UNITED STATES
SECURITIES 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 September 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 No.)

6195 Shiloh Road, Alpharetta, Georgia 30005(Address of principal executive offices) (Zip code)

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(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

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes ý    No o

As of October 21, 2004, there were 35,390,029 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. |  | Consolidated Balance Sheets at September 30, 2004 and December 31, 2003                                             |  | 1   
|                                 |         |  | Consolidated Statements of Operations for the three and nine months ended September 30, 2004 and September 30, 2003 |  | 2   
|                                 |         |  | Consolidated Statements of Cash Flows for the nine months ended September 30, 2004 and September 30, 2003           |  | 3   
|                                 |         |  | Notes to Consolidated Financial Statements                                                                          |  | 4   
|                                 | Item 2. |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                               |  | 13  
|                                 | Item 3. |  | Quantitative and Qualitative Disclosures About Market Risk                                                          |  | 22  
|                                 | Item 4. |  | Controls and Procedures                                                                                             |  | 22  
|PART II.    OTHER INFORMATION    |         | 
|                                 | Item 1. |  | Legal Proceedings                                                                                                   |  | 24  
|                                 | Item 2. |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                         |  | 24  
|                                 | Item 6. |  | Exhibits                                                                                                            |  | 25  
|                                 |         |  | Signatures                                                                                                          |  | 26  
|                                 |         |  | Certifications                                                                                                      |  | 27  

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PART IFINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

FIRST HORIZON PHARMACEUTICAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)

|                                                                                                                                                                                 |                                                                                                                                                                              | September 30,
2004 |                                            | December 31,
2003
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------ | ------------------------------------------ | -----------------
|
|ASSETS                                                                                                                                                                           |                                                                                                                                                                              |                    |                                            |                  
|Current assets:                                                                                                                                                                  |                                                                                                                                                                              |                    |                                            |                  
|                                                                                                                                                                                 | Cash and cash equivalents                                                                                                                                                    |                    | $                                          | 54,635           
|                                                                                                                                                                                 | Marketable securities                                                                                                                                                        |                    |                                            | 159,387          
|                                                                                                                                                                                 | Accounts receivable, net of allowance for doubtful accounts, discounts and contractual adjustments of $463 and $546 at September 30, 2004 and December 31, 2003 respectively |                    |                                            | 16,443           
|                                                                                                                                                                                 | Inventories                                                                                                                                                                  |                    |                                            | 11,426           
|                                                                                                                                                                                 | Income taxes receivable                                                                                                                                                      |                    |                                            |                 
|                                                                                                                                                                                 | Current deferred tax assets                                                                                                                                                  |                    |                                            | 2,763            
|                                                                                                                                                                                 | Other current assets                                                                                                                                                         |                    |                                            | 6,768            
|                                                                                                                                                                                 |                                                                                                                                                                              |                    |                                            |                  
|                                                                                                                                                                                 |                                                                                                                                                                              |                    | Total current assets                       |                  
|Property and equipment, net                                                                                                                                                      |                                                                                                                                                                              |                    | 2,731                                      |                  
|Other assets:                                                                                                                                                                    |                                                                                                                                                                              |                    |                                            |                  
|                                                                                                                                                                                 | Intangibles, net                                                                                                                                                             |                    |                                            | 228,799          
|                                                                                                                                                                                 | Deferred tax assets                                                                                                                                                          |                    |                                            |                 
|                                                                                                                                                                                 | Other assets                                                                                                                                                                 |                    |                                            | 10,173           
|                                                                                                                                                                                 |                                                                                                                                                                              |                    |                                            |                  
|                                                                                                                                                                                 |                                                                                                                                                                              |                    | Total other assets                         |                  
|                                                                                                                                                                                 |                                                                                                                                                                              |                    | Total assets                               |                  
|                                                                                                                                                                                 |                                                                                                                                                                              |                    |                                            |                  
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                                                                             |                                                                                                                                                                              |                    |                                            |                  
|Current liabilities:                                                                                                                                                             |                                                                                                                                                                              |                    |                                            |                  
|                                                                                                                                                                                 | Accounts payable                                                                                                                                                             |                    | $                                          | 10,901           
|                                                                                                                                                                                 | Accrued expenses                                                                                                                                                             |                    |                                            | 14,987           
|                                                                                                                                                                                 |                                                                                                                                                                              |                    |                                            |                  
|                                                                                                                                                                                 |                                                                                                                                                                              |                    | Total current liabilities                  |                  
|Long-term liabilities:                                                                                                                                                           |                                                                                                                                                                              |                    |                                            |                  
|                                                                                                                                                                                 | Convertible debt                                                                                                                                                             |                    |                                            | 150,000          
|                                                                                                                                                                                 | Deferred tax liabilities                                                                                                                                                     |                    |                                            | 3,012            
|                                                                                                                                                                                 | Other long-term liabilities                                                                                                                                                  |                    |                                            | 616              
|                                                                                                                                                                                 |                                                                                                                                                                              |                    |                                            |                  
|                                                                                                                                                                                 |                                                                                                                                                                              |                    | Total liabilities                          |                  
|Stockholders' equity:                                                                                                                                                            |                                                                                                                                                                              |                    |                                            |                  
|Preferred stock, 1,000,000 shares authorized and none outstanding                                                                                                                |                                                                                                                                                                              |                    |                                           |                  
|Common stock, $0.001 par value; 100,000,000 shares authorized; 35,389,967 and 35,595,442 shares issued and outstanding at September 30, 2004 and December 31, 2003, respectively |                                                                                                                                                                              |                    | 35                                         |                  
|Additional paid-in capital                                                                                                                                                       |                                                                                                                                                                              |                    | 279,249                                    |                  
|Retained earnings                                                                                                                                                                |                                                                                                                                                                              |                    | 34,752                                     |                  
|Accumulated other comprehensive (loss) income                                                                                                                                    |                                                                                                                                                                              |                    | (427                                       | )                
|                                                                                                                                                                                 |                                                                                                                                                                              |                    |                                            |                  
|                                                                                                                                                                                 |                                                                                                                                                                              |                    | Total stockholders' equity                 |                  
|                                                                                                                                                                                 |                                                                                                                                                                              |                    | Total liabilities and stockholders' equity |                  
|                                                                                                                                                                                 |                                                                                                                                                                              |                    |                                            |                  

