##### Table of Contents









UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549




---

FORM 10-Q

(Mark One)



| |   |                                                                                            
| | - | -------------------------------------------------------------------------------------------
| | x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934
|
| |   | For the quarterly period ended September 30, 2003                                          

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. 0-24425

King Pharmaceuticals, Inc.

(Exact name of registrant as specified in its
charter)


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

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

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 x No
o

Indicate by check mark whether the Registrant is
an accelerated filer (as defined in Rule 12b-2 of the
Exchange Act). Yes x No
o

Number of shares outstanding of Registrants
common stock as of November 10, 2003: 241,140,832



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TABLE OF CONTENTS



|                                             |                                                                                               |                                                                                                     |  |  |  |  |  | 
|-------------------------------------------- | --------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------- |  |  |  |  |  | 
|PART I -- FINANCIAL INFORMATION             
|                                             | Item 1. Financial Statements                                                                 
|                                             |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS                                                              
|                                             |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF INCOME                                                        
|                                             |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY AND OTHER COMPREHENSIVE INCOME
|                                             |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS                                                    
|                                             |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                                               
|PART I -- FINANCIAL INFORMATION             
|                                             | Item 2. Managements Discussion and Analysis of Results of Operations and Financial Condition
|RISK FACTORS                                
|                                             | Item 3. Quantitative and Qualitative Disclosure about Market Risk                            
|                                             | Item 4. Controls and Procedures                                                              
|PART II -- OTHER INFORMATION                
|                                             | Item 1. Legal Proceedings                                                                    
|                                             | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                                  
|EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
|EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
|EX-32.1 SECTION 906 CERTIFICATION OF THE CEO
|EX-32.2 SECTION 906 CERTIFICATION OF THE CFO



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##### Table of Contents






PART I  FINANCIAL INFORMATION




Item 1.     Financial
Statements

KING PHARMACEUTICALS, INC.






CONDENSED CONSOLIDATED BALANCE
SHEETS


(In thousands)


|                                                   |                                                                                      |                                            |           |              |           |  |           |           |           | 
|-------------------------------------------------- | ------------------------------------------------------------------------------------ | ------------------------------------------ | --------- | ------------ | --------- |  | --------- | --------- | --------- | 
|                                                   |                                                                                      | September 30,                              |           |             
|                                                   |                                                                                      | 2003                                       |           | December 31,
|                                                   |                                                                                      | (unaudited)                                |           | 2002        
|                                                   |                                                                                      |                                            |           |             
|ASSETS                                            
|CURRENT ASSETS:                                    |                                                                                      |                                            |           |              |           |  |           |          
|                                                   | Cash and cash equivalents                                                            |                                            | $         | 118,504      |           |  | $         | 588,225   |          
|                                                   | Restricted cash                                                                      |                                            |           | 122,253      |           |  |           |          |          
|                                                   | Marketable securities                                                                |                                            |           |             |           |  |           | 227,263   |          
|                                                   | Accounts receivable, net of allowance for
    doubtful accounts of $9,720 and $7,513 |                                            |           | 229,305      |           |  |           | 159,987   |          
|                                                   | Inventories                                                                          |                                            |           | 251,728      |           |  |           | 167,153   |          
|                                                   | Deferred income taxes                                                                |                                            |           | 101,516      |           |  |           | 106,168   |          
|                                                   | Prepaid expenses and other current assets                                            |                                            |           | 14,133       |           |  |           | 12,906    |          
|                                                   |                                                                                      |                                            |           |              |           |  |           |          
|                                                   |                                                                                      | Total current assets                       |           |              | 837,439   |  |           |           | 1,261,702 | 
|                                                   |                                                                                      |                                            |           |              |           |  |           |          
|Property, plant and equipment, net                 |                                                                                      |                                            | 247,155   |              |           |  | 217,114   |          
|Intangible assets, net                             |                                                                                      |                                            | 1,785,838 |              |           |  | 1,219,571 |          
|Goodwill                                           |                                                                                      |                                            | 126,616   |              |           |  | 12,742    |          
|Other assets (includes $46,120 of restricted cash) |                                                                                      |                                            | 103,470   |              |           |  | 39,531    |          
|Deferred income tax assets                         |                                                                                      |                                            | 9,287     |              |           |  |          |          
|                                                   |                                                                                      |                                            |           |              |           |  |           |          
|                                                   |                                                                                      | Total assets                               |           | $            | 3,109,805 |  |           | $         | 2,750,660 | 
|                                                   |                                                                                      |                                            |           |              |           |  |           |          
|LIABILITIES AND SHAREHOLDERS
    EQUITY          
|CURRENT LIABILITIES:                               |                                                                                      |                                            |           |              |           |  |           |          
|                                                   | Accounts payable                                                                     |                                            | $         | 55,729       |           |  | $         | 49,889    |          
|                                                   | Accrued expenses                                                                     |                                            |           | 493,030      |           |  |           | 297,528   |          
|                                                   | Income taxes payable                                                                 |                                            |           | 62,255       |           |  |           | 21,247    |          
|                                                   | Current portion of long-term debt                                                    |                                            |           | 1,176        |           |  |           | 1,300     |          
|                                                   |                                                                                      |                                            |           |              |           |  |           |          
|                                                   |                                                                                      | Total current liabilities                  |           |              | 612,190   |  |           |           | 369,964   | 
|                                                   |                                                                                      |                                            |           |              |           |  |           |          
|Long-term debt:                                    |                                                                                      |                                            |           |              |           |  |           |          
|                                                   | Convertible debentures                                                               |                                            |           | 345,000      |           |  |           | 345,000   |          
|                                                   | Senior subordinated notes                                                            |                                            |           | 93           |           |  |           | 93        |          
|Deferred income taxes                              |                                                                                      |                                            |          |              |           |  | 33,596    |          
|Other long-term liabilities                        |                                                                                      |                                            | 152,400   |              |           |  | 70,824    |          
|                                                   |                                                                                      |                                            |           |              |           |  |           |          
|                                                   |                                                                                      | Total liabilities                          |           |              | 1,109,683 |  |           |           | 819,477   | 
|                                                   |                                                                                      |                                            |           |              |           |  |           |          
|Commitments and contingencies (note 8)             |                                                                                      |                                            |           |              |           |  |           |          
|                                                   | Shareholders equity                                                                 |                                            |           | 2,000,122    |           |  |           | 1,931,183 |          
|                                                   |                                                                                      |                                            |           |              |           |  |           |          
|                                                   |                                                                                      | Total liabilities and shareholders equity |           | $            | 3,109,805 |  |           | $         | 2,750,660 | 
|                                                   |                                                                                      |                                            |           |              |           |  |           |          

See accompanying notes.

