UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-Q

[MARK ONE]

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

For the quarterly period ended June 30, 2004

OR

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

For the transition period from  to

Commission File No. 000-30123

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FIRST HORIZON PHARMACEUTICAL CORPORATION(Exact name of registrant as specified in its charter)

|Delaware                                 |  | 58-2004779                             
|---------------------------------------- |  | ---------------------------------------
|(State of incorporation)                 |  | (I.R.S. Employer Identification Number)
|6195 Shiloh Road, Alpharetta, Georgia    |  | 30005                                  
|(Address of principal executive offices) |  | (Zip code)                             

(Registrant's
telephone number, including area code):(770) 442-9707

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 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 ý    No o

Indicated by check mark whether the registrant is an accelerated files (as defined in Rule 12b-2 of the Exchange
Act). Yes ý    No o

As of July 23, 2004, there were 36,019,807 shares of the Registrant's Common Stock outstanding.



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FIRST HORIZON PHARMACEUTICAL CORPORATION  FORM 10-Q  INDEX

|                                     |  |                                                                                                          |  | PAGE
|------------------------------------ |  | -------------------------------------------------------------------------------------------------------- |  | ----
|PART I.        FINANCIAL INFORMATION |  |                                                                                                         
|Item 1.                              |  | Financial Statements                                                                                     |  |     
|                                     |  | Consolidated Balance Sheets at June 30, 2004 and December 31, 2003                                       |  | 1   
|                                     |  | Consolidated Statements of Operations for the three and six months ended June 30, 2004 and June 30, 2003 |  | 2   
|                                     |  | Consolidated Statements of Cash Flows for the six months ended June 30, 2004 and June 30, 2003           |  | 3   
|                                     |  | Notes to Condensed Consolidated Financial Statements                                                     |  | 4   
|Item 2.                              |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                    |  | 12  
|Item 3.                              |  | Quantitative and Qualitative Disclosures about Market Risk                                               |  | 21  
|Item 4.                              |  | Controls and Procedures                                                                                  |  | 22  
|PART II.        OTHER INFORMATION    |  |                                                                                                         
|Item 1.                              |  | Legal Proceedings                                                                                        |  | 23  
|Item 2.                              |  | Changes in Securities and Use of Proceeds                                                                |  | 23  
|Item 3.                              |  | Defaults Upon Senior Securities                                                                          |  | 24  
|Item 4.                              |  | Submission of Matters to a Vote of Security Holders                                                      |  | 24  
|Item 5.                              |  | Other Information                                                                                        |  | 24  
|Item 6.                              |  | Exhibits and Reports on Form 8-K                                                                         |  | 24  
|                                     |  | Signatures                                                                                               |  | 26  
|                                     |  | Certifications                                                                                           |  |     

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PART IFINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

FIRST HORIZON PHARMACEUTICAL CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

|                                     |                                                                                                                                                                             | June 30,
2004                              |       | December 31,
2003
|------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ----- | -----------------
|
|ASSETS                               |                                                                                                                                                                             |                                            |       |                  
|Current assets:                      |                                                                                                                                                                             |                                            |       |                  
|                                     | Cash and cash equivalents                                                                                                                                                   |                                            | $     | 58,472           
|                                     | Marketable securities                                                                                                                                                       |                                            |       | 145,957          
|                                     | Accounts receivable, net of allowance for doubtful accounts, discounts and contractual adjustments of $515 and $546 at June 30, 2004 and December 31, 2003, respectively    |                                            |       | 17,353           
|                                     | Inventories                                                                                                                                                                 |                                            |       | 10,599           
|                                     | Income taxes receivable                                                                                                                                                     |                                            |       | 6,986            
|                                     | Current deferred tax assets                                                                                                                                                 |                                            |       | 2,989            
|                                     | Other current assets                                                                                                                                                        |                                            |       | 5,339            
|                                     |                                                                                                                                                                             |                                            |       |                  
|                                     |                                                                                                                                                                             | Total current assets                       |       |                  
|Property and equipment, net          |                                                                                                                                                                             |                                            | 2,766 |                  
|Other assets:                        |                                                                                                                                                                             |                                            |       |                  
|                                     | Intangibles, net                                                                                                                                                            |                                            |       | 232,893          
|                                     | Deferred tax assets                                                                                                                                                         |                                            |       |                 
|                                     | Other assets                                                                                                                                                                |                                            |       | 9,894            
|                                     |                                                                                                                                                                             |                                            |       |                  
|                                     |                                                                                                                                                                             | Total other assets                         |       |                  
|                                     |                                                                                                                                                                             | Total assets                               |       | $                
|                                     |                                                                                                                                                                             |                                            |       |                  
|LIABILITIES AND STOCKHOLDERS' EQUITY |                                                                                                                                                                             |                                            |       |                  
|Current liabilities:                 |                                                                                                                                                                             |                                            |       |                  
|                                     | Accounts payable                                                                                                                                                            |                                            | $     | 10,204           
|                                     | Accrued expenses                                                                                                                                                            |                                            |       | 12,910           
|                                     |                                                                                                                                                                             |                                            |       |                  
|                                     |                                                                                                                                                                             | Total current liabilities                  |       |                  
|Long-term liabilities:               |                                                                                                                                                                             |                                            |       |                  
|                                     | Convertible debt                                                                                                                                                            |                                            |       | 150,000          
|                                     | Deferred tax liabilities                                                                                                                                                    |                                            |       | 1,590            
|                                     | Other long-term liabilities                                                                                                                                                 |                                            |       | 621              
|                                     |                                                                                                                                                                             |                                            |       |                  
|                                     |                                                                                                                                                                             | Total liabilities                          |       |                  
|Stockholders' equity:                |                                                                                                                                                                             |                                            |       |                  
|                                     | Preferred stock, 1,000,000 share authorized and none outstanding                                                                                                            |                                            |       |                 
|                                     | Common stock, $0.001 par value; 100,000,000 shares authorized; 36,018,625 and 35,595,442 shares issued and outstanding at June 30, 2004 and December 31, 2003, respectively |                                            |       | 36               
|                                     | Additional paid-in capital                                                                                                                                                  |                                            |       | 291,755          
|                                     | Retained earnings                                                                                                                                                           |                                            |       | 27,317           
|                                     | Accumulated other comprehensive (loss) income                                                                                                                               |                                            |       | (1,185           
|                                     |                                                                                                                                                                             |                                            |       |                  
|                                     |                                                                                                                                                                             | Total stockholders' equity                 |       |                  
|                                     |                                                                                                                                                                             | Total liabilities and stockholders' equity |       | $                
|                                     |                                                                                                                                                                             |                                            |       |                  

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

1

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FIRST HORIZON PHARMACEUTICAL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited, in thousands, except per share data)