The accompanying notes are an integral part of these 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 September 30, |                                    | For The Nine Months Ended September 30, |  
|----------------------------------------------- | ---------------------------------------------------------- | ----------------------------------- | ---------------------------------- | --------------------------------------- | -
|
|Net revenues                                    |                                                            | $                                   | 41,559                             |                                         | $
|Operating costs and expenses:                   |                                                            |                                     |                                    |                                         |  
|                                                | Cost of revenues (excluding depreciation and amortization) |                                     |                                    | 8,895                                   |  
|                                                | Selling, general and administrative expense                |                                     |                                    | 16,699                                  |  
|                                                | Depreciation and amortization                              |                                     |                                    | 4,330                                   |  
|                                                | Impairment charge                                          |                                     |                                    |                                        |  
|                                                | Research and development expense                           |                                     |                                    | 479                                     |  
|                                                |                                                            |                                     |                                    |                                         |  
|                                                |                                                            |                                     | Total operating costs and expenses |                                         | $
|                                                |                                                            |                                     |                                    |                                         |  
|Operating income (loss)                         |                                                            |                                     | 11,156                             |                                         |  
|                                                |                                                            |                                     |                                    |                                         |  
|Other income (expense):                         |                                                            |                                     |                                    |                                         |  
|                                                | Interest expense                                           |                                     |                                    | (756                                    | )
|                                                | Interest income                                            |                                     |                                    | 1,219                                   |  
|                                                | Other                                                      |                                     |                                    |                                        |  
|                                                |                                                            |                                     |                                    |                                         |  
|                                                |                                                            |                                     | Total other income                 |                                         | $
|                                                |                                                            |                                     |                                    |                                         |  
|Income (loss) before provision for income taxes |                                                            |                                     | 11,619                             |                                         |  
|(Provision) benefit for income taxes            |                                                            |                                     | (4,184                             | )                                       |  
|                                                |                                                            |                                     |                                    |                                         |  
|Net income (loss)                               |                                                            | $                                   | 7,435                              |                                         | $
|Other comprehensive income (loss)               |                                                            | $                                   | 758                                |                                         | $
|                                                |                                                            |                                     |                                    |                                         |  
|Comprehensive income (loss)                     |                                                            | $                                   | 8,193                              |                                         | $
|                                                |                                                            |                                     |                                    |                                         |  
|Net income (loss) per common share:             |                                                            |                                     |                                    |                                         |  
|Basic earnings (loss) per common share          |                                                            | $                                   | 0.21                               |                                         | $
|                                                |                                                            |                                     |                                    |                                         |  
|Diluted earnings (loss) per common share        |                                                            | $                                   | 0.20                               |                                         | $
|                                                |                                                            |                                     |                                    |                                         |  
|Weighted average common shares outstanding:     |                                                            |                                     |                                    |                                         |  
|                                                | Basic                                                      |                                     |                                    | 35,767                                  |  
|                                                |                                                            |                                     |                                    |                                         |  
|                                                | Diluted                                                    |                                     |                                    | 36,749                                  |  
|                                                |                                                            |                                     |                                    |                                         |  

