-3



---



##### 



KING PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF INCOME
(LOSS)

for the years ended December 31, 2002, 2003
and 2004


(in thousands, except share data)


|                                         |                                                                                                |                                                  |         |            |           |      |        |           |           |   |          |           |           |  
|---------------------------------------- | ---------------------------------------------------------------------------------------------- | ------------------------------------------------ | ------- | ---------- | --------- | ---- | ------ | --------- | --------- | - | -------- | --------- | --------- | -
|                                         |                                                                                                | 2002                                             |         | 2003       |           |     
|                                         |                                                                                                | (restated)                                       |         | (restated) |           | 2004
|                                         |                                                                                                |                                                  |         |            |           |     
|Revenues:                                |                                                                                                |                                                  |         |            |           |      |        |           |           |   |          |          
|                                         | Net sales                                                                                      |                                                  | $       | 1,029,649  |           |      | $      | 1,424,424 |           |   | $        | 1,225,890 |          
|                                         | Royalty revenue                                                                                |                                                  |         | 58,375     |           |      |        | 68,365    |           |   |          | 78,474    |          
|                                         |                                                                                                |                                                  |         |            |           |      |        |           |           |   |          |          
|                                         |                                                                                                | Total revenues                                   |         |            | 1,088,024 |      |        |           | 1,492,789 |   |          |           | 1,304,364 |  
|                                         |                                                                                                |                                                  |         |            |           |      |        |           |           |   |          |          
|Operating costs and expenses:            |                                                                                                |                                                  |         |            |           |      |        |           |           |   |          |          
|                                         | Costs of revenues, exclusive of depreciation,
    amortization and
    impairments shown below |                                                  |         | 291,257    |           |      |        | 385,841   |           |   |          | 352,938   |          
|                                         |                                                                                                |                                                  |         |            |           |      |        |           |           |   |          |          
|                                         | Selling, general and administrative, exclusive of
    co-promotion fees                        |                                                  |         | 174,236    |           |      |        | 292,084   |           |   |          | 409,775   |          
|                                         | Medicaid related charge                                                                        |                                                  |         |           |           |      |        |          |           |   |          | 65,000    |          
|                                         | Mylan transaction costs                                                                        |                                                  |         |           |           |      |        |          |           |   |          | 9,062     |          
|                                         | Co-promotion fees                                                                              |                                                  |         | 183,172    |           |      |        | 198,498   |           |   |          | 111,604   |          
|                                         |                                                                                                |                                                  |         |            |           |      |        |           |           |   |          |          
|                                         |                                                                                                | Total selling, general and administrative        |         |            | 357,408   |      |        |           | 490,582   |   |          |           | 595,441   |  
|                                         |                                                                                                |                                                  |         |            |           |      |        |           |           |   |          |          
|                                         | Research and development                                                                       |                                                  |         | 28,184     |           |      |        | 44,078    |           |   |          | 67,939    |          
|                                         | Research and development  in process upon
    acquisition                                     |                                                  |         | 12,000     |           |      |        | 194,000   |           |   |          | 16,300    |          
|                                         |                                                                                                |                                                  |         |            |           |      |        |           |           |   |          |          
|                                         |                                                                                                | Total research and development                   |         |            | 40,184    |      |        |           | 238,078   |   |          |           | 84,239    |  
|                                         |                                                                                                |                                                  |         |            |           |      |        |           |           |   |          |          
|                                         | Depreciation and amortization                                                                  |                                                  |         | 51,377     |           |      |        | 113,745   |           |   |          | 162,115   |          
|                                         | Intangible asset impairment                                                                    |                                                  |         | 66,844     |           |      |        | 124,616   |           |   |          | 149,592   |          
|                                         | Merger, restructuring, and other nonrecurring
    charges                                      |                                                  |         | 5,911      |           |      |        |          |           |   |          | 10,827    |          
|                                         | Gain on sale of products                                                                       |                                                  |         |           |           |      |        | (12,025   | )         |   |          | (9,524    | )        
|                                         |                                                                                                |                                                  |         |            |           |      |        |           |           |   |          |          
|                                         |                                                                                                | Total operating costs and expenses               |         |            | 812,981   |      |        |           | 1,340,837 |   |          |           | 1,345,628 |  
|                                         |                                                                                                |                                                  |         |            |           |      |        |           |           |   |          |          
|                                         | Operating income (loss)                                                                        |                                                  |         | 275,043    |           |      |        | 151,952   |           |   |          | (41,264   | )        
|                                         |                                                                                                |                                                  |         |            |           |      |        |           |           |   |          |          
|Other (expense) income:                  |                                                                                                |                                                  |         |            |           |      |        |           |           |   |          |          
|                                         | Interest income                                                                                |                                                  |         | 22,395     |           |      |        | 6,849     |           |   |          | 5,974     |          
|                                         | Interest expense                                                                               |                                                  |         | (12,419    | )         |      |        | (13,396   | )         |   |          | (12,588   | )        
|                                         | Valuation (charge) benefit  convertible
    notes receivable                                  |                                                  |         | (35,629    | )         |      |        | 18,551    |           |   |          | (2,887    | )        
|                                         | Write-down of investment                                                                       |                                                  |         |           |           |      |        |          |           |   |          | (6,520    | )        
|                                         | Other, net                                                                                     |                                                  |         | (884       | )         |      |        | (629      | )         |   |          | (749      | )        
|                                         |                                                                                                |                                                  |         |            |           |      |        |           |           |   |          |          
|                                         |                                                                                                | Total other (expense) income                     |         |            | (26,537   | )    |        |           | 11,375    |   |          |           | (16,770   | )
|                                         |                                                                                                |                                                  |         |            |           |      |        |           |           |   |          |          
|                                         | Income (loss) from continuing operations before
    income taxes                               |                                                  |         | 248,506    |           |      |        | 163,327   |           |   |          | (58,034   | )        
|Income tax expense (benefit)             |                                                                                                |                                                  | 78,033  |            |           |      | 65,884 |           |           |   | (7,412   | )        
|                                         |                                                                                                |                                                  |         |            |           |      |        |           |           |   |          |          
|Income (loss) from continuing operations |                                                                                                |                                                  | 170,473 |            |           |      | 97,443 |           |           |   | (50,622  | )        
|Discontinued operations (Note 27):       |                                                                                                |                                                  |         |            |           |      |        |           |           |   |          |          
|                                         | Income (loss) from discontinued operations,
    including loss on impairment                   |                                                  |         | 18,965     |           |      |        | (8,771    | )         |   |          | (172,750  | )        
|                                         | Income tax expense (benefit)                                                                   |                                                  |         | 7,037      |           |      |        | (3,282    | )         |   |          | (63,084   | )        
|                                         |                                                                                                |                                                  |         |            |           |      |        |           |           |   |          |          
|                                         |                                                                                                | Total income (loss) from discontinued operations |         |            | 11,928    |      |        |           | (5,489    | ) |          |           | (109,666  | )
|                                         |                                                                                                |                                                  |         |            |           |      |        |           |           |   |          |          
|Net income (loss)                        |                                                                                                | $                                                | 182,401 |            |           | $    | 91,954 |           |           | $ | (160,288 | )        
|                                         |                                                                                                |                                                  |         |            |           |      |        |           |           |   |          |          
|Income per common share:                 |                                                                                                |                                                  |         |            |           |      |        |           |           |   |          |          
|                                         | Basic: Income (loss) from continuing operations                                                |                                                  | $       | 0.70       |           |      | $      | 0.40      |           |   | $        | (0.21     | )        
|                                         | Income (loss)
    from discontinued operations                                                 |                                                  |         | 0.05       |           |      |        | (0.02     | )         |   |          | (0.45     | )        
|                                         |                                                                                                |                                                  |         |            |           |      |        |           |           |   |          |          
|                                         | Net income
    (loss)                                                                          |                                                  | $       | 0.75       |           |      | $      | 0.38      |           |   | $        | (0.66     | )        
|                                         |                                                                                                |                                                  |         |            |           |      |        |           |           |   |          |          
|                                         | Diluted: Income (loss) from continuing operations                                              |                                                  | $       | 0.69       |           |      | $      | 0.40      |           |   | $        | (0.21     | )        
|                                         | Income
    (loss) from discontinued operations                                                 |                                                  |         | 0.05       |           |      |        | (0.02     | )         |   |          | (0.45     | )        
|                                         |                                                                                                |                                                  |         |            |           |      |        |           |           |   |          |          
|                                         | Net
    income (loss)                                                                          |                                                  | $       | 0.74       |           |      | $      | 0.38      |           |   | $        | (0.66     | )        
|                                         |                                                                                                |                                                  |         |            |           |      |        |           |           |   |          |          

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

F-4



---



##### 



KING PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS
EQUITY

AND OTHER COMPREHENSIVE INCOME
(LOSS)


for the years ended December 31, 2002,
2003 and 2004


(in thousands, except share data)


|                                                     |                                                                                    |                                   |             |            |   |               |           |          |   |            |         |          |   |   |       |      |   |   |           |          |          |  
|---------------------------------------------------- | ---------------------------------------------------------------------------------- | --------------------------------- | ----------- | ---------- | - | ------------- | --------- | -------- | - | ---------- | ------- | -------- | - | - | ----- | ---- | - | - | --------- | -------- | -------- | -
|                                                     |                                                                                    |                                   |             |            |   | Accumulated   |           |         
|                                                     |                                                                                    | Common Stock                      |             | Retained   |   | Other         |           |         
|                                                     |                                                                                    |                                   |             | Earnings   |   | Comprehensive |           | Total   
|                                                     |                                                                                    | Shares                            |             | Amount     |   | (restated)    |           | Income   |   | (restated)
|                                                     |                                                                                    |                                   |             |            |   |               |           |          |   |           
|Balance, January 1, 2002, as originally
    reported |                                                                                    |                                   | 247,692,984 |            |   | $             | 1,361,563 |          |   | $          | 546,721 |          |   | $ |      |      |   | $ | 1,908,284 |         
|                                                     |                                                                                    |                                   |             |            |   |               |           |          |   |            |         |          |   |   |       |      |   |   |           |         
|                                                     | Restatement (Note 2)                                                               |                                   |             |           |   |               |           |         |   |            |         | (23,668  | ) |   |       |     |   |   |           | (23,668  | )       
|                                                     |                                                                                    |                                   |             |            |   |               |           |          |   |            |         |          |   |   |       |      |   |   |           |         
|January 1, 2002, as restated                         |                                                                                    |                                   | 247,692,984 |            |   |               | 1,361,563 |          |   |            | 523,053 |          |   |   |      |      |   | $ | 1,884,616 |         
|                                                     |                                                                                    |                                   |             |            |   |               |           |          |   |            |         |          |   |   |       |      |   |   |           |         
|Comprehensive income:                                |                                                                                    |                                   |             |            |   |               |           |          |   |            |         |          |   |   |       |      |   |   |           |         
|                                                     | Net income (restated)                                                              |                                   |             |           |   |               |           |         |   |            |         | 182,401  |   |   |       |     |   |   |           | 182,401  |         
|                                                     | Net unrealized gain on marketable securities, net
    of tax of $24                |                                   |             |           |   |               |           |         |   |            |         |         |   |   |       | 45   |   |   |           | 45       |         
|                                                     |                                                                                    |                                   |             |            |   |               |           |          |   |            |         |          |   |   |       |      |   |   |           |         
|                                                     |                                                                                    | Total comprehensive income        |             |            |   |               |           |          |   |            |         |          |   |   |       |      |   |   |           |          | 182,446  |  
|                                                     |                                                                                    |                                   |             |            |   |               |           |          |   |            |         |          |   |   |       |      |   |   |           |         
|                                                     | Stock option activity                                                              |                                   |             | 431,767    |   |               |           | 6,608    |   |            |         |         |   |   |       |     |   |   |           | 6,608    |         
|                                                     | Stock repurchases                                                                  |                                   |             | (7,500,000 | ) |               |           | (166,274 | ) |            |         |         |   |   |       |     |   |   |           | (166,274 | )       
|                                                     |                                                                                    |                                   |             |            |   |               |           |          |   |            |         |          |   |   |       |      |   |   |           |         
|Balance, December 31, 2002                           |                                                                                    |                                   | 240,624,751 |            |   |               | 1,201,897 |          |   |            | 705,454 |          |   |   | 45    |      |   |   | 1,907,396 |         
|                                                     |                                                                                    |                                   |             |            |   |               |           |          |   |            |         |          |   |   |       |      |   |   |           |         
|Comprehensive income:                                |                                                                                    |                                   |             |            |   |               |           |          |   |            |         |          |   |   |       |      |   |   |           |         
|                                                     | Net income (restated)                                                              |                                   |             |           |   |               |           |         |   |            |         | 91,954   |   |   |       |     |   |   |           | 91,954   |         
|                                                     | Net unrealized gain on marketable securities, net
    of tax of $363               |                                   |             |           |   |               |           |         |   |            |         |         |   |   |       | 674  |   |   |           | 674      |         
|                                                     | Foreign currency translation, net of tax of $212                                   |                                   |             |            |   |               |           |          |   |            |         |          |   |   |       | 394  |   |   |           | 394      |         
|                                                     |                                                                                    |                                   |             |            |   |               |           |          |   |            |         |          |   |   |       |      |   |   |           |         
|                                                     |                                                                                    | Total comprehensive income        |             |            |   |               |           |          |   |            |         |          |   |   |       |      |   |   |           |          | 93,022   |  
|                                                     |                                                                                    |                                   |             |            |   |               |           |          |   |            |         |          |   |   |       |      |   |   |           |         
|                                                     | Stock option activity                                                              |                                   |             | 566,101    |   |               |           | 4,073    |   |            |         |         |   |   |       |     |   |   |           | 4,073    |         
|                                                     |                                                                                    |                                   |             |            |   |               |           |          |   |            |         |          |   |   |       |      |   |   |           |         
|Balance, December 31, 2003                           |                                                                                    |                                   | 241,190,852 |            |   |               | 1,205,970 |          |   |            | 797,408 |          |   |   | 1,113 |      |   |   | 2,004,491 |         
|                                                     |                                                                                    |                                   |             |            |   |               |           |          |   |            |         |          |   |   |       |      |   |   |           |         
|Comprehensive income:                                |                                                                                    |                                   |             |            |   |               |           |          |   |            |         |          |   |   |       |      |   |   |           |         
|                                                     | Net income (loss)                                                                  |                                   |             |           |   |               |           |         |   |            |         | (160,288 | ) |   |       |     |   |   |           | (160,288 | )       
|                                                     | Net unrealized gain (loss) on marketable
    securities, net of tax benefit of $43 |                                   |             |           |   |               |           |         |   |            |         |         |   |   |       | (132 | ) |   |           | (132     | )       
|                                                     | Foreign currency translation                                                       |                                   |             |           |   |               |           |         |   |            |         |         |   |   |       | 42   |   |   |           | 42       |         
|                                                     |                                                                                    |                                   |             |            |   |               |           |          |   |            |         |          |   |   |       |      |   |   |           |         
|                                                     |                                                                                    | Total comprehensive income (loss) |             |            |   |               |           |          |   |            |         |          |   |   |       |      |   |   |           |          | (160,378 | )
|                                                     |                                                                                    |                                   |             |            |   |               |           |          |   |            |         |          |   |   |       |      |   |   |           |         
|                                                     | Stock option activity                                                              |                                   |             | 515,731    |   |               |           | 4,677    |   |            |         |         |   |   |       |     |   |   |           | 4,677    |         
|                                                     |                                                                                    |                                   |             |            |   |               |           |          |   |            |         |          |   |   |       |      |   |   |           |         
|Balance, December 31, 2004                           |                                                                                    |                                   | 241,706,583 |            |   | $             | 1,210,647 |          |   | $          | 637,120 |          |   | $ | 1,023 |      |   | $ | 1,848,790 |         
|                                                     |                                                                                    |                                   |             |            |   |               |           |          |   |            |         |          |   |   |       |      |   |   |           |         

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

F-5



---



##### 



KING PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

for the years ended December 31, 2002,
2003 and 2004


(in thousands)


|                                                                                 |                                                                                              |                                                  |                                                                        |            |         |         |          |          |          |         |          |         |         |         |  
|-------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------- | ------------------------------------------------ | ---------------------------------------------------------------------- | ---------- | ------- | ------- | -------- | -------- | -------- | ------- | -------- | ------- | ------- | ------- | -
|                                                                                 |                                                                                              | 2002                                             |                                                                        | 2003       |         |        
|                                                                                 |                                                                                              | (restated)                                       |                                                                        | (restated) |         | 2004   
|                                                                                 |                                                                                              |                                                  |                                                                        |            |         |        
|Cash flows from operating activities of
    continuing operations:               |                                                                                              |                                                  |                                                                        |            |         |         |          |          |          |         |          |        
|                                                                                 | Net income (loss) from continuing operations                                                 |                                                  | $                                                                      | 170,473    |         |         | $        | 97,443   |          |         | $        | (50,622 | )      
|                                                                                 | Adjustments to reconcile net income (loss) to net
    cash provided by operating activities: |                                                  |                                                                        |            |         |         |          |          |          |         |          |         |        
|                                                                                 |                                                                                              | Depreciation and amortization                    |                                                                        |            | 51,377  |         |          |          | 113,745  |         |          |         | 162,115 |        
|                                                                                 |                                                                                              | Amortization of deferred financing costs         |                                                                        |            | 2,898   |         |          |          | 3,160    |         |          |         | 3,145   |        
|                                                                                 |                                                                                              | Write-off of inventory                           |                                                                        |            | 15,152  |         |          |          |         |         |          |         |        |        
|                                                                                 |                                                                                              | Deferred income taxes                            |                                                                        |            | (76,802 | )       |          |          | (139,598 | )       |          |         | (17,083 | )      
|                                                                                 |                                                                                              | Valuation charge on convertible notes receivable |                                                                        |            | 35,443  |         |          |          | (18,151  | )       |          |         | 2,887   |        
|                                                                                 |                                                                                              | Tax benefits of stock options exercised          |                                                                        |            | 2,206   |         |          |          |         |         |          |         |        |        
|                                                                                 |                                                                                              | Impairment of intangible assets                  |                                                                        |            | 66,844  |         |          |          | 124,616  |         |          |         | 149,592 |        
|                                                                                 |                                                                                              | In-process research and development charges      |                                                                        |            | 12,000  |         |          |          | 194,000  |         |          |         | 16,300  |        
|                                                                                 |                                                                                              | Gain on sale of products                         |                                                                        |            |        |         |          |          | (12,025  | )       |          |         | (9,524  | )      
|                                                                                 |                                                                                              | Loss on investment                               |                                                                        |            |        |         |          |          |         |         |          |         | 6,520   |        
|                                                                                 |                                                                                              | Other non-cash items, net                        |                                                                        |            | 5,199   |         |          |          | 6,990    |         |          |         | 9,484   |        
|                                                                                 |                                                                                              | Changes in operating assets and liabilities:     |                                                                        |            |         |         |          |          |          |         |          |         |         |        
|                                                                                 |                                                                                              |                                                  | Accounts receivable                                                    |            |         | (3,713  | )        |          |          | (84,186 | )        |         |         | 57,978  |  
|                                                                                 |                                                                                              |                                                  | Inventories                                                            |            |         | (69,193 | )        |          |          | (52,855 | )        |         |         | (15,205 | )
|                                                                                 |                                                                                              |                                                  | Prepaid expenses and other current assets                              |            |         | (5,090  | )        |          |          | 27,307  |          |         |         | (16,161 | )
|                                                                                 |                                                                                              |                                                  | Other assets                                                           |            |         | (1,020  | )        |          |          | (2,978  | )        |         |         | (3,483  | )
|                                                                                 |                                                                                              |                                                  | Accounts payable                                                       |            |         | 30,888  |          |          |          | 33,958  |          |         |         | 9,197   |  
|                                                                                 |                                                                                              |                                                  | Accrued expenses and other liabilities                                 |            |         | 194,448 |          |          |          | 92,798  |          |         |         | 43,566  |  
|                                                                                 |                                                                                              |                                                  | Deferred revenue                                                       |            |         | (9,090  | )        |          |          | (9,092  | )        |         |         | (9,091  | )
|                                                                                 |                                                                                              |                                                  | Income taxes                                                           |            |         | 5,160   |          |          |          | 60,554  |          |         |         | (78,708 | )
|                                                                                 |                                                                                              |                                                  |                                                                        |            |         |         |          |          |          |         |          |        
|                                                                                 |                                                                                              |                                                  | Net cash provided by operating activities of
    continuing operations |            |         | 427,180 |          |          |          | 435,686 |          |         |         | 260,907 |  
|                                                                                 |                                                                                              |                                                  |                                                                        |            |         |         |          |          |          |         |          |        
|Cash flows from investing activities of
    continuing operations:               |                                                                                              |                                                  |                                                                        |            |         |         |          |          |          |         |          |        
|                                                                                 | Purchases of investment securities                                                           |                                                  |                                                                        | (823,112   | )       |         |          | (25,903  | )        |         |          |        |        
|                                                                                 | Proceeds from maturity and sale of investment
    securities                                 |                                                  |                                                                        | 645,798    |         |         |          | 253,097  |          |         |          |        |        
|                                                                                 | Transfer (to)/from restricted cash                                                           |                                                  |                                                                        |           |         |         |          | (67,743  | )        |         |          | (2,331  | )      
|                                                                                 | Convertible senior notes                                                                     |                                                  |                                                                        | (10,000    | )       |         |          |         |          |         |          |        |        
|                                                                                 | Purchases of property, plant and equipment                                                   |                                                  |                                                                        | (73,587    | )       |         |          | (51,201  | )        |         |          | (55,141 | )      
|                                                                                 | Acquisition of primary care business of Elan                                                 |                                                  |                                                                        |           |         |         |          | (761,745 | )        |         |          | (36,000 | )      
|                                                                                 | Acquisition of Meridian                                                                      |                                                  |                                                                        |           |         |         |          | (238,498 | )        |         |          |         |        
|                                                                                 | Collaboration agreement                                                                      |                                                  |                                                                        |           |         |         |          |         |          |         |          | (20,000 | )      
|                                                                                 | Purchases of intangible assets                                                               |                                                  |                                                                        | (210,800   | )       |         |          | (12,300  | )        |         |          | (22,200 | )      
|                                                                                 | Proceeds from loan receivable                                                                |                                                  |                                                                        | 4,310      |         |         |          | 13,320   |          |         |          |         |        
|                                                                                 | Proceeds from sale of intangible assets                                                      |                                                  |                                                                        |           |         |         |          | 15,659   |          |         |          | 27,458  |        
|                                                                                 | Other investing activities                                                                   |                                                  |                                                                        | 4,388      |         |         |          | 295      |          |         |          | 648     |        
|                                                                                 |                                                                                              |                                                  |                                                                        |            |         |         |          |          |          |         |          |        
|Net cash used in investing activities of
    continuing operations               |                                                                                              |                                                  | (463,003                                                               | )          |         |         | (875,019 | )        |          |         | (107,566 | )      
|                                                                                 |                                                                                              |                                                  |                                                                        |            |         |         |          |          |          |         |          |        
|Cash flows from financing activities of
    continuing operations:               |                                                                                              |                                                  |                                                                        |            |         |         |          |          |          |         |          |        
|                                                                                 | Proceeds from revolving credit facility                                                      |                                                  |                                                                        |           |         |         |          | 125,000  |          |         |          |        |        
|                                                                                 | Payments on revolving credit facility                                                        |                                                  |                                                                        |           |         |         |          | (125,000 | )        |         |          |        |        
|                                                                                 | Proceeds from issuance of common shares and
    exercise of stock options, net               |                                                  |                                                                        | 4,402      |         |         |          | 4,053    |          |         |          | 4,677   |        
|                                                                                 | Stock repurchases                                                                            |                                                  |                                                                        | (166,274   | )       |         |          |         |          |         |          |        |        
|                                                                                 | Payments on other long-term debt                                                             |                                                  |                                                                        | (1,361     | )       |         |          | (1,296   | )        |         |          | (97     | )      
|                                                                                 | Debt issuance costs                                                                          |                                                  |                                                                        | (4,850     | )       |         |          | (214     | )        |         |          |        |        
|                                                                                 |                                                                                              |                                                  |                                                                        |            |         |         |          |          |          |         |          |        
|Net cash provided by (used in) financing
    activities of continuing operations |                                                                                              |                                                  | (168,083                                                               | )          |         |         | 2,543    |          |          |         | 4,580    |        
|                                                                                 |                                                                                              |                                                  |                                                                        |            |         |         |          |          |          |         |          |        
|Net cash provided by (used in) discontinued
    operations                       |                                                                                              |                                                  | (82,471                                                                | )          |         |         | (5,382   | )        |          |         | 38,112   |        
|Increase (decrease) in cash and cash
    equivalents                             |                                                                                              |                                                  | (286,377                                                               | )          |         |         | (442,172 | )        |          |         | 196,033  |        
|Cash and cash equivalents, beginning of year                                     |                                                                                              |                                                  | 874,602                                                                |            |         |         | 588,225  |          |          |         | 146,053  |        
|                                                                                 |                                                                                              |                                                  |                                                                        |            |         |         |          |          |          |         |          |        
|Cash and cash equivalents, end of year                                           |                                                                                              | $                                                | 588,225                                                                |            |         | $       | 146,053  |          |          | $       | 342,086  |        
|                                                                                 |                                                                                              |                                                  |                                                                        |            |         |         |          |          |          |         |          |        
|Supplemental disclosure of cash paid for:                                        |                                                                                              |                                                  |                                                                        |            |         |         |          |          |          |         |          |        
|Interest                                                                         |                                                                                              | $                                                | 11,731                                                                 |            |         | $       | 13,396   |          |          | $       | 10,626   |        
|                                                                                 |                                                                                              |                                                  |                                                                        |            |         |         |          |          |          |         |          |        
|Taxes                                                                            |                                                                                              | $                                                | 153,966                                                                |            |         | $       | 144,918  |          |          | $       | 90,365   |        
|                                                                                 |                                                                                              |                                                  |                                                                        |            |         |         |          |          |          |         |          |        

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

F-6



---



##### 



KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

(in thousands, except share data)




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

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

These consolidated financial statements include
the accounts of King and all of its wholly owned subsidiaries.
See Note 5. All intercompany transactions and balances have
been eliminated in consolidation.

The consolidated financial statements reflect the
Companys Prefest® and Nordette® product rights
as discontinued operations.



|   |                                                          
|-- | ---------------------------------------------------------
|2. | Restatement of Previously Issued Financial
    Statements

The Company has restated its previously issued
financial statements for the years 2002 and 2003, including
interim periods in 2003, and the first two quarters of 2004.



| |                                                
| | -----------------------------------------------
| | Returns reserve and other restatement
    items

Returns reserve.Generally Accepted Accounting Principles (GAAP)
requires that the Company reserve for expected product returns
when recognizing sales to wholesalers and other customers, who
have the right to return products for specified periods. From
the first quarter of 2000 through the second quarter of 2002,
the Company used the replacement cost method to value its
reserve for product returns. Under that method, the
Companys reserve for future product returns was valued at
the cost to manufacture replacement product. The Company
discontinued use of the replacement cost method effective
July 1, 2002, and began valuing its returns reserve at the
sales value of returned products. In connection with the recent
review of its returns reserve, management has concluded that use
of the replacement cost method constituted an error. From the
third quarter of 2002 through the second quarter of 2004, the
Company accrued for product returns based in part on the
Companys estimate of inventory in the wholesale and retail
distribution channels. Management has concluded that this
methodology also contained an error, because it did not take
into account the shelf life of its products in the wholesale
distribution channels. As a result of these conclusions, the
Company has adopted revised policies and procedures for
establishing reserves for product returns. The revised
methodology is described in Note 3.

Previously disclosed immaterial Medicaid
errors.The restatement has not
resulted in any change in the amounts of previously reported
errors in respect of Medicaid and other governmental pricing
programs. The restatement has, however, changed how the
immaterial Medicaid errors are reflected in the 2002 financial
statements. The Company previously disclosed immaterial Medicaid
errors that had arisen during 1998 through 2001 and recorded
those amounts in the fourth quarter of 2002. As described below,
as part of the restatement, all immaterial errors, including
those Medicaid errors, which arose prior to 2002 and that were
previously recorded as charges in 2002 have been removed as
charges from the 2002 income statement. The aggregate amount of
those immaterial errors is instead recorded as part of the
adjustment to the opening balance (January 1, 2002) of
retained earnings in the restated 2002 financial statements.

Other immaterial
items.In the course of its returns
review, the Company determined that in some instances its
estimates of inventory in the distribution channel did not
properly reflect relevant data in its

F-7



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

possession, and that it thereby inadvertently
under-accrued for estimated future chargeback amounts.
Chargebacks are credits issued to wholesalers (who purchase at
published wholesale prices) when they resell the Companys
products to a customer entitled to a discount pursuant to the
customers agreement with King. The wholesaler allows its
customer to purchase at the discounted price, and then the
wholesaler recovers the amount of the discount from King via a
chargeback.