|                                                |                                                            | For The Quarter Ended
June 30,     |        | For The Six Months Ended June 30, |       
|----------------------------------------------- | ---------------------------------------------------------- | ---------------------------------- | ------ | --------------------------------- | ------
|
|Net Revenues                                    |                                                            | $                                  | 35,990 |                                   | $     
|Operating costs and expenses:                   |                                                            |                                    |        |                                   |       
|                                                | Cost of revenues (excluding amortization and depreciation) |                                    |        | 6,825                             |       
|                                                | Selling, general and administrative expense                |                                    |        | 15,737                            |       
|                                                | Depreciation and amortization                              |                                    |        | 4,139                             |       
|                                                | Impairment charge                                          |                                    |        |                                  |       
|                                                | Research and development expense                           |                                    |        | 363                               |       
|                                                |                                                            |                                    |        |                                   |       
|                                                |                                                            | Total operating costs and expenses |        | $                                 | 27,064
|                                                |                                                            |                                    |        |                                   |       
|Operating income (loss)                         |                                                            |                                    | 8,926  |                                   |       
|                                                |                                                            |                                    |        |                                   |       
|Other income (expense):                         |                                                            |                                    |        |                                   |       
|                                                | Interest expense                                           |                                    |        | (754                              | )     
|                                                | Interest income                                            |                                    |        | 990                               |       
|                                                | Other                                                      |                                    |        | (23                               | )     
|                                                |                                                            |                                    |        |                                   |       
|                                                |                                                            | Total other income (expense)       |        | $                                 | 213   
|                                                |                                                            |                                    |        |                                   |       
|Income (loss) before provision for income taxes |                                                            |                                    | 9,139  |                                   |       
|(Provision) benefit for income taxes            |                                                            |                                    | (3,630 | )                                 |       
|                                                |                                                            |                                    |        |                                   |       
|Net income (loss)                               |                                                            | $                                  | 5,509  |                                   | $     
|Other comprehensive income (loss)               |                                                            | $                                  | (1,482 | )                                 | $     
|                                                |                                                            |                                    |        |                                   |       
|Comprehensive income (loss)                     |                                                            | $                                  | 4,027  |                                   | $     
|                                                |                                                            |                                    |        |                                   |       
|Net income (loss) per common share:             |                                                            |                                    |        |                                   |       
|                                                | Basic earnings (loss) per common share                     |                                    | $      | 0.15                              |       
|                                                |                                                            |                                    |        |                                   |       
|                                                | Diluted earnings (loss) per common share:                  |                                    | $      | 0.15                              |       
|                                                |                                                            |                                    |        |                                   |       
|Weighted average common shares outstanding:     |                                                            |                                    |        |                                   |       
|                                                | Basic                                                      |                                    |        | 36,000                            |       
|                                                |                                                            |                                    |        |                                   |       
|                                                | Diluted                                                    |                                    |        | 37,053                            |       
|                                                |                                                            |                                    |        |                                   |       

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

2

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FIRST HORIZON PHARMACEUTICAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)

|                                                                                                   |                                                                            | For The Six Months Ended June 30,                   |                                       
|-------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------- | --------------------------------------------------- | --------------------------------------
|
|Cash flows from operating activities:                                                              |                                                                            |                                                     |                                       
|Net income (loss)                                                                                  |                                                                            | $                                                   | 10,556                                
|Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |                                                                            |                                                     |                                       
|                                                                                                   | Depreciation and amortization                                              |                                                     |                                       
|                                                                                                   | Impairment charge                                                          |                                                     |                                       
|                                                                                                   | Non-cash interest expense                                                  |                                                     |                                       
|                                                                                                   | Deferred income tax provision/(benefit)                                    |                                                     |                                       
|                                                                                                   | Non-cash compensation expense                                              |                                                     |                                       
|                                                                                                   | Reduction in taxes payablestock option exercises                          |                                                     |                                       
|                                                                                                   | Changes in assets and liabilities, net of acquired assets and liabilities: |                                                     |                                       
|                                                                                                   |                                                                            |                                                     | Accounts receivable                   
|                                                                                                   |                                                                            |                                                     | Inventories                           
|                                                                                                   |                                                                            |                                                     | Other current assets and other assets 
|                                                                                                   |                                                                            |                                                     | Income taxes receivable               
|                                                                                                   |                                                                            |                                                     | Accrued expenses and other liabilities
|                                                                                                   |                                                                            |                                                     | Accounts payable                      
|                                                                                                   |                                                                            |                                                     |                                       
|                                                                                                   |                                                                            | Net cash provided by (used in) operating activities |                                       
|Cash flows from investing activities:                                                              |                                                                            |                                                     |                                       
|                                                                                                   | Purchase of marketable securities                                          |                                                     |                                       
|                                                                                                   | Advance payments for product licenses                                      |                                                     |                                       
|                                                                                                   | Purchase of property and equipment                                         |                                                     |                                       
|                                                                                                   |                                                                            |                                                     |                                       
|                                                                                                   |                                                                            | Net cash used in investing activities               |                                       
|Cash flows from financing activities:                                                              |                                                                            |                                                     |                                       
|                                                                                                   | Capitalized financing costs incurred                                       |                                                     |                                       
|                                                                                                   | Repurchase of common stock                                                 |                                                     |                                       
|                                                                                                   | Issuance of long-term debt                                                 |                                                     |                                       
|                                                                                                   | Net proceeds from issuance of common stock                                 |                                                     |                                       
|                                                                                                   |                                                                            |                                                     |                                       
|                                                                                                   |                                                                            | Net cash provided by (used in) financing activities |                                       
|Effect of foreign exchange rates on cash                                                           |                                                                            |                                                     | (25                                   
|Net change in cash and cash equivalents                                                            |                                                                            |                                                     | 24,750                                
|Cash and cash equivalents, beginning of period                                                     |                                                                            |                                                     | 33,722                                
|                                                                                                   |                                                                            |                                                     |                                       
|Cash and cash equivalents, end of period                                                           |                                                                            | $                                                   | 58,472                                
|                                                                                                   |                                                                            |                                                     |                                       
|Supplemental Cash Flow Information:                                                                |                                                                            |                                                     |                                       
|Cash paid for taxes                                                                                |                                                                            | $                                                   | 4,206                                 
|                                                                                                   |                                                                            |                                                     |                                       
|Cash paid for interest                                                                             |                                                                            | $                                                   | 25                                    
|                                                                                                   |                                                                            |                                                     |                                       

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

3

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FIRST HORIZON PHARMACEUTICAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2004

(unaudited)

1.     Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements reflect all adjustments (consisting solely of normal recurring adjustments) which
management considers necessary for fair presentation of the financial position, results of operations and cash flows of the Company for the interim periods. Certain footnote disclosures normally
included in financial statements prepared according to generally accepted accounting principles in the United States of America have been condensed or omitted from these interim financial statements
as permitted by the rules and regulations of the Securities and Exchange Commission. Interim results are not necessarily indicative of results for the full year. The interim results should be read in
conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2003 (File
No. 000-30123).

2.     New Accounting Pronouncements

On July 1, 2004, the Emerging Issues Task Force (the "EITF") of the FASB reached a tentative conclusion that would require all shares that are contingently
issuable under the Company's outstanding convertible notes to be considered outstanding for its diluted earnings per share computations, if dilutive, using the "if converted" method of accounting from
the date of issuance. Currently these
shares are only included in the diluted earnings per share computation if the Company's common stock price has reached certain conversion trigger prices. If approved, this EITF statement
("EITF 04-8") would also require the Company to retroactively restate its prior periods diluted earnings per share. It is believed likely that EITF 04-8 will be
effective for periods ending after mid-October 2004. If adopted, EITF 04-8 would have no impact on the Company's diluted earnings per share for the three and six
months ended June 30, 2003 but it would reduce the Company's diluted earnings per share by $0.01 for both the three and six months ended June 30, 2004.

In
March 2004, the Emerging Issues Task Force ("EITF") reached a consensus on Issue No. 03-1, "The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments." This consensus clarifies the meaning of other-than-temporary impairment and its application to investments classified as
either available-for-sale or held-to-maturity under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," and
investments accounted for under the cost method or the equity method. The application of this guidance should be used to determine when an investment is considered impaired, whether an impairment is
other than temporary, and the measurement of an impairment loss. The guidance also includes accounting considerations subsequent to the recognition of an other-than-temporary
impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The guidance for evaluating whether an
investment is other-than-temporarily impaired is effective for evaluations made in reporting periods beginning after June 15, 2004. The Company does not believe that the
application of this consensus will have a material impact on the results of operations or financial position.

In
March 2004 the FASB issued a proposed standard entitled "Share-Based PaymentAn Amendment of FAS Nos. 123 and 95." The proposed rules will eliminate the
disclosure-only election under FAS 123 and require the recognition of compensation expense for stock options and other forms of equity compensation based on the fair value of the
instruments on the date of grant. The FASB currently expects to issue a final standard in late 2004, which is slated to be effective for the first quarter 2005 for the Company. See note 10 for
the quarterly disclosures of the pro forma dilutive impact on net income and earnings per share of expensing stock options based on the Black-Scholes

4

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model.
The FASB's proposal advocates using a binomial (lattice-based) option pricing model rather than the Black-Scholes model the company currently uses to determine grant date fair value. The
Company has not yet determined what, if any, impact using the recommended binomial model will have on the company's estimated net income and earnings per share dilution compared to the Black-Scholes
model.