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

2

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FIRST HORIZON PHARMACEUTICAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)

|                                                                                                   |                                                                            | For The Nine Months
Ended September 30,             |        
|-------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------- | --------------------------------------------------- | -------
|
|Cash flows from operating activities:                                                              |                                                                            |                                                     |        
|Net income (loss)                                                                                  |                                                                            | $                                                   | 17,991 
|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                                              |                                                     |        
|                                                                                                   | 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                                |        
|                                                                                                   |                                                                            | Income taxes receivable                             |        
|                                                                                                   |                                                                            | Accrued expenses and other                          |        
|                                                                                                   |                                                                            | Accounts payable                                    |        
|                                                                                                   |                                                                            |                                                     |        
|                                                                                                   | Net cash provided by (used in) by 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                                                               |                                                                            |                                                     | (5,015 
|Repurchase of common stock                                                                         |                                                                            |                                                     | (17,960
|Proceeds from long-term debt                                                                       |                                                                            |                                                     | 150,000
|Principal payments on long-term debt                                                               |                                                                            |                                                     |       
|Net proceeds from issuance of common stock                                                         |                                                                            |                                                     | 5,951  
|                                                                                                   |                                                                            |                                                     |        
|                                                                                                   |                                                                            | Net cash provided by (used in) financing activities |        
|Effect of foreign exchange rates on cash                                                           |                                                                            |                                                     | (94    
|Net change in cash and cash equivalents                                                            |                                                                            |                                                     | 20,913 
|Cash and cash equivalents, beginning of period                                                     |                                                                            |                                                     | 33,722 
|                                                                                                   |                                                                            |                                                     |        
|Cash and cash equivalents, end of period                                                           |                                                                            | $                                                   | 54,635 
|                                                                                                   |                                                                            |                                                     |        
|Supplemental Cash Flow Information:                                                                |                                                                            |                                                     |        
|Cash paid for taxes                                                                                |                                                                            | $                                                   | 4,230  
|                                                                                                   |                                                                            |                                                     |        
|Cash paid for interest                                                                             |                                                                            | $                                                   | 1,351  
|                                                                                                   |                                                                            |                                                     |        

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

3

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FIRST HORIZON PHARMACEUTICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

The
accompanying unaudited interim consolidated financial statements reflect all adjustments (consisting 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 accounting principles generally accepted 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).

In
October 2004, the Emerging Issues Task Force (the "EITF") of the Financial Accounting Standards Board ("FASB") reached a consensus on EITF 04-8, "The Effect of Contingently Convertible Instruments on Diluted Earnings Per
Share"("EITF 04-8"), which requires 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. EITF 04-8 also requires the Company to retroactively restate its prior periods diluted earnings per share. EITF 04-8 is expected to be effective for periods ending
after December 15, 2004. When adopted, EITF 04-8 will have no impact on the Company's diluted earnings per share for the three and nine months ended September 30, 2003
but it will reduce the Company's diluted earnings per share by $0.02 for the three months ended September 30, 2004 and by $0.04 for the nine months ended September 30, 2004.

In
March 2004, the 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 Statement of Financial Accounting Standard ("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 application of this consensus did not have a material impact on the Company's 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 third quarter
2005 for the Company. See Note 3 for the quarterly disclosures of the pro forma dilutive

4

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impact
on net income and earnings per share of expensing stock options based on the Black-Scholes 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" ("SAB No. 104"), which supercedes SAB No. 101, "Revenue Recognition in Financial Statements" ("SAB
No. 101"). SAB No. 104'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"("EITF 00-21"). 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 SAB No. 104. The issuance
of SAB No. 104 did not impact the Company's accounting policy for revenue recognition.

During
December 2003, the 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"("SFAS No. 132"). SFAS No. 132 revises disclosure requirements about pension
plans and other postretirement benefit plans. SFAS No. 132 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."SFAS
No. 132 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 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 did not have a material impact on the Company's financial condition or results of operations.