Following the Companys determination that
it would restate its financial statements for 2002, 2003 and the
first two quarters of 2004, the Company also determined that it
would correct for other known miscellaneous immaterial errors
made in the application of GAAP that arose during those periods.
The Companys restated financial statements reflect each of
these items in the period in which it actually arose.



| |                                  
| | ---------------------------------
| | Restated Income Statement Amounts

The table below sets forth the effect of the
adjustments for the year ended December 31, 2002:

|                                                                 |                                                                         |                                                   |         |           |           |            |         |            |         |             |        |        |        |   |        |        |        |   |         |           |           | 
|---------------------------------------------------------------- | ----------------------------------------------------------------------- | ------------------------------------------------- | ------- | --------- | --------- | ---------- | ------- | ---------- | ------- | ----------- | ------ | ------ | ------ | - | ------ | ------ | ------ | - | ------- | --------- | --------- | 
|                                                                 |                                                                         | 2002                                              |         | Returns   |           | Immaterial |         | Other      |         |            
|                                                                 |                                                                         | As Originally                                     |         | Reserve   |           | Medicaid   |         | Immaterial |         | 2002       
|                                                                 |                                                                         | Reported                                          |         | Errors    |           | Errors     |         | Items      |         | As Restated
|                                                                 |                                                                         |                                                   |         |           |           |            |         |            |         |            
|Revenues:                                                        |                                                                         |                                                   |         |           |           |            |         |            |         |             |        |        |        |   |        |        |        |   |         |          
|                                                                 | Net sales                                                               |                                                   | $       | 1,030,119 |           |            | $       | (12,851    | )       |             | $      | 21,654 |        |   | $      | (9,273 | )      |   | $       | 1,029,649 |          
|                                                                 | Royalty revenue                                                         |                                                   |         | 58,375    |           |            |         |           |         |             |        |       |        |   |        |       |        |   |         | 58,375    |          
|                                                                 |                                                                         |                                                   |         |           |           |            |         |            |         |             |        |        |        |   |        |        |        |   |         |          
|                                                                 |                                                                         | Total revenues                                    |         |           | 1,088,494 |            |         |            | (12,851 | )           |        |        | 21,654 |   |        |        | (9,273 | ) |         |           | 1,088,024 | 
|                                                                 |                                                                         |                                                   |         |           |           |            |         |            |         |             |        |        |        |   |        |        |        |   |         |          
|Operating costs and expenses:                                    |                                                                         |                                                   |         |           |           |            |         |            |         |             |        |        |        |   |        |        |        |   |         |          
|                                                                 | Cost of revenues, exclusive of depreciation shown
    below             |                                                   |         | 291,098   |           |            |         | (50        | )       |             |        | 350    |        |   |        | (141   | )      |   |         | 291,257   |          
|                                                                 |                                                                         |                                                   |         |           |           |            |         |            |         |             |        |        |        |   |        |        |        |   |         |          
|                                                                 | Selling, general and administrative, exclusive of
    co-promotion fees |                                                   |         | 174,666   |           |            |         |           |         |             |        |       |        |   |        | (430   | )      |   |         | 174,236   |          
|                                                                 | Co-promotion fees                                                       |                                                   |         | 186,657   |           |            |         | (577       | )       |             |        |       |        |   |        | (2,908 | )      |   |         | 183,172   |          
|                                                                 |                                                                         |                                                   |         |           |           |            |         |            |         |             |        |        |        |   |        |        |        |   |         |          
|                                                                 |                                                                         | Total selling, general and administrative expense |         |           | 361,323   |            |         |            | (577    | )           |        |        |       |   |        |        | (3,338 | ) |         |           | 357,408   | 
|                                                                 |                                                                         |                                                   |         |           |           |            |         |            |         |             |        |        |        |   |        |        |        |   |         |          
|                                                                 | Research and development                                                |                                                   |         | 28,184    |           |            |         |           |         |             |        |       |        |   |        |       |        |   |         | 28,184    |          
|                                                                 | Research and development-in process upon
    acquisition                |                                                   |         | 12,000    |           |            |         |           |         |             |        |       |        |   |        |       |        |   |         | 12,000    |          
|                                                                 |                                                                         |                                                   |         |           |           |            |         |            |         |             |        |        |        |   |        |        |        |   |         |          
|                                                                 |                                                                         | Total research and development                    |         |           | 40,184    |            |         |            |        |             |        |        |       |   |        |        |       |   |         |           | 40,184    | 
|                                                                 |                                                                         |                                                   |         |           |           |            |         |            |         |             |        |        |        |   |        |        |        |   |         |          
|                                                                 | Depreciation and amortization                                           |                                                   |         | 51,377    |           |            |         |           |         |             |        |       |        |   |        |       |        |   |         | 51,377    |          
|                                                                 | Intangible asset impairment                                             |                                                   |         | 66,844    |           |            |         |           |         |             |        |       |        |   |        |       |        |   |         | 66,844    |          
|                                                                 | Merger, restructuring and other nonrecurring
    charges                |                                                   |         | 5,911     |           |            |         |           |         |             |        |       |        |   |        |       |        |   |         | 5,911     |          
|                                                                 |                                                                         |                                                   |         |           |           |            |         |            |         |             |        |        |        |   |        |        |        |   |         |          
|                                                                 |                                                                         | Total operating costs and expenses                |         |           | 816,737   |            |         |            | (627    | )           |        |        | 350    |   |        |        | (3,479 | ) |         |           | 812,981   | 
|                                                                 |                                                                         |                                                   |         |           |           |            |         |            |         |             |        |        |        |   |        |        |        |   |         |          
|                                                                 | Operating income (loss)                                                 |                                                   |         | 271,757   |           |            |         | (12,224    | )       |             |        | 21,304 |        |   |        | (5,794 | )      |   |         | 275,043   |          
|                                                                 |                                                                         |                                                   |         |           |           |            |         |            |         |             |        |        |        |   |        |        |        |   |         |          
|Total other (expense) income                                     |                                                                         |                                                   | (26,537 | )         |           |            |        |            |         |             |       |        |        |   |       |        |        |   | (26,537 | )        
|                                                                 |                                                                         |                                                   |         |           |           |            |         |            |         |             |        |        |        |   |        |        |        |   |         |          
|Income (loss) from continuing operations before
    income taxes |                                                                         |                                                   | 245,220 |           |           |            | (12,224 | )          |         |             | 21,304 |        |        |   | (5,794 | )      |        |   | 248,506 |          
|Income tax expense (benefit)                                     |                                                                         |                                                   | 76,774  |           |           |            | (4,680  | )          |         |             | 8,159  |        |        |   | (2,220 | )      |        |   | 78,033  |          
|                                                                 |                                                                         |                                                   |         |           |           |            |         |            |         |             |        |        |        |   |        |        |        |   |         |          
|Income (loss) from continuing operations                         |                                                                         |                                                   | 168,446 |           |           |            | (7,544  | )          |         |             | 13,145 |        |        |   | (3,574 | )      |        |   | 170,473 |          
|                                                                 |                                                                         |                                                   |         |           |           |            |         |            |         |             |        |        |        |   |        |        |        |   |         |          
|Discontinued operations:                                         |                                                                         |                                                   |         |           |           |            |         |            |         |             |        |        |        |   |        |        |        |   |         |          
|                                                                 | Income (loss) from discontinued operations,
    including expected loss |                                                   |         | 22,443    |           |            |         | (2,476     | )       |             |        | 459    |        |   |        | (1,461 | )      |   |         | 18,965    |          
|                                                                 | Income tax expense (benefit)                                            |                                                   |         | 8,369     |           |            |         | (948       | )       |             |        | 176    |        |   |        | (560   | )      |   |         | 7,037     |          
|                                                                 |                                                                         |                                                   |         |           |           |            |         |            |         |             |        |        |        |   |        |        |        |   |         |          
|                                                                 |                                                                         | Total income (loss) from discontinued operations  |         |           | 14,074    |            |         |            | (1,528  | )           |        |        | 283    |   |        |        | (901   | ) |         |           | 11,928    | 
|                                                                 |                                                                         |                                                   |         |           |           |            |         |            |         |             |        |        |        |   |        |        |        |   |         |          
|Net income (loss)                                                |                                                                         | $                                                 | 182,520 |           |           | $          | (9,072  | )          |         | $           | 13,428 |        |        | $ | (4,475 | )      |        | $ | 182,401 |          
|                                                                 |                                                                         |                                                   |         |           |           |            |         |            |         |             |        |        |        |   |        |        |        |   |         |          
|Income (loss) per common share:                                  |                                                                         |                                                   |         |           |           |            |         |            |         |             |        |        |        |   |        |        |        |   |         |          
|Basic income (loss) per common share                             |                                                                         | $                                                 | 0.75    |           |           | $          | (0.04   | )          |         | $           | 0.05   |        |        | $ | (0.01  | )      |        | $ | 0.75    |          
|                                                                 |                                                                         |                                                   |         |           |           |            |         |            |         |             |        |        |        |   |        |        |        |   |         |          
|Diluted income (loss) per common share                           |                                                                         | $                                                 | 0.74    |           |           | $          | (0.04   | )          |         | $           | 0.05   |        |        | $ | (0.01  | )      |        | $ | 0.74    |          
|                                                                 |                                                                         |                                                   |         |           |           |            |         |            |         |             |        |        |        |   |        |        |        |   |         |          

F-8



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The table below sets forth the effect of the
adjustments for the year ended December 31, 2003:

|                                                                 |                                                                         |                                                   |         |           |           |            |         |             |         |   |        |        |       |   |         |           |           |  
|---------------------------------------------------------------- | ----------------------------------------------------------------------- | ------------------------------------------------- | ------- | --------- | --------- | ---------- | ------- | ----------- | ------- | - | ------ | ------ | ----- | - | ------- | --------- | --------- | -
|                                                                 |                                                                         | 2003                                              |         | Returns   |           | Other      |         |            
|                                                                 |                                                                         | As Originally                                     |         | Reserve   |           | Immaterial |         | 2003       
|                                                                 |                                                                         | Reported                                          |         | Errors    |           | Items      |         | As Restated
|                                                                 |                                                                         |                                                   |         |           |           |            |         |            
|Revenues:                                                        |                                                                         |                                                   |         |           |           |            |         |             |         |   |        |        |       |   |         |          
|                                                                 | Net sales                                                               |                                                   | $       | 1,440,888 |           |            | $       | (17,401     | )       |   | $      | 937    |       |   | $       | 1,424,424 |          
|                                                                 | Royalty revenue                                                         |                                                   |         | 68,365    |           |            |         |            |         |   |        |       |       |   |         | 68,365    |          
|                                                                 |                                                                         |                                                   |         |           |           |            |         |             |         |   |        |        |       |   |         |          
|                                                                 |                                                                         | Total revenues                                    |         |           | 1,509,253 |            |         |             | (17,401 | ) |        |        | 937   |   |         |           | 1,492,789 |  
|                                                                 |                                                                         |                                                   |         |           |           |            |         |             |         |   |        |        |       |   |         |          
|Operating costs and expenses:                                    |                                                                         |                                                   |         |           |           |            |         |             |         |   |        |        |       |   |         |          
|                                                                 | Cost of revenues, exclusive of depreciation shown
    below             |                                                   |         | 381,794   |           |            |         | (54         | )       |   |        | 4,101  |       |   |         | 385,841   |          
|                                                                 |                                                                         |                                                   |         |           |           |            |         |             |         |   |        |        |       |   |         |          
|                                                                 | Selling, general and administrative, exclusive of
    co-promotion fees |                                                   |         | 293,834   |           |            |         |            |         |   |        | (1,750 | )     |   |         | 292,084   |          
|                                                                 | Co-promotion fees                                                       |                                                   |         | 193,350   |           |            |         | 2,558       |         |   |        | 2,590  |       |   |         | 198,498   |          
|                                                                 |                                                                         |                                                   |         |           |           |            |         |             |         |   |        |        |       |   |         |          
|                                                                 |                                                                         | Total selling, general and administrative expense |         |           | 487,184   |            |         |             | 2,558   |   |        |        | 840   |   |         |           | 490,582   |  
|                                                                 |                                                                         |                                                   |         |           |           |            |         |             |         |   |        |        |       |   |         |          
|                                                                 | Research and development                                                |                                                   |         | 44,078    |           |            |         |            |         |   |        |       |       |   |         | 44,078    |          
|                                                                 | Research and development-in process upon
    acquisition                |                                                   |         | 194,000   |           |            |         |            |         |   |        |       |       |   |         | 194,000   |          
|                                                                 |                                                                         |                                                   |         |           |           |            |         |             |         |   |        |        |       |   |         |          
|                                                                 |                                                                         | Total research and development                    |         |           | 238,078   |            |         |             |        |   |        |        |      |   |         |           | 238,078   |  
|                                                                 |                                                                         |                                                   |         |           |           |            |         |             |         |   |        |        |       |   |         |          
|                                                                 | Depreciation and amortization                                           |                                                   |         | 113,745   |           |            |         |            |         |   |        |       |       |   |         | 113,745   |          
|                                                                 | Intangible asset impairment                                             |                                                   |         | 124,616   |           |            |         |            |         |   |        |       |       |   |         | 124,616   |          
|                                                                 | (Gain) loss on sale of products                                         |                                                   |         | (12,025   | )         |            |         |            |         |   |        |       |       |   |         | (12,025   | )        
|                                                                 |                                                                         |                                                   |         |           |           |            |         |             |         |   |        |        |       |   |         |          
|                                                                 |                                                                         | Total operating costs and expenses                |         |           | 1,333,392 |            |         |             | 2,504   |   |        |        | 4,941 |   |         |           | 1,340,837 |  
|                                                                 |                                                                         |                                                   |         |           |           |            |         |             |         |   |        |        |       |   |         |          
|                                                                 | Operating income (loss)                                                 |                                                   |         | 175,861   |           |            |         | (19,905     | )       |   |        | (4,004 | )     |   |         | 151,952   |          
|                                                                 |                                                                         |                                                   |         |           |           |            |         |             |         |   |        |        |       |   |         |          
|Total other (expense) income                                     |                                                                         |                                                   | 10,975  |           |           |            |        |             |         |   | 400    |        |       |   | 11,375  |          
|                                                                 |                                                                         |                                                   |         |           |           |            |         |             |         |   |        |        |       |   |         |          
|Income (loss) from continuing operations before
    income taxes |                                                                         |                                                   | 186,836 |           |           |            | (19,905 | )           |         |   | (3,604 | )      |       |   | 163,327 |          
|Income tax expense (benefit)                                     |                                                                         |                                                   | 74,889  |           |           |            | (7,624  | )           |         |   | (1,381 | )      |       |   | 65,884  |          
|                                                                 |                                                                         |                                                   |         |           |           |            |         |             |         |   |        |        |       |   |         |          
|Income (loss) from continuing operations                         |                                                                         |                                                   | 111,947 |           |           |            | (12,281 | )           |         |   | (2,223 | )      |       |   | 97,443  |          
|                                                                 |                                                                         |                                                   |         |           |           |            |         |             |         |   |        |        |       |   |         |          
|Discontinued operations:                                         |                                                                         |                                                   |         |           |           |            |         |             |         |   |        |        |       |   |         |          
|                                                                 | Income (loss) from discontinued operations,
    including expected loss |                                                   |         | (9,747    | )         |            |         | (413        | )       |   |        | 1,389  |       |   |         | (8,771    | )        
|                                                                 | Income tax expense (benefit)                                            |                                                   |         | (3,656    | )         |            |         | (157        | )       |   |        | 531    |       |   |         | (3,282    | )        
|                                                                 |                                                                         |                                                   |         |           |           |            |         |             |         |   |        |        |       |   |         |          
|                                                                 |                                                                         | Total income (loss) from discontinued operations  |         |           | (6,091    | )          |         |             | (256    | ) |        |        | 858   |   |         |           | (5,489    | )
|                                                                 |                                                                         |                                                   |         |           |           |            |         |             |         |   |        |        |       |   |         |          
|Net income (loss)                                                |                                                                         | $                                                 | 105,856 |           |           | $          | (12,537 | )           |         | $ | (1,365 | )      |       | $ | 91,954  |          
|                                                                 |                                                                         |                                                   |         |           |           |            |         |             |         |   |        |        |       |   |         |          
|Basic income (loss) per common share                             |                                                                         | $                                                 | 0.44    |           |           | $          | (0.05   | )           |         | $ | (0.01  | )      |       | $ | 0.38    |          
|                                                                 |                                                                         |                                                   |         |           |           |            |         |             |         |   |        |        |       |   |         |          
|Diluted income (loss) per common share                           |                                                                         | $                                                 | 0.44    |           |           | $          | (0.05   | )           |         | $ | (0.01  | )      |       | $ | 0.38    |          
|                                                                 |                                                                         |                                                   |         |           |           |            |         |             |         |   |        |        |       |   |         |          

F-9



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For information on the effect of the restatement
on interim periods in 2003 and 2004, see Note 26 to our
financial statements.

The aggregate amount of immaterial errors that
arose prior to 2002, including the immaterial Medicaid errors
that were previously disclosed and recorded as charges in 2002
and which have been removed as charges from the 2002 income
statement, have been recorded as an adjustment to the opening
balance (January 1, 2002) of retained earnings in the 2002
financial statements, as set forth below.

|                                     |                        |                                   |   |         |         |  
|------------------------------------ | ---------------------- | --------------------------------- | - | ------- | ------- | -
|                                     |                        | January 1, 2002                  
|                                     |                        |                                  
|Opening balance of retained earnings |                        |                                   |   |        
|                                     | As originally reported |                                   | $ | 546,721 |        
|                                     |                        | Immaterial returns reserve errors |   |         | (10,395 | )
|                                     |                        | Immaterial Medicaid errors        |   |         | (13,428 | )
|                                     |                        | Other immaterial items            |   |         | 155     |  
|                                     |                        |                                   |   |        
|                                     | As restated            |                                   | $ | 523,053 |        
|                                     |                        |                                   |   |        

Of the $(10,395) of immaterial returns reserve
errors included in the adjustment to retained earnings,
$(6,740), $(3,235) and $(420) related to immaterial errors that
arose in 2001, 2000 and 1999, respectively. Of the $(13,428) of
immaterial Medicaid errors included in the adjustment to
retained earnings, $(4,438), $(3,544), $(3,929) and $(1,517)
related to immaterial errors that arose in 2001, 2000, 1999 and
1998, respectively. Of the $155 of other immaterial items
included in the adjustment to retained earnings, $(1,538) and
$1,693 related to immaterial errors that arose in 2001 and 2000,
respectively.

F-10



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Restated Balance Sheet Amounts

The table below sets forth the effect of the
adjustments on the balance sheet as of December 31, 2002:

|                                          |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |           |           | 
|----------------------------------------- | ----------------------------------------- | ------------------------------------------ | --------- | --------- | --------- | ---------- | - | ----------- | ------- | - | ----- | ------ | ------ | - | --------- | --------- | --------- | 
|                                          |                                           | 2002                                       |           | Returns   |           | Other      |   |            
|                                          |                                           | As Originally                              |           | Reserve   |           | Immaterial |   | 2002       
|                                          |                                           | Reported                                   |           | Errors    |           | Items      |   | As Restated
|                                          |                                           |                                            |           |           |           |            |   |            
|Assets                                    |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|Current Assets:                           |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|                                          | Cash and cash equivalents                 |                                            | $         | 588,225   |           |            |   |             |         |   |       |        |        |   | $         | 588,225   |          
|                                          | Marketable securities                     |                                            |           | 227,263   |           |            |   |             |         |   |       |        |        |   |           | 227,263   |          
|                                          | Accounts receivable, net                  |                                            |           | 159,987   |           |            |   |             |         |   |       |        |        |   |           | 159,987   |          
|                                          | Inventories                               |                                            |           | 162,606   |           |            |   |             |         |   |       |        |        |   |           | 162,606   |          
|                                          | Deferred income tax assets                |                                            |           | 106,168   |           |            | $ | 12,082      |         |   | $     | 4,669  |        |   |           | 122,919   |          
|                                          | Prepaid expenses and other current assets |                                            |           | 12,906    |           |            |   |             |         |   |       |        |        |   |           | 12,906    |          
|                                          | Assets related to discontinued operations |                                            |           | 4,547     |           |            |   |             |         |   |       |        |        |   |           | 4,547     |          
|                                          |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|                                          |                                           | Total current assets                       |           |           | 1,261,702 |            |   |             | 12,082  |   |       |        | 4,669  |   |           |           | 1,278,453 | 
|Property, plant and equipment, net        |                                           |                                            | 217,114   |           |           |            |   |             |         |   |       |        |        |   | 217,114   |          
|Goodwill                                  |                                           |                                            | 12,742    |           |           |            |   |             |         |   |       |        |        |   | 12,742    |          
|Intangible assets, net                    |                                           |                                            | 1,011,240 |           |           |            |   |             |         |   |       |        |        |   | 1,011,240 |          
|Other assets                              |                                           |                                            | 39,531    |           |           |            |   |             |         |   |       |        |        |   | 39,531    |          
|Assets related to discontinued operations |                                           |                                            | 208,331   |           |           |            |   |             |         |   |       |        |        |   | 208,331   |          
|                                          |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|                                          |                                           | Total assets                               |           | $         | 2,750,660 |            |   | $           | 12,082  |   |       | $      | 4,669  |   |           | $         | 2,767,411 | 
|                                          |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|                                         
|Liabilities and Shareholders
    Equity  |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|Current liabilities:                      |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|                                          | Accounts payable                          |                                            | $         | 49,889    |           |            |   |             |         |   | $     | (680   | )      |   | $         | 49,209    |          
|                                          | Accrued expenses                          |                                            |           | 297,528   |           |            | $ | 31,546      |         |   |       | 7,686  |        |   |           | 336,760   |          
|                                          | Income taxes payable                      |                                            |           | 21,247    |           |            |   |             |         |   |       |        |        |   |           | 21,247    |          
|                                          | Current portion of long term debt         |                                            |           | 1,300     |           |            |   |             |         |   |       |        |        |   |           | 1,300     |          
|                                          |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|                                          |                                           | Total current liabilities                  |           |           | 369,964   |            |   |             | 31,546  |   |       |        | 7,006  |   |           |           | 408,516   | 
|Long-term debt                            |                                           |                                            | 345,093   |           |           |            |   |             |         |   |       |        |        |   | 345,093   |          
|Deferred income tax liabilities           |                                           |                                            | 33,596    |           |           |            |   |             |         |   | 1,986 |        |        |   | 35,582    |          
|Other liabilities                         |                                           |                                            | 70,824    |           |           |            |   |             |         |   |       |        |        |   | 70,824    |          
|                                          |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|                                          |                                           | Total liabilities                          |           |           | 819,477   |            |   |             | 31,546  |   |       |        | 8,992  |   |           |           | 860,015   | 
|                                          |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|Shareholders equity:                     |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|                                          | Preferred stock                           |                                            |           |          |           |            |   |             |         |   |       |        |        |   |           |          |          
|                                          | Common stock                              |                                            |           | 1,201,897 |           |            |   |             |         |   |       |        |        |   |           | 1,201,897 |          
|                                          | Retained earnings                         |                                            |           | 729,241   |           |            |   | (19,464     | )       |   |       | (4,323 | )      |   |           | 705,454   |          
|                                          | Accumulated other comprehensive income    |                                            |           | 45        |           |            |   |             |         |   |       |        |        |   |           | 45        |          
|                                          |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|                                          |                                           | Total shareholders equity                 |           |           | 1,931,183 |            |   |             | (19,464 | ) |       |        | (4,323 | ) |           |           | 1,907,396 | 
|                                          |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|                                          |                                           | Total liabilities and shareholders equity |           | $         | 2,750,660 |            |   | $           | 12,082  |   |       | $      | 4,669  |   |           | $         | 2,767,411 | 
|                                          |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          

F-11



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The table below sets forth the effect of the
adjustments on the balance sheet as of December 31, 2003:

|                                          |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |           |           | 
|----------------------------------------- | ----------------------------------------- | ------------------------------------------ | --------- | --------- | --------- | ---------- | - | ----------- | ------- | - | ----- | ------ | ------ | - | --------- | --------- | --------- | 
|                                          |                                           | 2003                                       |           | Returns   |           | Other      |   |            
|                                          |                                           | As Originally                              |           | Reserve   |           | Immaterial |   | 2003       
|                                          |                                           | Reported                                   |           | Errors    |           | Items      |   | As Restated
|                                          |                                           |                                            |           |           |           |            |   |            
|Assets                                    |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|Current Assets:                           |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|                                          | Cash and cash equivalents                 |                                            | $         | 146,053   |           |            |   |             |         |   |       |        |        |   | $         | 146,053   |          
|                                          | Restricted cash                           |                                            |           | 133,969   |           |            |   |             |         |   |       |        |        |   |           | 133,969   |          
|                                          | Accounts receivable, net                  |                                            |           | 246,417   |           |            |   |             |         |   |       |        |        |   |           | 246,417   |          
|                                          | Inventories                               |                                            |           | 260,886   |           |            |   |             |         |   |       |        |        |   |           | 260,886   |          
|                                          | Deferred income tax assets                |                                            |           | 124,930   |           |            | $ | 19,864      |         |   | $     | 3,685  |        |   |           | 148,479   |          
|                                          | Prepaid expenses and other current assets |                                            |           | 30,036    |           |            |   |             |         |   |       |        |        |   |           | 30,036    |          
|                                          | Assets related to discontinued operations |                                            |           | 4,012     |           |            |   |             |         |   |       |        |        |   |           | 4,012     |          
|                                          |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|                                          |                                           | Total current assets                       |           |           | 946,303   |            |   |             | 19,864  |   |       |        | 3,685  |   |           |           | 969,852   | 
|Property, plant and equipment, net        |                                           |                                            | 257,659   |           |           |            |   |             |         |   |       |        |        |   | 257,659   |          
|Goodwill                                  |                                           |                                            | 121,355   |           |           |            |   |             |         |   |       |        |        |   | 121,355   |          
|Intangible assets, net                    |                                           |                                            | 1,552,492 |           |           |            |   |             |         |   |       |        |        |   | 1,552,492 |          
|Other assets                              |                                           |                                            | 76,117    |           |           |            |   |             |         |   | 400   |        |        |   | 76,517    |          
|Deferred income tax assets                |                                           |                                            | 19,307    |           |           |            |   |             |         |   | (153  | )      |        |   | 19,154    |          
|Assets related to discontinued operations |                                           |                                            | 204,501   |           |           |            |   |             |         |   |       |        |        |   | 204,501   |          
|                                          |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|                                          |                                           | Total assets                               |           | $         | 3,177,734 |            |   | $           | 19,864  |   |       | $      | 3,932  |   |           | $         | 3,201,530 | 
|                                          |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|                                         
|Liabilities and Shareholders
    Equity  |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|Current liabilities:                      |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|                                          | Accounts payable                          |                                            | $         | 83,078    |           |            |   |             |         |   | $     | (1,430 | )      |   | $         | 81,648    |          
|                                          | Accrued expenses                          |                                            |           | 506,033   |           |            | $ | 51,864      |         |   |       | 8,807  |        |   |           | 566,704   |          
|                                          | Income taxes payable                      |                                            |           | 79,641    |           |            |   |             |         |   |       |        |        |   |           | 79,641    |          
|                                          | Current portion of long term debt         |                                            |           | 97        |           |            |   |             |         |   |       |        |        |   |           | 97        |          
|                                          |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|                                          |                                           | Total current liabilities                  |           |           | 668,849   |            |   |             | 51,864  |   |       |        | 7,377  |   |           |           | 728,090   | 
|Long-term debt                            |                                           |                                            | 345,000   |           |           |            |   |             |         |   |       |        |        |   | 345,000   |          
|Other liabilities                         |                                           |                                            | 121,705   |           |           |            |   |             |         |   | 2,244 |        |        |   | 123,949   |          
|                                          |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|                                          |                                           | Total liabilities                          |           |           | 1,135,554 |            |   |             | 51,864  |   |       |        | 9,621  |   |           |           | 1,197,039 | 
|                                          |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|Shareholders equity:                     |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|                                          | Preferred stock                           |                                            |           |          |           |            |   |             |         |   |       |        |        |   |           |          |          
|                                          | Common stock                              |                                            |           | 1,205,970 |           |            |   |             |         |   |       |        |        |   |           | 1,205,970 |          
|                                          | Retained earnings                         |                                            |           | 835,097   |           |            |   | (32,000     | )       |   |       | (5,689 | )      |   |           | 797,408   |          
|                                          | Accumulated other comprehensive income    |                                            |           | 1,113     |           |            |   |             |         |   |       |        |        |   |           | 1,113     |          
|                                          |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|                                          |                                           | Total shareholders equity                 |           |           | 2,042,180 |            |   |             | (32,000 | ) |       |        | (5,689 | ) |           |           | 2,004,491 | 
|                                          |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|                                          |                                           | Total liabilities and shareholders equity |           | $         | 3,177,734 |            |   | $           | 19,864  |   |       | $      | 3,932  |   |           | $         | 3,201,530 | 
|                                          |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          

F-12



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

3.     Summary of
Significant Accounting Policies

Use of Estimates.The preparation of financial
statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period.