During
December 2003, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 104,Revenue
Recognition, which supercedes SAB No. 101, Revenue Recognition in
Financial Statements. This Bulletin's primary purpose is to rescind accounting guidance contained in SAB No. 101 related to multiple element revenue arrangements,
superceded as a result of the issuance of EITF 00-21,Accounting for Revenue Arrangements with Multiple Deliverables. While the
wording of SAB No. 104 has changed to reflect the issuance of EITF 00-21, the revenue recognition principles of SAB No. 101 remain largely unchanged by the issuance of
SAB No. 104. The issuance of this Bulletin did not impact the Company's accounting policy for revenue recognition.

During
December 2003, the Financial Accounting Standards Board ("FASB") issued SFAS No. 132 (revised 2003),Employers' Disclosures about Pensions
and Other Postretirement Benefitsan amendment of FASB Statements No. 87, 88, and 106. This Statement revises disclosure requirements about pension plans and
other postretirement benefit plans. It does not change the measurement or recognition of those plans required by SFAS No. 87,Employers' Accounting for
Pensions,SFAS No. 88,Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination
Benefits,and SFAS No. 106,Employers' Accounting for Postretirement Benefits Other Than Pensions.This Statement
requires additional disclosures about the assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other postretirement benefit plans. In addition, the
various elements of pension and other postretirement benefit costs must be disclosed on a quarterly basis. The annual disclosure provisions of SFAS No. 132 (revised 2003) generally are
effective for fiscal years ending after December 15, 2003, while the interim disclosure provisions are effective for interim periods beginning after December 15, 2003. The adoption of
SFAS No. 132 (revised 2003) did not have a material impact on the Company's financial condition or results of operations.

3.     Stock Options

The Company applies APB No. 25, "Accounting for Stock Issued to Employees," and related interpretations in
accounting for all stock options issued to employees. Accordingly, the Company records compensation expense for any stock option grants with exercise prices lower than fair value, recognized ratably
over the vesting period.

Had
compensation costs for the Company's options been determined using the Black Scholes option-pricing models prescribed by SFAS No. 123, "Accounting for
Stock Based Compensation," the

5

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Company's
pro forma net income (loss) per common share would have been reported as follows (in thousands except per share data):

|                                            |                                                                                                                              | For The Quarter Ended June 30, |       | For The Six Months Ended June 30, |  
|------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------- | ------------------------------ | ----- | --------------------------------- | -
|
|Net income (loss) as reported               |                                                                                                                              | $                              | 5,509 |                                   | $
|Deduct:                                     |                                                                                                                              |                                |       |                                   |  
|                                            | Total stock-based employee compensation expense determined under fair value basis for all awards, net of related tax effects |                                |       | (606                              | )
|                                            |                                                                                                                              |                                |       |                                   |  
|Pro forma                                   |                                                                                                                              | $                              | 4,903 |                                   | $
|                                            |                                                                                                                              |                                |       |                                   |  
|Net income (loss) per common sharebasic:   |                                                                                                                              |                                |       |                                   |  
|                                            | As reported                                                                                                                  |                                | $     | 0.15                              |  
|                                            | Pro forma                                                                                                                    |                                | $     | 0.14                              |  
|Net income (loss) per common sharediluted: |                                                                                                                              |                                |       |                                   |  
|                                            | As reported                                                                                                                  |                                | $     | 0.15                              |  
|                                            | Pro-forma                                                                                                                    |                                | $     | 0.13                              |  

The
weighted average fair value per share of options granted during the six months ended June 30, 2004 and 2003 is estimated at $13.06 and $3.19, respectively. The
value of options is estimated on the date of the grant using the following weighted average assumptions:

2004

2003Risk-free interest rate

3.22
%
2.38
%Expected dividend yield



Expected lives

5 years

5 yearsExpected volatility

128.36
%
137.25
%


The
Black-Scholes option valuation model was not developed for use in valuing employee stock options. Instead, this model was developed for use in estimating the fair
value of traded options, which have no vesting restrictions, and are fully transferable, which differ significantly from the Company's stock option awards. In addition, option valuation models require
the input of highly subjective assumptions including the expected stock price volatility and expected survival rates of the options.

4.     Reclassifications

Certain prior year amounts have been reclassified to conform to the current year financial statement presentation.

5.     Marketable Securities

The Company classifies its existing marketable securities as available-for-sale. All available-for-sale securities
are considered current, as the Company intends to use them for current operating and investing purposes. There were no realized gains or losses in the three or six months ended June 30, 2004.
At June 30, 2004, the Company had total net unrealized losses from marketable securities of $2.3 million.

The
carrying amount of available-for-sale securities and their approximate fair values at June 30, 2004 were as follows (in thousands):

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair ValueU.S. Government and Federal agency obligations

$
87,912

$
20

$
(1,563
)
$
86,369Corporate bonds


60,376





(788
)

59,588Total

$
148,288

$
20

$
(2,351
)
$
145,957


6

---



6.     Inventories

Inventories consist of purchased pharmaceutical products and are stated at the lower of cost or market. Cost is determined using the first-in,
first-out method, and market is considered to be net realizable value. Inventories consist of finished product and bulk product awaiting processing and packaging into finished product. At
June 30, 2004, the Company had an allowance for excess and obsolete inventory of $2.1 million compared to $2.4 million at December 31, 2003. Inventories at June 30,
2004 and December 31, 2003 consisted of (in thousands):

June 30,
2004

December 31,
2003Bulk product

$
4,965

$
6,050Finished product


5,634


5,138$
10,599

$
11,188


7.     Samples

Samples primarily consist of product samples used in the sales and marketing efforts of the Company's products. Samples are expensed upon distribution, as a
selling expense. Sample inventories at June 30, 2004 and December 31, 2003 were $1.4 and $0.8 million, respectively, and are included in other current assets.

8.     Other Assets

Other assets at June 30, 2004 and December 31, 2003 consist of the following (in thousands):

June 30,
2004

December 31,
2003Capitalized finance costs (See Note 16)

$
4,732

$
145Advance payment for product licenses


5,000


Deposits


162


588$
9,894

$
733


During
the second quarter of 2004, the Company announced an agreement with SkyePharma PLC, granting it the exclusive license to market and distribute a cardiovascular
product in the United States. The Agreement requires the Company to pay $5.0 million to SkyePharma upon signing the Agreement and up to an additional $15.0 million is payable
thereafterall of which are contingent upon milestones related to FDA approval. The product has been submitted to the U.S. Food and Drug Administration ("FDA") for approval, which is
expected by the end of this year. The Company intends to begin marketing and distribution shortly after FDA approval.

9.     Accrued Expenses

Accrued expenses at June 30, 2004 and December 31, 2003 consist of the following (in thousands):

June 30,
2004

December 31,
2003Employee compensation and benefits

$
1,764

$
1,982Product returns


1,800


3,813Sales deductions


5,966


4,287Assumed liabilitiesproduct acquisitions


30


824Royalties


662


546Accrued interest


817


Other


1,871


1,758$
12,910

$
13,210


7

---



10.   Earnings Per Share

Below is the calculation of basic and diluted net income (loss) per share (in thousands except per share data):

|                                                   |  | For The Quarter Ended June 30, |        | For The Six Months Ended June 30, |  
|-------------------------------------------------- |  | ------------------------------ | ------ | --------------------------------- | -
|
|Net income (loss)                                  |  | $                              | 5,509  |                                   | $
|Other comprehensive income (loss)                  |  |                                | (1,482 | )                                 |  
|                                                   |  |                                |        |                                   |  
|Comprehensive income (loss)                        |  | $                              | 4,027  |                                   | $
|                                                   |  |                                |        |                                   |  
|Weighted average common shares outstandingbasic   |  |                                | 36,000 |                                   |  
|Diluted effect of stock options                    |  |                                | 1,053  |                                   |  
|                                                   |  |                                |        |                                   |  
|Weighted average common shares outstandingdiluted |  |                                | 37,053 |                                   |  
|                                                   |  |                                |        |                                   |  
|Basic earnings (loss) per common share:            |  | $                              | 0.15   |                                   | $
|                                                   |  |                                |        |                                   |  
|Diluted earnings (loss) per common share:          |  | $                              | 0.15   |                                   | $
|                                                   |  |                                |        |                                   |  

For
the quarter and six months ended June 30, 2004, there were 634,349 and 637,499 potential common shares outstanding, respectively, that were excluded from the
diluted net income (loss) per share calculation because their effect would have been anti-dilutive. The convertible debt could also be converted into 6,772,005 shares of common stock in
the future, subject to certain contingencies outlined in footnote 16. Because such contingencies were not fulfilled, the convertible debt was not considered in the calculation of diluted income
per common share.