The
Company applies Accounting Principal Board Opinion 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 stock 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
September 30,

For The Nine Months Ended
September 30,2004

2003

2004

2003Net income (loss) as reported

$
7,435

$
3,440

$
17,991

$
(11,343
)Deduct:Total stock-based employee compensation
expense determined under fair value
basis for all awards, net of related tax effects


(661
)

(379
)

(1,908
)

(1,106
)Pro forma

$
6,774

$
3,061

$
16,083

$
(12,449
)Net income (loss) per common share-basic:As reported

$
0.21

$
0.10

$
0.50

$
(0.32
)Pro forma

$
0.19

$
0.09

$
0.45

$
(0.36
)Net income (loss) per common share-diluted:As reported

$
0.20

$
0.10

$
0.49

$
(0.32
)Pro forma

$
0.18

$
0.09

$
0.44

$
(0.36
)


The
weighted average fair value per share of stock options granted during the nine months ended September 30, 2004 and 2003 is estimated at $14.72 and $4.88, respectively. The
value of the stock options is estimated on the date of the grant using the following weighted average assumptions:

2004

2003Risk-free interest rate

3.38
%
3.06
%Expected dividend yield



Expected lives

5 years

5 yearsExpected volatility

123.79
%
134.61
%


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.

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

The
Company classifies its existing marketable securities as available-for-sale. All available-for-sale securities are considered current,
as the Company has the ability to use them for current operating and investing purposes. There were no realized gains or losses in the three or nine months ended September 30, 2004. At
September 30, 2004, the Company had total net unrealized losses from marketable securities of $1.0 million.

6

---



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

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair
ValueU.S. Government and Federal agency obligations

$
97,119

$
24

$
(642
)
$
96,501Corporate bonds


63,316


11


(441
)

62,886Total

$
160,435

$
35

$
(1,083
)
$
159,387


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 September 30, 2004, the
Company had an allowance for excess and obsolete inventory of $1.7 million compared to $2.4 million at December 31, 2003. Inventories at September 30, 2004 and
December 31, 2003 consisted of (in thousands):

September 30,
2004

December 31,
2003Bulk product

$
3,949

$
6,050Finished product


7,477


5,138$
11,426

$
11,188


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 September 30, 2004 and December 31, 2003 were $1.3 million and $0.8 million, respectively, and are included in other current assets.

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

September 30,
2004

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

$
4,716

$
145Advance payment for product licenses


5,296


Deposits


161


588$
10,173

$
733


During
the second quarter of 2004, the Company announced an agreement with SkyePharma PLC granting the Company 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 PLC upon signing the agreement and up to an additional $15.0 million is payable
thereafterall of which are contingent upon milestones related to the U.S. Food and Drug Administration ("FDA") approval. The product has been submitted to the FDA for approval, which the
Company expects to receive by the end of 2004. The Company intends to begin marketing and distribution shortly after receipt of the FDA approval.

7

---



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

September 30,
2004

December 31,
2003Employee compensation and benefits

$
2,223

$
1,982Product returns


1,602


3,813Sales deductions


7,046


4,287Assumed liabilitiesproduct acquisitions


12


824Royalties


1,215


546Accrued interest


160


Accrued income taxes


353


Other


2,376


1,758$
14,987

$
13,210


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

|                                                   |  | For The Quarter Ended September 30, |        | For The Nine Months Ended
September 30, |  
|-------------------------------------------------- |  | ----------------------------------- | ------ | --------------------------------------- | -
|
|Net income (loss)                                  |  | $                                   | 7,435  |                                         | $
|Other comprehensive income (loss)                  |  |                                     | 758    |                                         |  
|                                                   |  |                                     |        |                                         |  
|Comprehensive income (loss)                        |  | $                                   | 8,193  |                                         | $
|                                                   |  |                                     |        |                                         |  
|Weighted average common shares outstanding-basic   |  |                                     | 35,767 |                                         |  
|Diluted effect of stock options                    |  |                                     | 982    |                                         |  
|                                                   |  |                                     |        |                                         |  
|Weighted average common shares outstanding-diluted |  |                                     | 36,749 |                                         |  
|                                                   |  |                                     |        |                                         |  
|Basic earnings (loss) per common share:            |  | $                                   | 0.21   |                                         | $
|                                                   |  |                                     |        |                                         |  
|Diluted earnings (loss) per common share:          |  | $                                   | 0.20   |                                         | $
|                                                   |  |                                     |        |                                         |  

For
the quarter and nine months ended September 30, 2004, there were 363,699 and 386,849 potential common shares outstanding that were excluded from the diluted net income 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.