Significant estimates for which it is reasonably
possible that a material change in estimate could occur in the
near term include forecasted future cash flows used in testing
for impairments of intangible and tangible assets and loss
accruals for excess inventory and fixed purchase commitments
under the Companys supply contracts. Forecasted future
cash flows in particular require considerable judgment and are
subject to inherent imprecision. In the case of impairment
testing, changes in estimates of future cash flows could result
in an immediate material impairment charge and, whether or not
they result in an impairment charge, could result prospectively
in a reduction in the estimated remaining useful life of
tangible or intangible assets, which could be material to the
financial statements.

Other significant estimates include accruals for
Medicaid and other rebates, returns and chargebacks, allowances
for doubtful accounts and estimates used in applying the revenue
recognition policy and accounting for the Co-Promotion Agreement
with Wyeth.

The Company is subject to risks and uncertainties
that may cause actual results to differ from the related
estimates, and the Companys estimates may change from time
to time in response to actual developments and new information.

Revenue recognition.Revenue is recognized when title and
risk of loss are transferred to customers, collection of sales
is reasonably assured, and we have no further performance
obligations. This is generally at the time products are received
by the customer. Accruals for estimated discounts, returns,
rebates and chargebacks, determined based on historical
experience, reduce revenues at the time of sale and are included
in accrued expenses. Royalty revenue is recognized based on a
percentage of sales (namely, contractually agreed-upon royalty
rates) reported by third parties. For the year ended
December 31, 2002, the Company deferred recognition of
revenue associated with a purchase of our products by the King
Benevolent Fund. The Company has recognized the deferred revenue
as the purchased products were distributed by the King
Benevolent Fund (see Note 21).

Intangible Assets and Goodwill.Intangible assets, which include
primarily acquired product rights, trademarks, and patents, are
stated at cost, net of accumulated amortization. Amortization is
computed over the estimated useful lives, ranging from 2 to
40 years, using primarily the straight-line method.
Beginning in 2002, goodwill and certain other intangible assets
are not amortized, but are tested for impairment on an annual
basis, or more frequently if conditions warrant. 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 factors. The
Company reviews its intangible assets for possible impairment
whenever events or circumstances indicate that the carrying
amount of an asset may not be recoverable. The Company reviews
goodwill for possible impairment annually, or whenever events or
circumstances indicate that the carrying amount may not be
recoverable. In evaluating goodwill for impairment, the Company
estimates fair value of the Companys individual business
reporting units on a discounted cash flow basis. Assumptions and
estimates used in the evaluation of impairment may affect the
carrying value of long-lived assets, which could result in
impairment charges in future periods. Such assumptions include
projections of future cash flows and, in some cases, the current
fair value of the asset. In addition, the Companys
amortization policies reflect judgments on the estimated useful
lives of assets.

Accruals for rebates, returns, and
chargebacks.The Company establishes
accruals for returns, chargebacks and commercial and Medicaid
rebates in the same period it recognizes the related sales. The

F-13



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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, the Company records a reduction to
accrued expenses and, at the end of each quarter, adjusts
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 chargeback and
rebates may be different from the Companys estimates.

The Companys product returns accrual is
primarily based on estimates of future product returns over the
period during which customers have a right of return, which is
in turn based in part on estimates of the remaining shelf life
of our products when sold to customers. Future product returns
are estimated primarily based on historical sales and return
rates. The Company estimates its Medicaid rebate and commercial
contractual rebate accruals based on estimates of utilization by
rebate-eligible customers, estimates of the level of inventory
of its products in the distribution channel that remain
potentially subject to those rebates, and the terms of its
contractual and regulatory rebate obligations. The Company
estimates its chargeback accrual based on its estimates of the
level of inventory of its products in the distribution channel
that remain subject to chargebacks, and specific contractual and
historical chargeback rates.

The Companys accruals for returns,
chargebacks and rebates are adjusted as appropriate for specific
known developments that may result in a change in its product
returns or its rebate and chargeback obligations. In the case of
product returns, the Company monitors demand levels for its
products and the effects of the introduction of competing
products and other factors on this demand. When the Company
identifies decreases in demand for products or experience higher
than historical rates of returns caused by unexpected discrete
events, it further analyzes these products for potential
additional supplemental reserves.

Shipping and Handling Costs.The Company incurred $2,072, $2,790,
and $2,127 in 2002, 2003, and 2004, respectively, related to
third-party shipping and handling costs classified with selling,
general and administrative expenses in the consolidated
statements of operations. The Company does not bill customers
for such costs.

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

Restricted Cash.Cash escrowed for a specific purpose
is designated as restricted cash.

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

Accounts Receivable and Allowance for Doubtful
Accounts.Trade accounts receivable
are recorded at the invoiced amount and do not bear interest.
The allowance for doubtful accounts is managements best
estimate of the amount of probable credit losses in the
Companys existing accounts receivable. Management
determines the allowance based on historical experience along
with the present knowledge of potentially uncollectible
accounts. Management reviews its allowance for doubtful accounts
quarterly. Past due balances over 120 days and over a specified
amount are reviewed individually for collectibility. All other
balances are reviewed on a pooled basis by type of receivable.
Account balances are charged off

F-14



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

against the allowance when management feels it is
probable the receivable will not be recovered. The Company does
not have any off-balance-sheet credit exposure related to
customers.

Inventories.Inventories are stated at the lower of
cost or market. Cost is determined using the first-in, first-out
(FIFO) method. Product samples held for distribution to
third parties represent 7% and 4% of inventory as of
December 31, 2003 and 2004, respectively. The Company has
fixed purchase commitments under supply contracts for certain
raw materials. A loss accrual is recorded when the total
inventory for a product is projected to be more than the
forecasted demand.

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

Litigation.At
various times the Company may be involved in patent, product
liability, consumer, commercial, environmental and tax
litigations and claims; government investigations; and other
legal proceedings that arise from time to time in the ordinary
course of business (see Note 19). The Company accrues for
amounts related to these legal matters if it is probable that a
liability has been incurred and an amount is reasonably
estimable. If the estimated amount of the liability is a range
and some amount within the range appears to be a better estimate
than any other amount within the range, that amount is accrued.
When no amount within the range is a better estimate than any
other amount, the minimum amount in the range is accrued. The
Company capitalizes legal costs in the defense of its patents to
the extent of an evident increase in the value of the patent.

Financial Instruments and Derivatives.The Company does not use financial
instruments for trading purposes. On December 31, 2003 and
2004, the Company did not have any interest rate protection
agreements or other derivatives outstanding.

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

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

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

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

Research and Development Costs.Research and development costs are
expensed as incurred. Upfront and milestone payments made to
third parties in connection with research and development
collaborations are expensed as incurred up to the point of
regulatory approval. Payments made to third parties subsequent
to regulatory approval are capitalized and amortized over the
remaining useful life. Amounts capitalized for such payments are
included in intangibles assets. Acquired research and

F-15



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

development projects for products that have not
received regulatory approval and that do not have alternative
future use are expensed.

Deferred Financing Costs.Financing costs related to the
$345,000 convertible debt are being amortized over five years to
the first date the debt can be put by the holders to the
Company. Financing costs related to the Senior Secured Revolving
Credit Facility (Note 14) are being amortized over five years,
the term of the facility.

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

Advertising.The
Company expenses advertising costs as incurred and these costs
are included as selling, general and administrative expenses.
Advertising costs for the years ended December 31, 2002,
2003, and 2004 were $56,532, $70,865, and $87,821, respectively.

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

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



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

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

F-16



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Stock Compensation.The Company has adopted the disclosure only provision of SFAS
No. 123, Accounting for Stock Based
Compensation, as amended by FAS 148. Accordingly,
since options were granted at a strike price equal to market
price at the date of grant, no compensation cost has been
recognized for stock options granted to date. Had compensation
cost for these plans been determined for options granted,
consistent with SFAS No. 123, the Companys net income
(loss) and diluted income per share would have decreased
(increased) to the following pro forma amounts for the years
ended December 31, 2002, 2003 and 2004:

|                                 |                                        |            |   |            |  |      |   |        |  |  |   |          |  
|-------------------------------- | -------------------------------------- | ---------- | - | ---------- |  | ---- | - | ------ |  |  | - | -------- | -
|                                 |                                        | 2002       |   | 2003       |  | 2004
|                                 |                                        |            |   |            |  |     
|                                 |                                        | (Restated) |   | (Restated) |  |     
|Net income (loss):               |                                        |            |   |            |  |      |   |        |  |  |   |         
|                                 | As reported                            |            | $ | 182,401    |  |      | $ | 91,954 |  |  | $ | (160,288 | )
|                                 | Compensation costs for options granted |            |   | 8,142      |  |      |   | 1,506  |  |  |   | 5,943    |  
|                                 |                                        |            |   |            |  |      |   |        |  |  |   |         
|                                 | Pro forma                              |            | $ | 174,259    |  |      | $ | 90,448 |  |  | $ | (166,231 | )
|                                 |                                        |            |   |            |  |      |   |        |  |  |   |         
|Basic income (loss) per share:   |                                        |            |   |            |  |      |   |        |  |  |   |         
|                                 | As reported                            |            | $ | 0.75       |  |      | $ | 0.38   |  |  | $ | (0.66    | )
|                                 |                                        |            |   |            |  |      |   |        |  |  |   |         
|                                 | Pro forma                              |            | $ | 0.71       |  |      | $ | 0.38   |  |  | $ | (0.69    | )
|                                 |                                        |            |   |            |  |      |   |        |  |  |   |         
|Diluted income (loss) per share: |                                        |            |   |            |  |      |   |        |  |  |   |         
|                                 | As reported                            |            | $ | 0.74       |  |      | $ | 0.38   |  |  | $ | (0.66    | )
|                                 |                                        |            |   |            |  |      |   |        |  |  |   |         
|                                 | Pro forma                              |            | $ | 0.71       |  |      | $ | 0.37   |  |  | $ | (0.69    | )
|                                 |                                        |            |   |            |  |      |   |        |  |  |   |         

The fair value of each option grant is estimated
on the date of grant using the Black-Scholes option pricing
model with the following weighted-average assumptions used for
grants in 2002, 2003 and 2004:

|                        |  |      |       |      |  |      |       |   |  |  |       |  
|----------------------- |  | ---- | ----- | ---- |  | ---- | ----- | - |  |  | ----- | -
|                        |  | 2002 |       | 2003 |  | 2004
|                        |  |      |       |      |  |     
|Expected life of option |  |      | 4.00  |      |  |      | 4.00  |   |  |  | 4.00  |  
|Risk-free interest rate |  |      | 3.07  | %    |  |      | 2.79  | % |  |  | 2.83  | %
|Expected volatility     |  |      | 71.59 | %    |  |      | 61.00 | % |  |  | 47.26 | %
|Expected dividend yield |  |      | 0.00  | %    |  |      | 0.00  | % |  |  | 0.00  | %

The weighted average fair values of options
granted during 2002, 2003 and 2004 are $10.91, $7.63 and $6.72,
respectively.

Reclassifications.Certain amounts from the prior consolidated financial statements
have been reclassified to conform to the presentation adopted in
2004.

4.     Concentrations
of Credit Risk

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

|           |  |      |      |      |  |      |      |   |  |  |      |  
|---------- |  | ---- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|           |  | 2002 |      | 2003 |  | 2004
|           |  |      |      |      |  |     
|Customer A |  |      | 15.1 | %    |  |      | 28.4 | % |  |  | 29.2 | %
|Customer B |  |      | 13.2 | %    |  |      | 19.2 | % |  |  | 23.0 | %
|Customer C |  |      | 18.5 | %    |  |      | 20.8 | % |  |  | 21.1 | %

F-17



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table represents a summary of sales
to significant customers as a percentage of the Companys
total revenues, including net revenues from discontinued
operations:

|           |  |      |      |      |  |      |      |   |  |  |      |  
|---------- |  | ---- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|           |  | 2002 |      | 2003 |  | 2004
|           |  |      |      |      |  |     
|Customer A |  |      | 21.5 | %    |  |      | 20.8 | % |  |  | 26.0 | %
|Customer B |  |      | 32.9 | %    |  |      | 26.0 | % |  |  | 29.0 | %
|Customer C |  |      | 24.0 | %    |  |      | 15.5 | % |  |  | 15.0 | %

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

5.     Marketable
Securities

At December 31, 2004, the Company held
common stock of Novavax and Palatin as follows:

|                     |       |           |        |            |  |            |     |       |  |   |   |   |  |   |        |        | 
|-------------------- | ----- | --------- | ------ | ---------- |  | ---------- | --- | ----- |  | - | - | - |  | - | ------ | ------ | 
|                     |       |           |        | 2004       |  | 2004       |     |      
|                     |       | 2004      |        | Gross      |  | Gross      |     | 2004 
|                     |       | Amortized |        | Unrealized |  | Unrealized |     | Fair 
|                     |       | Cost      |        | Gains      |  | Losses     |     | Value
|                     |       |           |        |            |  |            |     |      
|Novavax common stock |       | $         | 12,635 |            |  | $          | 735 |       |  | $ |  |   |  | $ | 13,370 |       
|Palatin common stock |       |           | 3,094  |            |  |            | 34  |       |  |   |  |   |  |   | 3,128  |       
|                     |       |           |        |            |  |            |     |       |  |   |   |   |  |   |        |       
|                     | Total |           | $      | 15,729     |  |            | $   | 769   |  |   | $ |  |  |   | $      | 16,498 | 
|                     |       |           |        |            |  |            |     |       |  |   |   |   |  |   |        |       

The Financial Accounting Standards Board issued
FASB Interpretations No. 46, Consolidation of
Variable Interest Entities, an Interpretation of Accounting
Research Bulletin No. 51 (ARB No. 51), in January 2003,
and a further interpretation of FIN 46 in December 2003
(FIN 46-R, and collectively FIN 46). FIN 46 clarifies
the application of ARB No. 51, Consolidated Financial
Statements, to certain entities in which equity investors
do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity
to finance its activities without additional subordinated
financial support from other parties, referred to as variable
interest entities (VIE). While the Company has
interests in two VIEs, Novavax and Palatin, the Company is not
considered to be the primary beneficiary of these entities.
Therefore, in accordance with the provisions of FIN No. 46,
the Company has not consolidated the financial statements of
those entities into its consolidated financial statements.

On December 19, 2000, September 7,
2001, and June 24, 2002, the Company acquired convertible
senior notes of $20,000, $10,000 and $10,000, respectively, from
Novavax, Inc. (Novavax). The Company sold all of its
Novavax convertible notes to Novavax on July 19, 2004. The
convertible senior notes earned interest at 4% payable
semi-annually in June and December. The convertible senior notes
were due December 19, 2007. At December 31, 2002 and
2003, the convertible senior notes were convertible to 17.0% and
12.4%, respectively, of the outstanding common shares of
Novavax. During 2002, the convertible senior notes were deemed
to be impaired as defined under SFAS No. 114,
Accounting by Creditors for Impairment of a Loan.
The Company recorded a valuation allowance of $35,443 during
2002. During 2003, this valuation allowance was reduced by
$18,151. During 2004, the valuation allowance was increased by
$2,887. The Company determined the amount of the valuation
allowance by reference to the December 31, 2002,
December 31, 2003 and June 30, 2004 quoted market
price of the Novavax common stock.

F-18



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

6.     Receivables

Receivables, net of allowance for doubtful
accounts, consist of the following at December 31, 2003 and
2004:

|                  |  |      |         |      |  |   |         | 
|----------------- |  | ---- | ------- | ---- |  | - | ------- | 
|                  |  | 2003 |         | 2004
|                  |  |      |         |     
|Trade             |  | $    | 224,277 |      |  | $ | 159,388 | 
|Royalty           |  |      | 20,726  |      |  |   | 20,578  | 
|Other             |  |      | 1,414   |      |  |   | 997     | 
|                  |  |      |         |      |  |   |         | 
|Total Receivables |  | $    | 246,417 |      |  | $ | 180,963 | 
|                  |  |      |         |      |  |   |         | 

7.     Inventory

Inventory consists of the following:

|                                   |  |      |         |      |  |   |         |  
|---------------------------------- |  | ---- | ------- | ---- |  | - | ------- | -
|                                   |  | 2003 |         | 2004
|                                   |  |      |         |     
|Raw materials                      |  | $    | 139,675 |      |  | $ | 168,541 |  
|Work-in process                    |  |      | 11,508  |      |  |   | 20,287  |  
|Finished goods                     |  |      | 140,308 |      |  |   | 133,527 |  
|                                   |  |      |         |      |  |   |         |  
|                                   |  |      | 291,491 |      |  |   | 322,355 |  
|Less inventory valuation allowance |  |      | (30,605 | )    |  |   | (47,943 | )
|                                   |  |      |         |      |  |   |         |  
|                                   |  | $    | 260,886 |      |  | $ | 274,412 |  
|                                   |  |      |         |      |  |   |         |  

As discussed in Note 21 below in 2002, the
Company recorded a donation of $15,152 of Lorabid®
inventory to a charitable organization as a result of its
decision to divest the Lorabid® intangible assets.

8.     Property,
Plant and Equipment

Property, plant and equipment consists of the
following:

|                             |                               |      |         |         |   |   |         |         |  
|---------------------------- | ----------------------------- | ---- | ------- | ------- | - | - | ------- | ------- | -
|                             |                               | 2003 |         | 2004   
|                             |                               |      |         |        
|Land                         |                               | $    | 9,476   |         |   | $ | 15,724  |        
|Buildings and improvements   |                               |      | 102,346 |         |   |   | 107,553 |        
|Machinery and equipment      |                               |      | 178,635 |         |   |   | 197,619 |        
|Capital projects in progress |                               |      | 34,160  |         |   |   | 53,116  |        
|                             |                               |      |         |         |   |   |         |        
|                             |                               |      | 324,617 |         |   |   | 374,012 |        
|                             | Less accumulated depreciation |      |         | (66,958 | ) |   |         | (93,281 | )
|                             |                               |      |         |         |   |   |         |        
|                             |                               | $    | 257,659 |         |   | $ | 280,731 |        
|                             |                               |      |         |         |   |   |         |        

Included in net property, plant and equipment as
of December 31, 2003 and 2004 are computer software costs
of $29,914 and $24,719, respectively.

Depreciation expense for the years ended
December 31, 2002, 2003 and 2004 was $11,233, $21,285 and
$31,957, respectively, which includes $632, $3,687 and $6,688,
respectively, related to computer software.

In June 2004, the U.S. Food and Drug
Administration (FDA) approved supplemental New Drug
Applications (sNDA) which provide that
Unithroid®(levothyroxine sodium tablets, USP) and
Levo-T® (levothyroxine sodium tablets, USP) are
bioequivalent and therapeutically equivalent
(AB-Rated) to Levoxyl® (levothyroxine sodium
tablets, USP). Similarly, in July 2004, the FDA approved a
supplemental Abbreviated New Drug Application
(sANDA) which provides that a previously approved
generic for

F-19



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Unithroid® is AB-Rated to Levoxyl®.
Accordingly, some prescriptions written for Levoxyl® are
being filled with AB-Rated product instead of Levoxyl®. As
a result, sales of Levoxyl® are likely to be materially
adversely affected in future periods. The Company does not have
any intangible assets recorded on its balance sheet related to
Levoxyl®. However, the St. Petersburg, Florida
facility manufactures Levoxyl® exclusively. At
December 31, 2004, the net carrying value of the property,
plant and equipment at the St. Petersburg facility was
$13,835. Management currently believes that these assets are not
impaired based on estimated undiscounted future cash flows.

The Companys Rochester facility
manufactures products for the Company and various third-party
manufacturers. At December 31, 2004, the net carrying value
of the property, plant and equipment at the Rochester facility
was $86,914. Overall production volume at this facility declined
during the year ended December 31, 2004. The Company
currently has plans to transfer to this facility the manufacture
of certain products that are currently manufactured for the
Company at other facilities or by third parties. These transfers
should increase production and cash flow at the Rochester
facility. Management currently believes that these long-term
assets associated with the Rochester facility are not impaired
based on estimated undiscounted future cash flows. However, if
production volumes continue to decline or if the Company is not
successful in transferring additional production to Rochester,
the Company may have to write-off a portion of the property,
plant, equipment associated with this facility.

9.     Acquisitions
and Dispositions

On December 23, 2004, the Company sold all
of its rights in Nordette® for approximately $12,000. See
Note 27 for additional information related to
Nordette®.

On August 12, 2004, the Company entered into
a collaborative agreement with Palatin Technologies, Inc.
(Palatin) to jointly develop and, on obtaining
necessary regulatory approvals, commercialize Palatins
PT-141 for the treatment of male and female sexual dysfunction
for $20,000 plus acquisition costs of $498. Pursuant to the
terms of the agreement, Palatin has granted King a co-exclusive
license with Palatin to PT-141 in North America and an exclusive
right to collaborate in the licensing or sublicensing of PT-141
with Palatin outside North America. At the time of closing King
received approximately 1,176 shares of Palatin common stock and
approximately 235 warrants for the right to purchase
Palatin common stock. Of the total purchase price, $3,093 was
allocated to the common stock, $260 was allocated to the
warrants, and the remaining $17,145 was allocated to in-process
research and development. In addition to the initial purchase
price, King may pay potential milestone payments to Palatin of
up to $100,000 for achieving certain development and regulatory
approval targets. A portion of these milestone payments could
consist of additional equity investments in Palatin. After
regulatory approval and commercialization of PT-141, King may
also pay potential milestone payments to Palatin of up to
$130,000 upon achieving specified annual North American net
sales thresholds. King and Palatin will share all collaboration
development and marketing costs associated with and
collaboration net profits derived from PT-141 based upon an
agreed percentage.

On July 19, 2004, the Company and Novavax,
Inc. (Novavax) mutually agreed to end their
co-promotion and license agreements regarding
EstrasorbTM. As part of this transaction, Novavax
reacquired all rights to EstrasorbTM as well as all
rights to other womens health products that Novavax may
successfully develop utilizing its micellar nanoparticle
technology. Additionally, Novavax repurchased all of its
convertible notes held by King, acquired a portion of
Kings womens health field sales force, and received
approximately $8,000 from the Company to provide support for
marketing and promotion. In return, Novavax paid King $22,000
and issued approximately 3,776 shares of Novavax common
stock to King. This transaction resulted in a net gain in the
amount of $4,021 during the third quarter of 2004. As a result
of this transaction, King now owns approximately
4,101 shares of common stock of Novavax that the Company
accounts for as available for sale securities. Such shares are
currently restricted and are

F-20



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

required to be held by the Company until July
2005. As of September 30, 2004, the Company determined the
decline in fair value of the Companys equity interest in
Novavax was other than temporary and recorded a charge of
$6,520, which is reflected in other income (expense) in the
accompanying consolidated financial statements.

On June 30, 2004, the Company sold the
Anusol-HC® and Proctocort® product lines to Salix
Pharmaceuticals, Inc. (Salix) for $13,000. In
addition, the Company sold inventory of Anusol-HC® and
Proctocort® to Salix for $337. The assets sold included
related product assets, intangible property, advertising and
promotional materials, and labeling and packaging materials. As
part of the transaction, the Company will contract manufacture
the Anusol-HC® and Proctocort® product lines for two
years. The Company recorded a $4,715 gain on the sale of the
Anusol-HC® and Proctocort® product lines, which is
included as a reduction in total operating costs and expenses in
the accompanying consolidated financial statements.

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

On June 12, 2003, the Company acquired the
primary care business of Elan Corporation, plc
(Elan) and of some of its subsidiaries in the United
States and Puerto Rico, including the rights to Sonata® and
Skelaxin® and rights pertaining to potential new
formulations of these products, together with Elans United
States primary care field sales force.

The total initial purchase price of $814,368
includes the cost of acquisition, assumed liabilities and a
portion of contingent liabilities. See the allocation of the
purchase price in the table below. The identifiable intangible
assets have been assigned useful lives with a weighted-average
range of 16.5 years. The acquired business is included in
the branded pharmaceuticals segment. In connection with this
acquisition, $163,416 was placed into escrow to satisfy the
deferred obligations to Wyeth that were assumed by the Company
in connection with the acquisition. Since the Company is
entitled to the interest income and can direct investments of
the escrow fund, the Company has included the escrow amount in
current restricted cash and other long-term assets as restricted
cash. The $163,416 placed into escrow was included in the
purchase price as liabilities acquired. These deferred
obligations are payable on a quarterly basis through March 2005.
As of December 31, 2004, $31,188 remains in the escrow fund.

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



| |   |                                                                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | an additional $60,000 if Elan achieves specific
    milestones in connection with the development of new
    formulations of Sonata®; and                                                                 
|
| |  | $15,000 if annual net sales of Sonata®
    exceed $100.0 million (see below for the discussion regarding
    the Companys decision to discontinue the program to
    develop a reformulation of Sonata®).

F-21



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

Of the total estimated purchase price, $175,000
was allocated to an acquired in-process research and development
project associated with the Companys acquisition of rights
to new formulations of Sonata®. Specifically, the goal of
the project was to successfully develop a modified-release
formulation of Sonata® (Sonata® MR) that
would enable patients who have difficulty staying asleep to
remain asleep for a longer period of time when utilizing the
reformulated product. The value of the acquired in-process
research and development project was expensed on the date of
acquisition, as it had not received regulatory approval as of
that date and had no alternative future use. The project was
valued through the application of a probability-weighted,
discounted cash flow approach with the assistance of an
independent valuation specialist. The estimated cash flows were
projected over a 25-year period utilizing a discount rate of
20%. The estimated cost to complete the project at the time of
the acquisition was approximately $120,000, which included up to
$71,000 that would be paid upon successful attainment of certain
significant development milestones of the project. At the time
of the acquisition, the project was in Phase I of clinical
development.

Elan commenced a Phase II clinical trial
program for the purpose of developing Sonata® MR in March
2004. However, the Phase II clinical trial results showed
that the Sonata® MR formulations that Elan developed did
not meet contractually required specifications. After several
months of review, the Company concluded that it was not possible
for Elan to develop a Sonata® MR formulation meeting the
contractually required specifications. Accordingly, the Company
decided to discontinue the Sonata® MR clinical program and
intends to terminate the agreement with Elan. Although the
Company believes it is entitled to terminate the agreement, it
can provide no assurance that it will effectively terminate the
agreement and, if it does, under what terms. As of
December 31, 2004, the Company has accrued $5,000 as a
potential loss under the contract.

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

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






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Excludes restricted cash placed in escrow.                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|(2) | The Company recorded $123,000 of the purchase
    price as patents and $474,000 of the purchase price as
    trademarks and product rights within intangible assets,
    including $88,000 related to core technology utilized for
    Sonata® MR. During 2004, the Company wrote off the
    remaining $82,081 of the $88,000 related to the Sonata® MR
    core technology. See Note 10 for further discussion. The
    Sonata® core technology intangible asset is part of the
    branded pharmaceutical segment.

F-22



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

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

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

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

As mentioned above, $19,000 of the purchase price
was allocated to an acquired in-process research and development
project, an auto-injector pre-filled with diazepam indicated
for, among other things, the treatment of epileptic seizures and
management of anxiety disorders. The value of the acquired
in-process research and development project was expensed on the
date of acquisition, as it had not received regulatory approval
and had no alternative future use. The project was valued
through the application of a probability-weighted, discounted
cash flow approach with the assistance of an independent
valuation specialist. The estimated cash flows were projected
over a 30-year period utilizing a discount rate of 21%. Pre-tax
margins (after an adjustment to reflect the use of auto-injector
core technology) were assumed to be (10%) in 2003 and improving
to 23% in 10 years. The estimated cost to complete the
project was less than $700. The project was originally submitted
to the FDA as an Abbreviated New Drug Application
(ANDA), which referenced an approved New Drug
Application (NDA) owned by the United States Army
for a diazepam-filled auto-injector currently manufactured under
contract exclusively by Meridian. The project as originally
contemplated was substantially complete as of the valuation
date. At the time of valuation, the Company anticipated FDA
approval of the project during 2004. In May 2004, the Company
received a letter from the FDA advising the Company that its
ANDA was not approvable. The FDA raised concerns regarding
whether the product, a self-injectable therapy, is appropriate
for self-diagnosis and use. King is currently evaluating how
best to satisfy the concerns raised by the FDA with the intent
of amending or resubmitting the application. Even if the project
is not successfully completed, it would not materially adversely
affect the Companys results of operations.

The following unaudited pro forma summary
presents the financial information as if the acquisitions of
Meridian and the primary care business of Elan had occurred on
January 1, 2003 for the year ended

F-23



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

December 31, 2003. These pro forma results
do not purport to be indicative of what would have occurred had
the acquisition been made on January 1, 2003, nor are they
indicative of future results.

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

On December 30, 2002, the Company acquired
or licensed the exclusive rights, including the NDA, trademarks,
product rights and certain patents, to three branded
prescription pharmaceutical products from Sanofi-Aventis S.A.
for $197,500, plus $3,812 in expenses. The products include the
rights in the United States, Puerto Rico, and Canada to
Intal® and Tilade®, inhaled anti-inflammatory agents
for the management of asthma, and worldwide rights, excluding
Japan, to Synercid®, an injectable antibiotic. The
acquisition was financed with cash on hand. The Company recorded
$35,864 of the purchase price as patents and $155,937 of the
purchase price as trademarks and product rights within
intangible assets.