11.   Impairment Charge

In the second quarter of 2003, the Company formulated a new sales and marketing strategy upon the Company hiring Mr. Patrick Fourteau as its President and
Chief Operating Officer. This new strategy resulted in the discontinuation of the pursuit of a line extension for Cognex as well as the subsequent plans to promote the product. As part of this new
strategy, using market research, the Company updated its forecasts of Cognex sales projections to reflect a life cycle through June 2013, the period of time that the Company expects it will
continue to sell the product in the future. As a result, the estimated useful life of Cognex was decreased from a remaining life of 17 years to 10 years, and using the estimated future
undiscounted cash flows over the useful life of the product, the intangible asset related to Cognex was not projected to be recoverable.

To
determine a fair value of the intangible asset related to Cognex, the Company performed an internal analysis utilizing a number of factors, including information from an independent
valuation. The Company's analysis resulted in an impairment charge of $4.2 million being recorded as of June 30, 2003. The methodologies used to determine a fair value for Cognex
included a combination of a market approach, which used a marketable multiple methodology and a comparable transaction methodology, as well as an income approach, using a discounted cash flow
methodology.

12.   Intangible Assets

The following table reflects the components of intangible assets as of June 30, 2004 (in thousands):

|                               |  | Gross Amount |         | Accumulated
Amortization |   | Impairment
Charge |   | Net Amount |        | Weighted
Average Life
|------------------------------ |  | ------------ | ------- | ------------------------ | - | ----------------- | - | ---------- | ------ | ---------------------
|Licensing rights               |  | $            | 244,715 |                          | $ | (32,331           | ) | $          | (4,152 | )                    
|Trade names                    |  |              | 11,060  |                          |   | (1,463            | ) |            |       |                      
|Contracts                      |  |              | 8,300   |                          |   | (4,002            | ) |            |       |                      
|Supply/Distribution agreements |  |              | 11,490  |                          |   | (3,495            | ) |            |       |                      
|Other intangibles              |  |              | 3,220   |                          |   | (449              | ) |            |       |                      
|                               |  |              |         |                          |   |                   |   |            |        |                      
|Total                          |  | $            | 278,785 |                          | $ | (41,740           | ) | $          | (4,152 | )                    
|                               |  |              |         |                          |   |                   |   |            |        |                      

8

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The
following table reflects the components of intangible assets as of December 31, 2003 (in thousands):

|                               |  | Gross Amount |         | Accumulated
Amortization |   | Impairment
Charge |   | Net Amount |        | Weighted
Average Life
|------------------------------ |  | ------------ | ------- | ------------------------ | - | ----------------- | - | ---------- | ------ | ---------------------
|Licensing rights               |  | $            | 244,415 |                          | $ | (26,287           | ) | $          | (4,152 | )                    
|Trade names                    |  |              | 11,060  |                          |   | (1,186            | ) |            |       |                      
|Contracts                      |  |              | 8,300   |                          |   | (3,172            | ) |            |       |                      
|Supply/Distribution agreements |  |              | 11,490  |                          |   | (2,821            | ) |            |       |                      
|Other intangibles              |  |              | 3,082   |                          |   | (373              | ) |            |       |                      
|                               |  |              |         |                          |   |                   |   |            |        |                      
|Total                          |  | $            | 278,347 |                          | $ | (33,839           | ) | $          | (4,152 | )                    
|                               |  |              |         |                          |   |                   |   |            |        |                      

For
the three and six months ended June 30, 2004, amortization expense related to the intangible assets was $4.0 million and $7.9 million,
respectively. Amortization is calculated on a straight-line basis over the estimated useful life of the intangible asset. Estimated annual amortization expense for each of the five
succeeding fiscal years is as follows (in thousands):

Fiscal year ended December 31:

Amount2004

$
15,7242005

$
15,5362006

$
15,4322007

$
14,1272008

$
13,876


13.   Segment Reporting

The Company is engaged solely in the business of marketing and selling prescription pharmaceutical products. Accordingly, the Company's business is classified in
a single reportable segment, the sale and marketing of prescription products. Prescription products include a variety of branded pharmaceuticals for the treatment of cardiovascular, obstetrical and
gynecological, pediatric and gastroenterological conditions and disorders.

The
following presents revenues for prescription products by area of treatment:

For The Quarter Ended June 30,

For The Six Months Ended June 30,2004

2003

2004

2003Cardiovascular

$
20,451

$
12,625

$
34,996

$
16,566Women's Health/Pediatrics


12,606


8,161


25,828


15,194Non Promoted


2,933


172


7,184


1,693Net Revenues

$
35,990

$
20,958

$
68,008

$
33,453


14.   Share Repurchase Program

On July 8, 2002, the Company announced a share repurchase program. This program authorized the repurchase of up to $8.0 million in common stock
until July 5, 2003. Through July 5, 2003, the Company repurchased 823,400 shares of its common stock at an aggregate cost of approximately $2.1 million. On August 25, 2003,
the Company authorized the repurchase of up to an additional $7.9 million of common stock, for a total authorization of $10.0 million, and extended the repurchase program to
August 31, 2004. In September 2003, the Company repurchased an additional 162,225 shares of common stock at an aggregate cost of approximately $1.0 million. Through
December 31, 2003, the Company had repurchased a total of 985,625 shares of common stock at an aggregate cost of approximately $3.1 million. During the six months ended June 30,
2004, the Company repurchased a total of 260,000 shares of common stock at an aggregate cost of approximately $4.6 million. All the shares repurchased were retired.

9

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In
July 2004, our Board of Directors authorized a $20.0 million share repurchase program. The new program, which authorizes the purchase of up to $5 million of
common stock per quarter, will become effective on August 3, 2004, terminating and replacing the $10.0 million share repurchase program authorized by our Board of Directors in fiscal
2002. The plan will expire in August 2005.

15.   Credit Agreement

On February 11, 2003, the Company entered into a Credit Agreement for a $20.0 million senior secured revolving credit facility with various lenders
and LaSalle Bank National Association, as Administrative Agent. Borrowings may be used for working capital requirements and general corporate purposes. Borrowings are secured by substantially all of
the Company's assets. Borrowings bear interest at the Company's option at the base rate in effect from time to time plus an applicable margin or the Eurodollar rate, plus an applicable margin. The
applicable margin will vary dependent upon the Company's leverage ratio in effect from time to time. The revolving facility, as amended, matures on August 11, 2006. The revolving loan contains
various covenants, including covenants relative to maintaining financial ratios and earnings levels, limitations on acquisitions, dispositions, mergers and capital expenditures, limitations on
incurring additional indebtedness and a prohibition on payment of dividends and certain issuances of our capital stock. As of June 30, 2004, the Company was in compliance with all financial
covenants of the Credit Agreement. As of June 30, 2004 there was no outstanding balance on the Credit Agreement. For the quarter and six months ended June 30, 2004, there were no
borrowings or repayments under the Credit Agreement.