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. As a result, the estimated useful life of Cognex was decreased from a remaining life of 17 years to 10 years, and using the

8

---



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.

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

Gross Amount

Accumulated
Amortization

Impairment
Charge

Net
Amount

Weighted
Average LifeLicensing rights

$
244,715

$
(35,349
)
$
(4,152
)
$
205,214

20 yearsTrade names


11,060


(1,601
)




9,459

20 yearsContracts


8,300


(4,417
)




3,883

5 yearsSupply/Distribution agreements


11,490


(3,832
)




7,658

1 to 10 yearsOther intangibles


3,082


(497
)




2,585

20 yearsTotal

$
278,647

$
(45,696
)
$
(4,152
)
$
228,799

19 years


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 LifeLicensing rights

$
244,415

$
(26,287
)
$
(4,152
)
$
213,976

20 yearsTrade names


11,060


(1,186
)




9,874

20 yearsContracts


8,300


(3,172
)




5,128

5 yearsSupply/Distribution agreements


11,490


(2,821
)




8,669

1 to 10 yearsOther intangibles


3,082


(373
)




2,709

20 yearsTotal

$
278,347

$
(33,839
)
$
(4,152
)
$
240,356

19 years


9

---



The
amortization expense related to the intangible assets was $4.0 million for the three months ended September 30, 2004 and $11.9 million for the nine months ended
September 30, 2004. 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


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 (in thousands):

For The Quarter Ended
September 30,

For The Nine Months Ended
September 30,2004

2003

2004

2003Cardiovascular

$
23,239

$
8,352

$
58,234

$
24,918Women's Health/Pediatrics


15,049


12,828


38,866


28,022Non Promoted


3,271


3,542


12,467


5,235Net Revenues

$
41,559

$
24,722

$
109,567

$
58,175


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's Board of
Directors authorized the repurchase of up to an additional $7.9 million of common stock and extended the repurchase program to August 31, 2004. In September 2003, the Company
repurchased 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 of these shares were retired.

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

In
the third quarter of 2004, as part of the new share repurchase program, the Company's Board of Directors increased the per quarter repurchase cap and authorized the Company to
repurchase a

10

---



total
of 731,580 shares of common stock, inclusive of the 500,000 shares of common stock repurchased from one of Dr. Kapoor's family partnerships, at an aggregate cost of approximately
$13.4 million. These shares have been retired.

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 (i) the base rate in effect from time to time plus an applicable margin or (ii) the Eurodollar rate, plus an applicable
margin. The applicable margin will vary depending upon the Company's leverage ratio in effect from time to time. The revolving facility matures on February 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 September 30, 2004, the Company was in compliance with all
financial covenants of the Credit Agreement. As of September 30, 2004, there was no outstanding balance on the Credit Agreement. For the quarter and nine months ended September 30, 2004,
there were no borrowings or repayments under the Credit Agreement.

In
March 2004, the Company issued a total of $150.0 million of its 1.75% senior subordinated contingent convertible notes due in 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 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 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 September 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.

11

---



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 25, 2004 the Company filed a registration statement on Form S-3 with the Securities and Exchange
Commission to register for resale of 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.

A
lawsuit was filed in the U.S. District Court for the Northern District of Georgia on August 22, 2002 (which was 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 sought to be certified as a class action lawsuit. The consolidated amended complaint generally alleged 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 asserted that the 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 alleged 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 sought unspecified compensatory damages in an amount to be proven at trial. The Company denied the claims made in the lawsuit and
filed a motion to dismiss the claims. On September 29, 2004, the U.S. District Court for the Northern District of Georgia dismissed, without prejudice, the class action lawsuit. Although the
class action lawsuit was dismissed, the court granted the plaintiffs the right to refile their class action lawsuit provided that the plaintiffs pay all of the defendants' fees and costs associated
with filing the motions to dismiss the class action lawsuit. As of October 29, 2004, the plaintiffs had not refiled their lawsuit. If the lawsuit is refiled, the Company intends to vigorously
defend against any claims made.

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.

12

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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 Revenues.Net revenues for the quarter ended September 30, 2004 increased $16.9 million or 68% to
$41.6 million, as compared to $24.7 million for the quarter ended September 30, 2003. Net revenues for the nine months ended September 30, 2004 increased
$51.4 million or 88% to $109.6 million, as compared to $58.2 million for the nine months ended September 30, 2003. Net revenues increased for the quarter and nine month
period as a result of an increase in our sales due to a growth in our sales force, significant hospital and prescription growth, recent managed care plan additions and increased sales from the Sular,
Nitrolingual 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 we expected. 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 month of inventory. Trade levels of our promoted
products were approximately one month at September 30, 2004.