In connection with the acquisition, $12,000 of
the purchase price was allocated to an in-process research and
development project. The value of the in-process research and
development project was expensed on the date of acquisition as
it had not received regulatory approval and had no alternative
future use. The project is for a new formulation of Intal®
using a new propellant that was valued through the application
of a probability-weighted, discounted cash flow approach by
independent valuation specialists. The estimated cash flows were
projected over periods ranging from zero to 16 years using
a discount rate of 20.5%. Operating margins were assumed to be
similar to historical margins of similar products. At the time
of valuation, the Company estimated the cost to complete the
project was less than $2,000. The project was substantially
complete as of the valuation date. The success of the project is
dependent upon whether the Company receives FDA approval. The
Company received an approvable letter pertaining to this product
from the FDA during the third quarter of 2003. At the time of
valuation of this project, the Company anticipated FDA approval
of this project in 2004. The Company now anticipates FDA
approval in 2006. If the project is not successfully completed
it would not materially adversely affect the Companys
results of operations.

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

On May 29, 2002, the Company acquired the
exclusive rights to Prefest® tablets in the United States,
its territories and possessions and Puerto Rico, including the
related NDA, Investigational NDA, copyrights, and patents or
licenses to the related patents from Ortho-McNeil
Pharmaceutical, Inc., a

F-24



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Johnson & Johnson subsidiary. The Company
paid $108,000 for the product rights upon closing plus
approximately $3,300 of expenses. During February 2003, the
Company paid Ortho-McNeil an additional $7,000 upon receipt of
the FDAs approval to rename the product
Prefest®, which was previously named
Ortho-Prefest. The acquisition was financed with
cash on hand. Of the total purchase price of $111,300 at
December 31, 2002, $80,442 was allocated to trademarks and
product rights and $30,858 was allocated to patents. On
November 22, 2004, the Company sold all of its rights in
Prefest® for approximately $15,000. See Note 27 for
additional information related to Prefest®.

10.     Intangible
Assets and Goodwill

Intangible assets consist of the following:

|                              |                         |          |           |              |  |          |         |              |  |   |           |           |  |   |         |         | 
|----------------------------- | ----------------------- | -------- | --------- | ------------ |  | -------- | ------- | ------------ |  | - | --------- | --------- |  | - | ------- | ------- | 
|                              |                         |          |           |             
|                              |                         | 2003     |           | 2004        
|                              |                         |          |           |             
|                              |                         | Gross    |           |              |  | Gross    |         |             
|                              |                         | Carrying |           | Accumulated  |  | Carrying |         | Accumulated 
|                              |                         | Amount   |           | Amortization |  | Amount   |         | Amortization
|                              |                         |          |           |              |  |          |         |             
|Trademarks and product rights |                         | $        | 1,523,527 |              |  | $        | 164,482 |              |  | $ | 1,370,711 |           |  | $ | 222,592 |        
|Patents                       |                         |          | 258,300   |              |  |          | 67,113  |              |  |   | 267,049   |           |  |   | 130,494 |        
|Other intangibles             |                         |          | 9,804     |              |  |          | 7,544   |              |  |   | 9,819     |           |  |   | 8,532   |        
|                              |                         |          |           |              |  |          |         |              |  |   |           |           |  |   |         |        
|                              | Total intangible assets |          | $         | 1,791,631    |  |          | $       | 239,139      |  |   | $         | 1,647,579 |  |   | $       | 361,618 | 
|                              |                         |          |           |              |  |          |         |              |  |   |           |           |  |   |         |        

Amortization expense for the years ended
December 31, 2002, 2003 and 2004 was $40,818, $92,460 and
$130,159, respectively. Estimated annual amortization expense at
December 31, 2004 for each of the five succeeding fiscal
years is as follows:

|                               |  |        |         | 
|------------------------------ |  | ------ | ------- | 
|Fiscal Year Ended December 31, |  | Amount
|                               |  |       
|2005                           |  | $      | 108,704 | 
|2006                           |  |        | 91,325  | 
|2007                           |  |        | 89,982  | 
|2008                           |  |        | 84,385  | 
|2009                           |  |        | 72,736  | 

During the third and fourth quarters of 2004, the
Company recorded intangible asset impairment charges totaling
$82,081 due to the Companys decision to discontinue the
clinical program to develop a modified-release formulation of
Sonata®. These impairment charges were based on the
estimated fair values of the expected cash flows of the
intangible asset at the balance sheet dates. Pursuant to an
agreement between the Company and Elan, Elan commenced a
Phase II clinical trial program for the purpose of
developing a modified release formulation of Sonata®
(Sonata® MR) in March 2004. However, the
Phase II clinical trial results showed that the
Sonata® MR formulations that Elan developed did not meet
contractually required specifications. After several months of
review, the Company recently concluded that it was not possible
for Elan to develop a Sonata® MR formulation meeting the
contractually required specifications. Accordingly, the Company
decided to discontinue the Sonata® MR clinical program and
intends to terminate the agreement with Elan. Although the
Company believes it is entitled to terminate the agreement, it
can provide no assurance that it will effectively terminate the
agreement and, if it does, under what terms. The agreement
currently requires the Company to pay up to an additional
$60,000 if Elan achieves certain milestones in connection with
the development of a reformulated version of Sonata® and
$15,000 as a milestone payment if annual net sales of a
reformulated version of Sonata® exceed $100,000, plus costs
associated with the development of a reformulated version of
Sonata®.

F-25



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Rochester, Michigan facility manufactures
several products for the Company, including Aplisol® and
Coly-Mycin®. The products that are manufactured at this
facility are considered one asset group and evaluated for
impairment together. The Company reviewed the Rochester
intangible assets for impairment under SFAS No. 144.
Based on that review, the Company determined that the Rochester
intangible assets were impaired and recorded an impairment
charge of $17,492 during the third quarter of 2004. The
Rochester intangible assets are part of the branded
pharmaceutical segment.

During January 2003, the Company was notified of
the approval by the FDA of a second generic fludrocortisone
acetate, USP, a product that represents additional competition
for the Companys Florinef® (fludrocortisone acetate,
USP) product. The Company recorded an impairment charge in the
amount of $110,970 in the first quarter of 2003 reflecting the
reduction in the fair value of the Florinef® intangible
assets. During the first quarter of 2004, the Company recorded
intangible asset impairment charges totaling $34,936 primarily
due to a greater than anticipated decline in prescriptions for
Florinef® and Tapazole® as a result of the
availability of generics for these products. The Company
determined the fair value of the intangible assets associated
with Florinef® and Tapazole® based on
managements discounted cash flow projections for these
products. Florinef® and Tapazole® are included in the
Companys branded pharmaceuticals reporting segment.

As a result of a continuing decline of
Lorabid® prescriptions, management determined that it would
not be able to sell all the Lorabid® product the Company is
required to purchase under its supply contract with Eli Lilly.
Accordingly, under the requirements of Accounting Research
Bulletin No. 43, the Company recorded a $49,877 liability
related to Lorabid® purchase commitments in excess of
expected demand as a charge to cost of revenues in the fourth
quarter of 2002. During the fourth quarter of 2003 and 2004,
primarily as a result of the continuing decline of Lorabid®
prescriptions, the Company recorded an additional $29,959 and
$4,483, respectively, for purchase commitments in excess of
expected demand as a charge to cost of revenues. As of
December 31, 2004, the excess purchase commitment accrual
totals $21,666.

The Company also reviewed the Lorabid®
intangible assets for impairment under SFAS No. 144. Based
on that review, the Company determined that the Lorabid®
intangible assets were impaired and recorded an impairment
charge of $66,844 in the fourth quarter of 2002 to write down
the assets to their estimated fair value as of December 31,
2002. During the third quarter of 2004, the Company recorded an
additional impairment charge of $4,400 to write down the assets
to their estimated fair value due to continued decline in
prescriptions. As of December 31, 2004, the remaining book
value of the intangible assets associated with Lorabid®
equal $194.

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

During the fourth quarter of 2003 and the third
quarter of 2004, the Company incurred intangible asset
impairment charges totaling $13,646 and $10,711, respectively,
that were related to certain of the Companys smallest
branded pharmaceutical products and the write-off of some
unutilized intangible assets. The impairment charges related to
the branded pharmaceutical products were primarily the result of
declining prescriptions and manufacturing issues with respect to
these products. The impairment charge related to the unutilized
intangible assets were the result of the Companys
assessment of the prospects for commercialization of products
utilizing those intangible assets. All of the affected
intangible assets were part of the branded pharmaceuticals
segment.

Demand for some of the Companys non-key
products, including but not limited to Intal®, Tilade®
and Corzide®, declined over the past year at a rate which
triggered a review of the intangible assets

F-26



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

associated with these products. The net
intangible assets associated with these three products totals
approximately $161,028. The Company believes that these
intangible assets are not currently impaired based on estimated
undiscounted cash flows associated with these assets. However,
if demand for the products associated with these intangible
assets declines below current expectations, the Company may have
to write off a portion or all of these intangible assets.

Goodwill at December 31, 2002, 2003 and 2004
is as follows:

|                                              |  |         |        |          |  |       |         |   |  |   |         |  
|--------------------------------------------- |  | ------- | ------ | -------- |  | ----- | ------- | - |  | - | ------- | -
|                                              |  | Branded |        | Meridian |  |      
|                                              |  | Segment |        | Segment  |  | Total
|                                              |  |         |        |          |  |      
|Goodwill at December 31, 2002                 |  | $       | 12,742 |          |  | $     |        |   |  | $ | 12,742  |  
|Goodwill associated with Meridian acquisition |  |         |       |          |  |       | 108,613 |   |  |   | 108,613 |  
|Goodwill at December 31, 2003                 |  |         | 12,742 |          |  |       | 108,613 |   |  |   | 121,355 |  
|Adjustments                                   |  |         |        |          |  |       | (203    | ) |  |   | (203    | )
|                                              |  |         |        |          |  |       |         |   |  |   |         |  
|Goodwill at December 31, 2004                 |  | $       | 12,742 |          |  | $     | 108,410 |   |  | $ | 121,152 |  
|                                              |  |         |        |          |  |       |         |   |  |   |         |  

11.     Other
Assets

Other assets consist of the following:

|                                                 |  |            |        |      |  |   |        | 
|------------------------------------------------ |  | ---------- | ------ | ---- |  | - | ------ | 
|                                                 |  | 2003       |        |     
|                                                 |  | (restated) |        | 2004
|                                                 |  |            |        |     
|Convertible senior notes receivable from Novavax |  | $          | 32,804 |      |  | $ |       | 
|Restricted cash                                  |  |            | 30,265 |      |  |   | 2,775  | 
|Loan receivable                                  |  |            | 1,101  |      |  |   |       | 
|Deferred financing costs, net                    |  |            | 9,393  |      |  |   | 6,248  | 
|Other                                            |  |            | 2,954  |      |  |   | 7,295  | 
|                                                 |  |            |        |      |  |   |        | 
|                                                 |  | $          | 76,517 |      |  | $ | 16,318 | 
|                                                 |  |            |        |      |  |   |        | 

On June 22, 2000, the Company entered into
an agreement with Sanofi-Aventis to provide Sanofi-Aventis with
funds for a facilities expansion that provides additional
production capacity for an outsourced product of the Company.
During 2000 and 2001, the Company loaned Sanofi-Aventis $15,000
and $15,000, respectively, under this agreement. This loan bears
interest at 8% and is being repaid by reducing amounts otherwise
payable on the purchase of inventory. During 2002, 2003 and
2004, inventory in the amount of $4,310, $13,321 and $1,101,
respectively, was received as principal and interest payments
against these loans. As of December 31, 2004, all amounts
have been repaid.

Amortization expense related to deferred
financing costs was $2,898, $3,163 and $3,145 for 2002, 2003 and
2004, respectively, and is included in interest expense.

In connection with the acquisition of the primary
care business of Elan (see Note 9) in June 2003, $163,416
was placed into the escrow to satisfy Elans deferred
obligations to Wyeth that were assumed by the Company. Interest
income during 2003 and 2004 includes $710 and $873,
respectively, that is related to interest earned on the funds in
escrow. During 2003 and 2004, $67,751 and $66,060, respectively,
of the deferred obligation was paid to Wyeth from funds in
escrow. As of December 31, 2004, $31,188 remains in escrow
to satisfy the deferred obligation to Wyeth, all of which
represents a short-term obligation and is classified as part of
restricted cash in the accompanying financial statements.

F-27



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

12.     Lease
Obligations

The Company leases certain office and
manufacturing equipment and automobiles under non-cancelable
operating leases with terms from one to five years. Estimated
future minimum lease payments as of December 31, 2004 for
leases with initial or remaining terms in excess of one year are
as follows:

|           |  |   |        | 
|---------- |  | - | ------ | 
|2005       |  | $ | 15,997 | 
|2006       |  |   | 13,182 | 
|2007       |  |   | 13,083 | 
|2008       |  |   | 12,101 | 
|2009       |  |   | 2,792  | 
|Thereafter |  |   | 12     | 

Lease expense for the years ended
December 31, 2002, 2003 and 2004 was approximately $10,189,
$10,411 and $12,982, respectively.

13.     Accrued
Expenses

Accrued expenses consist of the following:

|                                                   |  |            |         |      |  |   |         | 
|-------------------------------------------------- |  | ---------- | ------- | ---- |  | - | ------- | 
|                                                   |  | 2003       |         |     
|                                                   |  | (restated) |         | 2004
|                                                   |  |            |         |     
|Rebates (see Note 19)                              |  | $          | 232,472 |      |  | $ | 215,649 | 
|Accrued co-promotion fees                          |  |            | 56,380  |      |  |   | 38,184  | 
|Current portion of loss contract (see
    Note 19) |  |            | 39,375  |      |  |   | 30,029  | 
|Product returns                                    |  |            | 82,477  |      |  |   | 122,863 | 
|Chargebacks                                        |  |            | 25,349  |      |  |   | 27,953  | 
|Medicaid settlement                                |  |            |        |      |  |   | 65,000  | 
|Accrued interest                                   |  |            | 1,216   |      |  |   | 1,212   | 
|Product recall accrual                             |  |            | 1,832   |      |  |   | 4,238   | 
|Contingent liabilities (see Note 19)               |  |            | 69,212  |      |  |   | 21,969  | 
|Other                                              |  |            | 58,391  |      |  |   | 68,913  | 
|                                                   |  |            |         |      |  |   |         | 
|                                                   |  | $          | 566,704 |      |  | $ | 596,010 | 
|                                                   |  |            |         |      |  |   |         | 

14.     Long-Term
Debt

Long-term debt consists of the following:

|                                                                                                                         |                      |      |         |      |  |   |         |   | 
|------------------------------------------------------------------------------------------------------------------------ | -------------------- | ---- | ------- | ---- |  | - | ------- | - | 
|                                                                                                                         |                      | 2003 |         | 2004
|                                                                                                                         |                      |      |         |     
|Convertible debentures(a)                                                                                                |                      | $    | 345,000 |      |  | $ | 345,000 |  
|Senior subordinated notes(b)                                                                                             |                      |      | 93      |      |  |   |        |  
|Senior secured revolving credit facility(c)                                                                              |                      |      |        |      |  |   |        |  
|Various capital leases with interest rates
    ranging from 8.3% to 12.7% and maturing at various times through
    2003 |                      |      | 4       |      |  |   |        |  
|                                                                                                                         |                      |      |         |      |  |   |         |  
|                                                                                                                         |                      |      | 345,097 |      |  |   | 345,000 |  
|                                                                                                                         | Less current portion |      |         | 97   |  |   |         |  | 
|                                                                                                                         |                      |      |         |      |  |   |         |  
|                                                                                                                         |                      | $    | 345,000 |      |  | $ | 345,000 |  
|                                                                                                                         |                      |      |         |      |  |   |         |  




|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | During the fourth quarter of 2001, the Company
    issued $345,000 of 2 3/4% Convertible Debentures due
    November 15, 2021. The debentures are unsecured
    unsubordinated obligations, and the payment of principal and
    interest is guaranteed by the Companys domestic
    subsidiaries on a joint and several basis. The debentures accrue
    interest at an initial rate of 2 3/4%, which will be reset
    (but not below

F-28



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |  | 2 3/4% or above 4 1/4%) on May 15,
    2006, May 15, 2011, and May 15, 2016. Interest is
    payable on May 15 and November 15 of each year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|    |  | On or after November 20, 2006, the Company
    may redeem for cash all or part of the debentures that have not
    previously been converted or repurchased at a price equal to
    100% of the principal amount of the debentures plus accrued
    interest up to but not including the date of redemption. Holders
    may require the Company to repurchase for cash all or part of
    their debentures on November 15, 2006, November 15,
    2011 or November 15, 2016 at a price equal to 100% of the
    principal amount of the debentures plus accrued interest up to
    but not including the date of repurchase. In addition, upon a
    change of control, each holder may require the Company to
    repurchase for cash all or a portion of the holders
    debentures.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   
|    |  | Holders may surrender their debentures for
    conversion into shares of King common stock at the conversion
    price (initially $50.16 per share and subject to certain
    adjustments) if any of the following conditions are satisfied:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|    |  |  if the closing sale price of King
    common stock, for at least 20 trading days in the 30 trading day
    period ending on the trading day prior to the date of surrender,
    exceeds 110% of the conversion price per share of King common
    stock on that preceding trading day;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   
|    |  |  if we have called the debentures for
    redemption; or                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|    |  |  upon the occurrence of specified
    corporate transactions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|    |  | The Company has reserved 6,877,990 shares of
    common stock in the event such debentures are converted into
    shares of the Companys common stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|(b) |  | On March 3, 1999, the Company issued
    $150,000 of 10 3/4% Senior Subordinated Notes due 2009.
    During 2000 and 2001, the Company redeemed $53,618 and $96,289,
    respectively, at a price of $59,144 and $114,299, respectively.
    The Company redeemed the remaining Senior Subordinated Notes of
    $93 during the first quarter of 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|(c) |  | On April 23, 2002, the Company established a
    $400,000 five year Senior Secured Revolving Credit Facility. The
    facility has been collateralized in general by all real estate
    with a value of $5,000 or 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,
    2004, there were no outstanding borrowings under this facility,
    however, the Company had $10,000 of letters of credit
    outstanding under this facility. Subsequent to the end of the
    year, the letter of credit was terminated and replaced with cash
    collateral.
|   
|    |  | 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, 2004, the Company
    has complied with these covenants.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

F-29



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For the years ended December 31, 2002, 2003
and 2004, the Company capitalized interest of approximately
$1,127, $1,180, and $1,185, respectively.

Holders of the 2 3/4% Convertible Debentures may
require the Company to repurchase for cash all or part of the
debentures on November 15, 2006, November 15, 2011 or
November 15, 2016 at a price equal to 100% of the principal
amount of the debentures plus accrued interest up to but not
including the date of repurchase.

15.     Other
Liabilities

Other liabilities consist of the following:

|                                                |  |            |         |      |  |   |        | 
|----------------------------------------------- |  | ---------- | ------- | ---- |  | - | ------ | 
|                                                |  | 2003       |         |     
|                                                |  | (restated) |         | 2004
|                                                |  |            |         |     
|Contingent milestone liabilities (Note 9)       |  | $          | 39,302  |      |  | $ | 9,605  | 
|Deferred revenue from co-promotion revenue fees |  |            | 34,694  |      |  |   | 25,603 | 
|Contingent escrow liabilities (Note 9)          |  |            | 29,605  |      |  |   |       | 
|Long-term portion of loss contract              |  |            | 18,365  |      |  |   | 3,589  | 
|Other                                           |  |            | 1,983   |      |  |   | 2,639  | 
|                                                |  |            |         |      |  |   |        | 
|                                                |  | $          | 123,949 |      |  | $ | 41,436 | 
|                                                |  |            |         |      |  |   |        | 

16.     Financial
Instruments

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

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

Marketable Securities.The fair value of marketable
securities was based primarily on quoted market prices
(Note 5). If quoted market prices are not readily
available, fair values are based on quoted market prices of
comparable instruments.

Long-Term Debt.The
fair value of the Companys long-term debt, including the
current portion, at December 31, 2003 and 2004 is estimated
to be approximately $322,674 and $327,750, respectively, using
quoted market price.

F-30



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

17.     Income
Taxes

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

|                        |         |                |        |            |         |      |        |          |          |   |        |         |         |  
|----------------------- | ------- | -------------- | ------ | ---------- | ------- | ---- | ------ | -------- | -------- | - | ------ | ------- | ------- | -
|                        |         | 2002           |        | 2003       |         |     
|                        |         | (restated)     |        | (restated) |         | 2004
|                        |         |                |        |            |         |     
|Current                 |         |                |        |            |         |      |        |          |          |   |        |        
|                        | Federal |                | $      | 147,762    |         |      | $      | 192,126  |          |   | $      | 3,152   |        
|                        | State   |                |        | 8,419      |         |      |        | 13,012   |          |   |        | 6,540   |        
|                        |         |                |        |            |         |      |        |          |          |   |        |        
|                        |         | Total current  |        | $          | 156,181 |      |        | $        | 205,138  |   |        | $       | 9,692   |  
|                        |         |                |        |            |         |      |        |          |          |   |        |        
|Deferred                |         |                |        |            |         |      |        |          |          |   |        |        
|                        | Federal |                | $      | (71,245    | )       |      | $      | (134,036 | )        |   |        | (17,780 | )      
|                        | State   |                |        | (6,903     | )       |      |        | (5,218   | )        |   |        | 676     |        
|                        |         |                |        |            |         |      |        |          |          |   |        |        
|                        |         | Total deferred |        | $          | (78,148 | )    |        | $        | (139,254 | ) |        | $       | (17,104 | )
|                        |         |                |        |            |         |      |        |          |          |   |        |        
|Total expense (benefit) |         | $              | 78,033 |            |         | $    | 65,884 |          |          | $ | (7,412 | )      
|                        |         |                |        |            |         |      |        |          |          |   |        |        

A reconciliation of the difference between the
federal statutory tax rate and the effective income tax rate as
a percentage of income from continuing operations before income
taxes and extraordinary item is as follows:

|                                           |  |            |       |            |  |      |       |   |  |  |       |  
|------------------------------------------ |  | ---------- | ----- | ---------- |  | ---- | ----- | - |  |  | ----- | -
|                                           |  | 2002       |       | 2003       |  |     
|                                           |  | (restated) |       | (restated) |  | 2004
|                                           |  |            |       |            |  |     
|Federal statutory tax rate                 |  |            | 35.0  | %          |  |      | 35.0  | % |  |  | 35.0  | %
|State income taxes, net of federal benefit |  |            | 0.6   |            |  |      | 4.3   |   |  |  | (12.4 | )
|Charitable donations                       |  |            | (2.9) |            |  |      | (3.8) |   |  |  | 25.4  |  
|In-process research and development        |  |            |      |            |  |      | 4.1   |   |  |  |      |  
|Fines and penalties                        |  |            |      |            |  |      |       |   |  |  | (39.3 | )
|Other                                      |  |            | (1.3) |            |  |      | 0.7   |   |  |  | 4.1   |  
|                                           |  |            |       |            |  |      |       |   |  |  |       |  
|Effective tax rate                         |  |            | 31.4  | %          |  |      | 40.3  | % |  |  | 12.8  | %
|                                           |  |            |       |            |  |      |       |   |  |  |       |  

The tax effects of temporary differences that
give rise to significant portions of the deferred tax assets and
liabilities are as follows:

|                                  |                                |            |         |         |   |   |         |         |  
|--------------------------------- | ------------------------------ | ---------- | ------- | ------- | - | - | ------- | ------- | -
|                                  |                                | 2003       |         |        
|                                  |                                | (restated) |         | 2004   
|                                  |                                |            |         |        
|Accrued expenses and reserves     |                                | $          | 160,765 |         |   | $ | 149,000 |        
|Net operating losses              |                                |            | 4,008   |         |   |   | 1,445   |        
|Intangible assets                 |                                |            | 42,111  |         |   |   | 120,544 |        
|Charitable contribution carryover |                                |            |        |         |   |   | 26,570  |        
|Other                             |                                |            | 2,032   |         |   |   | 4,831   |        
|                                  |                                |            |         |         |   |   |         |        
|                                  | Total deferred tax assets      |            |         | 208,916 |   |   |         | 302,390 |  
|Valuation allowance               |                                |            | (6,525  | )       |   |   | (3,950  | )      
|                                  |                                |            |         |         |   |   |         |        
|                                  | Net deferred tax assets        |            |         | 202,391 |   |   |         | 298,440 |  
|                                  |                                |            |         |         |   |   |         |        
|Property, plant and equipment     |                                |            | (16,188 | )       |   |   | (30,661 | )      
|Other                             |                                |            | (18,570 | )       |   |   | (20,869 | )      
|                                  |                                |            |         |         |   |   |         |        
|                                  | Total deferred tax liabilities |            |         | (34,758 | ) |   |         | (51,530 | )
|                                  |                                |            |         |         |   |   |         |        
|                                  | Net deferred tax asset         |            | $       | 167,633 |   |   | $       | 246,910 |  
|                                  |                                |            |         |         |   |   |         |        

F-31



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Company has $3.9 million of foreign
operating loss carryforwards which may be carried forward
indefinitely; a valuation allowance has been provided as it is
more likely than not that the deferred tax assets relating to
those loss carryforwards will not be fully realized.
Additionally, a valuation allowance has been provided against
certain state deferred tax assets where it is more likely than
not that the deferred tax asset will not be realized.

18.     Benefit
Plans

The Company sponsors a defined contribution
employee retirement savings 401(k) plan that covers all
employees over 21 years of age. The plan allows for
employees contributions, which are matched by the Company
up to a specific amount under provisions of the plan. Company
contributions during the years ended December 31, 2002,
2003 and 2004 were $2,412, $3,860, and $4,858, respectively. The
plan also provides for discretionary profit-sharing
contributions by the Company. There were no discretionary
profit-sharing contributions during the years ended
December 31, 2002, 2003 and 2004. The increases during 2003
and 2004 are primarily due to an increase in the number of
employees and an increase in the Companys matching
percentage.

19.     Commitments
and Contingencies



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

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

While the Company cannot predict the outcome of
these suits, the Company believes that the claims against it are
without merit and intends to vigorously pursue all defenses
available to it. The Company is being indemnified in all of
these suits by GlaxoSmithKline for which the Company
manufactured the anorexigenic product, provided that neither the
lawsuits nor the associated liabilities are based upon the
independent negligence or intentional acts of the Company, and
intends to submit a claim for all unreimbursed costs to the
Companys product liability insurance carrier. However, in
the event that GlaxoSmithKline is unable to satisfy or fulfill
its obligations under the indemnity, the Company would have to
defend the lawsuits and be responsible for damages, if any, that
are awarded against it or for amounts in excess of the
Companys product liability coverage. A reasonable estimate
of possible losses related to these suits cannot be made.

In addition, King Research and Development, Inc.
(King R&D), successor to Jones Pharma,
Incorporated (Jones) and a wholly owned subsidiary
of the Company, is a defendant in approximately
381 multi-defendant lawsuits involving the manufacture and
sale of dexfenfluramine, fenfluramine and phentermine. These
suits have been filed in various jurisdictions throughout the
United States, and in each of these suits King R&D is one of
many defendants, including manufacturers and other distributors
of these drugs. Although Jones did not at any time manufacture
dexfenfluramine, fenfluramine, or phentermine, Jones was a
distributor of a generic phentermine product and, after the
acquisition of Abana Pharmaceuticals, was a distributor of
Obenix®, its branded phentermine product. The plaintiffs in
these cases claim injury as a result of ingesting a combination
of these weight-loss drugs and are seeking

F-32



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##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

compensatory and punitive damages as well as
medical care and court supervised medical monitoring. The
plaintiffs claim liability based on a variety of theories
including but not limited to, product liability, strict
liability, negligence, breach of warranty, and misrepresentation.

King R&D denies any liability incident to the
distribution of Obenix® or Jones generic phentermine
product and intends to pursue all defenses available to it. King
R&D has tendered defense of these lawsuits to its insurance
carriers for handling and they are currently defending King
R&D in these suits. The manufacturers of fenfluramine and
dexfenfluramine have settled many of these cases. In the event
that King R&Ds insurance coverage is inadequate to
satisfy any resulting liability, King R&D will have to
resume defense of these lawsuits and be responsible for the
damages, if any, that are awarded against it.

While the Company cannot predict the outcome of
these suits, management believes that the claims against King
R&D are without merit and intends to vigorously pursue all
defenses available. The Company is unable to disclose an
aggregate dollar amount of damages claimed because many of these
complaints are multi-party suits and do not state specific
damage amounts. Rather, these claims typically state damages as
may be determined by the court or similar language and state no
specific amount of damages against King R&D. Additionally,
the Company cannot reasonably estimate possible losses related
to the lawsuits.



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

King and Parkedale Pharmaceuticals, Inc.
(Parkedale), a wholly owned subsidiary of King, have
been named as defendants in California, Illinois and
Mississippi, along with other pharmaceutical companies that have
manufactured or sold products containing the mercury-based
preservative, thimerosal.