16.   Long-term Debt

In March 2004, the Company issued a total of $150.0 million of its 1.75% senior subordinated contingent convertible notes due 2024 in transactions
that were exempt from registration in reliance upon Rule 144A and other available exemptions under the Securities Act. The notes are due March 8, 2024 and interest is payable
semi-annually in arrears on March 8 and September 8 of each year, commencing on September 8, 2004. In addition to the interest on the notes, after March 8,
2007, the Company will also pay contingent interest during specified six-month periods if the average trading price of the notes per $1,000 principal amount for the five day trading period
ending on the third trading day immediately preceding the first day of the applicable six-month period equals $1,200 or more. During any period when contingent interest is payable, it will
be payable at a rate equal to 0.5% per annum. As this contingent interest feature is based on the underlying trading price of the notes, the contingent interest qualifies as an embedded derivative. As
of June 30, 2004, management determined that the fair value of this contingent interest embedded derivative is not material. The net proceeds from this issuance, after deducting offering
expenses, were approximately $145.4 million. Financing costs of $4.6 million were incurred with the issuance which are being amortized on a straight line basis over the life of the notes
and are included in other assets in the consolidated balance sheet.

Holders
of the notes may initially convert the notes into shares of the Company's common stock at a conversion rate of 45.1467 shares per $1,000 principal amount of the notes, which is
equivalent to a conversion price of $22.15 per share, subject to anti-dilution adjustments, before the close of business on March 8, 2024. Holders may convert the notes only under
the following circumstances: (1) during any calendar quarter commencing after June 30, 2004, if the closing sales price of the Company's common stock exceeds 120% of the conversion price
for at least 20 trading days in the 30 consecutive trading days ending on the last trading day of the preceding calendar quarter; (2) if the notes have been called for redemption;
(3) during the five trading day period immediately following any nine consecutive trading day period in which the trading price of the notes per $1,000 principal amount for each day of that
period was less than 95% of the product of the closing price of the Company's common stock and the number of shares of common stock issuable upon conversion of $1,000 principal amount of the notes; or
(4) the occurrence of specified corporate transactions.

10

---



The
Company has the option to redeem the notes beginning March 13, 2007 at a price equal to 100% of their aggregate principal amount, plus accrued and unpaid interest, including
contingent interest, if any.

The
holders of the notes have the option to require the Company to repurchase the notes on March 8 of 2009, 2014 and 2019, and upon a change in control, at a price equal to 100%
of their aggregate principal amount, plus accrued and unpaid interest, including contingent interest, if any.

In
connection with the issuance of the notes, on March 30, 2004 the Company filed a registration statement on Form S-3 with the Securities and Exchange
Commission to register for resale the 6.8 million shares of the Company's common stock issuable, subject to
anti-dilution adjustments, upon conversion of the notes. The registration statement became effective during the second quarter of 2004.

17.   Commitments and Contingencies

A lawsuit was filed in the U.S. District Court for the Northern District of Georgia on August 22, 2002 (which has been consolidated with two subsequent
lawsuits based upon substantially the same allegations) against the Company, all members of the Company's Board of Directors, certain former and current officers, and the Company's underwriters for
its public offering completed on April 24, 2002. The consolidated lawsuit is seeking to be certified as a class action lawsuit, but has not yet been granted that status. The consolidated
amended complaint generally alleges that the Company issued a series of materially false and misleading statements to the market in connection with the Company's public offering on April 24,
2002 and thereafter relating to alleged "channel stuffing" activities. The amended complaint asserts that Defendants violated Sections 11 and 12(a)(2) of the Securities Act of 1933. The amended
complaint further alleges violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The amended complaint also alleges
controlling person liability on behalf of certain of the Company's officers under Section 15 of the Securities Act and Section 20 of the Securities Exchange Act.

Plaintiffs
in this consolidated class action lawsuit seek unspecified compensatory damages in an amount to be proven at trial. The Company denies the claims made in the lawsuit and
intends to vigorously defend against these claims. All Defendants have filed motions to dismiss these claims, which currently are pending before the Court. Due to the inherent uncertainties involved
in litigation, the Company is unable to predict the outcome of this litigation and an adverse result could have a material adverse effect on the Company's financial position and results of operations.

The
Company is also involved with other various routine legal proceedings incident to the ordinary course of business. None of these proceedings are expected to have a material adverse
effect on the consolidated financial statements.

11

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following should be read with the consolidated financial statements and related footnotes and Management's Discussion and Analysis of Results of Operations
and Financial Condition included in the Company's Annual Report on Form 10-K for the year ended December 31, 2003 (File No. 000-30123.) The results
discussed below are not necessarily indicative of the results to be expected in any future periods. The following discussion contains forward-looking statements that are subject to risks and
uncertainties, which could cause actual results to differ from the statements made.

Overview

We are a specialty pharmaceutical company that markets and sells brand name prescription products. Our current operating plan focuses on maximizing the sales of
our existing product portfolio. We plan to accelerate growth by launching line extensions to our current products and acquiring or licensing approved products or late stage development products. We
plan to focus on products that fit within the Cardiology and Women's Health/Pediatric categories that will allow us to leverage our existing sales force infrastructure.

We
sell our products to pharmaceutical wholesalers (who in turn distribute to pharmacies), chain drug stores, other retail merchandisers and, on a limited basis, directly to pharmacies.
We recognize revenue when our products are shipped and the customer takes ownership and assumes the risk of loss. Our sales force targets high-prescribing primary care physicians and
select specialty physicians. Our sales force seeks to develop close relationships with these physicians and respond to their needs and the needs of their patients. These physicians, in turn, write
prescriptions for our products in order to treat their patients. We evaluate the effectiveness of our sales and marketing efforts by monitoring prescription trends of our promoted products.

Results of Operations

Net Revenue.Net revenues for the quarter ended June 30, 2004 increased $15.0 million or 71% to
$36.0 million, as compared to $21.0 million for the quarter ended June 30, 2003. Net revenues for the six months ended June 30, 2004 increased $34.5 million or 103%
to $68.0 million, as compared to $33.5 million for the six months ended June 30, 2003. Net revenues increased for the quarter and six month period as a result of the successful
execution of our sales and marketing strategy, an increase in sales force, significant hospital and prescription growth, recent managed care plan additions and increased sales from the Sular and
Prenate Elite product lines.

In
late 2002, our wholesaler customers purchased what we believe to be excessive levels of inventory of our products in anticipation of future price increases. This adversely impacted
our sales in the first half of 2003. As a result of limiting shipments to wholesalers in the first half of 2003 and thereby attempting to reduce the amount of inventory held by the wholesalers, unit
sales decreased 29%, from the first half of 2002 compared to the first half of 2003.

Prior
to developing systems in 2003, we first learned of the wholesalers increasing the trade levels of inventory in mid-December 2002 upon receiving the IMS Health
Pipeline Report which was a report provided by IMS Health Incorporated that provides information on inventory levels held by certain major wholesalers. This report indicated that wholesaler inventory
levels were higher than expected by the Company. This additional inventory was purchased by the wholesalers prior to our January 2003 product price increases, allowing these wholesaler
customers to increase the prices they charge their retail customers in the first quarter of 2003, thereby improving their margins for these products. In response, in the second and third quarters of
2003, we entered into inventory management agreements with our three largest wholesale customers to encourage the wholesaler's to maintain on average one

12

---



month
of inventory. Trade levels of our promoted products were approximately one month at June 30, 2004 including Tanafed, which had a trade level of approximately two months at June 30,
2004.

Net
revenues for the six months ended June 30, 2003, also include a decrease of $3.4 million for an accrual for estimated future returns of the Tanafed Suspension and
Tanafed DM products which we discontinued in April 2003.



Change in total dispensed
prescriptions for the quarter
ended June 30, 2004
compared to the quarter
ended June 30, 2003(a)

Change in new dispensed
prescriptions for the quarter
ended June 30, 2004
compared to the quarter
ended June 30, 2003(a)Sular

+9.4
%
+24.0
%Nitrolingual(b)

(9.0
)%
(9.8
)%Prenate Elite(c)

N/A

N/ARobinul line

+2.1
%
+0.1
%Tanafed line

(19.5
)%
(22.1
)%Ponstel

(16.0
)%
(15.6
)%


---

Net
revenues of Sular were $16.3 million and $27.0 million for the quarter and six months ended June 30, 2004, respectively, compared to $7.5 million and
$9.6 million for the quarter and six months ended June 30, 2003, respectively. The increase was primarily a result of total prescription growth, significant hospital growth and the
impact of recent managed care plan additions.