1



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##### Table of Contents



KING PHARMACEUTICALS, INC.






CONDENSED CONSOLIDATED STATEMENTS OF
INCOME


(Unaudited)


(In thousands, except per share
data)


|                              |                                                               |                    |                                            |                   |      |         |         |         |      |         |         |           |      |           |         |         |      |         |  
|----------------------------- | ------------------------------------------------------------- | ------------------ | ------------------------------------------ | ----------------- | ---- | ------- | ------- | ------- | ---- | ------- | ------- | --------- | ---- | --------- | ------- | ------- | ---- | ------- | -
|                              |                                                               |                    |                                            |                  
|                              |                                                               | Three Months Ended |                                            | Nine Months Ended
|                              |                                                               | September 30,      |                                            | September 30,    
|                              |                                                               |                    |                                            |                  
|                              |                                                               | 2003               |                                            | 2002              |      | 2003    |         | 2002   
|                              |                                                               |                    |                                            |                   |      |         |         |        
|Revenues:                     |                                                               |                    |                                            |                   |      |         |         |         |      |         |         |           |      |           |         |        
|                              | Net sales                                                     |                    | $                                          | 407,929           |      |         | $       | 300,708 |      |         | $       | 1,090,881 |      |           | $       | 815,278 |     
|                              | Royalty revenue                                               |                    |                                            | 16,275            |      |         |         | 14,997  |      |         |         | 47,876    |      |           |         | 41,025  |     
|                              |                                                               |                    |                                            |                   |      |         |         |         |      |         |         |           |      |           |         |        
|                              |                                                               |                    | Total revenues                             |                   |      | 424,204 |         |         |      | 315,705 |         |           |      | 1,138,757 |         |         |      | 856,303 |  
|                              |                                                               |                    |                                            |                   |      |         |         |         |      |         |         |           |      |           |         |        
|Operating costs and expenses: |                                                               |                    |                                            |                   |      |         |         |         |      |         |         |           |      |           |         |        
|                              | Cost of revenues, exclusive of depreciation shown
    below   |                    |                                            | 90,421            |      |         |         | 63,562  |      |         |         | 262,569   |      |           |         | 166,898 |     
|                              |                                                               |                    |                                            |                   |      |         |         |         |      |         |         |           |      |           |         |        
|                              | Selling, general and administrative                           |                    |                                            | 89,124            |      |         |         | 46,473  |      |         |         | 210,935   |      |           |         | 132,484 |     
|                              | Co-promotion fees                                             |                    |                                            | 46,109            |      |         |         | 53,652  |      |         |         | 163,049   |      |           |         | 134,747 |     
|                              |                                                               |                    |                                            |                   |      |         |         |         |      |         |         |           |      |           |         |        
|                              |                                                               |                    | Total selling, general, and administrative |                   |      | 135,233 |         |         |      | 100,125 |         |           |      | 373,984   |         |         |      | 267,231 |  
|                              |                                                               |                    |                                            |                   |      |         |         |         |      |         |         |           |      |           |         |        
|                              | Research and development                                      |                    |                                            | 8,758             |      |         |         | 6,448   |      |         |         | 29,487    |      |           |         | 18,779  |     
|                              | Research and development  in process
    upon acquisition    |                    |                                            |                  |      |         |         |        |      |         |         | 193,000   |      |           |         |        |     
|                              |                                                               |                    |                                            |                   |      |         |         |         |      |         |         |           |      |           |         |        
|                              |                                                               |                    | Total research and development             |                   |      | 8,758   |         |         |      | 6,448   |         |           |      | 222,487   |         |         |      | 18,779  |  
|                              |                                                               |                    |                                            |                   |      |         |         |         |      |         |         |           |      |           |         |        
|                              | Depreciation and amortization                                 |                    |                                            | 39,698            |      |         |         | 15,603  |      |         |         | 83,323    |      |           |         | 43,743  |     
|                              | Intangible asset impairment                                   |                    |                                            |                  |      |         |         |        |      |         |         | 110,970   |      |           |         |        |     
|                              | Gain on sale of products                                      |                    |                                            | (10,312           | )    |         |         |        |      |         |         | (10,312   | )    |           |         |        |     
|                              |                                                               |                    |                                            |                   |      |         |         |         |      |         |         |           |      |           |         |        
|                              |                                                               |                    | Total operating costs and expenses         |                   |      | 263,798 |         |         |      | 185,738 |         |           |      | 1,043,021 |         |         |      | 496,651 |  
|                              |                                                               |                    |                                            |                   |      |         |         |         |      |         |         |           |      |           |         |        
|                              | Operating income                                              |                    |                                            | 160,406           |      |         |         | 129,967 |      |         |         | 95,736    |      |           |         | 359,652 |     
|                              |                                                               |                    |                                            |                   |      |         |         |         |      |         |         |           |      |           |         |        
|Other income (expense):       |                                                               |                    |                                            |                   |      |         |         |         |      |         |         |           |      |           |         |        
|                              | Interest income                                               |                    |                                            | 1,037             |      |         |         | 5,952   |      |         |         | 5,729     |      |           |         | 17,410  |     
|                              | Interest expense                                              |                    |                                            | (3,669            | )    |         |         | (3,143  | )    |         |         | (10,137   | )    |           |         | (9,028  | )   
|                              | Valuation benefit (charge) 
    convertible notes receivable |                    |                                            | 9,338             |      |         |         | 548     |      |         |         | 24,952    |      |           |         | (27,378 | )   
|                              | Other, net                                                    |                    |                                            | (36               | )    |         |         | 87      |      |         |         | (134      | )    |           |         | (994    | )   
|                              |                                                               |                    |                                            |                   |      |         |         |         |      |         |         |           |      |           |         |        
|                              |                                                               |                    | Total other income (expense)               |                   |      | 6,670   |         |         |      | 3,444   |         |           |      | 20,410    |         |         |      | (19,990 | )
|                              |                                                               |                    |                                            |                   |      |         |         |         |      |         |         |           |      |           |         |        
|Income before income tax      |                                                               |                    | 167,076                                    |                   |      |         | 133,411 |         |      |         | 116,146 |           |      |           | 339,662 |        
|Income tax expense            |                                                               |                    | 60,989                                     |                   |      |         | 49,166  |         |      |         | 52,267  |           |      |           | 125,699 |        
|                              |                                                               |                    |                                            |                   |      |         |         |         |      |         |         |           |      |           |         |        
|Net income                    |                                                               | $                  | 106,087                                    |                   |      | $       | 84,245  |         |      | $       | 63,879  |           |      | $         | 213,963 |        
|                              |                                                               |                    |                                            |                   |      |         |         |         |      |         |         |           |      |           |         |        
|Income per common share:      |                                                               |                    |                                            |                   |      |         |         |         |      |         |         |           |      |           |         |        
|                              | Basic:                                                        |                    |                                            |                   |      |         |         |         |      |         |         |           |      |           |         |         |     
|                              |                                                               | Net income         |                                            | $                 | 0.44 |         |         | $       | 0.35 |         |         | $         | 0.27 |           |         | $       | 0.87 |        
|                              |                                                               |                    |                                            |                   |      |         |         |         |      |         |         |           |      |           |         |        
|                              | Diluted:                                                      |                    |                                            |                   |      |         |         |         |      |         |         |           |      |           |         |         |     
|                              |                                                               | Net income         |                                            | $                 | 0.44 |         |         | $       | 0.35 |         |         | $         | 0.26 |           |         | $       | 0.87 |        
|                              |                                                               |                    |                                            |                   |      |         |         |         |      |         |         |           |      |           |         |        