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

The Companys product liability insurance
carrier has been given proper notice of all of these matters and
defense counsel is vigorously defending the Companys
interests. The Company has filed motions to dismiss due, among
other things, to lack of product identity in the
plaintiffs complaints. In 2001, the Company was dismissed
on this basis in a similar case. The Company intends to defend
these lawsuits vigorously but is unable currently to predict the
outcome or reasonably estimate the range of potential loss, if
any.



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

The Company has been named as a defendant in four
lawsuits involving the manufacture and sale of hormone
replacement therapy drugs. Numerous pharmaceutical companies
have also been sued. These cases have been filed in Alabama,
Pennsylvania, Ohio and Mississippi. The plaintiffs allege that
King and other defendants failed to conduct adequate
pre-approval research and post-approval surveillance to
establish the safety of the long-term hormone therapy regimen,
thus misleading consumers when marketing their products.
Plaintiffs claims include allegations of negligence,
strict liability, breach of implied warranty, breach of express
warranty, fraud and misrepresentation. The Company intends to
defend these lawsuits vigorously but is unable currently to
predict the outcome or reasonably estimate the range of
potential loss, if any.

F-33



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##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



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

In August 2004, King and Monarch Pharmaceuticals,
Inc. (Monarch), a wholly owned subsidiary of King,
were named as defendants along with 44 other pharmaceutical
manufacturers in an action brought by the City of New York
(NYC) in federal court in the state of New York. NYC
claims that the defendants fraudulently inflated their Average
Wholesale Prices (AWP) and fraudulently failed to
accurately report their Best Prices and their
Average Manufacturers Prices (AMP) and failed
to pay proper rebates pursuant to federal law. Additional claims
allege violations of federal and New York statutes, fraud and
unjust enrichment. For the period from 1992 to the present, NYC
is requesting money damages, civil penalties, declaratory and
injunctive relief, restitution, disgorgement of profits, and
treble and punitive damages.

In August 2004, a defendant in the NYC action
sought to have the action transferred to the United States
District Court for the District of Massachusetts and combined
with existing multi-district litigation, entitled In re
Average Wholesale Pricing Litigation, being heard by that
court. A conditional transfer order was issued during September
2004 indicating that the action is subject to transfer for
pretrial proceedings to the United States District Court for the
District of Massachusetts. The Company intends to defend this
lawsuit vigorously but is unable currently to predict the
outcome or reasonably estimate the range of loss, if any.

The Company also has been named as a defendant
along with other pharmaceutical manufacturers in four other
lawsuits containing allegations of fraudulently inflating
average wholesale prices. These lawsuits have been filed in
federal courts in New York and Massachusetts, and in state
courts in New York and Alabama, all of which the Company will
seek to have transferred to the United States District Court for
the District of Massachusetts and combined with the existing
multi-district litigation.



| |                                                                    
| | -------------------------------------------------------------------
| | Governmental Investigations and Securities and
    ERISA Litigation

As previously reported, in March 2003 the SEC
initiated a formal investigation of King relating to, among
other topics, sales of its products to VitaRx and Prison Health
Services, its best price lists, the pricing of its
pharmaceutical products provided to governmental Medicaid
agencies, the accrual and payment of rebates on the product
Altace®, the products Fluogen® and Lorabid®, the
King Benevolent Fund, Inc., its calculations related to Medicaid
rebates, and the Audit Committees internal review of
issues raised by the SEC investigation. As also previously
reported, on November 13, 2003, the Company received a
subpoena duces tecum from the Office of Inspector General at the
Department of Health and Human Services requesting the
production of documents relating to some of the matters being
investigated by the SEC and to its sales, marketing and other
business practices for Altace®, Aplisol®, and
Levoxyl®. More recently, we have reviewed with the staff of
the SEC the circumstances giving rise to the restatement of
previously issued financial statements as discussed in
Note 2.

In connection with the Companys
determination that it underpaid amounts due to Medicaid and
other government pricing programs from 1998 through 2002, the
Company has continued to engage in discussions with
representatives of the SEC, the United States Attorney for the
Eastern District of Pennsylvania, the Department of Justice, the
National Association of Medicaid Fraud Control Units, the Office
of Inspector General of the Department of Health and Human
Services, the Department of Veterans Affairs, the Centers for
Medicare & Medicaid Services, and the Public Health
Service. The Companys objective in these discussions has
been to achieve a comprehensive settlement relating to all the
matters being investigated by or discussed with all the
governmental authorities.

The Company has not yet reached any agreements or
understandings with respect to the terms of such a settlement,
and may not ever be able to reach such an agreement. However,
based on the status of

F-34



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##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

the discussions to date, the Company now believes
that it is reasonably likely that it will be able to achieve a
comprehensive settlement with all relevant governmental parties
on the following terms:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Company has accrued $130,400 in respect of
    its estimated underpayments to Medicaid and other government
    pricing programs and estimated settlement costs with all
    relevant governmental parties. This amount includes $65,400
    accrued for estimated underpayments to Medicaid and other
    government pricing programs, and an additional $65,000 for
    estimated settlement costs as an operating expense during the
    second quarter of 2004 to cover interest, costs, fines,
    penalties and all other additional amounts. The Companys
    current expectation is that the aggregate cost to settle with
    the governmental authorities should not materially exceed the
    amounts already accrued.                      
|
| |  | With respect to the matters being investigated by
    or discussed with the staff of the SEC, the Company currently
    anticipates that it would settle, without admitting or denying,
    one or more charges that the Company had failed to maintain
    adequate books and records and internal controls. The Company
    anticipates that the action to be settled could also include one
    or more charges that our public filings contained material
    misstatements or omissions relating to our financial results for
    some or all of the periods for which results have been restated
    as discussed under Note 2. The Company does not anticipate
    being required to restate any results for periods prior to 2002.                  
|
| |  | The Company expects that it will be required to
    enter into a Corporate Integrity Agreement with the Department
    of Health and Human Services, which would require the Company to
    submit to audits relating to its Medicaid rebate calculations
    over a five-year period. The Company does not expect that the
    resolution of the pending investigations will result in any
    prohibitions on the Companys sales to Medicaid or any
    related state or Federal program, nor does the Company expect
    any other material restriction on its ability to conduct its
    business, although the Company will be required to incur
    consultant fees and other expenses in order to comply with the
    Corporate Integrity Agreement.
|
| |  | The Company does not expect that any criminal
    charges will be asserted against it or against any present or
    former director, officer or employee in connection with the
    matters being investigated.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

The Companys ability to achieve a
settlement on these or other terms is subject to substantial
uncertainties. The Companys discussions to date have been
conducted with the staffs of various agencies and other
governmental authorities. The Company does not yet have any
agreements or understandings with any of them. Even if the
Company were to reach such an agreement or understanding with
staff personnel, it would be subject to the approval of numerous
more senior representatives of the governmental parties,
including the members of the U.S. Securities and Exchange
Commission, the United States Attorney for the Eastern District
of Pennsylvania, senior officials in the Departments of Justice,
Health and Human Services and Veterans Affairs, and senior
officials in most or all of the States. The Company expects that
its agreements with the various governmental parties would also
require that those governmental parties reach numerous
agreements among themselves, and that the consummation of the
Companys agreement with each governmental party would be
dependent on consummation of the Companys agreements with
other governmental parties. The Company also expects that some
aspects of a comprehensive settlement would require court
approval.

In light of these uncertainties, the Company
stresses that it may not be able to reach a settlement with the
governmental parties, whether on the terms described above or at
all. As a result, the ultimate amount that the Company will
actually have to pay to resolve these matters could be
materially more than the amount accrued to date, and the terms
could otherwise be materially less favorable than those
described above. Because of these uncertainties and the
complexity of completing a comprehensive resolution, the Company
is not yet able to estimate with reasonable confidence the
amount of time that will be required to enter into and
consummate comprehensive settlement agreements.

F-35



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##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The possible settlement described above would not
apply to the related pending class actions and derivative suits,
or any other claims by private plaintiffs. While the Company
denies any liability, it is unable to predict the outcome of the
class actions and derivative suits or reasonably estimate the
range of loss, if any.

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

On August 12, 2004, the United States
District Court for the Eastern District of Tennessee ruled on
defendants motions to dismiss. The Court dismissed all
claims as to Jones and as to defendants Dennis Jones and Henry
Richards. The Court also dismissed certain claims as to five
other individual defendants. The Court denied the motions to
dismiss in all other respects. Following the Courts
ruling, on September 20, 2004, the Company and the other
remaining defendants filed answers to plaintiffs
consolidated amended complaint. Discovery and other proceedings
in the case are continuing, and no trial date has been set.

Seven purported shareholder derivative complaints
have also been filed in federal and state courts in Tennessee
alleging a breach of fiduciary duty, among other things, by some
of the Companys officers and directors. On
October 26, 2004, all of the defendants named in this
action filed an answer to the amended consolidated derivative
and class action complaint. Discovery in this action has
commenced. No trial date has been set.

Another purported class action complaint was
filed on August 16, 2004 in Tennessee state court against
the Company and the members of the Companys board of
directors. This new case largely asserts substantially the same
claims and seeks the same relief as the class action claim that
was recently added to the state derivative action described
above. Defendants in that action filed a motion to dismiss on
November 30, 2004; that motion is pending and no hearing
date has been set.

Additionally, a class action complaint was filed
in the United States District Court for the Eastern District of
Tennessee under the Employee Retirement Income Security Act
(ERISA). As amended, the complaint alleges that the
Company and certain of its executive officers, former executive
officers, directors, former directors and an employee of the
Company violated fiduciary duties that they allegedly owed the
Companys 401(k) Retirement Savings Plans
participants and beneficiaries under ERISA. The allegations
underlying this action are similar in many respects to those in
the class action litigation described above. The defendants
filed a motion to dismiss the ERISA action on March 5,
2004. The District Court Judge referred the motion to a
Magistrate Judge for a report and recommendation. On

F-36



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##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

December 8, 2004, the Magistrate Judge held
a hearing on this motion, and, on December 10, 2004, he
recommended that the District Court Judge dismiss the action.
The District Court Judge accepted the recommendation and
dismissed the case on February 4, 2005.

The Company intends to defend all of these
lawsuits vigorously but is unable currently to predict the
outcome or reasonably estimate the range of potential loss, if
any.

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



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

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

Cobalt Pharmaceuticals, Inc.
(Cobalt), a generic drug manufacturer located in
Mississauga, Ontario, Canada, filed an ANDA with the FDA seeking
permission to market a generic version of Altace®. The
following U.S. patents are listed for Altace® in the
FDAs Approved Drug Products With Therapeutic
Equivalence Evaluations(the Orange Book): U.S.
Patent Nos. 4,587,258 (the 258 patent) and
5,061,722 (the 722 patent), two composition of matter
patents related to Altace®, and U.S. Patent
No. 5,403,856 (the 856 patent), a method-of-use
patent related to Altace®, with expiration dates of January
2005, October 2008, and April 2012, respectively. Under the
federal Hatch-Waxman Act of 1984, any generic manufacturer may
file an ANDA with a certification (a Paragraph IV
certification) challenging the validity or infringement of
a patent listed in the FDAs Orange Book four years after
the pioneer company obtains approval of its NDA. Cobalt has
filed a Paragraph IV certification alleging invalidity of
the 722 patent, and the Company filed suit on
March 14, 2003 in the District Court for the District of
Massachusetts to enforce its rights under that patent. Pursuant
to the Hatch-Waxman Act, the filing of that suit provides the
Company an automatic stay of FDA approval of Cobalts ANDA
for 30 months from no earlier than February 5, 2003.
In March 2004, Cobalt stipulated to infringement of the
722 patent. Should the court find in favor of a Cobalt
summary judgment motion on the 722 patent, however,
the Company would not receive the full benefit of that
30 month stay. Subsequent to filing its original complaint,
the Company amended its complaint to add an allegation of
infringement of the 856 patent. The 856 patent
covers one of Altace®s three indications for use. In
response to the amended complaint, Cobalt informed the FDA that
it no longer seeks approval to market its proposed product for
the indication covered by the 856 patent. On this basis,
the court granted Cobalt summary judgment of non-infringement of
the 856 patent. The courts decision does not affect
Cobalts infringement of the 722 patent. The Company
intends to vigorously enforce its rights under the 722 and
856 patents.

Eon Labs, Inc. (Eon Labs),
CorePharma, LLC (CorePharma) and Mutual
Pharmaceutical Co., Inc. (Mutual) have each filed an
ANDA with the FDA seeking permission to market a generic version
of Skelaxin® 400 mg tablets. Additionally, Eon Labs
ANDA seeks permission to market a generic version

F-37



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##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

of Skelaxin® 800 mg tablets. United States
Patent Nos. 6,407,128 (the 128 patent) and
6,683,102 (the 102 patent) two method-of-use patents
relating to Skelaxin®, are listed in the FDAs Orange
Book and do not expire until December 3, 2021. Eon Labs and
CorePharma have each filed Paragraph IV certifications
against the 128 and 102 patents alleging
noninfringement and invalidity of those patents. Mutual has
filed a Paragraph IV certification against the 102 patent
alleging noninfringement and invalidity of that patent. The
Company filed a patent infringement suit against Eon Labs on
January 2, 2003 in the District Court for the Eastern
District of New York; CorePharma on March 7, 2003 in the
District Court for the District of New York (subsequently
transferred to the District Court for the Eastern District of
New York); and Mutual on March 12, 2004 in the District Court
for the Eastern District of Pennsylvania concerning their
proposed 400 mg products. Additionally, the Company filed a
separate suit against Eon Labs on December 17, 2004 in the
District Court for the Eastern District of New York, concerning
its proposed 800 mg product. Pursuant to the Hatch-Waxman Act,
the filing of the suit against CorePharma provides the Company
with an automatic stay of FDA approval of CorePharmas ANDA
for 30 months from no earlier than January 24, 2003. Also
pursuant to the Hatch-Waxman Act, the filing of the suits
against Eon Labs provides the Company with an automatic stay of
FDA approval of Eon Labs ANDA for its proposed 400 mg
and 800 mg products for 30 months from no earlier than
November 18, 2002, and November 3, 2004, respectively.
The Company intends to vigorously enforce its rights under the
128 and 102 patents to the full extent of the
law.

On March 9, 2004, the Company received a
copy of a letter from the FDA to all ANDA applicants for
Skelaxin® stating that the use listed in the FDAs
Orange Book for the 128 patent may be deleted from the
ANDA applicants product labeling. The Company believes
that this decision is arbitrary, capricious, and inconsistent
with the FDAs previous position on this issue. The Company
filed a Citizen Petition on March 18, 2004 (supplemented on
April  15, 2004 and on July 21, 2004), requesting
the FDA to rescind that letter, require generic applicants to
submit Paragraph IV certifications for the 128
patent, and prohibit the removal of information corresponding to
the use listed in the Orange Book. King concurrently filed a
Petition for Stay of Action requesting the FDA to stay approval
of any generic metaxalone products until the FDA has fully
evaluated the Companys Citizen Petition.

On March 12, 2004, the FDA sent a letter to
the Company explaining that Kings proposed labeling
revision, which includes references to additional clinical
studies relating to food, age, and gender effects, was
approvable and only required certain formatting changes. On
April 5, 2004, the Company submitted amended labeling text
that incorporated those changes. On April 5, 2004, Mutual
filed a Petition for Stay of Action requesting the FDA to stay
approval of the Companys proposed labeling revision until
the FDA has fully evaluated and ruled upon the Companys
Citizen Petition, as well as all comments submitted in response
to that petition. Discussions with the FDA concerning
appropriate labeling are ongoing. The Company, CorePharma and
Mutual have filed responses and supplements to the pending
Citizen Petition.

If the Companys Citizen Petition is
rejected, there is a substantial likelihood that a generic
version of Skelaxin® will enter the market, and the
Companys business, financial condition, results of
operations and cash flows could be materially adversely
affected. As of December 31, 2004, the Company had net
intangible assets related to Skelaxin® of $202,309.

Barr Laboratories Inc. (Barr) filed
an ANDA, which included a Paragraph IV certification, with
the FDA seeking permission to market a generic version of
Prefest®. United States Patent No. 5,108,995 (the
995 patent), a utility patent with method of
treatment claims relating to Prefest®, and United States
Patent No. 5,382,573 (the 573 patent), a utility
patent with pharmaceutical preparation claims relating to
Prefest®, were issued on April 28, 1992, and
January 17, 1995, respectively. The 995 patent
and the 573 patent are both listed in the FDAs
Orange Book. The 995 patent does not expire until
April 28, 2009, and the 573 patent does not expire
until January 17, 2012. On October 15, 2003, the
Company received notice of Barrs Paragraph IV
certification, which alleges noninfringement and invalidity of
the

F-38



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##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

995 patent and the
573 patent. On November 26, 2003, the Company
filed a Complaint against Barr in the Southern District of New
York for infringement of the 995 and 573 patents.
Pursuant to the Hatch-Waxman Act, the filing of that suit
provides the Company an automatic stay of FDA approval of
Barrs ANDA for 30 months from no earlier than
October 15, 2003.



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

The following summarizes the Companys
unconditional purchase obligations at December 31, 2004:

|           |       |   |         |         | 
|---------- | ----- | - | ------- | ------- | 
|2005       |       | $ | 171,047 |        
|2006       |       |   | 104,219 |        
|2007       |       |   | 98,875  |        
|2008       |       |   | 93,190  |        
|2009       |       |   |        |        
|Thereafter |       |   |        |        
|           |       |   |         |        
|           | Total |   | $       | 467,331 | 
|           |       |   |         |        

The unconditional purchase obligations of the
Company are primarily related to minimum purchase requirements
under contracts with suppliers to purchase raw materials and
finished goods related to the Companys branded
pharmaceutical products.

The Company has a supply agreement with Aventis
to produce ramipril, the active ingredient in Altace®. This
supply agreement is reflected in the unconditional purchase
obligations above. This supply agreement requires the Company to
purchase certain minimum levels of ramipril as long as the
Company maintains market exclusivity on Altace® in the
United States. If sales of Altace® do not increase at the
currently anticipated rates, if the Company is unable to
maintain market exclusivity for Altace® in accordance with
current expectations, if the Companys product life cycle
management is not successful, or if the Company does not
terminate the supply agreement at an optimal time, the Company
may incur losses in connection with the purchase commitments
under the supply agreement. In the event the Company incurs
losses in connection with the purchase commitments under the
supply agreement, there may be a material adverse effect upon
the Companys results of operations and cash flows.

The Company has a supply agreement with Eli Lilly
to produce Lorabid® which is reflected in the unconditional
purchase obligations above. This supply agreement requires the
Company to purchase certain minimum levels of inventory of
Lorabid® through September 1, 2005. Based on changes
in estimated prescription trends, the Company believes the
minimum purchase commitments under the supply agreement are
greater than that which the Company will be able to sell to its
customers. As a result, the Company recorded charges of $49,877,
$29,959, and $4,483 during 2002, 2003 and 2004, respectively,
related to the liability associated with the amount of its
purchase commitments in excess of expected demand.

The Company has supply agreements with Galenus
Mannheim and Boehringer-Ingelheim to produce metaxalone, the
active ingredient in Skelaxin®. This supply agreement
requires the Company to purchase certain minimum levels of
inventory of metaxalone through October 31, 2006. In the
event the Company incurs losses due to purchase commitments in
excess of demand under the supply agreements, there may be a
material adverse effect upon the Companys results of
operations and cash flows.

20.     Segment
Information

The Companys business is classified into
five reportable segments: branded pharmaceuticals, Meridian
Medical Technologies, royalties, contract manufacturing and all
other. Branded pharmaceuticals include a variety of branded
prescription products over seven therapeutic areas, including
cardiovascular, endocrinol-

F-39



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##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

ogy, neuroscience, critical care, anti-infective,
respiratory, and other. Such branded prescription products have
been aggregated because of the similarity in regulatory
environment, manufacturing processes, methods of distribution,
and types of customer. The Meridian Medical Technologies segment
was added as a new segment during 2003 as a result of the
acquisition of Meridian on January 8, 2003. Meridian
develops, manufactures, and sells auto-injector pharmaceutical
products to both commercial and government markets. The
principal source of revenues in the commercial market is the
EpiPen® product line marketed by Dey, L.P., which is
primarily prescribed for the treatment of severe allergic
reactions. Government revenues are principally derived from the
sale of nerve agent antidotes and other emergency medicine
auto-injector products marketed to the U.S. Department of
Defense and other federal, state and local agencies,
particularly those involved in homeland security, as well as to
approved foreign governments. Contract manufacturing primarily
includes pharmaceutical manufacturing services the Company
provides to third-party pharmaceutical and biotechnology
companies. Royalties include revenues the Company derives from
pharmaceutical products after the Company has transferred the
manufacturing or marketing rights to third parties in exchange
for licensing fees or royalty payments.

The Company primarily evaluates its segments
based on gross profit. Reportable segments were separately
identified based on revenues, gross profit (excluding
depreciation) and total assets. Revenues among the segments are
presented in the individual segments and removed through
eliminations in the information below. Substantially all of the
eliminations relate to sales from the contract manufacturing
segment to the branded pharmaceuticals segment.

The following represents selected information for
the Companys reportable segments for the periods indicated:

|                |                                    |                                                         |                             |            |         |           |   |           |         |           |   |           |         |           | 
|--------------- | ---------------------------------- | ------------------------------------------------------- | --------------------------- | ---------- | ------- | --------- | - | --------- | ------- | --------- | - | --------- | ------- | --------- | 
|                |                                    |                                                        
|                |                                    | For the years ended December 31,                       
|                |                                    |                                                        
|                |                                    | 2002                                                    |                             | 2003       |         |          
|                |                                    | (restated)                                              |                             | (restated) |         | 2004     
|                |                                    |                                                         |                             |            |         |          
|Total revenues: |                                    |                                                         |                             |            |         |           |   |           |         |           |   |          
|                | Branded pharmaceuticals            |                                                         | $                           | 992,520    |         |           | $ | 1,272,350 |         |           | $ | 1,076,517 |        
|                | Meridian Medical Technologies      |                                                         |                             |           |         |           |   | 124,157   |         |           |   | 123,329   |        
|                | Royalties                          |                                                         |                             | 58,375     |         |           |   | 68,365    |         |           |   | 78,473    |        
|                | Contract manufacturing(1)          |                                                         |                             | 143,373    |         |           |   | 278,836   |         |           |   | 505,538   |        
|                | All other                          |                                                         |                             | 1,193      |         |           |   | 628       |         |           |   | (1        | )      
|                | Eliminations(1)                    |                                                         |                             | (107,437   | )       |           |   | (251,547  | )       |           |   | (479,492  | )      
|                |                                    |                                                         |                             |            |         |           |   |           |         |           |   |          
|                |                                    |                                                         | Consolidated total revenues |            | $       | 1,088,024 |   |           | $       | 1,492,789 |   |           | $       | 1,304,364 | 
|                |                                    |                                                         |                             |            |         |           |   |           |         |           |   |          
|Segment profit: |                                    |                                                         |                             |            |         |           |   |           |         |           |   |          
|                | Branded pharmaceuticals            |                                                         | $                           | 756,769    |         |           | $ | 991,741   |         |           | $ | 824,949   |        
|                | Meridian Medical Technologies      |                                                         |                             |           |         |           | $ | 57,954    |         |           |   | 64,033    |        
|                | Royalties                          |                                                         |                             | 47,881     |         |           |   | 57,122    |         |           |   | 67,596    |        
|                | Contract manufacturing             |                                                         |                             | (7,727     | )       |           |   | 85        |         |           |   | (5,162    | )      
|                | All other                          |                                                         |                             | (156       | )       |           |   | 17        |         |           |   | 10        |        
|                | Other operating costs and expenses |                                                         |                             | (521,724   | )       |           |   | (954,967  | )       |           | $ | (992,690  | )      
|                | Other income (expense)             |                                                         |                             | (26,537    | )       |           |   | 11,375    |         |           |   | (16,770   | )      
|                |                                    |                                                         |                             |            |         |           |   |           |         |           |   |          
|                |                                    | Income (loss) from continuing operations before
    tax |                             | $          | 248,506 |           |   | $         | 163,327 |           |   | $         | (58,034 | )        
|                |                                    |                                                         |                             |            |         |           |   |           |         |           |   |          

F-40



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|              |                               |                           |   |           |           |  |   |           |           | 
|------------- | ----------------------------- | ------------------------- | - | --------- | --------- |  | - | --------- | --------- | 
|              |                               |                          
|              |                               | As of December 31,       
|              |                               |                          
|              |                               | 2003                      |   |          
|              |                               | (restated)                |   | 2004     
|              |                               |                           |   |          
|Total assets: |                               |                           |   |           |           |  |   |          
|              | Branded pharmaceuticals       |                           | $ | 3,174,823 |           |  | $ | 2,865,803 |          
|              | Meridian Medical Technologies |                           |   | 250,953   |           |  |   | 275,850   |          
|              | Royalties                     |                           |   | 20,032    |           |  |   | 22,430    |          
|              | Contract manufacturing        |                           |   | 90,992    |           |  |   | 95,151    |          
|              | All other                     |                           |   | 10        |           |  |   |          |          
|              | Eliminations                  |                           |   | (335,280  | )         |  |   | (335,078  | )        
|              |                               |                           |   |           |           |  |   |          
|              |                               | Consolidated total assets |   | $         | 3,201,530 |  |   | $         | 2,924,156 | 
|              |                               |                           |   |           |           |  |   |          



---



|    |                                                                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Contract manufacturing revenues include $107,437,
    $251,547 and $479,492 of intercompany sales for the years ended
    December 31, 2002, 2003 and 2004, respectively.

The following represents branded pharmaceutical
revenues by therapeutic area:

|                |                |                                              |   |            |         |      |   |         |           |  |   |         |           | 
|--------------- | -------------- | -------------------------------------------- | - | ---------- | ------- | ---- | - | ------- | --------- |  | - | ------- | --------- | 
|                |                |                                             
|                |                | For the years ended December 31,            
|                |                |                                             
|                |                | 2002                                         |   | 2003       |         |     
|                |                | (restated)                                   |   | (restated) |         | 2004
|                |                |                                              |   |            |         |     
|Total revenues: |                |                                              |   |            |         |      |   |         |           |  |   |        
|                | Cardiovascular |                                              | $ | 487,600    |         |      | $ | 574,982 |           |  | $ | 363,215 |          
|                | Anti-infective |                                              |   | 114,115    |         |      |   | 85,745  |           |  |   | 52,746  |          
|                | Critical care  |                                              |   | 105,700    |         |      |   | 146,854 |           |  |   | 185,255 |          
|                | Endocrinology  |                                              |   | 203,242    |         |      |   | 157,154 |           |  |   | 132,160 |          
|                | Neuroscience   |                                              |   |           |         |      |   | 246,814 |           |  |   | 298,928 |          
|                | Respiratory    |                                              |   | 2,474      |         |      |   | 38,012  |           |  |   | 9,483   |          
|                | Other branded  |                                              |   | 79,389     |         |      |   | 22,789  |           |  |   | 34,730  |          
|                |                |                                              |   |            |         |      |   |         |           |  |   |        
|                |                | Consolidated branded pharmaceutical revenues |   | $          | 992,520 |      |   | $       | 1,272,350 |  |   | $       | 1,076,517 | 
|                |                |                                              |   |            |         |      |   |         |           |  |   |        

Capital expenditures of $73,587, $51,201 and
$53,955 for the years ended December 31, 2002, 2003 and
2004, respectively, are substantially related to the branded
pharmaceuticals and contract manufacturing segments.

21.     Related Party
Transactions

The Benevolent Fund is a nonprofit corporation
organized under the laws of the Commonwealth of Virginia and is
exempt from taxation under Section 501(c)(3) of the
Internal Revenue Code. The Benevolent Fund obtains
pharmaceutical products either as gifts-in-kind from
manufacturers or by purchase from third-party distributors or
wholesalers. The Benevolent Fund donates the pharmaceutical
products purchased or received as gifts-in-kind to medical
missions in the United States and in foreign countries to
advance its humanitarian aid efforts. The Benevolent Fund was
founded in 1994 by John M. Gregory, who also founded King and
was its Chairman of the Board until June 28, 2002 and its
Chief Executive Officer until January 1, 2002. John M.
Gregory owned more than 5% of the Companys common stock
until May 6, 2002. John M. Gregory, who serves as President
of the Board of Directors of the Benevolent Fund, is the brother
of Jefferson J. Gregory, who served as the Companys Chief
Executive Officer from January 1, 2002 until May 14,
2004 and the Companys Chairman of the Board from
June 28, 2002 until May 14, 2004, and James E.
Gregory, a former director of the Company. In addition, Mary Ann
Blessing, a sister of Jefferson J. Gregory, John M. Gregory
and James E. Gregory, served as the Chief Operating Officer
of the Benevolent Fund until approximately January 2001 and
presently serves

F-41



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

as a director and Treasurer of the Board of the
Directors of the Benevolent Fund. Carol Shrader, mother of Brian
Shrader, Chief Financial Officer of the Company until September
2000, is presently a director of the Benevolent Fund.