Net
revenues of the promoted Women's Health/Pediatric products (namely Prenate Elite, the Robinul line, the Tanafed line and Ponstel), were $12.6 million for the quarter ended
June 30, 2004 compared to $8.2 million for the quarter ended June 30, 2003.

In
March 2004, we announced that we were launching Prenate Elite, the next generation of the Prenate line of prenatal vitamins. We began promoting and selling Prenate Elite in
April 2004. Net revenues of Prenate Elite were $2.7 million for the quarter ended June 30, 2004. Prenate Elite has captured an 8.5% market share of new prescriptions as of
June 2004 (Source: IMS Health's National Prescription Audit Plus data), reinforcing our belief that its principal component, Metafolin®, offers greater opportunity for
folate metabolism and subsequent absorption over folic acid. Net revenues of Prenate GT and Prenate Advance were $1.3 million for the quarter ended June 30, 2003.

Cost of Revenues.Cost of revenues for the quarter ended June 30, 2004 were $6.8 million compared to
$5.9 million for the quarter ended June 30, 2003. Cost of revenues for the six months ended June 30, 2004 were $12.4 million compared to $10.0 million for the six
months ended June 30, 2003. As a result of a change in the Company's sales forecast, cost of revenues for the quarter and six months ended June 30, 2003 included an increased allowance
for obsolete and excess inventory of $2.2 million and $3.5 million, respectively. These charges were primarily for the Company's non-promoted products, excess Sular and
Tanafed inventory and short dated Prenate GT inventory. Cost of revenues for the quarter and six months ended June 30, 2004 do not include a comparable allowance for obsolete and excess
inventory.

13

---



Gross Margin.Gross margin for the quarter ended June 30, 2004 was 81% compared to 72% for the quarter ended
June 30, 2003. Gross margin for the six months ended June 30, 2004 was 82% compared to 70% for the six months ended June 30, 2003. Approximately ten percentage points of this
increase in gross margin percentage for the quarter and six months ended June 30, 2004 resulted from the increased allowance for obsolete and excess inventory recorded in 2003. Also affecting
gross margin was a change in product sales mix.

Selling, General and Administrative Expenses.Selling, general and administrative expenses increased $0.2 million, or
1.3%, to $15.7 million for the quarter ended June 30, 2004, compared to $15.5 million for the quarter ended June 30, 2003. Expenses totaling $1.3 million are
included in the quarter ended June 30, 2003 for an allowance for obsolete sample inventory and severance for departing executives. Selling, general and administrative expenses for the quarter
ended June 30, 2004 do not include comparable expenses.

Selling,
general and administrative expenses decreased $3.0 million, or 9.2%, to $29.6 million for the six months ended June 30, 2004, compared to
$32.6 million for the six months ended June 30, 2003. Selling, general and administrative expenses for the six months ended June 30, 2003 include expenses totaling
$2.7 million for an allowance for obsolete sample inventory, shipping cost related to the withdrawal of Tanafed and Tanafed DM and severance for departing executives. Selling, general and
administrative expenses for the six months ended June 30, 2004 do not include such comparable expenses. This decrease in expenses was partially offset by costs associated with the expansion of
the sales force during 2004.

Depreciation and Amortization Expense.Depreciation and amortization expense decreased $0.1 million, or 2.4%, to
$4.1 million for the quarter ended June 30, 2004 compared to $4.2 million for the quarter ended June 30, 2003. Depreciation and amortization expense was $8.3 million
for the six months ended June 30, 2004 and 2003.

Impairment Charge.In the second quarter of 2003, the Company revised its revenue forecast for all of its products and
evaluated the remaining estimated useful lives of its intangible assets. As a result, the Company changed the remaining estimated useful life of its Cognex intangible assets from 17 years to
10 years. An analysis of the projected undiscounted cash flows for all intangibles was performed as required by SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets". The analysis of the projected undiscounted cash flows for Cognex indicated that the carrying value of the asset was not recoverable
over the revised remaining useful life of the asset. The Company estimated the fair market value of the Cognex assets and based on the estimated fair market value, it was determined that the carrying
value of the Cognex licensing rights was in excess of the fair value and an impairment charge of $4.2 million was recorded.

Research and Development Expense.Research and development expense decreased $0.2 million to $0.4 million for
the quarter ended June 30, 2004 compared to $0.6 million for the quarter ended June 30, 2003. Research and development expense decreased $1.0 million to $0.5 million
for the six months ended June 30, 2004 compared to $1.5 million for the six months ended June 30, 2003. The decrease in expense
is primarily a result of costs incurred in 2003 associated with manufacturing transfers for the Company's Ponstel, Cognex and Furadantin products and development costs for the Prenate line. Research
and development expenses for the six months ended June 30, 2004 do not include such comparable expenses.

In
late 2002, the FDA issued a notice about various cough and cold combination products, which requires that the Company obtain FDA approval of the Company's Tanafed products before
January 1, 2005 in order to be able to thereafter continue to market and sell these products as prescription products. The Company has not yet determined the estimated cost to obtain FDA
approval. The Company continues to evaluate its strategy for its Tanafed products, which may include incurring

14

---



significant
developmental expenses to obtain FDA approval or may involve marketing Tanafed products as non-prescription products, which could have a material adverse effect on net revenues
and profit margins for the Tanafed product line.

Interest Expense.Interest expense was $0.8 million and $1.0 million for the quarter and six months ended
June 30, 2004 compared to $0.1 million for the quarter and six months ended June 30, 2003. The increase is due to the Company issuing a total of $150.0 million of its 1.75%
senior subordinated contingent convertible notes in March 2004. For the quarter and six months ended June 30, 2003, the Company had no debt outstanding.

In
March 2004, the Company issued a total of $150.0 million 1.75% contingent convertible senior subordinated notes. The notes are due March 8, 2024 and accrued
interest is payable semi-annually in arrears on March 8 and September 8 of each year, commencing on September 8, 2004. In addition to the interest in the notes, after
March 8, 2007, the Company will also pay contingent interest during specified six-month periods if the average trading price of the notes per $1,000 principal amount for the five
day trading period ending on the third trading day immediately preceding the first day of the applicable six-month period equals $1,200 or more. During any period when contingent interest
is payable, it will be payable at a rate equal to 0.5% per annum. The net proceeds from this issuance after deducting offering expenses were approximately $145.4 million.

Holders
of the convertible notes may convert those notes into shares of the Company's common stock at a conversion rate of 45.1467 shares per $1,000 principal amount of the notes, which
is equivalent to a conversion price of $22.15 per share, subject to anti-dilution adjustments, before the close of business on March 8, 2024. Holders may convert their convertible
notes only under the following circumstances: (1) during any calendar quarter commencing after June 30, 2004, if the closing sales price of the Company's common stock exceeds 120% of the
conversion price for at least 20 trading days in the 30 consecutive trading days ending on the last trading day of the preceding calendar quarter; (2) if the notes have been called for
redemption; (3) during the five trading day period immediately following any nine consecutive trading day period in which the trading price of the notes per $1,000 principal amount for each day
of that period was less than 95% of the product of the
closing price of the Company's common stock and the number of shares of common stock issuable upon conversion of $1,000 principal amount of the notes; or (4) the occurrence of specified
corporate transactions.

The
Company has the option to redeem the notes beginning March 13, 2007 at a price equal to 100% of their aggregate principal amount, plus accrued and unpaid interest, including
contingent interest, if any.

The
holders of the notes have the option to require the Company to repurchase the notes on March 8 of 2009, 2014 and 2019, and upon a change in control, at a price equal to 100%
of their aggregate principal amount, plus accrued and unpaid interest, including contingent interest, if any.