13

---



Net
revenues for the nine months ended September 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.

Product Overview

|                |  | Change in total dispensed prescriptions for the quarter ended September 30, 2004 compared to the quarter ended September 30, 2003(a) |  | Change in new dispensed prescriptions for the quarter ended September 30, 2004 compared to the quarter ended September 30, 2003(a)
|--------------- |  | ------------------------------------------------------------------------------------------------------------------------------------ |  | ----------------------------------------------------------------------------------------------------------------------------------
|Sular           |  | +14.2%                                                                                                                               |  | +27.0%                                                                                                                            
|Nitrolingual(b) |  | +2.0%                                                                                                                                |  | +4.4%                                                                                                                             
|Prenate line(c) |  | N/A                                                                                                                                  |  | N/A                                                                                                                               
|Tanafed line    |  | (33.5)%                                                                                                                              |  | (35.7)%                                                                                                                           
|Robinul line    |  | +0.5%                                                                                                                                |  | (2.8)%                                                                                                                            
|Ponstel         |  | (11.9)%                                                                                                                              |  | (10.9)%                                                                                                                           

---

Net
revenues of Sular were $17.1 million and $44.1 million for the quarter and nine months ended September 30, 2004, respectively, compared to $4.5 million
and $14.2 million for the quarter and nine months ended September 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, Ponstel, the Robinul line and the Tanafed line), were $15.0 million and $38.9 million
for the quarter and nine months ended September 30, 2004 compared to $12.8 million and $28.0 million for the quarter and nine months ended September 30, 2003. The increase
was primarily a result of total prescription growth, significant hospital growth and the impact of recent managed care plan additions.

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 $5.0 million for the quarter ended September 30, 2004. Prenate Elite has captured a market share of 11.1% of new prescriptions and
8.5% of total prescriptions as of September 30, 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 $4.7 million for the
quarter ended September 30, 2003.

Cost of Revenues.Cost of revenues for the quarter ended September 30, 2004 were $8.9 million compared to
$3.4 million for the quarter ended September 30, 2003. Cost of revenues for the nine months ended September 30, 2004 were $21.3 million compared to $13.4 million for
the nine months ended September 30, 2003. As a result of a change in our sales forecast, cost of revenues for the nine months ended September 30, 2003 included an increased allowance for
obsolete and excess inventory of $3.5 million. These charges were primarily for our non-promoted products, excess Sular and Tanafed inventory and short dated Prenate GT inventory.
Cost of revenues for the nine months ended September 30, 2004 do not include a comparable allowance for obsolete and excess inventory.

Gross Margin.Gross margin for the quarter ended September 30, 2004 was 79% compared to 86% for the quarter ended
September 30, 2003. Gross margin for the nine months ended

14

---



September 30,
2004 was 81% compared to 77% for the nine months ended September 30, 2003. Approximately ten percentage points of this increase in gross margin percentage for the nine
months ended September 30, 2004 resulted from the increased allowance for obsolete and excess inventory recorded in 2003. Also affecting gross margin for the quarter and nine months ended
September 30, 2004 was a change in product sales mix, as well as increased sales under recent managed care plan additions.

Selling, General and Administrative Expenses.Selling, general and administrative expenses increased $4.9 million, or
42%, to $16.7 million for the quarter ended September 30, 2004, compared to $11.8 million for the quarter ended September 30, 2003. Selling, general and administrative
expenses increased $2.0 million, or less than 1%, to $46.3 million for the nine months ended September 30, 2004, compared to $44.3 million for the nine months ended
September 30, 2003. This increase is primarily related to the increase in sales force, increased accounting fees related to the Sarbanes-Oxley requirements, as well as increased royalties
related to the increased sales. This increase was partially offset by lower selling expenses resulting from the Company's revised strategy and operating plan.

Depreciation and Amortization Expense.Depreciation and amortization expense increased $0.2 million, or 4.9%, to
$4.3 million for the quarter ended September 30, 2004, compared to $4.1 million for the quarter ended September 30, 2003. Depreciation and amortization expense increased
$0.2 million, or 2%, to $12.6 million for the nine months ended September 30, 2004 compared to $12.4 million for the nine months ended September 30, 2003.