See accompanying notes.

2



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##### Table of Contents



KING PHARMACEUTICALS, INC.




CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS EQUITY

AND OTHER COMPREHENSIVE INCOME


(Unaudited)


(In thousands, except share data)


|                              |                                                          |                            |             |          |  |               |           |        |  |       |         |         |  |   |       |       |  |   |           |         |         | 
|----------------------------- | -------------------------------------------------------- | -------------------------- | ----------- | -------- |  | ------------- | --------- | ------ |  | ----- | ------- | ------- |  | - | ----- | ----- |  | - | --------- | ------- | ------- | 
|                              |                                                          |                            |             |          |  | Accumulated   |           |       
|                              |                                                          | Common Stock               |             |          |  | Other         |           |       
|                              |                                                          |                            |             | Retained |  | Comprehensive |           |       
|                              |                                                          | Shares                     |             | Amount   |  | Earnings      |           | Income |  | Total
|                              |                                                          |                            |             |          |  |               |           |        |  |      
|Balance at December 31, 2001  |                                                          |                            | 247,692,984 |          |  | $             | 1,361,563 |        |  | $     | 546,721 |         |  | $ |      |       |  | $ | 1,908,284 |        
|Comprehensive income:         |                                                          |                            |             |          |  |               |           |        |  |       |         |         |  |   |       |       |  |   |           |        
|                              | Net income                                               |                            |             |         |  |               |           |       |  |       |         | 213,963 |  |   |       |      |  |   |           | 213,963 |        
|                              | Unrealized gain on marketable securities, net of
    tax |                            |             |         |  |               |           |       |  |       |         |        |  |   |       | 423   |  |   |           | 423     |        
|                              |                                                          |                            |             |          |  |               |           |        |  |       |         |         |  |   |       |       |  |   |           |        
|                              |                                                          | Total comprehensive income |             |          |  |               |           |        |  |       |         |         |  |   |       |       |  |   |           |         | 214,386 | 
|Stock repurchases             |                                                          |                            | (6,828,680  | )        |  |               | (155,390  | )      |  |       |        |         |  |   |      |       |  |   | (155,390  | )      
|Exercise of stock options     |                                                          |                            | 397,916     |          |  |               | 3,996     |        |  |       |        |         |  |   |      |       |  |   | 3,996     |        
|                              |                                                          |                            |             |          |  |               |           |        |  |       |         |         |  |   |       |       |  |   |           |        
|Balance at September 30, 2002 |                                                          |                            | 241,262,220 |          |  | $             | 1,210,169 |        |  | $     | 760,684 |         |  | $ | 423   |       |  | $ | 1,971,276 |        
|                              |                                                          |                            |             |          |  |               |           |        |  |       |         |         |  |   |       |       |  |   |           |        
|Balance at December 31, 2002  |                                                          |                            | 240,624,751 |          |  | $             | 1,201,897 |        |  | $     | 729,241 |         |  | $ | 45    |       |  | $ | 1,931,183 |        
|Comprehensive income:         |                                                          |                            |             |          |  |               |           |        |  |       |         |         |  |   |       |       |  |   |           |        
|                              | Net income                                               |                            |             |         |  |               |           |       |  |       |         | 63,879  |  |   |       |      |  |   |           | 63,879  |        
|                              | Unrealized gain on marketable securities, net of
    tax |                            |             |         |  |               |           |       |  |       |         |        |  |   |       | 1,341 |  |   |           | 1,341   |        
|                              | Foreign currency translation                             |                            |             |         |  |               |           |       |  |       |         |        |  |   |       | 144   |  |   |           | 144     |        
|                              |                                                          |                            |             |          |  |               |           |        |  |       |         |         |  |   |       |       |  |   |           |        
|                              |                                                          | Total comprehensive income |             |          |  |               |           |        |  |       |         |         |  |   |       |       |  |   |           |         | 65,364  | 
|Exercise of stock options     |                                                          |                            | 512,476     |          |  |               | 3,575     |        |  |       |        |         |  |   |      |       |  |   | 3,575     |        
|                              |                                                          |                            |             |          |  |               |           |        |  |       |         |         |  |   |       |       |  |   |           |        
|Balance at September 30, 2003 |                                                          |                            | 241,137,227 |          |  | $             | 1,205,472 |        |  | $     | 793,120 |         |  | $ | 1,530 |       |  | $ | 2,000,122 |        
|                              |                                                          |                            |             |          |  |               |           |        |  |       |         |         |  |   |       |       |  |   |           |        

See accompanying notes.

3



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##### Table of Contents



KING PHARMACEUTICALS, INC.






CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS


(Unaudited)


(In thousands)


|                                               |                                                                              |                                                         |          |          |          |   |          |          |          |  
|---------------------------------------------- | ---------------------------------------------------------------------------- | ------------------------------------------------------- | -------- | -------- | -------- | - | -------- | -------- | -------- | -
|                                               |                                                                              |                                                        
|                                               |                                                                              | Nine Months Ended                                      
|                                               |                                                                              | September 30,                                          
|                                               |                                                                              |                                                        
|                                               |                                                                              | 2003                                                    |          | 2002    
|                                               |                                                                              |                                                         |          |         
|Cash flows from operating activities           |                                                                              | $                                                       | 368,485  |          |          | $ | 325,552  |         
|                                               |                                                                              |                                                         |          |          |          |   |          |         
|Cash flows from investing activities:          |                                                                              |                                                         |          |          |          |   |          |         
|                                               | Purchases of marketable securities                                           |                                                         |          | (25,903  | )        |   |          | (597,873 | )       
|                                               | Proceeds from the sale of marketable securities                              |                                                         |          | 253,097  |          |   |          | 457,461  |         
|                                               | Transfer (to)/from restricted cash                                           |                                                         |          | (48,083  | )        |   |          |         |         
|                                               | Loans receivable                                                             |                                                         |          | 8,668    |          |   |          |         |         
|                                               | Purchases of property, plant and equipment                                   |                                                         |          | (33,530  | )        |   |          | (48,771  | )       
|                                               | Acquisition of primary care business of Elan                                 |                                                         |          | (761,745 | )        |   |          |         |         
|                                               | Purchase of convertible senior notes                                         |                                                         |          |         |          |   |          | (10,044  | )       
|                                               | Acquisition of Meridian Medical Technologies,
    Inc., net of cash acquired |                                                         |          | (238,498 | )        |   |          |         |         
|                                               | Purchase of product rights                                                   |                                                         |          | (9,000   | )        |   |          | (120,300 | )       
|                                               | Proceeds from sale of products                                               |                                                         |          | 13,310   |          |   |          |         |         
|                                               | Proceeds from sale of assets                                                 |                                                         |          | 261      |          |   |          | 4,358    |         
|                                               |                                                                              |                                                         |          |          |          |   |          |         
|                                               |                                                                              | Net cash used in investing activities                   |          |          | (841,423 | ) |          |          | (315,169 | )
|                                               |                                                                              |                                                         |          |          |          |   |          |         
|Cash flows from financing activities:          |                                                                              |                                                         |          |          |          |   |          |         
|                                               | Proceeds from exercise of stock options, net                                 |                                                         |          | 3,555    |          |   |          | 3,996    |         
|                                               | Purchase of common stock                                                     |                                                         |          |         |          |   |          | (155,390 | )       
|                                               | Debt issuance costs                                                          |                                                         |          | (214     | )        |   |          | (4,850   | )       
|                                               | Proceeds from revolving credit facility                                      |                                                         |          | 125,000  |          |   |          |         |         
|                                               | Payments on revolving credit facility                                        |                                                         |          | (125,000 | )        |   |          |         |         
|                                               | Payments on other long-term debt and capital
    lease obligations           |                                                         |          | (124     | )        |   |          | (207     | )       
|                                               |                                                                              |                                                         |          |          |          |   |          |         
|                                               |                                                                              | Net cash provided by (used in) financing
    activities |          |          | 3,217    |   |          |          | (156,451 | )
|                                               |                                                                              |                                                         |          |          |          |   |          |         
|Decrease in cash and cash equivalents          |                                                                              |                                                         | (469,721 | )        |          |   | (146,068 | )       
|Cash and cash equivalents, beginning of period |                                                                              |                                                         | 588,225  |          |          |   | 874,602  |         
|                                               |                                                                              |                                                         |          |          |          |   |          |         
|Cash and cash equivalents, end of period       |                                                                              | $                                                       | 118,504  |          |          | $ | 728,534  |         
|                                               |                                                                              |                                                         |          |          |          |   |          |         

See accompanying notes.

4



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##### Table of Contents



KING PHARMACEUTICALS, INC.






NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS


September 30, 2003 and 2002


(In thousands)


1.     General

The accompanying unaudited interim condensed
consolidated financial statements of King Pharmaceuticals, Inc.
(King or the Company) have been prepared
by the Company in accordance with the instructions to
Form 10-Q and Rule 10-01 of Regulation S-X, and
accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management,
all adjustments (consisting of items of a normal recurring
nature) considered necessary for a fair presentation have been
included. Operating results for the three and nine months ended
September 30, 2003 are not necessarily indicative of the
results that may be expected for the year ending
December 31, 2003. These consolidated statements should be
read in conjunction with the audited consolidated financial
statements and notes thereto included in the Companys
Annual Report on Form 10-K for the year ended
December 31, 2002. The year-end condensed consolidated
balance sheet was derived from the audited consolidated
financial statements but does not include all disclosures
required by generally accepted accounting principles.

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

Certain amounts from the prior consolidated
financial statements have been reclassified to conform to the
presentation adopted in 2003.

2.     Stock
Compensation

The Company has adopted the disclosure-only
provisions of Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock
Based Compensation. Accordingly, since options were
granted with exercise prices equal to the then quoted market
prices, no compensation cost has been recognized for stock
options granted to date. Had compensation cost for these plans
been determined for options granted, consistent with SFAS
No. 123, the Companys net income and diluted income
per common share would have been adjusted to the following pro
forma amounts:

|                                 |                                        |                    |   |                   |   |      |   |        |   |  |   |        |   |  |   |         |  
|-------------------------------- | -------------------------------------- | ------------------ | - | ----------------- | - | ---- | - | ------ | - |  | - | ------ | - |  | - | ------- | -
|                                 |                                        |                    |   |                  
|                                 |                                        | Three Months Ended |   | Nine Months Ended
|                                 |                                        | September 30,      |   | September 30,    
|                                 |                                        |                    |   |                  
|                                 |                                        | 2003               |   | 2002              |   | 2003 |   | 2002  
|                                 |                                        |                    |   |                   |   |      |   |       
|Net income:                      |                                        |                    |   |                   |   |      |   |        |   |  |   |        |   |  |   |        
|                                 | As reported                            |                    | $ | 106,087           |   |      | $ | 84,245 |   |  | $ | 63,879 |   |  | $ | 213,963 |  
|                                 | Compensation costs for options granted |                    |   | (353              | ) |      |   | (42    | ) |  |   | (445   | ) |  |   | (556    | )
|                                 |                                        |                    |   |                   |   |      |   |        |   |  |   |        |   |  |   |        
|                                 | Pro forma                              |                    | $ | 105,734           |   |      | $ | 84,203 |   |  | $ | 63,434 |   |  | $ | 213,407 |  
|                                 |                                        |                    |   |                   |   |      |   |        |   |  |   |        |   |  |   |        
|Diluted income per common share: |                                        |                    |   |                   |   |      |   |        |   |  |   |        |   |  |   |        
|Net income:                      |                                        |                    |   |                   |   |      |   |        |   |  |   |        |   |  |   |        
|                                 | As reported                            |                    | $ | 0.44              |   |      | $ | 0.35   |   |  | $ | 0.26   |   |  | $ | 0.87    |  
|                                 |                                        |                    |   |                   |   |      |   |        |   |  |   |        |   |  |   |        
|                                 | Pro forma                              |                    | $ | 0.44              |   |      | $ | 0.35   |   |  | $ | 0.26   |   |  | $ | 0.86    |  
|                                 |                                        |                    |   |                   |   |      |   |        |   |  |   |        |   |  |   |        

5



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##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The fair value of each option grant is estimated
on the date of grant using the Black-Scholes option pricing
model. The following weighted-average assumptions were used for
grants for the three months ended September 30, 2003 and
2002:

|                        |  |                    |       |      |  |  |       |  
|----------------------- |  | ------------------ | ----- | ---- |  |  | ----- | -
|                        |  |                   
|                        |  | Three Months Ended
|                        |  | September 30,     
|                        |  |                   
|                        |  | 2003               |       | 2002
|                        |  |                    |       |     
|Expected life of option |  |                    | 4.00  |      |  |  | 4.00  |  
|Risk-free interest rate |  |                    | 2.84  | %    |  |  | 3.49  | %
|Expected volatility     |  |                    | 71.79 | %    |  |  | 76.00 | %
|Expected dividend yield |  |                    | 0.00  | %    |  |  | 0.00  | %

3.     Earnings Per
Share

The basic and diluted income per common share was
determined using the following share data:

|                                 |                                |                    |  |                   |  |      |  |         |  |  |  |         |  |  |  |         | 
|-------------------------------- | ------------------------------ | ------------------ |  | ----------------- |  | ---- |  | ------- |  |  |  | ------- |  |  |  | ------- | 
|                                 |                                |                    |  |                  
|                                 |                                | Three Months Ended |  | Nine Months Ended
|                                 |                                | September 30,      |  | September 30,    
|                                 |                                |                    |  |                  
|                                 |                                | 2003               |  | 2002              |  | 2003 |  | 2002   
|                                 |                                |                    |  |                   |  |      |  |        
|Basic income per common share:   |                                |                    |  |                   |  |      |  |         |  |  |  |         |  |  |  |        
|                                 | Weighted average common shares |                    |  | 241,066           |  |      |  | 241,840 |  |  |  | 240,932 |  |  |  | 245,535 | 
|                                 |                                |                    |  |                   |  |      |  |         |  |  |  |         |  |  |  |        
|Diluted income per common share: |                                |                    |  |                   |  |      |  |         |  |  |  |         |  |  |  |        
|                                 | Weighted average common shares |                    |  | 241,066           |  |      |  | 241,840 |  |  |  | 240,932 |  |  |  | 245,535 | 
|                                 | Effect of stock options        |                    |  | 517               |  |      |  | 1,033   |  |  |  | 567     |  |  |  | 1,472   | 
|                                 |                                |                    |  |                   |  |      |  |         |  |  |  |         |  |  |  |        
|                                 | Weighted average common shares |                    |  | 241,583           |  |      |  | 242,873 |  |  |  | 241,499 |  |  |  | 247,007 | 
|                                 |                                |                    |  |                   |  |      |  |         |  |  |  |         |  |  |  |        

The weighted average stock options that were
anti-dilutive at September 30, 2003 and 2002 were 2,898 and
2,578, respectively. The convertible debentures could also be
converted into 6,878 shares of common stock in the future,
subject to certain contingencies outlined in the indenture.
Because such contingencies were not fulfilled, the convertible
debentures were not considered in the calculation of diluted
income per common share.

4.     Inventories

Inventory consists of the following:

|                                                                                     |  |               |         |              |  |   |         |  
|------------------------------------------------------------------------------------ |  | ------------- | ------- | ------------ |  | - | ------- | -
|                                                                                     |  | September 30, |         | December 31,
|                                                                                     |  | 2003          |         | 2002        
|                                                                                     |  |               |         |             
|Finished goods (including $14,361 and $17,951 of
    sample inventory, respectively) |  | $             | 138,181 |              |  | $ | 110,623 |  
|Work-in-process                                                                      |  |               | 16,311  |              |  |   | 7,810   |  
|Raw materials                                                                        |  |               | 117,754 |              |  |   | 56,778  |  
|                                                                                     |  |               |         |              |  |   |         |  
|                                                                                     |  |               | 272,246 |              |  |   | 175,211 |  
|Inventory valuation allowance                                                        |  |               | (20,518 | )            |  |   | (8,058  | )
|                                                                                     |  |               |         |              |  |   |         |  
|                                                                                     |  | $             | 251,728 |              |  | $ | 167,153 |  
|                                                                                     |  |               |         |              |  |   |         |  

5.     Acquisitions

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

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##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

acquisition of these branded pharmaceutical
products should provide additional growth opportunities in the
branded pharmaceuticals segment through promotional activities,
development opportunities and a significantly expanded field
sales force. Product rights subject to the agreement include
those related to Sonata®, a nonbenzodiazepine treatment for
insomnia, and Skelaxin®, a muscle relaxant, in the United
States, its territories and possessions, and Puerto Rico. Under
the terms of the agreement, Elans sale of Skelaxin®
included related New Drug Applications, copyrights, trademarks,
patents and U.S. rights to potential new formulations of
Skelaxin®. Elans sale of Sonata® included its
rights to the product, as well as certain related copyrights.
The Company also acquired certain intellectual property,
regulatory, and other assets relating to Sonata® directly
from Wyeth. Under the terms of the agreement, the Company
secured an exclusive license to the intellectual property
rights, in the United States, its territories and possessions
and Puerto Rico, of both Wyeth and Elan to the extent they
relate to new formulations of Sonata®, other than for use
in animals.