Interest Income.Interest income was $1.0 million and $1.3 million for the quarter and six months ended
June 30, 2004, respectively, compared to $0.1 million and $0.2 million for the quarter and six months ended June 30, 2003. The increase in interest income for the three and
six-month period ended June 30, 2004 is primarily due to a higher average cash and marketable securities balance as a result of the proceeds from the issuance of the contingent
convertible senior subordinated notes in March 2004.

(Provision) Benefit for Income Taxes.Income taxes were provided for at a rate of 39.7% for the quarter and six months ended
June 30, 2004, compared to 35.2% and 35.5% for the quarter and six months ended June 30, 2003 respectively. The increase in the effective rate is due to the change in ratio in
non-deductible expenses to pre-tax income, as well as an increase in the state tax rate as the result of a change in the mix of states where our sales occurred.

15

---



Liquidity and Capital Resources

The Company's liquidity requirements arise primarily from debt service, working capital requirements, product development activities and funding of acquisitions.
The Company has met these cash requirements through cash from operations, borrowings for product acquisitions and the issuance of common stock.

The
Company's cash and cash equivalents were $58.5 million at June 30, 2004. Net cash provided by operating activities for the six months ended June 30, 2004 was
$22.2 million. This providing of cash was
primarily the result of the net income of $10.6 million, non-cash depreciation and amortization expense of $8.3 million, non-cash tax expenses of
$5.0 million and accounts payable of $4.5 million. Partially offsetting provisions of cash were increases in accounts receivable of $1.7 million, income tax receivable of
$2.1 million and other current assets and other assets of $2.8 million.

The
Company maintains supply agreements with third party suppliers for most of its products. Some of these supply agreements contain minimum purchase requirements. For most of these
supply agreements, the Company believes that its inventory requirements and related purchases of inventory will exceed the minimum purchase requirement in 2004. In those cases in which the Company
does not believe its purchases will exceed the minimum purchase requirements, the Company seeks to negotiate waivers or modifications of the minimum purchase requirements.

Recent
regulatory developments affecting the Company's Tanafed line could affect the Company's liquidity requirements. In late 2002, the FDA issued a notice about various cough and cold
combination products, which requires that the Company obtain FDA approval of the Company's Tanafed products before January 1, 2005 in order to be able to thereafter continue to market and sell
these products as prescription products. The Company has not yet determined the estimated cost to obtain FDA approval. The Company continues to evaluate its strategy for its Tanafed products, which
may include incurring significant developmental expenses to obtain FDA approval or may involve marketing Tanafed products as non-prescription products, which could have a material adverse
effect on net revenues and profit margins for the Tanafed product line.

Net
cash used in investing activities for the six months ended June 30, 2004 was $143.7 million. The primary uses of this cash were for the purchases of marketable
securities of $138.3 million and the purchases of product licenses of $5.1 million. During the second quarter of 2004, First Horizon announced an agreement with SkyePharma PLC, granting
First Horizon the exclusive license to market and distribute a cardiovascular product in the United States. The Agreement requires First Horizon to pay $5.0 million to SkyePharma upon signing
the Agreement and up to an additional $15.0 million is payable thereafterall of which are contingent upon milestones related to FDA approval. The product has been submitted to the
U.S. Food and Drug Administration ("FDA") for approval, which is expected by the end of this year. First Horizon intends to begin marketing and distribution shortly after FDA approval.

Net
cash used in investing activities for the six months ended June 30, 2003 was $0.6 million. The use of this cash was primarily for purchases of software and computer
equipment.

Net
cash provided by financing activities was $146.4 million for the six months ended June 30, 2004. The primary providers of cash were the issuance of
$150.0 million in convertible debt in March 2004, as well as proceeds of $5.5 million from the issuance of common stock. Partially offsetting this net cash provided was
$4.6 million in capitalized financing costs and $4.6 million in stock repurchases. Net cash used in financing activities was $1.7 million for the six months ended June 30,
2003. The primary use of this cash was to repurchase shares of the Company's outstanding common stock under its share repurchase program and fees paid to obtain a new credit facility through LaSalle
Bank N.A., offset by proceeds from the sale of stock.

16

---



As
of June 30, 2004, there were no borrowings or repayments under the Credit Agreement. At June 30, 2004, the Company was in compliance with the financial covenants of this
credit facility.

The
Company believes that its cash and cash equivalents and cash which it expects to generate from operations will be adequate to fund its current working capital requirements for at
least the next 12 months. However, in the event that the Company makes significant acquisitions in the future, it may be required to raise additional funds through additional borrowings or the
issuance of debt or equity securities.

In
March 2004, we issued a total of $150.0 million 1.75% contingent convertible senior subordinated notes. The notes are due March 8, 2024 and accrued interest is
payable semi-annually in arrears on March 8 and September 8 of each year, commencing on September 8, 2004. In addition to the interest in the Notes, after
March 8, 2007, we will also pay contingent interest during specified six-month periods if the average trading price of the Notes per $1,000 principal amount for the five day trading
period ending on the third trading day immediately preceding the first day of the applicable six-month period equals $1,200 or more. During any period when contingent interest is payable,
it will be payable at a rate equal to 0.5% per annum. The net proceeds from this issuance after deducting offering expenses were approximately $145.4 million.

Holder
of the convertible notes may convert those notes into shares of our common stock at a conversion rate of 45.1467 shares per $1,000 principal amount of the notes, which is
equivalent to a conversion price of $22.15 per share, subject to anti-dilution adjustments, before the close of business on March 8, 2024. Holders may convert their convertible
notes only under the following circumstances: (1) during any calendar quarter commencing after June 30, 2004, if the closing sales price of our common stock exceeds 120% of the
conversion price for at least 20 trading days in the 30 consecutive trading days ending on the last trading day of the preceding calendar quarter; (2) if the notes have been called for
redemption; (3) during the five trading day period immediately following any nine consecutive trading day period in which the trading price of the notes per $1,000 principal amount for each day
of that period was less than 95% of the product of the closing price of our common stock and the number of shares of common stock issuable upon conversion of $1,000 principal amount of the notes; or
(4) the occurrence of specified corporate transactions.

We
have the option to redeem the notes beginning March 13, 2007 at a price equal to 100% of their aggregate principal amount, plus accrued and unpaid interest, including
contingent interest, if any.

The
holders of the notes have the option to require us to repurchase the notes on March 8 of 2009, 2014 and 2019, and upon a change in control, at a price equal to 100% of their
aggregate principal amount, plus accrued and unpaid interest, including contingent interest, if any.

On
February 11, 2003, we entered into a Credit Agreement for a $20 million senior secured revolving credit facility with various lenders and LaSalle Bank National
Association, as Administrative Agent. Subject to the satisfaction of certain borrowing base requirements, we may from time-to-time borrow monies under the revolving facility
for working capital requirements and general corporate purposes. Borrowings are secured by substantially all of our assets. Borrowings bear interest at our option at the base rate in effect from time
to time plus an applicable margin or the Eurodollar rate, plus an applicable margin. The applicable margin will vary dependent upon our leverage ratio in effect from
time-to-time. As of July 31, 2004, we had no borrowings outstanding under this facility. The revolving facility, as amended, matures on August 11, 2006. Fees
payable under the revolving facility include a one-time commitment fee of 0.685% of the stated amount of the facility, an unused commitment fee based on funds committed but not borrowed
under the revolving facility at rates which vary dependent upon our leverage ratio in effect from time-to-time and letter of credit fees equal to 0.25% per annum of the face
amount of letters of credit issued and outstanding under the revolving facility. The revolving facility may be prepaid from time-to-time or terminated at our discretion without
penalty.

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The
revolving loan contains various restrictive covenants, including covenants relative to maintaining financial ratios and earnings levels, limitations on acquisitions, dispositions,
mergers and capital expenditures, limitations on incurring additional indebtedness and a prohibition on payment of dividends and certain issuances of our capital stock. As of June 30, 2004, we
were in compliance with these financial covenants.