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

The Company occasionally donates its products to
the Benevolent Fund. The Company donated inventory with a
carrying value of $22,586 in 2002, $16,322 in 2003 and $1,452 in
2004. In addition to receiving donations of products directly
from pharmaceutical manufacturers, the Benevolent Fund also
purchases pharmaceutical products, including those manufactured
by King, from third-party distributors or wholesalers.

On December 26, 2002, the Company sold
$4,701 of Cortisporin®, Silvadene® and Tigan® to
a third-party wholesaler, which in turn resold those products to
the Benevolent Fund in January 2003. The Company is recognizing
revenue associated with this transaction as the Benevolent Fund
distributes the products to the beneficiaries of the Benevolent
Funds charitable donations. During 2003, the Company
recognized $4,270 of the deferred revenue. The remainder was
recognized in 2004.

The Company periodically makes contributions to
charitable and not-for-profit organizations in communities where
its facilities are located. In April 2004, the Company made a
three-year pledge totaling $900 to Sullins Academy, a private
school offering education in grades K-8. The Company
recorded the pledge during the second quarter of 2004. During
the fourth quarter of 2003 and the first quarter of 2004, the
Company made a contribution to Sullins Academy of $150. At
certain times during this period, children of some Company
employees, including the Companys former Chief Executive
Officer and the former President, attended Sullins Academy, and
the former President and the spouse of the former Chief
Executive Officer served as volunteer members of the Sullins
Academy board of directors.

During 2002, the Company paid $73 to James E.
Gregory, a director of the Company, for consulting services. Of
that amount, $23 was for personal use of the corporate aircraft.

During the year ended December 2002, the Company
paid $171 to the Wake Forest University School of Medicine for
research and development activities. R. Charles Moyer, a
director of the Company, was the former Dean of the Babcock
Graduate School of Management at Wake Forest University.

22.     Stockholders
Equity



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

The Company is authorized to issue
15 million shares of blank-check preferred
stock, the terms and conditions of which will be determined by
the Board of Directors. As of December 31, 2003 and 2004,
there were no shares issued or outstanding.



| |                         
| | ------------------------
| | Stock Repurchase Program

On May 13, 2002, the Companys Board of
Directors authorized a plan to repurchase up to 7.5 million
shares of the Companys common stock. Under the plan, the
Company could repurchase shares of its common stock in the
open-market from time to time, depending on market conditions,
share price

F-42



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

and other factors. During the year ended
December 31, 2002, the Company completed the plan,
repurchasing 7.5 million shares for a total purchase price
of $166,274.



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

Accumulated other comprehensive income consists
of the following components:

|                                                              |  |      |       |      |  |   |       | 
|------------------------------------------------------------- |  | ---- | ----- | ---- |  | - | ----- | 
|                                                              |  | 2003 |       | 2004
|                                                              |  |      |       |     
|Net unrealized gains on marketable securities,
    net of tax |  | $    | 719   |      |  | $ | 587   | 
|Foreign currency translation, net of tax                      |  |      | 394   |      |  |   | 436   | 
|                                                              |  |      |       |      |  |   |       | 
|                                                              |  | $    | 1,113 |      |  | $ | 1,023 | 
|                                                              |  |      |       |      |  |   |       | 



| |                   
| | ------------------
| | Stock Option Plans

The Company has various incentive stock plans for
executives and employees. In connection with the plans, options
to purchase common stock are granted at option prices not less
than the fair market values of the common stock at the time the
options are granted and either vest immediately or ratably over
a period of up to ten years from the grant date. As of
December 31, 2004, options for 6,138,755 shares of
common stock are available for future grant. A total of
4,908,317, 3,849,864 and 5,979,551 options to purchase common
stock were outstanding under these plans as of December 31,
2002, 2003 and 2004, respectively, of which 4,211,652, 3,561,167
and 2,607,131, respectively, were exercisable.

Certain of the incentive stock plans allow for
employee payment of option exercise prices in the form of either
cash or previously held common stock of the Company. Shares
tendered in payment of the option exercise price must be owned
by the employee making the tender, for either six months or one
year depending on how the shares were acquired, prior to the
date of tender.

A summary of the status of the Companys
plans as of December 31, 2004 and changes during the years
ended December 31, 2002, 2003 and 2004 are presented in the
table below:

|                                                               |           |      |           |          |   |      |           |          |   |   |           |            |  
|-------------------------------------------------------------- | --------- | ---- | --------- | -------- | - | ---- | --------- | -------- | - | - | --------- | ---------- | -
|                                                               |           | 2002 |           | 2003     |   | 2004
|                                                               |           |      |           |          |   |     
|Outstanding options, January 1                                 |           |      | 4,648,646 |          |   |      | 4,908,317 |          |   |   | 3,849,864 |           
|                                                               | Exercised |      |           | (436,160 | ) |      |           | (578,245 | ) |   |           | (530,720   | )
|                                                               | Granted   |      |           | 895,750  |   |      |           | 101,000  |   |   |           | 3,883,417  |  
|                                                               | Cancelled |      |           | (199,919 | ) |      |           | (581,208 | ) |   |           | (1,223,010 | )
|                                                               |           |      |           |          |   |      |           |          |   |   |           |           
|Outstanding options, December 31                               |           |      | 4,908,317 |          |   |      | 3,849,864 |          |   |   | 5,979,551 |           
|                                                               |           |      |           |          |   |      |           |          |   |   |           |           
|Weighted average price of options outstanding,
    January 1   |           | $    | 20.83     |          |   | $    | 21.27     |          |   | $ | 22.48     |           
|                                                               |           |      |           |          |   |      |           |          |   |   |           |           
|Weighted average price of options exercised                    |           | $    | 9.95      |          |   | $    | 7.31      |          |   | $ | 6.55      |           
|                                                               |           |      |           |          |   |      |           |          |   |   |           |           
|Weighted average price of options granted                      |           | $    | 19.69     |          |   | $    | 13.95     |          |   | $ | 16.83     |           
|                                                               |           |      |           |          |   |      |           |          |   |   |           |           
|Weighted average price of options cancelled                    |           | $    | 28.52     |          |   | $    | 25.90     |          |   | $ | 22.19     |           
|                                                               |           |      |           |          |   |      |           |          |   |   |           |           
|Weighted average price of options outstanding,
    December 31 |           | $    | 21.27     |          |   | $    | 22.48     |          |   | $ | 20.28     |           
|                                                               |           |      |           |          |   |      |           |          |   |   |           |           

F-43



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Options outstanding at December 31, 2004
have exercise prices between $4.67 and $40.98, with a weighted
average exercise price of $20.28 and a remaining contractual
life of approximately 7.67 years.

|                  |               |        |  |           |  |               |   |       |  |  |  |      | 
|----------------- | ------------- | ------ |  | --------- |  | ------------- | - | ----- |  |  |  | ---- | 
|                  |               |        |  | Weighted  |  | Weighted     
|                  |               |        |  | Average   |  | Average      
|                  |               |        |  | Exercise  |  | Remaining    
|Range of Exercise |               |        |  | Price per |  | Contractual  
|Prices per Share  |               | Shares |  | Share     |  | Life in Years
|                  |               |        |  |           |  |              
|Outstanding:      |               |        |  |           |  |               |   |       |  |  |  |     
|                  | $4.67-$17.38  |        |  | 1,054,066 |  |               | $ | 11.46 |  |  |  | 7.03 | 
|                  | $17.39-$18.96 |        |  | 2,597,893 |  |               |   | 17.40 |  |  |  | 9.04 | 
|                  | $18.98-$40.98 |        |  | 2,327,592 |  |               |   | 27.50 |  |  |  | 6.44 | 
|                  |               |        |  |           |  |               |   |       |  |  |  |     
|                  | $4.67-$40.98  |        |  | 5,979,551 |  |               | $ | 20.28 |  |  |  |      | 
|                  |               |        |  |           |  |               |   |       |  |  |  |     

|                  |               |        |  |                  |  |  |   |       | 
|----------------- | ------------- | ------ |  | ---------------- |  |  | - | ----- | 
|                  |               |        |  | Weighted        
|Range of Exercise |               |        |  | Average Exercise
|Prices per Share  |               | Shares |  | Price per Share 
|                  |               |        |  |                 
|Exercisable:      |               |        |  |                  |  |  |   |      
|                  | $4.67-$17.38  |        |  | 491,368          |  |  | $ | 9.75  | 
|                  | $17.39-$18.96 |        |  | 14,950           |  |  |   | 18.52 | 
|                  | $18.98-40.98  |        |  | 2,100,813        |  |  |   | 28.34 | 
|                  |               |        |  |                  |  |  |   |      
|                  | $4.67-$40.98  |        |  | 2,607,131        |  |  | $ | 24.78 | 
|                  |               |        |  |                  |  |  |   |      

During 2002, 2003 and 2004, the Company granted
50,000, 70,000 and 81,698 options, respectively, of common stock
to its directors under the 1998 Stock Option Plan at an exercise
price equal to market value at the date of grant. The options
vested immediately upon grant for the 2002 grants and after one
year of service for the 2003 and 2004 grants. Options totaling
261,830 issued under the 1998 Stock Option Plan were outstanding
at December 31, 2004 of which 179,999 were fully vested.
Options under the 1998 Stock Option Plan expire 10 years
from the date of grant. These options are included in amounts
reflected in the above tables.



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

The basic and diluted income per common share was
determined based on the following share data:

|                                 |                                  |      |  |             |  |      |  |             |  |  |  |             | 
|-------------------------------- | -------------------------------- | ---- |  | ----------- |  | ---- |  | ----------- |  |  |  | ----------- | 
|                                 |                                  | 2002 |  | 2003        |  | 2004
|                                 |                                  |      |  |             |  |     
|Basic income per common share:   |                                  |      |  |             |  |      |  |             |  |  |  |            
|                                 | Weighted average common shares   |      |  | 244,375,770 |  |      |  | 240,989,093 |  |  |  | 241,475,058 | 
|                                 |                                  |      |  |             |  |      |  |             |  |  |  |            
|Diluted income per common share: |                                  |      |  |             |  |      |  |             |  |  |  |            
|                                 | Weighted average common shares   |      |  | 244,375,770 |  |      |  | 240,989,093 |  |  |  | 241,475,058 | 
|                                 | Effect of dilutive stock options |      |  | 1,322,898   |  |      |  | 537,540     |  |  |  |            | 
|                                 | Convertible debentures           |      |  |            |  |      |  |            |  |  |  |            | 
|                                 |                                  |      |  |             |  |      |  |             |  |  |  |            
|                                 | Weighted average common shares   |      |  | 245,698,668 |  |      |  | 241,526,633 |  |  |  | 241,475,058 | 
|                                 |                                  |      |  |             |  |      |  |             |  |  |  |            

For the year ended December 31, 2004,
options to purchase 444,990 shares of common stock were not
included in the computation of diluted earnings (loss) per share
because their inclusion would have been anti-dilutive and would
have reduced the loss per share. In addition, the weighted
average stock options that were anti-dilutive at
December 31, 2002, 2003 and 2004 were 1,669,922, 3,034,318
and 5,895,970 shares, respectively. The convertible
debentures could also be converted into 6,877,990 shares of
common stock in the future, subject to certain contingencies
outlined in the indenture (Note 14). Because

F-44



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

the convertible debentures are anti-dilutive,
they were not included in the calculation of diluted income per
common share.



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

In December 2004, the FASB issued SFAS
No. 123(R), (Share-based Payment) that requires the Company
to expense costs related to share-based payment transactions
with employees. SFAS No. 123(R) becomes mandatorily
effective on July 1, 2005. The Company is in the process of
evaluating the impact of this standard.

In November 2004, the FASB issued SFAS
No. 151, (Inventory Costs), an amendment of ARB
No. 43. SFAS No. 151 requires certain abnormal
expenditures to be recognized as expenses in the current period.
It also requires that the amount of fixed production overhead
allocated to inventory be based on the normal capacity of the
production facilities. The standard is effective for the fiscal
year beginning January 1, 2006. The Company is currently
evaluating the effect that SFAS No. 151 will have on the
Companys financial reporting.

25.     Restructuring
Activities and Executive Retirements

During 2004 the Company incurred restructuring
charges as a result of separation agreements with several
executives, the relocation of the Companys sales and
marketing operations from Bristol, Tennessee to Princeton, New
Jersey, the termination of the womens health sales force,
and the decision to end principal operations of a small
subsidiary of Meridian Medical Technologies located in Northern
Ireland. A summary of the types of costs accrued and incurred
are summarized below:

|                             |  |              |       |           |  |          |       |          |  |              |        |   |  |   |        |   |  |   |     | 
|---------------------------- |  | ------------ | ----- | --------- |  | -------- | ----- | -------- |  | ------------ | ------ | - |  | - | ------ | - |  | - | --- | 
|                             |  | Accrued      |       |           |  |          |       |          |  | Accrued     
|                             |  | Balance at   |       | Income    |  |          |       |          |  | Balance at  
|                             |  | December 31, |       | Statement |  |          |       |          |  | December 31,
|                             |  | 2003         |       | Impact    |  | Payments |       | Non-Cash |  | 2004        
|                             |  |              |       |           |  |          |       |          |  |             
|Employee separation payments |  | $            |      |           |  | $        | 6,162 |          |  | $            | (6,162 | ) |  | $ |       |   |  |   |    | 
|Employee relocation          |  |              |      |           |  |          | 1,864 |          |  |              | (1,864 | ) |  |   |       |   |  |   |    | 
|Previously accrued amounts   |  |              | 1,019 |           |  |          | (95   | )        |  |              |       |   |  |   |       |   |  |   | 924 | 
|Write-down of assets         |  |              |      |           |  |          | 1,643 |          |  |              |       |   |  |   | (1,643 | ) |  |   |     | 
|                             |  |              |       |           |  |          |       |          |  |              |        |   |  |   |        |   |  |   |     | 
|                             |  | $            | 1,019 |           |  | $        | 9,574 |          |  | $            | (8,026 | ) |  | $ | (1,643 | ) |  | $ | 924 | 
|                             |  |              |       |           |  |          |       |          |  |              |        |   |  |   |        |   |  |   |     | 

It is anticipated that the relocation of key
sales and marketing employees to New Jersey will be completed
within the next six months and will require additional costs,
which in accordance with FAS 146, Accounting for
Costs Associated with Exit or Disposal Activities, have
not yet been accrued. All of the accrued restructuring charges
relate to the branded pharmaceutical segment, except for $374
related to contract manufacturing, and $2,932 related to
Meridian Medical Technologies. As of December 31, 2004,
$924 of the contract manufacturing restructuring charges had not
yet been paid and remained accrued.

During 2002, the Company consolidated the
international division into the Companys operations in
Bristol, Tennessee, decided to sell the veterinary business, and
decided to terminate production at one of its facilities. These
activities eliminated approximately 35 employee positions
of which approximately 16 were hourly and 19 were salaried. Also
during 2002, two executives retired and were paid $4,325.
Accordingly, the Company incurred a charge of $5,911 during the
year ended December 31, 2002. The Company had $2,216
accrued relating to these activities as of December 31,
2002, which was paid during 2003.

F-45



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



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

The following table sets forth summary financial
information for the years ended December 31, 2003 and 2004:

|                                          |  |            |         |            |  |            |         |            |  |            |         |            |  |            |         |            |  |   |         |  |  |   |         |  |  |   |         |  |  |   |         | 
|----------------------------------------- |  | ---------- | ------- | ---------- |  | ---------- | ------- | ---------- |  | ---------- | ------- | ---------- |  | ---------- | ------- | ---------- |  | - | ------- |  |  | - | ------- |  |  | - | ------- |  |  | - | ------- | 
|                                          |  | First      |         | First      |  | Second     |         | Second     |  | Third      |         | Third      |  | Fourth     |         | Fourth    
|2003 By Quarter                           |  | (reported) |         | (restated) |  | (reported) |         | (restated) |  | (reported) |         | (restated) |  | (reported) |         | (restated)
|                                          |  |            |         |            |  |            |         |            |  |            |         |            |  |            |         |           
|Total revenues                            |  | $          | 338,421 |            |  | $          | 343,589 |            |  | $          | 367,015 |            |  | $          | 358,402 |            |  | $ | 423,137 |  |  | $ | 424,813 |  |  | $ | 380,680 |  |  | $ | 365,985 | 
|Operating income (loss)                   |  |            | (3,078  | )          |  |            | (38     | )          |  |            | (59,549 | )          |  |            | (65,742 | )          |  |   | 164,729 |  |  |   | 165,878 |  |  |   | 73,759  |  |  |   | 51,854  | 
|Net income (loss)                         |  |            | (7,193  | )          |  |            | (4,858  | )          |  |            | (35,015 | )          |  |            | (38,867 | )          |  |   | 106,087 |  |  |   | 106,365 |  |  |   | 41,977  |  |  |   | 29,314  | 
|Basic (loss) income per common share(1)   |  | $          | (0.03   | )          |  | $          | (0.02   | )          |  | $          | (0.15   | )          |  | $          | (0.16   | )          |  | $ | 0.44    |  |  | $ | 0.44    |  |  | $ | 0.17    |  |  | $ | 0.12    | 
|Diluted (loss) income per common share(1) |  | $          | (0.03   | )          |  | $          | (0.02   | )          |  | $          | (0.15   | )          |  | $          | (0.16   | )          |  | $ | 0.44    |  |  | $ | 0.44    |  |  | $ | 0.17    |  |  | $ | 0.12    | 

|                                          |  |            |          |            |  |            |          |            |  |       |         |        |  |   |         |   |  |   |         |   |  |   |         | 
|----------------------------------------- |  | ---------- | -------- | ---------- |  | ---------- | -------- | ---------- |  | ----- | ------- | ------ |  | - | ------- | - |  | - | ------- | - |  | - | ------- | 
|                                          |  | First      |          | First      |  | Second     |          | Second     |  |       |         |       
|2004 By Quarter                           |  | (reported) |          | (restated) |  | (reported) |          | (restated) |  | Third |         | Fourth
|                                          |  |            |          |            |  |            |          |            |  |       |         |       
|Total revenues                            |  | $          | 290,644  |            |  | $          | 291,450  |            |  | $     | 275,140 |        |  | $ | 275,611 |   |  | $ | 394,684 |   |  | $ | 342,619 | 
|Operating income (loss)                   |  |            | (595     | )          |  |            | 7,344    |            |  |       | (62,021 | )      |  |   | (59,842 | ) |  |   | (11,653 | ) |  |   | 22,888  | 
|Net income (loss)                         |  |            | (111,060 | )          |  |            | (104,076 | )          |  |       | (63,539 | )      |  |   | (62,924 | ) |  |   | (8,014  | ) |  |   | 14,727  | 
|Basic income (loss) per common share(1)   |  | $          | (0.46    | )          |  | $          | (0.43    | )          |  | $     | (0.26   | )      |  | $ | (0.26   | ) |  | $ | (0.03   | ) |  | $ | 0.06    | 
|Diluted income (loss) per common share(1) |  | $          | (0.46    | )          |  | $          | (0.43    | )          |  | $     | (0.26   | )      |  | $ | (0.26   | ) |  | $ | (0.03   | ) |  | $ | 0.06    | 






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

The information shown above for the fourth
quarter 2003 reflects



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a $280 adjustment reducing royalty expense
    related to royalties due on the Companys Altace®
    product as a result of a Medicaid adjustment during 2003,                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | a $15,212 adjustment reducing the co-promotion
    fees paid to our Altace® co-promotion colleague as a result
    of the charges for amounts due under Medicaid and other
    governmental pricing programs for the years 1998 to 2002.
    Specifically (a) the Company recovered on a pre-tax basis $9,514
    in fees which the Company previously accrued during the fourth
    quarter of 2002 and has reduced the accrual for these fees by
    this amount in the fourth quarter of 2003 and (b) fees under the
    Co-Promotion Agreement for Altace® in the fourth quarter of
    2003 were reduced on a pre-tax basis by an additional $5,698 as
    a result of the Medicaid accrual adjustment recorded in that
    quarter.



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

Ongoing research, referred to as the Womens
Health Initiative, is being conducted by the National Institutes
of Health. Data from the trial released in July 2002
indicated that an increase in certain health risks may result
from the long-term use of a competitors combination
hormone replacement therapy for women. News of this data and the
perception it has created have negatively affected the entire
combination hormone therapy and the oral estrogen therapy
markets including certain of the Companys products.
Prescriptions for some of the Companys other womens
health products have also continued to decline over the past few
years primarily due to the availability of generics. On March
30, 2004, the Companys Board of Directors approved
managements decision to market for divestiture many of the
Companys womens health products. On
November 22, 2004 the Company sold all of its rights in
Prefest® for approximately $15,000. On December 23,
2004, the Company sold all of its rights in Nordette® for
approximately $12,000.

F-46



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Prefest® and Nordette® product
rights, which the Company divested on November 22, 2004 and
December 23, 2004, respectively, had identifiable cash
flows that were largely independent of the cash flows of other
groups of assets and liabilities and are classified as
discontinued operations in the accompanying financial
statements. Prefest® and Nordette® formerly were
included in the Companys branded pharmaceuticals segment.
During the first and third quarters of 2004, the Company wrote
down intangible assets by the amount of $169,591 and $5,734,
respectively, to reduce the carrying value of the intangible
assets associated with these products to their estimated fair
value less costs to sell. The Company determined the fair value
of these assets based on managements discounted cash flow
projections for the products less expected selling costs.

The major classes of assets associated with
discontinued operations in the accompanying financial statements
are as follows:

|                       |              |      |         |         |  |   |   |   | 
|---------------------- | ------------ | ---- | ------- | ------- |  | - | - | - | 
|                       |              | 2003 |         | 2004   
|                       |              |      |         |        
|Inventories            |              | $    | 4,012   |         |  | $ |  |  
|Intangible assets, net |              |      | 204,501 |         |  |   |  |  
|                       |              |      |         |         |  |   |   |  
|                       | Total assets |      | $       | 208,513 |  |   | $ |  | 
|                       |              |      |         |         |  |   |   |  

Summarized financial information for the
discontinued operations are as follows:

|                                                                 |  |      |        |      |  |      |        |   |  |   |          |  
|---------------------------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ | - |  | - | -------- | -
|                                                                 |  | 2002 |        | 2003 |  | 2004
|                                                                 |  |      |        |      |  |     
|Total revenues                                                   |  | $    | 36,287 |      |  | $    | 13,112 |   |  | $ | 13,182   |  
|Operating income (loss), including expected loss
    on disposal |  |      | 18,965 |      |  |      | (8,771 | ) |  |   | (172,750 | )
|Net income (loss)                                                |  |      | 11,928 |      |  |      | (5,489 | ) |  |   | (109,666 | )



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

On July 26, 2004, the Company entered into a
merger agreement with Mylan Laboratories Inc. and a wholly owned
subsidiary of Mylan, pursuant to which Mylan agreed to acquire
King in a stock-for-stock transaction. On February 27,
2005, Mylan and King announced they had mutually agreed to
terminate that agreement. As of March 1, 2005 both Mylan
and King would have had a right to terminate the merger
agreement and following discussions, the companies were not able
to agree on terms for a revised transaction.



|    |                               
|--- | ------------------------------
|29. | Guarantor Financial Statements

Each of the Companys subsidiaries, except
Monarch Pharmaceuticals Ireland Limited (the Guarantor
Subsidiaries), has guaranteed, on a full, unconditional
and joint and several basis, the Companys performance
under the $345,000, 2 3/4% Convertible Debentures due 2021
and under the $400,000 Senior Secured Revolving Credit Facility
on a joint and several basis. There are no restrictions under
the Companys financing arrangements on the ability of the
Guarantor Subsidiaries to distribute funds to the Company in the
form of cash dividends, loans or advances. The following
combined financial data provides information regarding the
financial position, results of operations and cash flows of the
Guarantor Subsidiaries (condensed consolidating financial data).
Separate financial statements and other disclosures concerning
the Guarantor Subsidiaries are not presented because management
has determined that such information would not be material to
the holders of the debt.

F-47



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

GUARANTOR SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE
SHEETS


|                                          |                                            |                   |           |              |  |               |           |             |  |              |       |        |  |   |            |            |   |   |           |           | 
|----------------------------------------- | ------------------------------------------ | ----------------- | --------- | ------------ |  | ------------- | --------- | ----------- |  | ------------ | ----- | ------ |  | - | ---------- | ---------- | - | - | --------- | --------- | 
|                                          |                                            |                  
|                                          |                                            | December 31, 2003
|                                          |                                            | (restated)       
|                                          |                                            |                  
|                                          |                                            |                   |           | Guarantor    |  | Non Guarantor |           | Eliminating |  | King        
|                                          |                                            | King              |           | Subsidiaries |  | Subsidiaries  |           | Entries     |  | Consolidated
|                                          |                                            |                   |           |              |  |               |           |             |  |             
|ASSETS                                    |                                            |                   |           |              |  |               |           |             |  |              |       |        |  |   |            |            |   |   |           |          
|Current assets:                           |                                            |                   |           |              |  |               |           |             |  |              |       |        |  |   |            |            |   |   |           |          
|Cash and cash equivalents                 |                                            | $                 | 140,617   |              |  | $             | 3,641     |             |  | $            | 1,795 |        |  | $ |           |            |   | $ | 146,053   |          
|Marketable securities                     |                                            |                   |          |              |  |               |          |             |  |              |      |        |  |   |            |            |   |   |          |          
|Restricted cash                           |                                            |                   | 67,199    |              |  |               | 66,770    |             |  |              |      |        |  |   |           |            |   |   | 133,969   |          
|Accounts receivable, net                  |                                            |                   | 4,529     |              |  |               | 240,574   |             |  |              | 1,314 |        |  |   |           |            |   |   | 246,417   |          
|Inventories                               |                                            |                   | 224,081   |              |  |               | 36,554    |             |  |              | 251   |        |  |   |           |            |   |   | 260,886   |          
|Deferred income tax assets                |                                            |                   | 16,236    |              |  |               | 132,243   |             |  |              |      |        |  |   |           |            |   |   | 148,479   |          
|Prepaid expenses and other current assets |                                            |                   | 5,250     |              |  |               | 24,786    |             |  |              |      |        |  |   |           |            |   |   | 30,036    |          
|Assets related to discontinued operations |                                            |                   | 4,012     |              |  |               |          |             |  |              |      |        |  |   |           |            |   |   | 4,012     |          
|                                          |                                            |                   |           |              |  |               |           |             |  |              |       |        |  |   |            |            |   |   |           |          
|                                          | Total current assets                       |                   |           | 461,924      |  |               |           | 504,568     |  |              |       | 3,360  |  |   |            |           |   |   |           | 969,852   | 
|Property, plant, and equipment, net       |                                            |                   | 115,442   |              |  |               | 142,217   |             |  |              |      |        |  |   |           |            |   |   | 257,659   |          
|Goodwill                                  |                                            |                   |          |              |  |               | 121,355   |             |  |              |      |        |  |   |           |            |   |   | 121,355   |          
|Intangible assets, net                    |                                            |                   | 6,955     |              |  |               | 1,538,035 |             |  |              | 7,502 |        |  |   |           |            |   |   | 1,552,492 |          
|Other assets                              |                                            |                   | 45,811    |              |  |               | 30,706    |             |  |              |      |        |  |   |           |            |   |   | 76,517    |          
|Deferred income tax assets                |                                            |                   | 14,678    |              |  |               | 4,476     |             |  |              |      |        |  |   |           |            |   |   | 19,154    |          
|Assets related to discontinued operations |                                            |                   |          |              |  |               | 204,501   |             |  |              |      |        |  |   |           |            |   |   | 204,501   |          
|Investment in subsidiaries                |                                            |                   | 2,270,679 |              |  |               |          |             |  |              |      |        |  |   | (2,270,679 | )          |   |   |          |          
|                                          |                                            |                   |           |              |  |               |           |             |  |              |       |        |  |   |            |            |   |   |           |          
|                                          | Total assets                               |                   | $         | 2,915,489    |  |               | $         | 2,545,858   |  |              | $     | 10,862 |  |   | $          | (2,270,679 | ) |   | $         | 3,201,530 | 
|                                          |                                            |                   |           |              |  |               |           |             |  |              |       |        |  |   |            |            |   |   |           |          
|LIABILITIES AND SHAREHOLDERS EQUITY      |                                            |                   |           |              |  |               |           |             |  |              |       |        |  |   |            |            |   |   |           |          
|Current liabilities:                      |                                            |                   |           |              |  |               |           |             |  |              |       |        |  |   |            |            |   |   |           |          
|Accounts payable                          |                                            | $                 | 51,424    |              |  | $             | 30,205    |             |  | $            | 19    |        |  | $ |           |            |   | $ | 81,648    |          
|Accrued expenses                          |                                            |                   | 57,521    |              |  |               | 509,183   |             |  |              |      |        |  |   |           |            |   |   | 566,704   |          
|Income taxes payable                      |                                            |                   | 78,363    |              |  |               | 838       |             |  |              | 440   |        |  |   |           |            |   |   | 79,641    |          
|Current portion of long-term debt         |                                            |                   | 97        |              |  |               |          |             |  |              |      |        |  |   |           |            |   |   | 97        |          
|                                          |                                            |                   |           |              |  |               |           |             |  |              |       |        |  |   |            |            |   |   |           |          
|                                          | Total current liabilities                  |                   |           | 187,405      |  |               |           | 540,226     |  |              |       | 459    |  |   |            |           |   |   |           | 728,090   | 
|Long-term debt                            |                                            |                   | 345,000   |              |  |               |          |             |  |              |      |        |  |   |           |            |   |   | 345,000   |          
|Deferred income tax liabilities           |                                            |                   |          |              |  |               |          |             |  |              |      |        |  |   |           |            |   |   |          |          
|Other liabilities                         |                                            |                   | 53,197    |              |  |               | 70,752    |             |  |              |      |        |  |   |           |            |   |   | 123,949   |          
|Intercompany (receivable) payable         |                                            |                   | 325,396   |              |  |               | (329,103  | )           |  |              | 3,707 |        |  |   |           |            |   |   |          |          
|                                          |                                            |                   |           |              |  |               |           |             |  |              |       |        |  |   |            |            |   |   |           |          
|                                          | Total liabilities                          |                   |           | 910,998      |  |               |           | 281,875     |  |              |       | 4,166  |  |   |            |           |   |   |           | 1,197,039 | 
|                                          |                                            |                   |           |              |  |               |           |             |  |              |       |        |  |   |            |            |   |   |           |          
|Shareholders equity                      |                                            |                   | 2,004,491 |              |  |               | 2,263,983 |             |  |              | 6,696 |        |  |   | (2,270,679 | )          |   |   | 2,004,491 |          
|                                          |                                            |                   |           |              |  |               |           |             |  |              |       |        |  |   |            |            |   |   |           |          
|                                          | Total liabilities and shareholders equity |                   | $         | 2,915,489    |  |               | $         | 2,545,858   |  |              | $     | 10,862 |  |   | $          | (2,270,679 | ) |   | $         | 3,201,530 | 
|                                          |                                            |                   |           |              |  |               |           |             |  |              |       |        |  |   |            |            |   |   |           |          