The total estimated purchase price of $814,368,
includes the cost of acquisition, assumed liabilities, and a
portion of contingent liabilities. See the allocation of the
purchase price in the table below. The identifiable intangible
assets have been assigned useful lives with a weighted-average
range of 16.5 years. The purchase price allocation among
the assets acquired and the assignment of lives to the
intangible assets are preliminary and subject to further
evaluation, as the Company has not yet finalized its valuation
of intangible assets acquired. In connection with this
acquisition, $163,416 was placed into escrow to satisfy the
deferred obligations to Wyeth that were assumed by the Company
in connection with the acquisition. Since the Company is
entitled to the interest income and can direct investments of
the escrow fund, the Company has included the escrow amount in
current restricted cash and other long-term assets as restricted
cash. The $163,416 placed into escrow was included in the
purchase price as liabilities acquired. These deferred
obligations are payable on a quarterly basis through March 2005.
As of September 30, 2003, $120,290 remains in the escrow
fund.

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



| |   |                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------
| |  | $71,000 if Elan achieves specific milestones in
    connection with the development of new formulations of
    Sonata®;
|
| |  | $15,000 if annual net sales of a reformulation of
    Sonata® exceed $100.0 million; and                               
|
| |  | a $25,000 milestone payment to Elan relating to
    the ongoing exclusivity of Skelaxin® on January 2,
    2004.       

The acquired business is included in the branded
pharmaceuticals segment. The Company financed the acquisition
through borrowings of $125,000 under the senior secured
revolving credit facility and with cash on hand.

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

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KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

the success of the project depends on the outcome
of future clinical trials involving a modified-release
formulation of Sonata® and the U.S. Food and Drug
Administration (FDA) approval of the product.
Management currently anticipates that the completion of the
project should occur no earlier than 2006. If the project is not
successfully completed before 2008, the Companys business,
financial position, results of operations and cash flows could
be materially adversely affected.

The preliminary allocation of the estimated
purchase price of the primary care business of Elan is as
follows:

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






|    |                                           
|--- | ------------------------------------------
|(1) | Excludes restricted cash placed in escrow.

On January 8, 2003, the Company completed
its acquisition of Meridian Medical Technologies, Inc.
(Meridian). Meridian is a leading manufacturer of
auto-injectors for the self-administration of injectable
pharmaceuticals. The Company believes the acquisition of
Meridian provides additional lines of pharmaceutical products,
auto-injector technology and development opportunities. The
Company paid a cash price of $44.50 per common share to Meridian
shareholders, totaling approximately $246,592, and incurred
$7,317 of expenses related to the transaction. Of the total
purchase price, $140,400 was assigned to identifiable intangible
assets, $18,000 was assigned to acquired in-process research and
development, which was expensed during the first quarter of 2003
and included in research and development, and $113,874 was
assigned to goodwill. None of the goodwill is expected to be
deductible for tax purposes. The identifiable intangible assets
have been assigned useful lives with a weighted-average range of
32.3 years. The purchase price allocation among the assets
acquired and the assignment of lives to the intangible assets
are preliminary and subject to further evaluation, as the
Company has not yet finalized its valuation of tangible assets
acquired. The acquisition is allocated to the Meridian Medical
Technologies segment. The Company financed the acquisition using
available cash on hand.

As mentioned above, $18,000 of the purchase price
was allocated to an acquired in-process research and development
project, an auto-injector pre-filled with diazepam indicated
for, among other things, the treatment of epileptic seizures and
management of anxiety disorders. The value of the acquired
in-process research and development project was expensed on the
date of acquisition, as it had not received regulatory approval
and had no alternative future use. The project was valued
through the application of a probability-weighted, discounted
cash flow approach with the assistance of an independent
valuation specialist. The estimated cash flows were projected
over a 30-year period utilizing a discount rate of 21%. Pre-tax
margins (after an adjustment to reflect the use of auto-injector
core technology) were assumed to be (10%) in 2003 and increasing
to 23% in 10 years. The estimated cost to complete the
project was less than $700. The project was submitted to the FDA
as an Abbreviated New Drug Application (ANDA), which
references an approved New Drug Application (NDA)
owned by the United States Army for a diazepam-filled auto-
injector currently manufactured under contract exclusively by
Meridian. The application for the project is under review by the
FDA and the Company must satisfactorily respond to chemistry,
microbiology,

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KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

manufacturing and other questions from the FDA
that arise as a result of its normal review and approval
process. The Company anticipates FDA approval of the project
during 2004. The project was substantially complete as of the
valuation date. The success of the project is dependent upon
whether the FDA approves the ANDA for the Companys
diazepam-filled auto-injector. The Company is not aware of any
material issues with respect to the FDAs review of the
ANDA. Even if the project is not successfully completed, it
would not materially adversely affect the Companys results
of operations.

The preliminary allocation of the estimated
purchase price of Meridian is as follows:

|                                               |  |   |         |  
|---------------------------------------------- |  | - | ------- | -
|Cash consideration, including transaction fees |  | $ | 253,909 |  
|                                               |  |   |         |  
|                                              
|Allocation of purchase price:                  |  |   |         |  
|Current assets                                 |  | $ | 38,574  |  
|Property, plant and equipment                  |  |   | 15,791  |  
|Goodwill                                       |  |   | 113,874 |  
|Intangible assets                              |  |   | 140,400 |  
|In process research and development            |  |   | 18,000  |  
|Other assets                                   |  |   | 662     |  
|Current liabilities                            |  |   | (14,505 | )
|Deferred income taxes                          |  |   | (57,612 | )
|Other liabilities                              |  |   | (1,275  | )
|                                               |  |   |         |  
|                                               |  | $ | 253,909 |  
|                                               |  |   |         |  

The following unaudited pro forma summary
presents the financial information as if the acquisitions of
Meridian and the primary care business of Elan had occurred on
January 1, 2003 for the three and nine months ended
September 30, 2003 and on January 1, 2002 for the
three and nine months ended September 30, 2002. These pro
forma results have been prepared for comparative purposes and do
not purport to be indicative of what would have occurred had the
acquisition been made on January 1, 2003 or January 1,
2002, nor is it indicative of future results.