Impairment Charge.In the second quarter of 2003, we revised our revenue forecast for all of our products and evaluated the
remaining estimated useful lives of our intangible assets. As a result, we changed the remaining estimated useful life of our 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. We estimated the fair market value of the Cognex assets. Based on the estimated fair market value, we 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 increased $0.3 million to $0.5 million for
the quarter ended September 30, 2004, compared to $0.2 million for the quarter ended September 30, 2003. Research and development expense decreased $0.6 million to
$1.0 million for the nine months ended September 30, 2004 compared to $1.6 million for the nine months ended September 30, 2003. The decrease in expense is primarily a
result of costs incurred in 2003 associated with manufacturing transfers for our Ponstel, Cognex and Furadantin products and development costs
for the Prenate line. Research and development expenses for the nine months ended September 30, 2004 do not include comparable expenses.

In
late 2002, the U.S. Food and Drug Administration, or the FDA, issued a notice about various cough and cold combination products, which requires us to obtain FDA approval of our
Tanafed products before January 1, 2005 in order to be able to thereafter continue to market and sell these products as prescription products. We have not yet determined the estimated cost to
obtain FDA approval. We continue to evaluate our strategy for our 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.

Interest Expense.Interest expense was $0.8 million and $1.7 million for the quarter and nine months ended
September 30, 2004, respectively, compared to $0.03 million and $0.2 million for the quarter and nine months ended September 30, 2003, respectively. The increase is due to
the issuance of

15

---



a
total of $150.0 million, 1.75% senior subordinated contingent convertible notes in March 2004. For the quarter and nine months ended September 30, 2003, the Company had no debt
outstanding.

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 on 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.

The
holders of the convertible notes may convert the 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.

Interest Income.Interest income was $1.2 million and $2.5 million for the quarter and nine months ended
September 30, 2004, respectively, compared to $0.1 million and $0.3 million for the quarter and nine months ended September 30, 2003. The increase in interest income for
the three and nine month period ended September 30, 2004 is primarily due to a higher average cash and marketable securities balances 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 36.0% for the quarter ended
September 30, 2004 and 38.2% for the nine months ended September 30, 2004, compared to 36.0% for the three months ended September 30, 2003 and 35.3% for the nine months ended
September 30, 2003. The increase in the effective rate for the nine month ended September 30, 2004 is due to the change in the ratio of 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.

Liquidity and Capital Resources

Our liquidity requirements arise primarily from debt service, working capital requirements, product development activities and funding of acquisitions. We have
met these cash requirements through cash from operations, borrowings for product acquisitions and the issuance of common stock.

Our
cash and cash equivalents were $54.6 million at September 30, 2004. Net cash provided by operating activities for the nine months ended September 30, 2004 was
$44.4 million. This providing of cash was the result of the net income of $18.0 million, non-cash depreciation and amortization expense

16

---



of
$12.6 million, non-cash tax expense of $6.6 million, non-cash interest expense of $0.2 million, decrease in income tax receivable of $4.8 million and the
increase in accounts payable and accrued expenses of $7.1 million. Partially offsetting the provision of cash from operations were increases in accounts receivable of $0.8 million,
increases in inventory of $0.2 million, and increases in other current assets of $3.9 million.

Our
cash and cash equivalents were $30.0 million at September 30, 2003. Net cash used in operating activities for the nine months ended September 30, 2003 was
$14.0 million. The use of cash was the result of the net loss of $11.3 million, decrease in accounts payable and accrued expenses of $18.5 million, increase in other current
assets of $1.2 million, and increase in income tax receivable of $8.0 million. Partially offsetting the use of cash from operations were non-cash depreciation and amortization expense of
$12.4 million, an impairment charge of $4.2 million, non-cash tax expense of $1.2 million, non-cash compensation expense of $0.2 million, decrease in accounts receivable of
$1.8 million and decrease in inventories of $5.2 million.

We
maintain supply agreements with third party suppliers for most of our products. Some of these supply agreements contain minimum purchase requirements. For most of these supply
agreements, we believe that our inventory requirements and related purchases of inventory will exceed the minimum purchase requirement in 2004. In those cases in which we do not believe our purchases
will exceed the minimum purchase requirements, we are seeking to negotiate waivers or modifications of the minimum purchase requirements.