[Additional columns below]

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

|                                          |                                            |                   |           |              |  |               |           |             |   |              |        |        |  |   |            |            |   |   |           |           | 
|----------------------------------------- | ------------------------------------------ | ----------------- | --------- | ------------ |  | ------------- | --------- | ----------- | - | ------------ | ------ | ------ |  | - | ---------- | ---------- | - | - | --------- | --------- | 
|                                          |                                            |                  
|                                          |                                            | December 31, 2004
|                                          |                                            |                  
|                                          |                                            |                   |           | Guarantor    |  | Non Guarantor |           | Eliminating |   | King        
|                                          |                                            | King              |           | Subsidiaries |  | Subsidiaries  |           | Entries     |   | Consolidated
|                                          |                                            |                   |           |              |  |               |           |             |   |             
|ASSETS                                    |                                            |                   |           |              |  |               |           |             |   |              |        |        |  |   |            |            |   |   |           |          
|Current assets:                           |                                            |                   |           |              |  |               |           |             |   |              |        |        |  |   |            |            |   |   |           |          
|Cash and cash equivalents                 |                                            | $                 | 313,881   |              |  | $             | 27,035    |             |   | $            | 1,170  |        |  | $ |           |            |   | $ | 342,086   |          
|Marketable securities                     |                                            |                   | 16,498    |              |  |               |          |             |   |              |       |        |  |   |           |            |   |   | 16,498    |          
|Restricted cash                           |                                            |                   | 66,543    |              |  |               | 31,187    |             |   |              |       |        |  |   |           |            |   |   | 97,730    |          
|Accounts receivable, net                  |                                            |                   | 3,344     |              |  |               | 174,797   |             |   |              | 2,822  |        |  |   |           |            |   |   | 180,963   |          
|Inventories                               |                                            |                   | 237,448   |              |  |               | 36,743    |             |   |              | 221    |        |  |   |           |            |   |   | 274,412   |          
|Deferred income tax assets                |                                            |                   | 32,809    |              |  |               | 121,170   |             |   |              |       |        |  |   |           |            |   |   | 153,979   |          
|Prepaid expenses and other current assets |                                            |                   | 22,846    |              |  |               | 38,481    |             |   |              | 68     |        |  |   |           |            |   |   | 61,395    |          
|Assets related to discontinued operations |                                            |                   |          |              |  |               |          |             |   |              |       |        |  |   |           |            |   |   |          |          
|                                          |                                            |                   |           |              |  |               |           |             |   |              |        |        |  |   |            |            |   |   |           |          
|                                          | Total current assets                       |                   |           | 693,369      |  |               |           | 429,413     |   |              |        | 4,281  |  |   |            |           |   |   |           | 1,127,063 | 
|Property, plant, and equipment, net       |                                            |                   | 112,416   |              |  |               | 168,313   |             |   |              | 2      |        |  |   |           |            |   |   | 280,731   |          
|Goodwill                                  |                                            |                   |          |              |  |               | 121,152   |             |   |              |       |        |  |   |           |            |   |   | 121,152   |          
|Intangible assets, net                    |                                            |                   | 194       |              |  |               | 1,275,474 |             |   |              | 10,293 |        |  |   |           |            |   |   | 1,285,961 |          
|Other assets                              |                                            |                   | 16,078    |              |  |               | 240       |             |   |              |       |        |  |   |           |            |   |   | 16,318    |          
|Deferred income tax assets                |                                            |                   | 14,197    |              |  |               | 78,734    |             |   |              |       |        |  |   |           |            |   |   | 92,931    |          
|Assets related to discontinued operations |                                            |                   |          |              |  |               |          |             |   |              |       |        |  |   |           |            |   |   |          |          
|Investment in subsidiaries                |                                            |                   | 2,186,234 |              |  |               |          |             |   |              |       |        |  |   | (2,186,234 | )          |   |   |          |          
|                                          |                                            |                   |           |              |  |               |           |             |   |              |        |        |  |   |            |            |   |   |           |          
|                                          | Total assets                               |                   | $         | 3,022,488    |  |               | $         | 2,073,326   |   |              | $      | 14,576 |  |   | $          | (2,186,234 | ) |   | $         | 2,924,156 | 
|                                          |                                            |                   |           |              |  |               |           |             |   |              |        |        |  |   |            |            |   |   |           |          
|LIABILITIES AND SHAREHOLDERS EQUITY      |                                            |                   |           |              |  |               |           |             |   |              |        |        |  |   |            |            |   |   |           |          
|Current liabilities:                      |                                            |                   |           |              |  |               |           |             |   |              |        |        |  |   |            |            |   |   |           |          
|Accounts payable                          |                                            | $                 | 61,427    |              |  | $             | 31,339    |             |   | $            | 154    |        |  | $ |           |            |   | $ | 92,920    |          
|Accrued expenses                          |                                            |                   | 125,095   |              |  |               | 470,899   |             |   |              | 16     |        |  |   |           |            |   |   | 596,010   |          
|Income taxes payable                      |                                            |                   |          |              |  |               |          |             |   |              |       |        |  |   |           |            |   |   |          |          
|Current portion of long-term debt         |                                            |                   |          |              |  |               |          |             |   |              |       |        |  |   |           |            |   |   |          |          
|                                          |                                            |                   |           |              |  |               |           |             |   |              |        |        |  |   |            |            |   |   |           |          
|                                          | Total current liabilities                  |                   |           | 186,522      |  |               |           | 502,238     |   |              |        | 170    |  |   |            |           |   |   |           | 688,930   | 
|Long-term debt                            |                                            |                   | 345,000   |              |  |               |          |             |   |              |       |        |  |   |           |            |   |   | 345,000   |          
|Deferred income tax liabilities           |                                            |                   |          |              |  |               |          |             |   |              |       |        |  |   |           |            |   |   |          |          
|Other liabilities                         |                                            |                   | 29,417    |              |  |               | 12,019    |             |   |              |       |        |  |   |           |            |   |   | 41,436    |          
|Intercompany (receivable) payable         |                                            |                   | 612,759   |              |  |               | (620,511  | )           |   |              | 7,752  |        |  |   |           |            |   |   |          |          
|                                          |                                            |                   |           |              |  |               |           |             |   |              |        |        |  |   |            |            |   |   |           |          
|                                          | Total liabilities                          |                   |           | 1,173,698    |  |               |           | (106,254    | ) |              |        | 7,922  |  |   |            |           |   |   |           | 1,075,366 | 
|                                          |                                            |                   |           |              |  |               |           |             |   |              |        |        |  |   |            |            |   |   |           |          
|Shareholders equity                      |                                            |                   | 1,848,790 |              |  |               | 2,179,580 |             |   |              | 6,654  |        |  |   | (2,186,234 | )          |   |   | 1,848,790 |          
|                                          |                                            |                   |           |              |  |               |           |             |   |              |        |        |  |   |            |            |   |   |           |          
|                                          | Total liabilities and shareholders equity |                   | $         | 3,022,488    |  |               | $         | 2,073,326   |   |              | $      | 14,576 |  |   | $          | (2,186,234 | ) |   | $         | 2,924,156 | 
|                                          |                                            |                   |           |              |  |               |           |             |   |              |        |        |  |   |            |            |   |   |           |          

F-48



---



##### 



GUARANTOR SUBSIDIARIES

CONSOLIDATING STATEMENTS OF
OPERATIONS

|                                                                 |                                                      |                                    |         |              |         |              |         |              |           |              |   |   |   |  |          |          |          |   |         |           |           |  
|---------------------------------------------------------------- | ---------------------------------------------------- | ---------------------------------- | ------- | ------------ | ------- | ------------ | ------- | ------------ | --------- | ------------ | - | - | - |  | -------- | -------- | -------- | - | ------- | --------- | --------- | -
|                                                                 |                                                      |                                   
|                                                                 |                                                      | Twelve Months Ended 12/31/2002    
|                                                                 |                                                      |                                   
|                                                                 |                                                      |                                    |         | Non          |         |             
|                                                                 |                                                      |                                    |         | Guarantor    |         | Guarantor    |         |              |           | King        
|                                                                 |                                                      | King                               |         | Subsidiaries |         | Subsidiaries |         | Eliminations |           | Consolidated
|                                                                 |                                                      |                                    |         |              |         |              |         |              |           |             
|Revenues:                                                        |                                                      |                                    |         |              |         |              |         |              |           |              |   |   |   |  |          |          |          |   |         |          
|                                                                 | Net sales                                            |                                    | $       | 235,154      |         |              | $       | 1,027,670    |           |              | $ |  |   |  | $        | (233,175 | )        |   | $       | 1,029,649 |          
|                                                                 | Royalty revenue                                      |                                    |         |             |         |              |         | 58,375       |           |              |   |  |   |  |          |         |          |   |         | 58,375    |          
|                                                                 |                                                      |                                    |         |              |         |              |         |              |           |              |   |   |   |  |          |          |          |   |         |          
|                                                                 |                                                      | Total revenues                     |         |              | 235,154 |              |         |              | 1,086,045 |              |   |   |  |  |          |          | (233,175 | ) |         |           | 1,088,024 |  
|                                                                 |                                                      |                                    |         |              |         |              |         |              |           |              |   |   |   |  |          |          |          |   |         |          
|Operating costs and expenses:                                    |                                                      |                                    |         |              |         |              |         |              |           |              |   |   |   |  |          |          |          |   |         |          
|                                                                 | Cost of revenues                                     |                                    |         | 122,922      |         |              |         | 401,510      |           |              |   |  |   |  |          | (233,175 | )        |   |         | 291,257   |          
|                                                                 | Selling, general and administrative                  |                                    |         | 14,166       |         |              |         | 343,242      |           |              |   |  |   |  |          |         |          |   |         | 357,408   |          
|                                                                 | Medicaid related charge                              |                                    |         |             |         |              |         |             |           |              |   |  |   |  |          |         |          |   |         |          |          
|                                                                 | Mylan transaction costs                              |                                    |         |             |         |              |         |             |           |              |   |  |   |  |          |         |          |   |         |          |          
|                                                                 | Depreciation and amortization                        |                                    |         | 35,658       |         |              |         | 15,719       |           |              |   |  |   |  |          |         |          |   |         | 51,377    |          
|                                                                 | Research and development                             |                                    |         | 12,676       |         |              |         | 27,508       |           |              |   |  |   |  |          |         |          |   |         | 40,184    |          
|                                                                 | Intangible asset impairment                          |                                    |         | 66,844       |         |              |         |             |           |              |   |  |   |  |          |         |          |   |         | 66,844    |          
|                                                                 | Gain on sale of intangible assets                    |                                    |         |             |         |              |         |             |           |              |   |  |   |  |          |         |          |   |         |          |          
|                                                                 | Restructuring charges                                |                                    |         |             |         |              |         | 5,911        |           |              |   |  |   |  |          |         |          |   |         | 5,911     |          
|                                                                 |                                                      |                                    |         |              |         |              |         |              |           |              |   |   |   |  |          |          |          |   |         |          
|                                                                 |                                                      | Total operating costs and expenses |         |              | 252,266 |              |         |              | 793,890   |              |   |   |  |  |          |          | (233,175 | ) |         |           | 812,981   |  
|                                                                 |                                                      |                                    |         |              |         |              |         |              |           |              |   |   |   |  |          |          |          |   |         |          
|Operating income                                                 |                                                      |                                    | (17,112 | )            |         |              | 292,155 |              |           |              |  |   |   |  |         |          |          |   | 275,043 |          
|Other income (expense):                                          |                                                      |                                    |         |              |         |              |         |              |           |              |   |   |   |  |          |          |          |   |        |          
|                                                                 | Interest income                                      |                                    |         | 21,227       |         |              |         | 1,168        |           |              |   |  |   |  |          |         |          |   |         | 22,395    |          
|                                                                 | Interest expense                                     |                                    |         | (12,400      | )       |              |         | (19          | )         |              |   |  |   |  |          |         |          |   |         | (12,419   | )        
|                                                                 | Valuation charge  convertible notes
    receivable  |                                    |         | (35,629      | )       |              |         |             |           |              |   |  |   |  |          |         |          |   |         | (35,629   | )        
|                                                                 | Write-down of investment                             |                                    |         |             |         |              |         |             |           |              |   |  |   |  |          |         |          |   |         |          |          
|                                                                 | Other, net                                           |                                    |         | (190         | )       |              |         | (694         | )         |              |   |  |   |  |          |         |          |   |         | (884      | )        
|                                                                 | Equity in earnings of subsidiaries                   |                                    |         | 202,364      |         |              |         |             |           |              |   |  |   |  |          | (202,364 | )        |   |         |          |          
|                                                                 | Intercompany interest income (expense)               |                                    |         | 8,916        |         |              |         | (8,916       | )         |              |   |  |   |  |          |         |          |   |         |          |          
|                                                                 |                                                      |                                    |         |              |         |              |         |              |           |              |   |   |   |  |          |          |          |   |         |          
|                                                                 |                                                      | Total other income (expenses)      |         |              | 184,288 |              |         |              | (8,461    | )            |   |   |  |  |          |          | (202,364 | ) |         |           | (26,537   | )
|                                                                 |                                                      |                                    |         |              |         |              |         |              |           |              |   |   |   |  |          |          |          |   |         |          
|Income (loss) from continuing operations
    before income taxes |                                                      |                                    | 167,176 |              |         |              | 283,694 |              |           |              |  |   |   |  | (202,364 | )        |          |   | 248,506 |          
|                                                                 |                                                      |                                    |         |              |         |              |         |              |           |              |   |   |   |  |          |          |          |   |         |          
|Income tax expense (benefit)                                     |                                                      |                                    | (15,225 | )            |         |              | 93,258  |              |           |              |  |   |   |  |         |          |          |   | 78,033  |          
|                                                                 |                                                      |                                    |         |              |         |              |         |              |           |              |   |   |   |  |          |          |          |   |         |          
|Income from continuing operations                                |                                                      |                                    | 182,401 |              |         |              | 190,436 |              |           |              |  |   |   |  | (202,364 | )        |          |   | 170,473 |          
|Discontinued operations:                                         |                                                      |                                    |         |              |         |              |         |              |           |              |   |   |   |  |          |          |          |   |         |          
|                                                                 | Income (loss) from discontinued operations           |                                    |         |              |         |              |         | 18,965       |           |              |   |  |   |  |          |         |          |   |         | 18,965    |          
|                                                                 | Income tax expense (benefit)                         |                                    |         |              |         |              |         | 7,037        |           |              |   |  |   |  |          |         |          |   |         | 7,037     |          
|                                                                 |                                                      |                                    |         |              |         |              |         |              |           |              |   |   |   |  |          |          |          |   |         |          
|                                                                 | Total income (loss) from discontinued
    operations |                                    |         |              |         |              |         | 11,928       |           |              |   |  |   |  |          |         |          |   |         | 11,928    |          
|                                                                 |                                                      |                                    |         |              |         |              |         |              |           |              |   |   |   |  |          |          |          |   |         |          
|                                                                 |                                                      | Net income (loss)                  |         | $            | 182,401 |              |         | $            | 202,364   |              |   | $ |  |  |          | $        | (202,364 | ) |         | $         | 182,401   |  
|                                                                 |                                                      |                                    |         |              |         |              |         |              |           |              |   |   |   |  |          |          |          |   |         |          

[Additional columns below]

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

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

[Additional columns below]

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

|                                                                 |                                                      |                                    |          |              |          |              |        |              |           |              |      |       |       |   |        |          |          |   |         |           |           |  
|---------------------------------------------------------------- | ---------------------------------------------------- | ---------------------------------- | -------- | ------------ | -------- | ------------ | ------ | ------------ | --------- | ------------ | ---- | ----- | ----- | - | ------ | -------- | -------- | - | ------- | --------- | --------- | -
|                                                                 |                                                      |                                   
|                                                                 |                                                      | Twelve Months Ended 12/31/2004    
|                                                                 |                                                      |                                   
|                                                                 |                                                      |                                    |          | Non          |          |             
|                                                                 |                                                      |                                    |          | Guarantor    |          | Guarantor    |        |              |           | King        
|                                                                 |                                                      | King                               |          | Subsidiaries |          | Subsidiaries |        | Eliminations |           | Consolidated
|                                                                 |                                                      |                                    |          |              |          |              |        |              |           |             
|Revenues:                                                        |                                                      |                                    |          |              |          |              |        |              |           |              |      |       |       |   |        |          |          |   |         |          
|                                                                 | Net sales                                            |                                    | $        | 374,833      |          |              | $      | 1,222,515    |           |              | $    | 2,030 |       |   | $      | (373,488 | )        |   | $       | 1,225,890 |          
|                                                                 | Royalty revenue                                      |                                    |          |             |          |              |        | 78,474       |           |              |      |      |       |   |        |         |          |   |         | 78,474    |          
|                                                                 |                                                      |                                    |          |              |          |              |        |              |           |              |      |       |       |   |        |          |          |   |         |          
|                                                                 |                                                      | Total revenues                     |          |              | 374,833  |              |        |              | 1,300,989 |              |      |       | 2,030 |   |        |          | (373,488 | ) |         |           | 1,304,364 |  
|                                                                 |                                                      |                                    |          |              |          |              |        |              |           |              |      |       |       |   |        |          |          |   |         |          
|Operating costs and expenses:                                    |                                                      |                                    |          |              |          |              |        |              |           |              |      |       |       |   |        |          |          |   |         |          
|                                                                 | Cost of revenues                                     |                                    |          | 135,430      |          |              |        | 590,388      |           |              |      | 608   |       |   |        | (373,488 | )        |   |         | 352,938   |          
|                                                                 | Selling, general and administrative                  |                                    |          | 189,962      |          |              |        | 330,434      |           |              |      | 983   |       |   |        |         |          |   |         | 521,379   |          
|                                                                 | Medicaid related charge                              |                                    |          | 65,000       |          |              |        |             |           |              |      |      |       |   |        |         |          |   |         | 65,000    |          
|                                                                 | Mylan transaction costs                              |                                    |          | 9,062        |          |              |        |             |           |              |      |      |       |   |        |         |          |   |         | 9,062     |          
|                                                                 | Depreciation and amortization                        |                                    |          | 16,925       |          |              |        | 144,722      |           |              |      | 468   |       |   |        |         |          |   |         | 162,115   |          
|                                                                 | Research and development                             |                                    |          | 509          |          |              |        | 83,730       |           |              |      |      |       |   |        |         |          |   |         | 84,239    |          
|                                                                 | Intangible asset impairment                          |                                    |          | 4,399        |          |              |        | 145,193      |           |              |      |      |       |   |        |         |          |   |         | 149,592   |          
|                                                                 | Gain on sale of intangible assets                    |                                    |          | (4,022       | )        |              |        | (5,502       | )         |              |      |      |       |   |        |         |          |   |         | (9,524    | )        
|                                                                 | Restructuring charges                                |                                    |          | 7,646        |          |              |        | 3,181        |           |              |      |      |       |   |        |         |          |   |         | 10,827    |          
|                                                                 |                                                      |                                    |          |              |          |              |        |              |           |              |      |       |       |   |        |          |          |   |         |          
|                                                                 |                                                      | Total operating costs and expenses |          |              | 424,911  |              |        |              | 1,292,146 |              |      |       | 2,059 |   |        |          | (373,488 | ) |         |           | 1,345,628 |  
|                                                                 |                                                      |                                    |          |              |          |              |        |              |           |              |      |       |       |   |        |          |          |   |         |          
|Operating income                                                 |                                                      |                                    | (50,078  | )            |          |              | 8,843  |              |           |              | (29  | )     |       |   |       |          |          |   | (41,264 | )        
|Other income (expense):                                          |                                                      |                                    |          |              |          |              |        |              |           |              |      |       |       |   |        |          |          |   |        |          
|                                                                 | Interest income                                      |                                    |          | 5,101        |          |              |        | 873          |           |              |      |      |       |   |        |         |          |   |         | 5,974     |          
|                                                                 | Interest expense                                     |                                    |          | (12,492      | )        |              |        | (96          | )         |              |      |      |       |   |        |         |          |   |         | (12,588   | )        
|                                                                 | Valuation charge  convertible notes
    receivable  |                                    |          | (2,887       | )        |              |        |             |           |              |      |      |       |   |        |         |          |   |         | (2,887    | )        
|                                                                 | Write-down of investment                             |                                    |          | (6,520       | )        |              |        |             |           |              |      |      |       |   |        |         |          |   |         | (6,520    | )        
|                                                                 | Other, net                                           |                                    |          | (820         | )        |              |        | (82          | )         |              |      | 153   |       |   |        |         |          |   |         | (749      | )        
|                                                                 | Equity in earnings of subsidiaries                   |                                    |          | (84,284      | )        |              |        |             |           |              |      |      |       |   |        | 84,284   |          |   |         |          |          
|                                                                 | Intercompany interest income (expense)               |                                    |          | (33,648      | )        |              |        | 33,937       |           |              |      | (289  | )     |   |        |         |          |   |         |          |          
|                                                                 |                                                      |                                    |          |              |          |              |        |              |           |              |      |       |       |   |        |          |          |   |         |          
|                                                                 |                                                      | Total other income (expenses)      |          |              | (135,550 | )            |        |              | 34,632    |              |      |       | (136  | ) |        |          | 84,284   |   |         |           | (16,770   | )
|                                                                 |                                                      |                                    |          |              |          |              |        |              |           |              |      |       |       |   |        |          |          |   |         |          
|Income (loss) from continuing operations
    before income taxes |                                                      |                                    | (185,628 | )            |          |              | 43,475 |              |           |              | (165 | )     |       |   | 84,284 |          |          |   | (58,034 | )        
|                                                                 |                                                      |                                    |          |              |          |              |        |              |           |              |      |       |       |   |        |          |          |   |         |          
|Income tax expense (benefit)                                     |                                                      |                                    | (25,315  | )            |          |              | 18,026 |              |           |              | (123 | )     |       |   |       |          |          |   | (7,412  | )        
|                                                                 |                                                      |                                    |          |              |          |              |        |              |           |              |      |       |       |   |        |          |          |   |         |          
|Income from continuing operations                                |                                                      |                                    | (160,313 | )            |          |              | 25,449 |              |           |              | (42  | )     |       |   | 84,284 |          |          |   | (50,622 | )        
|Discontinued operations:                                         |                                                      |                                    |          |              |          |              |        |              |           |              |      |       |       |   |        |          |          |   |         |          
|                                                                 | Income (loss) from discontinued operations           |                                    |          | 40           |          |              |        | (172,790     | )         |              |      |      |       |   |        |         |          |   |         | (172,750  | )        
|                                                                 | Income tax expense (benefit)                         |                                    |          | 15           |          |              |        | (63,099      | )         |              |      |      |       |   |        |         |          |   |         | (63,084   | )        
|                                                                 |                                                      |                                    |          |              |          |              |        |              |           |              |      |       |       |   |        |          |          |   |         |          
|                                                                 | Total income (loss) from discontinued
    operations |                                    |          | 25           |          |              |        | (109,691     | )         |              |      |      |       |   |        |         |          |   |         | (109,666  | )        
|                                                                 |                                                      |                                    |          |              |          |              |        |              |           |              |      |       |       |   |        |          |          |   |         |          
|                                                                 |                                                      | Net income (loss)                  |          | $            | (160,288 | )            |        | $            | (84,242   | )            |      | $     | (42   | ) |        | $        | 84,284   |   |         | $         | (160,288  | )
|                                                                 |                                                      |                                    |          |              |          |              |        |              |           |              |      |       |       |   |        |          |          |   |         |          