|                                  |  |                    |         |                   |  |      |         |      |  |   |           |  |  |   |           | 
|--------------------------------- |  | ------------------ | ------- | ----------------- |  | ---- | ------- | ---- |  | - | --------- |  |  | - | --------- | 
|                                  |  |                    |         |                  
|                                  |  | Three Months Ended |         | Nine Months Ended
|                                  |  | September 30,      |         | September 30,    
|                                  |  |                    |         |                  
|                                  |  | 2003               |         | 2002              |  | 2003 |         | 2002
|                                  |  |                    |         |                   |  |      |         |     
|Total revenues                    |  | $                  | 424,204 |                   |  | $    | 411,601 |      |  | $ | 1,255,522 |  |  | $ | 1,122,000 | 
|                                  |  |                    |         |                   |  |      |         |      |  |   |           |  |  |   |           | 
|Net income                        |  | $                  | 106,638 |                   |  | $    | 89,222  |      |  | $ | 73,753    |  |  | $ | 107,708   | 
|                                  |  |                    |         |                   |  |      |         |      |  |   |           |  |  |   |           | 
|Basic earnings per common share   |  | $                  | 0.44    |                   |  | $    | 0.37    |      |  | $ | 0.31      |  |  | $ | 0.44      | 
|                                  |  |                    |         |                   |  |      |         |      |  |   |           |  |  |   |           | 
|Diluted earnings per common share |  | $                  | 0.44    |                   |  | $    | 0.37    |      |  | $ | 0.31      |  |  | $ | 0.44      | 
|                                  |  |                    |         |                   |  |      |         |      |  |   |           |  |  |   |           | 

6.     Intangible
Assets

The following table reflects the components of
intangible assets as of September 30, 2003:

|                              |                         |          |           |              |  |   |         |         | 
|----------------------------- | ----------------------- | -------- | --------- | ------------ |  | - | ------- | ------- | 
|                              |                         | Gross    |           |             
|                              |                         | Carrying |           | Accumulated 
|                              |                         | Amount   |           | Amortization
|                              |                         |          |           |             
|Trademarks and product rights |                         | $        | 1,708,083 |              |  | $ | 166,799 |        
|Patents                       |                         |          | 299,523   |              |  |   | 57,442  |        
|Other intangibles             |                         |          | 10,346    |              |  |   | 7,873   |        
|                              |                         |          |           |              |  |   |         |        
|                              | Total intangible assets |          | $         | 2,017,952    |  |   | $       | 232,114 | 
|                              |                         |          |           |              |  |   |         |        

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KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Amortization expense for the three months ended
September 30, 2003 and 2002 was $33,781 and $12,760,
respectively. Estimated annual amortization expense at
September 30, 2003 for each of the five succeeding fiscal
years is as follows:

|                               |  |        |         | 
|------------------------------ |  | ------ | ------- | 
|Fiscal Year Ended December 31: |  | Amount
|                               |  |       
|2003                           |  | $      | 102,650 | 
|2004                           |  |        | 135,091 | 
|2005                           |  |        | 115,014 | 
|2006                           |  |        | 95,359  | 
|2007                           |  |        | 92,043  | 

Goodwill at December 31, 2002 and
September 30, 2003 is as follows:

|                                              |  |         |        |          |  |       |         |  |  |   |         | 
|--------------------------------------------- |  | ------- | ------ | -------- |  | ----- | ------- |  |  | - | ------- | 
|                                              |  | Branded |        | Meridian |  |      
|                                              |  | Segment |        | Segment  |  | Total
|                                              |  |         |        |          |  |      
|Goodwill at December 31, 2002                 |  | $       | 12,742 |          |  | $     |        |  |  | $ | 12,742  | 
|Goodwill associated with Meridian acquisition |  |         |       |          |  |       | 113,874 |  |  |   | 113,874 | 
|                                              |  |         |        |          |  |       |         |  |  |   |         | 
|Goodwill at September 30, 2003                |  | $       | 12,742 |          |  | $     | 113,874 |  |  | $ | 126,616 | 
|                                              |  |         |        |          |  |       |         |  |  |   |         | 

During January 2003, the Company was notified of
the approval by the FDA of a second generic fludrocortisone
acetate, USP, a product that represents additional competition
for the Companys Florinef®(fludrocortisone acetate,
USP) product. The Company has completed its impairment review
and has recorded an impairment charge in the amount of $110,970
in the first quarter of 2003 reflecting the reduction in the
fair value of the Florinef® intangible assets. The Company
determined the fair value of its Florinef® product based on
managements current discounted cash flow projections for
the product. Florinef® is included in the Companys
branded pharmaceuticals reporting segment.

The Company acquired the antibiotic Lorabid®
in the United States and Puerto Rico from Eli Lilly and Company
(Eli Lilly) on August 19, 1999 for a purchase
price of $91,700, including acquisition costs. Since the
acquisition, sales declined for a variety of reasons. During the
fourth quarter of 2002, the Company decided to divest its rights
to Lorabid®.

As a result of a continuing decline of
Lorabid® prescriptions, management determined that it would
not be able to sell all the Lorabid® product the Company is
required to purchase under its supply contract with Eli Lilly.
Accordingly, under the requirements of Accounting Research
Bulletin No. 43, the Company recorded a $49,877 liability
related to Lorabid® purchase commitments in excess of
expected demand as a charge to cost of revenues in the fourth
quarter of 2002. At September 30, 2003, the excess purchase
commitment accrual is $40,599.

Sales of Nordette®, a womens health
product, have continued to decline over the past year. The
Nordette® product right has net intangible assets
associated with it of $97.1 million. Management currently
believes that this asset is not impaired based on estimated
undiscounted future cash flows, however, if revenue declines
exceed current expectations, the Company may have to write-off a
portion or all of the intangible assets associated with this
product right.