Recent
regulatory developments affecting our Tanafed line could affect our liquidity requirements. In late 2002, the FDA issued a notice about various cough and cold combination
products, which requires that us to obtain FDA approval of our Tanafed products before January 1, 2005 in order to be able to thereafter continue to market and sell these products as
prescription products. We have not yet determined the estimated cost to obtain FDA approval. We continue to evaluate our strategy for our 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 nine months ended September 30, 2004 was $156.4 million. The uses of this cash was for the purchases of marketable securities
of $150.5 million, the purchases of product licenses of $5.3 million and the purchases of property and equipment of $0.6 million. During the second quarter of 2004, we announced
an agreement with SkyePharma PLC, granting us the exclusive license to market and distribute a cardiovascular product in the United States. The agreement requires us to pay $5.0 million to
SkyePharma PLC 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 FDA for approval, which we expect to
receive by the end of 2004. We intend to begin marketing and distribution shortly after receipt of the FDA approval.

Net
cash used in investing activities for the nine months ended September 30, 2003 was $1.2 million. The use of this cash was primarily for purchases of software and
computer equipment.

Net
cash provided by financing activities was $133.0 million for the nine months ended September 30, 2004. The providers of cash were the issuance of $150 million in
convertible debt in March 2004, as well as proceeds of $6.0 million from the exercise of common stock options. Partially offsetting this net cash provided was $5.0 million in
capitalized financing costs and $18.0 million in stock repurchases.

Net
cash used in financing activities was $2.3 million for the nine months ended September 30, 2003. The use of this cash was $3.0 million to repurchase shares of
our outstanding common stock under our share repurchase program and $0.2 million in fees paid to obtain the credit facility through LaSalle Bank N.A., partially offset by $0.9 million in
proceeds from the exercise of common stock options.

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

We
believe that our cash and cash equivalents and cash which we expect to generate from operations will be adequate to fund our current working capital requirements for at least the next
12 months. However, in the event that we make significant acquisitions in the future, we 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.

The
holders of the convertible notes may convert the 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 our 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 September 30, 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 relating 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 September 30,
2004, we were in compliance with these financial covenants.

Critical Accounting Policies

We view our critical accounting policies to be those policies which are very important to the portrayal of our 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. We believe our 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, including, but not limited to, our Annual Report on Form 10-K for the fiscal
year ended December 31, 2003.

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our operating results and cash flows are subject to fluctuations from changes in foreign currency exchange rates and interest rates. Our purchases of Nitrolingual
under our agreement with Pohl-Boskamp and our purchases of Sular product inventory from Bayer are made in Euros. We traditionally have eliminated 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. We currently hold 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 our 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 our senior secured revolving credit facility arranged by LaSalle Bank N.A., we 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, our 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
September 30, 2004 there was no debt outstanding under this facility and the facility was not used at any time during the quarter or nine months ended September 30, 2004.

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.

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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 third 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

On September 29, 2004, the U.S. District Court for the Northern District of Georgia dismissed, without prejudice, the class action lawsuit filed against
us, our Board of Directors, certain of our current and former officers and our underwriters for our initial public offering completed on April 24, 2002. Although the class action lawsuit was
dismissed, the court granted the plaintiffs the right to refile their class action lawsuit provided that the plaintiffs pay all of the defendants' fees and costs associated with filing the motions to
dismiss the class action lawsuit.

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.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table presents the total number of shares repurchased during the third quarter of fiscal 2004 and the average price paid per share:

|Fiscal Period                                |  | Plan     |  | Total
Number of
Shares
Purchased |  | Average
Price Per
Share |       | Total Number of
Shares Purchased as
Part of Publicly
Announced Plans |         | Approximate Dollar
Value of Shares that
May Yet Be
Purchased Under
the Plans
|-------------------------------------------- |  | -------- |  | -------------------------------- |  | ----------------------- | ----- | -------------------------------------------------------------------- | ------- | ----------------------------------------------------------------------------
|July 1, 2004 through July 31, 2004           |  | (1)      |  |                                 |  | $                       |      |                                                                      |        |                                                                             
|August 1, 2004 through August 31, 2004       |  | (2)      |  | 231,580                          |  |                         | 16.77 |                                                                      | 231,580 |                                                                             
|September 1, 2004 through September 30, 2004 |  | (2), (3) |  | 500,000                          |  |                         | 19.04 |                                                                      | 500,000 |                                                                             
|Total Fiscal 2004 Third Quarter              |  |          |  | 731,580                          |  | $                       | 18.32 |                                                                      | 731,580 |                                                                             

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ITEM 6.    EXHIBITS



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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: October 29, 2004 |  | By:                                                 
|Date: October 29, 2004 |  | By:                                                 

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