F-49



---



##### 



KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

GUARANTOR SUBSIDIARIES

CONSOLIDATING STATEMENTS OF CASH
FLOWS


|                                                                                       |                                                                                |                                           |          |                   |              |   |                   |              |         |   |              |          |        |           |          |          |              |   |          |              |         |      |              |          |         |              |           |       |        |           |        |              |        |   |              |          |         |              |          |         |              |   |          |          |        |   |        |        |        |   |        |         |   |   |          |         |         |  
|-------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------ | ----------------------------------------- | -------- | ----------------- | ------------ | - | ----------------- | ------------ | ------- | - | ------------ | -------- | ------ | --------- | -------- | -------- | ------------ | - | -------- | ------------ | ------- | ---- | ------------ | -------- | ------- | ------------ | --------- | ----- | ------ | --------- | ------ | ------------ | ------ | - | ------------ | -------- | ------- | ------------ | -------- | ------- | ------------ | - | -------- | -------- | ------ | - | ------ | ------ | ------ | - | ------ | ------- | - | - | -------- | ------- | ------- | -
|                                                                                       |                                                                                |                                           |          |                   |              |   |                   |              |         |   |              |         
|                                                                                       |                                                                                |                                           |          | December 31, 2003 |              |   | December 31, 2004 |             
|                                                                                       |                                                                                | December 31, 2002                         |          |                   |              |   |                   |              |        
|                                                                                       |                                                                                |                                           |          |                   |              |   | Non               |              |         |   |              |          |        | Non       |          |          |             
|                                                                                       |                                                                                |                                           |          | Guarantor         |              |   |                   |              | King    |   |              |          |        | Guarantor |          |          | Guarantor    |   |          |              |         | King |              |          |         |              | Guarantor |       |        | Guarantor |        |              |        |   | King         |         
|                                                                                       |                                                                                | King                                      |          |                   | Subsidiaries |   |                   | Eliminations |         |   | Consolidated |          |        | King      |          |          | Subsidiaries |   |          | Subsidiaries |         |      | Eliminations |          |         | Consolidated |           |       | King   |           |        | Subsidiaries |        |   | Subsidiaries |          |         | Eliminations |          |         | Consolidated |  
|                                                                                       |                                                                                |                                           |          |                   |              |   |                   |              |         |   |              |          |        |           |          |          |              |   |          |              |         |      |              |          |         |              |           |       |        |           |        |              |        |   |              |          |         |              |          |         |              |  
|Cash flows from operating activities of
    continuing operations:                     |                                                                                |                                           |          |                   |              |   |                   |              |         |   |              |          |        |           |          |          |              |   |          |              |         |      |              |          |         |              |           |       |        |           |        |              |        |   |              |          |         |              |          |         |              |   |          |          |        |   |        |        |        |   |        |         |   |   |          |        
|                                                                                       | Net income from continuing operations                                          |                                           | $        | 170,473           |              |   | $                 | 190,436      |         |   | $            | (190,436 | )      |           | $        | 170,473  |              |   | $        | 97,443       |         |      | $            | 51,140   |         |              |           | 1,179 |        |           | $      | (52,319      | )      |   | $            | 97,443   |         |              | $        | (50,622 | )            |   | $        | 25,449   |        |   | $      | (42    | )      |   | $      | (25,407 | ) |   | $        | (50,622 | )      
|Equity in earnings of subsidiaries                                                     |                                                                                |                                           | (190,436 | )                 |              |   |                  |              |         |   | 190,436      |          |        |           |         |          |              |   | (52,319  | )            |         |      |             |          |         |              |          |       |        |           | 52,319 |              |        |   |             |          |         |              | (25,407  | )       |              |   |         |          |        |   |        |        |        |   | 25,407 |         |   |   |         |        
|                                                                                       | Adjustments to reconcile net income to net cash
    provided by                |                                           |          |                   |              |   |                   |              |         |   |              |          |        |           |          |          |              |   |          |              |         |      |              |          |         |              |           |       |        |           |        |              |        |   |              |          |         |              |          |         |              |   |          |          |        |   |        |        |        |   |        |         |   |   |          |         |        
|                                                                                       | Operating activities:                                                          |                                           |          |                   |              |   |                   |              |         |   |              |          |        |           |          |          |              |   |          |              |         |      |              |          |         |              |           |       |        |           |        |              |        |   |              |          |         |              |          |         |              |   |          |          |        |   |        |        |        |   |        |         |   |   |          |         |        
|                                                                                       | Depreciation and amortization                                                  |                                           |          | 36,333            |              |   |                   | 15,044       |         |   |              |         |        |           |          | 51,377   |              |   |          | 8,914        |         |      |              | 104,408  |         |              |           | 423   |        |           |        |             |        |   |              | 113,745  |         |              |          | 16,924  |              |   |          | 144,724  |        |   |        | 467    |        |   |        |        |   |   |          | 162,115 |        
|                                                                                       | Amortization of deferred financing costs                                       |                                           |          | 2,898             |              |   |                   |             |         |   |              |         |        |           |          | 2,898    |              |   |          | 3,160        |         |      |              |         |         |              |           |      |        |           |        |             |        |   |              | 3,160    |         |              |          | 3,145   |              |   |          |         |        |   |        |        |        |   |        |        |   |   |          | 3,145   |        
|                                                                                       | Extinguishment of debt expense                                                 |                                           |          |                  |              |   |                   |             |         |   |              |         |        |           |          |         |              |   |          |             |         |      |              |         |         |              |           |      |        |           |        |             |        |   |              |         |         |              |          |        |              |   |          |         |        |   |        |       |        |   |        |        |   |   |          |        |        
|                                                                                       | Cumulative effect of change in accounting
    principle                        |                                           |          |                  |              |   |                   |             |         |   |              |         |        |           |          |         |              |   |          |             |         |      |              |         |         |              |           |      |        |           |        |             |        |   |              |         |         |              |          |        |              |   |          |         |        |   |        |       |        |   |        |        |   |   |          |        |        
|                                                                                       | Stock compensation charge                                                      |                                           |          |                  |              |   |                   |             |         |   |              |         |        |           |          |         |              |   |          |             |         |      |              |         |         |              |           |      |        |           |        |             |        |   |              |         |         |              |          |        |              |   |          |         |        |   |        |       |        |   |        |        |   |   |          |        |        
|                                                                                       | Write-down of inventory                                                        |                                           |          |                  |              |   |                   | 15,152       |         |   |              |         |        |           |          | 15,152   |              |   |          |             |         |      |              |         |         |              |           |      |        |           |        |             |        |   |              |         |         |              |          |        |              |   |          |         |        |   |        |        |        |   |        |        |   |   |          |        |        
|                                                                                       | Deferred income taxes                                                          |                                           |          | (29,972           | )            |   |                   | (46,830      | )       |   |              |         |        |           |          | (76,802  | )            |   |          | 13,700       |         |      |              | (153,298 | )       |              |           |      |        |           |        |             |        |   |              | (139,598 | )       |              |          | (16,050 | )            |   |          | (1,033   | )      |   |        |       |        |   |        |        |   |   |          | (17,083 | )      
|                                                                                       | Valuation charge on convertible notes receivable                               |                                           |          | 35,443            |              |   |                   |             |         |   |              |         |        |           |          | 35,443   |              |   |          | (18,151      | )       |      |              |         |         |              |           |      |        |           |        |             |        |   |              | (18,151  | )       |              |          | 2,887   |              |   |          |          |        |   |        |       |        |   |        |        |   |   |          | 2,887   |        
|                                                                                       | Net unrealized gain on convertible senior notes                                |                                           |          |                  |              |   |                   |             |         |   |              |         |        |           |          |         |              |   |          |             |         |      |              |         |         |              |           |      |        |           |        |             |        |   |              |         |         |              |          |        |              |   |          |         |        |   |        |       |        |   |        |        |   |   |          |        |        
|                                                                                       | Tax benefits of stock options exercised                                        |                                           |          | 2,206             |              |   |                   |             |         |   |              |         |        |           |          | 2,206    |              |   |          |             |         |      |              |         |         |              |           |      |        |           |        |             |        |   |              |         |         |              |          |        |              |   |          |         |        |   |        |       |        |   |        |        |   |   |          |        |        
|                                                                                       | Impairment of intangible assets                                                |                                           |          | 66,844            |              |   |                   |             |         |   |              |         |        |           |          | 66,844   |              |   |          | 7,425        |         |      |              | 117,191  |         |              |           |      |        |           |        |             |        |   |              | 124,616  |         |              |          | 4,400   |              |   |          | 145,192  |        |   |        |       |        |   |        |        |   |   |          | 149,592 |        
|                                                                                       | In-process research and development charges                                    |                                           |          | 12,000            |              |   |                   |             |         |   |              |         |        |           |          | 12,000   |              |   |          |             |         |      |              | 194,000  |         |              |           |      |        |           |        |             |        |   |              | 194,000  |         |              |          | 17,145  |              |   |          | (845     | )      |   |        |       |        |   |        |        |   |   |          | 16,300  |        
|                                                                                       | Gain on sales of intangible assets                                             |                                           |          |                  |              |   |                   |             |         |   |              |         |        |           |          |         |              |   |          | (805         | )       |      |              | (11,220  | )       |              |           |      |        |           |        |             |        |   |              | (12,025  | )       |              |          | (4,879  | )            |   |          | (4,645   | )      |   |        |       |        |   |        |        |   |   |          | (9,524  | )      
|                                                                                       | Loss on investment                                                             |                                           |          |                  |              |   |                   |             |         |   |              |         |        |           |          |         |              |   |          |             |         |      |              |         |         |              |           |      |        |           |        |             |        |   |              |         |         |              |          | 6,520   |              |   |          |         |        |   |        |       |        |   |        |        |   |   |          | 6,520   |        
|                                                                                       | Other non-cash items, net                                                      |                                           |          | (873              | )            |   |                   | 6,072        |         |   |              |         |        |           |          | 5,199    |              |   |          | 47           |         |      |              | 6,943    |         |              |           |      |        |           |        |             |        |   |              | 6,990    |         |              |          | 498     |              |   |          | 8,986    |        |   |        |       |        |   |        |        |   |   |          | 9,484   |        
|                                                                                       | Changes in operating assets and liabilities:                                   |                                           |          |                   |              |   |                   |              |         |   |              |          |        |           |          |          |              |   |          |              |         |      |              |          |         |              |           |       |        |           |        |              |        |   |              |          |         |              |          |         |              |   |          |          |        |   |        |        |        |   |        |         |   |   |          |         |        
|                                                                                       |                                                                                | Accounts receivable                       |          |                   | (4,617       | ) |                   |              | (2,787  | ) |              |          | 3,691  |           |          |          | (3,713       | ) |          |              | 12,823  |      |              |          | (86,861 | )            |           |       | (1,314 | )         |        |              | (8,834 | ) |              |          | (84,186 | )            |          |         | 1,185        |   |          |          | 58,301 |   |        |        | (1,508 | ) |        |         |  |   |          |         | 57,978  |  
|                                                                                       |                                                                                | Inventories                               |          |                   | (27,078      | ) |                   |              | (42,115 | ) |              |          |       |           |          |          | (69,193      | ) |          |              | (84,826 | )    |              |          | 31,560  |              |           |       | 411    |           |        |              |       |   |              |          | (52,855 | )            |          |         | (14,325      | ) |          |          | (910   | ) |        |        | 30     |   |        |         |  |   |          |         | (15,205 | )
|                                                                                       |                                                                                | Prepaid expenses and other current assets |          |                   | (6,330       | ) |                   |              | 1,240   |   |              |          |       |           |          |          | (5,090       | ) |          |              | 1,189   |      |              |          | 26,118  |              |           |       |       |           |        |              |       |   |              |          | 27,307  |              |          |         | (20,729      | ) |          |          | 4,636  |   |        |        | (68    | ) |        |         |  |   |          |         | (16,161 | )
|                                                                                       |                                                                                | Other assets                              |          |                   | 3            |   |                   |              | (1,023  | ) |              |          |       |           |          |          | (1,020       | ) |          |              | (2,970  | )    |              |          | (8      | )            |           |       |       |           |        |              |       |   |              |          | (2,978  | )            |          |         | (3,243       | ) |          |          | (240   | ) |        |        |       |   |        |         |  |   |          |         | (3,483  | )
|                                                                                       |                                                                                | Accounts payable                          |          |                   | 21,338       |   |                   |              | 13,241  |   |              |          | (3,691 | )         |          |          | 30,888       |   |          |              | (12,085 | )    |              |          | 37,190  |              |           |       | 19     |           |        |              | 8,834  |   |              |          | 33,958  |              |          |         | 8,555        |   |          |          | 507    |   |        |        | 135    |   |        |         |  |   |          |         | 9,197   |  
|                                                                                       |                                                                                | Accrued expenses and other liabilities    |          |                   | 53,476       |   |                   |              | 140,972 |   |              |          |       |           |          |          | 194,448      |   |          |              | 11,853  |      |              |          | 80,945  |              |           |       |       |           |        |              |       |   |              |          | 92,798  |              |          |         | 52,522       |   |          |          | (8,972 | ) |        |        | 16     |   |        |         |  |   |          |         | 43,566  |  
|                                                                                       |                                                                                | Deferred revenue                          |          |                   | (9,090       | ) |                   |              |        |   |              |          |       |           |          |          | (9,090       | ) |          |              | (9,092  | )    |              |          |        |              |           |       |       |           |        |              |       |   |              |          | (9,092  | )            |          |         | (9,091       | ) |          |          |       |   |        |        |       |   |        |         |  |   |          |         | (9,091  | )
|                                                                                       |                                                                                | Income taxes                              |          |                   | 23,589       |   |                   |              | (18,429 | ) |              |          |       |           |          |          | 5,160        |   |          |              | 97,062  |      |              |          | (36,948 | )            |           |       | 440    |           |        |              |       |   |              |          | 60,554  |              |          |         | (78,323      | ) |          |          | 55     |   |        |        | (440   | ) |        |         |   |   |          |         | (78,708 | )
|                                                                                       |                                                                                |                                           |          |                   |              |   |                   |              |         |   |              |          |        |           |          |          |              |   |          |              |         |      |              |          |         |              |           |       |        |           |        |              |        |   |              |          |         |              |          |         |              |  
|Net cash flows (used in) provided by operating
    activities of continuing operations |                                                                                |                                           | 156,207  |                   |              |   | 270,973           |              |         |   |             |          |        |           | 427,180  |          |              |   | 73,368   |              |         |      | 361,160      |          |         |              | 1,158     |       |        |           |       |              |        |   | 435,686      |          |         |              | (108,888 | )       |              |   | 371,205  |          |        |   | (1,410 | )      |        |   |       |         |   |   | 260,907  |        
|                                                                                       |                                                                                |                                           |          |                   |              |   |                   |              |         |   |              |          |        |           |          |          |              |   |          |              |         |      |              |          |         |              |           |       |        |           |        |              |        |   |              |          |         |              |          |         |              |  
|Cash flows from investing activities of
    continuing operations:                     |                                                                                |                                           |          |                   |              |   |                   |              |         |   |              |          |        |           |          |          |              |   |          |              |         |      |              |          |         |              |           |       |        |           |        |              |        |   |              |          |         |              |          |         |              |   |          |          |        |   |        |        |        |   |        |         |   |   |          |        
|                                                                                       | Purchase of investment securities                                              |                                           |          | (823,112          | )            |   |                   |             |         |   |              |         |        |           |          | (823,112 | )            |   |          | (25,903      | )       |      |              |         |         |              |           |      |        |           |        |             |        |   |              | (25,903  | )       |              |          |         |              |   |          |          |        |   |        |        |        |   |        |         |   |   |          |         |        
|                                                                                       | Proceeds from maturity and sale of investment
    securities                   |                                           |          | 645,798           |              |   |                   |             |         |   |              |         |        |           |          | 645,798  |              |   |          | 253,097      |         |      |              |         |         |              |           |      |        |           |        |             |        |   |              | 253,097  |         |              |          |        |              |   |          |         |        |   |        |        |        |   |        |         |   |   |          |         |        
|                                                                                       | Transfer (to)/from restricted cash                                             |                                           |          |                  |              |   |                   |             |         |   |              |         |        |           |          |         |              |   |          | (67,743      | )       |      |              |         |         |              |           |      |        |           |        |             |        |   |              | (67,743  | )       |              |          | (1,459  | )            |   |          | (872     | )      |   |        |        |        |   |        |         |   |   |          | (2,331  | )      
|                                                                                       | Convertible senior note                                                        |                                           |          | (10,000           | )            |   |                   |             |         |   |              |         |        |           |          | (10,000  | )            |   |          |             |         |      |              |         |         |              |           |      |        |           |        |             |        |   |              |         |         |              |          |        |              |   |          |         |        |   |        |       |        |   |        |        |   |   |          |        |        
|                                                                                       | Loans receivable                                                               |                                           |          |                  |              |   |                   |             |         |   |              |         |        |           |          |         |              |   |          |             |         |      |              |         |         |              |           |      |        |           |        |             |        |   |              |         |         |              |          |        |              |   |          |         |        |   |        |       |        |   |        |        |   |   |          |        |        
|                                                                                       | Purchases of property, plant and equipment                                     |                                           |          | (15,214           | )            |   |                   | (58,373      | )       |   |              |         |        |           |          | (73,587  | )            |   |          | (7,874       | )       |      |              | (43,327  | )       |              |           |      |        |           |        |             |        |   |              | (51,201  | )       |              |          | (12,034 | )            |   |          | (43,105  | )      |   |        | (2     | )      |   |        |        |   |   |          | (55,141 | )      
|                                                                                       | Acquisition of primary care business of Elan                                   |                                           |          |                  |              |   |                   |             |         |   |              |         |        |           |          |         |              |   |          |             |         |      |              | (761,745 | )       |              |           |      |        |           |        |             |        |   |              | (761,745 | )       |              |          |        |              |   |          | (36,000  | )      |   |        |       |        |   |        |        |   |   |          | (36,000 | )      
|                                                                                       | Acquisition of Meridian                                                        |                                           |          |                  |              |   |                   |             |         |   |              |         |        |           |          |         |              |   |          | (253,908     | )       |      |              | 15,410   |         |              |           |      |        |           |        |             |        |   |              | (238,498 | )       |              |          |        |              |   |          |         |        |   |        |        |        |   |        |        |   |   |          |         |        
|                                                                                       | Palatin collaboration                                                          |                                           |          |                  |              |   |                   |             |         |   |              |         |        |           |          |         |              |   |          |             |         |      |              |         |         |              |           |      |        |           |        |             |        |   |              |         |         |              |          | (20,000 | )            |   |          |         |        |   |        |       |        |   |        |        |   |   |          | (20,000 | )      
|                                                                                       | Purchases of intangible assets                                                 |                                           |          | (210,800          | )            |   |                   |             |         |   |              |         |        |           |          | (210,800 | )            |   |          | (2,000       | )       |      |              | (10,300  | )       |              |           |      |        |           |        |             |        |   |              | (12,300  | )       |              |          |         |              |   |          | (18,942  | )      |   |        | (3,258 | )      |   |        |         |   |   |          | (22,200 | )      
|                                                                                       | Proceeds from loan receivable                                                  |                                           |          |                  |              |   |                   | 4,310        |         |   |              |         |        |           |          | 4,310    |              |   |          |             |         |      |              | 13,320   |         |              |           |      |        |           |        |             |        |   |              | 13,320   |         |              |          |         |              |   |          |          |        |   |        |        |        |   |        |         |   |   |          |         |        
|                                                                                       | Proceeds from sale of intangible assets                                        |                                           |          |                  |              |   |                   |             |         |   |              |         |        |           |          |         |              |   |          | 14,460       |         |      |              | 1,199    |         |              |           |      |        |           |        |             |        |   |              | 15,659   |         |              |          | 27,715  |              |   |          | (257     | )      |   |        |       |        |   |        |        |   |   |          | 27,458  |        
|                                                                                       | Other investing activities                                                     |                                           |          | 28                |              |   |                   | 4,360        |         |   |              |         |        |           |          | 4,388    |              |   |          | 46           |         |      |              | 249      |         |              |           |      |        |           |        |             |        |   |              | 295      |         |              |          | 668     |              |   |          | (20      | )      |   |        |       |        |   |        |        |   |   |          | 648     |        
|                                                                                       |                                                                                |                                           |          |                   |              |   |                   |              |         |   |              |          |        |           |          |          |              |   |          |              |         |      |              |          |         |              |           |       |        |           |        |              |        |   |              |          |         |              |          |         |              |  
|Net cash used in investing activities of
    continuing operations                     |                                                                                |                                           | (413,300 | )                 |              |   | (49,703           | )            |         |   |             |          |        |           | (463,003 | )        |              |   | (89,825  | )            |         |      | (785,194     | )        |         |              |          |       |        |           |       |              |        |   | (875,019     | )        |         |              | (5,110   | )       |              |   | (99,196  | )        |        |   | (3,260 | )      |        |   |       |         |   |   | (107,566 | )      
|                                                                                       |                                                                                |                                           |          |                   |              |   |                   |              |         |   |              |          |        |           |          |          |              |   |          |              |         |      |              |          |         |              |           |       |        |           |        |              |        |   |              |          |         |              |          |         |              |  
|Cash flows from financing activities of
    continuing operations:                     |                                                                                |                                           |          |                   |              |   |                   |              |         |   |              |          |        |           |          |          |              |   |          |              |         |      |              |          |         |              |           |       |        |           |        |              |        |   |              |          |         |              |          |         |              |   |          |          |        |   |        |        |        |   |        |         |   |   |          |        
|                                                                                       | Proceeds from revolving credit facility                                        |                                           |          |                  |              |   |                   |             |         |   |              |         |        |           |          |         |              |   |          | 125,000      |         |      |              |         |         |              |           |      |        |           |        |             |        |   |              | 125,000  |         |              |          |        |              |   |          |         |        |   |        |       |        |   |        |        |   |   |          |        |        
|                                                                                       | Payments on revolving credit facility                                          |                                           |          |                  |              |   |                   |             |         |   |              |         |        |           |          |         |              |   |          | (125,000     | )       |      |              |         |         |              |           |      |        |           |        |             |        |   |              | (125,000 | )       |              |          |        |              |   |          |         |        |   |        |       |        |   |        |        |   |   |          |        |        
|                                                                                       | Proceeds from issuance of common shares and
    exercise of stock options, net |                                           |          | 4,402             |              |   |                   |             |         |   |              |         |        |           |          | 4,402    |              |   |          | 4,053        |         |      |              |         |         |              |           |      |        |           |        |             |        |   |              | 4,053    |         |              |          | 4,677   |              |   |          |         |        |   |        |        |        |   |        |        |   |   |          | 4,677   |        
|                                                                                       | Stock repurchases                                                              |                                           |          | (166,274          | )            |   |                   |             |         |   |              |         |        |           |          | (166,274 | )            |   |          |             |         |      |              |         |         |              |           |      |        |           |        |             |        |   |              |         |         |              |          |        |              |   |          |         |        |   |        |       |        |   |        |        |   |   |          |        |        
|                                                                                       | Payment of senior subordinated debt                                            |                                           |          |                  |              |   |                   |             |         |   |              |         |        |           |          |         |              |   |          |             |         |      |              |         |         |              |           |      |        |           |        |             |        |   |              |         |         |              |          |        |              |   |          |         |        |   |        |       |        |   |        |        |   |   |          |        |        
|                                                                                       | Payments on other long-term debt                                               |                                           |          | (1,348            | )            |   |                   | (13          | )       |   |              |         |        |           |          | (1,361   | )            |   |          | (1,296       | )       |      |              |         |         |              |           |      |        |           |        |             |        |   |              | (1,296   | )       |              |          | (97     | )            |   |          |         |        |   |        |        |        |   |        |        |   |   |          | (97     | )      
|                                                                                       | Proceeds from convertible debentures                                           |                                           |          |                  |              |   |                   |             |         |   |              |         |        |           |          |         |              |   |          |             |         |      |              |         |         |              |           |      |        |           |        |             |        |   |              |         |         |              |          |        |              |   |          |         |        |   |        |       |        |   |        |        |   |   |          |        |        
|                                                                                       | Debt issuance costs                                                            |                                           |          | (4,850            | )            |   |                   |             |         |   |              |         |        |           |          | (4,850   | )            |   |          | (214         | )       |      |              |         |         |              |           |      |        |           |        |             |        |   |              | (214     | )       |              |          |        |              |   |          |         |        |   |        |       |        |   |        |        |   |   |          |        |        
|                                                                                       | Other                                                                          |                                           |          |                  |              |   |                   |             |         |   |              |         |        |           |          |         |              |   |          |             |         |      |              |         |         |              |           |      |        |           |        |             |        |   |              |         |         |              |          |        |              |   |          |         |        |   |        |       |        |   |        |        |   |   |          |        |        
|                                                                                       | Intercompany                                                                   |                                           |          | 248,457           |              |   |                   | (248,457     | )       |   |              |         |        |           |          |         |              |   |          | (432,854     | )       |      |              | 432,217  |         |              |           | 637   |        |           |        |             |        |   |              |         |         |              |          | 250,935 |              |   |          | (254,980 | )      |   |        | 4,045  |        |   |        |         |   |   |          |        |        
|                                                                                       |                                                                                |                                           |          |                   |              |   |                   |              |         |   |              |          |        |           |          |          |              |   |          |              |         |      |              |          |         |              |           |       |        |           |        |              |        |   |              |          |         |              |          |         |              |  
|Net cash provided by (used in) financing
    activities of continuing operations       |                                                                                |                                           | 80,387   |                   |              |   | (248,470          | )            |         |   |             |          |        |           | (168,083 | )        |              |   | (430,311 | )            |         |      | 432,217      |          |         |              | 637       |       |        |           |       |              |        |   | 2,543        |          |         |              | 255,515  |         |              |   | (254,980 | )        |        |   | 4,045  |        |        |   |        |         |   |   | 4,580    |        
|                                                                                       |                                                                                |                                           |          |                   |              |   |                   |              |         |   |              |          |        |           |          |          |              |   |          |              |         |      |              |          |         |              |           |       |        |           |        |              |        |   |              |          |         |              |          |         |              |  
|Net cash provided by discontinued operations                                           |                                                                                |                                           | (111,300 | )                 |              |   | 28,829            |              |         |   |             |          |        |           | (82,471  | )        |              |   | (7,000   | )            |         |      | 1,618        |          |         |              |          |       |        |           |       |              |        |   | (5,382       | )        |         |              | 31,747   |         |              |   | 6,365    |          |        |   |       |        |        |   |       |         |   |   | 38,112   |        
|Increase (decrease) in cash and cash equivalents                                       |                                                                                |                                           | (288,006 | )                 |              |   | 1,629             |              |         |   |             |          |        |           | (286,377 | )        |              |   | (453,768 | )            |         |      | 9,801        |          |         |              | 1,795     |       |        |           |       |              |        |   | (442,172     | )        |         |              | 173,264  |         |              |   | 23,394   |          |        |   | (625   | )      |        |   |       |         |   |   | 196,033  |        
|Cash and cash equivalents, beginning of period                                         |                                                                                |                                           | 882,391  |                   |              |   | (7,789            | )            |         |   |             |          |        |           | 874,602  |          |              |   | 594,385  |              |         |      | (6,160       | )        |         |              |          |       |        |           |       |              |        |   | 588,225      |          |         |              | 140,617  |         |              |   | 3,641    |          |        |   | 1,795  |        |        |   |       |         |   |   | 146,053  |        
|                                                                                       |                                                                                |                                           |          |                   |              |   |                   |              |         |   |              |          |        |           |          |          |              |   |          |              |         |      |              |          |         |              |           |       |        |           |        |              |        |   |              |          |         |              |          |         |              |  
|Cash and cash equivalents, end of period                                               |                                                                                | $                                         | 594,385  |                   |              | $ | (6,160            | )            |         | $ |             |          |        | $         | 588,225  |          |              | $ | 140,617  |              |         | $    | 3,641        |          |         |              | 1,795     |       |        | $         |       |              |        | $ | 146,053      |          |         | $            | 313,881  |         |              | $ | 27,035   |          |        | $ | 1,170  |        |        | $ |       |         |   | $ | 342,086  |        
|                                                                                       |                                                                                |                                           |          |                   |              |   |                   |              |         |   |              |          |        |           |          |          |              |   |          |              |         |      |              |          |         |              |           |       |        |           |        |              |        |   |              |          |         |              |          |         |              |  

F-50



---



##### 



Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the registrant
has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.



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





| |     |                      
| | --- | ---------------------
| | By: | /s/ BRIAN A. MARKISON

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

March 16, 2005

In accordance with the requirements of the
Securities Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the
capacities and on the date indicated.

|                                                         |  |                                                                                       |  |      |                | 
|-------------------------------------------------------- |  | ------------------------------------------------------------------------------------- |  | ---- | -------------- | 
|Signature                                                |  | Capacity                                                                              |  | Date
|                                                         |  |                                                                                       |  |     
|                                                        
|/s/ TED G. WOODTed G. Wood                               |  | Chairman                                                                              |  |      | March 16, 2005 | 
|                                                        
|/s/ BRIAN A. MARKISONBrian A. Markison                   |  | President, Chief Executive Officer and Director                                       |  |      | March 16, 2005 | 
|                                                        
|/s/ JAMES R. LATTANZIJames R. Lattanzi                   |  | Chief Financial Officer and Director (principal
    financial and accounting officer) |  |      | March 16, 2005 | 
|                                                        
|/s/ EARNEST W. DEAVENPORT, JR.Earnest W. Deavenport, Jr. |  | Director                                                                              |  |      | March 16, 2005 | 
|                                                        
|/s/ ELIZABETH M. GREETHAMElizabeth M. Greetham           |  | Director                                                                              |  |      | March 16, 2005 | 
|                                                        
|/s/ GREGORY D. JORDANGregory D. Jordan                   |  | Director                                                                              |  |      | March 16, 2005 | 
|                                                        
|/s/ R. CHARLES MOYERR. Charles Moyer                     |  | Director                                                                              |  |      | March 16, 2005 | 
|                                                        
|/s/ PHILIP M. PFEFFERPhilip M. Pfeffer                   |  | Director                                                                              |  |      | March 16, 2005 | 
|                                                        
|/s/ D. GREG ROOKERD. Greg Rooker                         |  | Director                                                                              |  |      | March 16, 2005 | 

II-1



---



##### 



KING PHARMACEUTICALS, INC.

Schedule II. Valuation and Qualifying
Accounts


(In thousands)


|                                                                                                               |  |              |        |                    |  |            |       |               |  |            |       |  |  |   |       |   |  |   |        | 
|-------------------------------------------------------------------------------------------------------------- |  | ------------ | ------ | ------------------ |  | ---------- | ----- | ------------- |  | ---------- | ----- |  |  | - | ----- | - |  | - | ------ | 
|                                                                                                               |  |              |        |                    |  |            |       |              
|Column A                                                                                                       |  | Column B     |        | Column C Additions |  | Column D   |       | Column E     
|                                                                                                               |  |              |        |                    |  |            |       |              
|                                                                                                               |  |              |        |                    |  | Charged    |       |               |  |           
|                                                                                                               |  | Balances at  |        | Charged to         |  | (Credited) |       |               |  | Balance at
|                                                                                                               |  | Beginning of |        | Cost and           |  | to Other   |       |               |  | End of    
|Description                                                                                                    |  | Period       |        | Expenses           |  | Accounts   |       | Deductions(1) |  | Period    
|                                                                                                               |  |              |        |                    |  |            |       |               |  |           
|Allowance for doubtful accounts, deducted from
    accounts receivable in the balance sheet                    |  |              |        |                    |  |            |       |               |  |            |       |  |  |   |       |   |  |   |        | 
|Year ended December 31, 2004                                                                                   |  | $            | 11,055 |                    |  | $          | 7,476 |               |  | $          |       |  |  | $ | 3,183 |   |  | $ | 15,348 | 
|Year ended December 31, 2003                                                                                   |  |              | 7,513  |                    |  |            | 4,176 |               |  |            | 1,063 |  |  |   | 1,697 |   |  |   | 11,055 | 
|Year ended December 31, 2002                                                                                   |  |              | 6,047  |                    |  |            | 4,700 |               |  |            | 890   |  |  |   | 4,124 |   |  |   | 7,513  | 
|                                                                                                              
|Valuation allowance for deferred tax assets,
    deducted from deferred income tax assets in the balance sheet |  |              |        |                    |  |            |       |               |  |            |       |  |  |   |       |   |  |   |        | 
|Year ended December 31, 2004                                                                                   |  | $            | 6,525  |                    |  | $          |      |               |  | $          |      |  |  | $ | 2,575 | * |  | $ | 3,950  | 
|Year ended December 31, 2003                                                                                   |  |              |       |                    |  |            | 3,124 |               |  |            | 3,401 |  |  |   |      |   |  |   | 6,525  | 
|Year ended December 31, 2002                                                                                   |  |              |       |                    |  |            |      |               |  |            |      |  |  |   |      |   |  |   |       | 



---



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



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

S-1