Critical Accounting Policies

The Company views its critical accounting policies to be those policies which are very important to the portrayal of the Company's financial condition and results
of operations, and require management's most difficult, complex or subjective judgments. The circumstances that make these judgments difficult
or complex relate to the need for management to make estimates about the effect of matters that are inherently uncertain. The Company believes its critical accounting policies to be as follows:



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Forward Looking Statements

The Management's Discussion and Analysis of Financial Condition and Results of Operations discussion as well as information contained elsewhere in this Report
contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. These forward-looking statements include statements about the following:



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This
list is intended to identify some of the principal factors that could cause actual results to differ materially from those described in the forward-looking statements included
herein. These factors are not intended to represent a complete list of all risks and uncertainties inherent in our business, and should be read in conjunction with the more detailed cautionary
statements and risk factors included in our other filings with the Securities and Exchange Commission.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's operating results and cash flows are subject to fluctuations from changes in foreign currency exchange rates and interest rates. The Company's
purchases of Nitrolingual under its agreement with Pohl-Boskamp and its purchases of Sular product inventory from Bayer are made in Euros. The Company traditionally eliminates the risk of
foreign currency fluctuations after the time of shipment of product by entering into forward contracts for these purchases of inventory at the time of product shipments. The Company currently holds
Euros in certain European countries. In addition, sales of Cognex in Europe are recognized in Euros. While the effect of foreign currency translations has not been material to the Company's results of
operations to date, currency translations on cash held in foreign countries, export sales or import purchases could be adversely affected in the future by the relationship of the U.S. dollar with
foreign currencies.

In
connection with borrowings under the Company's senior secured revolving credit facility arranged by LaSalle Bank N. A., the Company should experience market risk with respect to
changes in the general level of the interest rates and the effect upon interest expense. Borrowings under this facility bear interest at variable rates. Because such rates are variable, an increase in
interest rates will result in additional interest expense and a reduction in interest rates will result in reduced interest expense. Accordingly, the Company's present exposure to interest rate
fluctuations is primarily dependent on rate changes that may occur while borrowings under the senior secured credit facility are outstanding. As of June 30, 2004, there was no debt outstanding
under this facility and the facility was not used at any time during the quarter or six months ended June 30, 2004.

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ITEM 4. CONTROLS AND PROCEDURES

We maintain a set of disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file under
the Securities Exchange Act of 1934, as amended ("Exchange Act"), is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. We carried out an
evaluation under the supervision and with the participation of management, including our President and Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and
operation of First Horizon's disclosure controls and procedures pursuant to Rule 13a-15(b) of the Exchange Act as of the end of the period covered by this report. Our President and
Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures provide reasonable assurance as of the end of the period for which the report is being filed
that (i) information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms and (ii) such information is accumulated and communicated to our management, including our President and Chief Executive Officer and our Chief Financial
Officer, as appropriate, to allow timely decisions regarding required disclosure.

We
are committed to a continuing process of identifying, evaluating and implementing improvements to the effectiveness of our disclosure and internal controls and procedures. Our
management, including our President and Chief Executive Officer and Chief Financial Officer, does not expect that our controls and procedures will prevent all errors. Because of the inherent
limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues within the Company have been or will be detected.

There
has not been any change in our internal controls over financial reporting that occurred during our second fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal controls over financial reporting.

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PART IIOTHER INFORMATION

ITEM 1: LEGAL PROCEEDINGS

There were no material developments during the three and six months ended June 30, 2004 in the previously reported putative class action lawsuit naming the
Company and certain affiliates as defendants.

On
April 15, 2004 we filed a patent infringement action against Breckenridge Pharmaceutical, Inc. in the U.S. District Court for the Northern District of Illinois, on the
grounds that their product, Duotan PD, infringes the patents for our products, Tanafed DP and Tanafed DMX. In response, on April 21, 2004, Breckenridge filed for
declaratory judgment in the U.S. District Court for the Southern District of Florida seeking to invalidate the Tanafed patents. On July 20, 2004 our action was transferred to the U.S. District
Court for the Southern District of Florida.

We
intend to vigorously litigate our infringement action and defend Breckenridge's motion for declaratory judgment. While we believe that Breckenridge's product, Duotan, infringes the
patent for Tanafed, we cannot assure you that we will prevail. If we lose our infringement action and Breckenridge is successful in invalidating the Tanafed patent we could lose market share for
Tanafed or we may have to decrease the price of Tanafed to keep its sales competitive, resulting in a loss of earnings and profits from Tanafed sales.

ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS

In May 2004, we resumed purchasing shares of our common stock pursuant to a $10.0 million share repurchase program authorized by our Board of
Directors in fiscal 2002. During the second quarter of
fiscal 2004, we purchased and retired 260,000 shares at a cost of $4.6 million. As of June 30, 2004, we had purchased and retired 1,245,625 shares at a cost of $7.7 million since
the inception of the share repurchase program in fiscal 2002. In July 2004, our Board of Directors authorized a $20.0 million share repurchase program which allows for the purchase of up
to $5.0 million of our common stock per quarter. The new program, which becomes effective on August 3, 2004, will terminate and replace the $10.0 million share repurchase program
authorized by the Board of Directors in fiscal 2002. The plan will expire in August 2005. We consider several factors in determining when to make share repurchases, including among other
things, our cash needs and the market price of the stock. Cash provided by future operating activities, as well as available cash and cash equivalents, are the expected sources of funding for the
share repurchase program.

The
following table presents the total number of shares repurchased during the second quarter of fiscal 2004, the average price paid per share, the number of shares that were purchased
as part of a publicly announced repurchase plan, and the approximate dollar value of shares that were available for repurchase as of June 30, 2004, pursuant to the $10.0 million share
repurchase program:

|Fiscal Period                        |  | Total Number
of Shares
Purchased |  | Average Price
Paid per Share |       | Total Number of
Shares Purchased as
Part of Publicly
Announced Plans
or Programs(1) |         | Approximate Dollar
Value of Shares
that May Yet Be
Purchased Under
the Plans or
Programs(1)
|------------------------------------ |  | -------------------------------- |  | ---------------------------- | ----- | ----------------------------------------------------------------------------------- | ------- | -------------------------------------------------------------------------------------------
|April 1, 2004 through April 30, 2004 |  |                                 |  | $                            |      |                                                                                     |        |                                                                                            
|May 1, 2004 through May 31, 2004     |  | 142,369                          |  |                              | 17.33 |                                                                                     | 142,369 |                                                                                            
|June 1, 2004 through June 30, 2004   |  | 117,631                          |  |                              | 17.76 |                                                                                     | 117,631 |                                                                                            
|                                     |  |                                  |  |                              |       |                                                                                     |         |                                                                                            
|Total Fiscal 2004 Second Quarter     |  | 260,000                          |  | $                            | 17.53 |                                                                                     | 260,000 |                                                                                            
|                                     |  |                                  |  |                              |       |                                                                                     |         |                                                                                            

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ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

First Horizon held its 2004 annual meeting of stockholders on May 7, 2004. The following summarizes the two proposals submitted for a vote of the
stockholders at the meeting:

Proposal 1.
To elect two Class B Directors to First Horizon's Board of Directors for a three-year term.

Patrick P. Fourteau

Jon S. SaxeVotes "For"

31,470,361 shares

26,603,106 sharesVotes "Withheld"

597,043 shares

5,464,298 shares


Mr. Fourteau
and Mr. Saxe will serve until the 2007 annual meeting of stockholders. In addition, the terms of the following directors continued after the meeting:
Dr. John N. Kapoor, Mr. Jerry N. Ellis, Mr. Pierre Lapalme and Mr. Patrick J. Zenner.

Proposal 2.
To approve the amendment and restatement of the First Horizon 2002 Stock Plan.

Votes "For"

18,576,901 sharesVotes "Against"

9,575,384 sharesAbstain

45,622 shares


Each
of the two proposals were approved by First Horizon's stockholders at the annual meeting.

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



31.1

Certifications of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14 and 15d-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2

Certifications of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14 and 15d-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.




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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.

|                     |  | FIRST HORIZON PHARMACEUTICAL CORPORATION(Registrant)
|-------------------- |  | ----------------------------------------------------
|Date: July 30 , 2004 |  | By:                                                 
|Date: July 30, 2004  |  | By:                                                 

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