7.     Accounting
Developments

In July 2002, the Financial Accounting Standards
Board issued SFAS No. 146, Accounting for Exit or Disposal
Activities. SFAS No. 146 addresses the recognition,
measurement, and reporting of costs that are associated with
exit and disposal activities, including costs related to
terminating a contract that is not a capital lease and
termination benefits that employees who are involuntarily
terminated receive under the terms of a one-time benefit
arrangement that is not an ongoing benefit arrangement or an
individual deferred-

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KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

compensation contract. SFAS No. 146
supersedes Emerging Issues Task Force Issue No. 94-3,
Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring). SFAS No. 146 was
effective for exit or disposal activities of the Company
initiated after December 31, 2002.

In May 2002, the Financial Accounting Standards
Board issued SFAS No. 145, Revision of FAS
Nos. 4, 44 and 64, Amendment of FAS 13 and Technical
Corrections as of April 2002. SFAS No. 145 is
effective for fiscal periods beginning after May 15, 2002.
The primary impact on the Company of adoptings FAS No. 145
will be that gains and losses incurred upon the extinguishment
of debt will no longer qualify for treatment as an extraordinary
item in the income statement but will be presented as
non-operating gain or loss. Accordingly, for purposes of
comparison in the Companys 2003 Form 10-K, the
Company will reclassify the loss incurred on the extinguishment
of debt during the year ended December 31, 2001 as other
expense.

In January 2003, the Financial Accounting
Standards Board issued Interpretation No. 46,
Consolidation of Variable Interest Entities
(FIN 46). FIN 46 requires a variable
interest entity to be consolidated by a company if that company
is required to absorb a majority of the variable interest
entitys expected losses or entitled to receive a majority
of the entitys residual returns or both. The Company is in
the process of assessing what impact this pronouncement will
have on its consolidated financial statements. Based on its
preliminary analysis of the impact of FIN 46, the Company
believes that it is reasonably possible that Novavax, Inc.
(Novavax) could be a variable interest entity, and
the Companys variable interest in Novavax may require that
the Company consolidate Novavax in the fourth quarter of 2003.

During the period from December 2000 through June
2002, the Company provided $40.0 million in financing to
Novavax in the form of notes receivable convertible to common
stock of Novavax. In addition, during 2001, the Company obtained
an exclusive worldwide license to promote, market, distribute
and sell EstrasorbTM and AndrosorbTM,
following approval, except in the United States and Puerto Rico,
where King and Novavax will co-market the products. Once
approved, the Company will pay Novavax a royalty based on a
percentage of net sales of the products outside of the United
States and Puerto Rico. Novavax will pay King a co-promotion fee
equal to 50% of net sales less cost of revenues of the products
within the United States and Puerto Rico. The New Drug
Application for EstrasorbTM was approved by the U.S.
Food and Drug Administration during October 2003. King owns
approximately 1.1% of Novavax common stock.

At September 30, 2003, Novavax reported
total assets of $61.6 million, total liabilities of
$48.7 million, revenues for the nine months ended
September 30, 2003 of $7.7 million, and a net loss of
$14.2 million for the nine months ended September 30,
2003.

8.     Contingencies

Fen/Phen
Litigation

Many distributors, marketers and manufacturers of
anorexigenic drugs have been subject to claims relating to the
use of these drugs. Generally, the lawsuits allege that the
defendants (1) misled users of the products with respect to
the dangers associated with them, (2) failed to adequately
test the products and (3) knew or should have known about
the negative effects of the drugs, and should have informed the
public about the risks of such negative effects. The actions
generally have been brought by individuals in their own right
and have been filed in various state and federal jurisdictions
throughout the United States. They seek, among other things,
compensatory and punitive damages and/or court supervised
medical monitoring of persons who have ingested the product. The
Company is one of many defendants in 10 lawsuits that claim
damages for personal injury arising from the Companys
production of the anorexigenic drug phentermine under contract
for GlaxoSmithKline. The Company expects to be named in
additional lawsuits related to the Companys production of
the anorexigenic drug under contract for GlaxoSmithKline.

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KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

In addition, Jones Pharma, Incorporated
(Jones), a wholly owned subsidiary of the Company,
is a defendant in approximately 916 multi-defendant lawsuits
involving the manufacture and sale of dexfenfluramine,
fenfluramine and phentermine. These suits have been filed in
various jurisdictions throughout the United States, and in each
of these suits Jones is one of many defendants, including
manufacturers and other distributors of these drugs. Although
Jones has not at any time manufactured dexfenfluramine,
fenfluramine, or phentermine, Jones was a distributor of a
generic phentermine product and, after the acquisition of Abana
Pharmaceuticals, was a distributor of Obenix®, its branded
phentermine product. The plaintiffs in these cases claim injury
as a result of ingesting a combination of these weight-loss
drugs and are seeking compensatory and punitive damages as well
as medical care and court supervised medical monitoring. The
plaintiffs claim liability based on a variety of theories
including but not limited to, product liability, strict
liability, negligence, breach of warranty, and misrepresentation.

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

While the Company cannot predict the outcome of
these suits, management believes that the claims against Jones
are without merit and intends to vigorously pursue all defenses
available. The Company is unable to disclose an aggregate dollar
amount of damages claimed because many of these complaints are
multi-party suits and do not state specific damage amounts.
Rather, these claims typically state damages as may be
determined by the court or similar language and state no
specific amount of damages against Jones. The Company, at this
time, cannot provide an aggregate dollar amount of damages
claimed or a reasonable estimate of possible losses related to
the lawsuits.

Thimerosal/Vaccine
Related Litigation

King and Parkedale Pharmaceuticals, Inc.
(Parkedale), a wholly owned subsidiary of King, have
been named as defendants in California, Illinois and
Mississippi, along with Abbott Laboratories, Wyeth, Aventis
Pharmaceuticals, and other pharmaceutical companies that have
manufactured or sold products containing the mercury-based
preservative, thimerosal.

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

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KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Companys product liability insurance
carrier has been given proper notice of all of these matters,
and defense counsel is vigorously defending the Companys
interests. The Company intends to file a motion to be dismissed
from the litigation due, among other things, to lack of product
identity in the plaintiffs complaints. In 2001, the
Company was dismissed on this basis in a similar case. The
Company intends to defend these lawsuits vigorously but is
unable currently to predict the outcome or reasonably estimate
the range of potential loss, if any.

Governmental
Investigations and Securities Litigation

On March 10, 2003, the Company learned that
it was the subject of a formal SEC investigation. Over the
course of this continuing investigation, the SEC has requested
the production of documents and information related to, among
other things, sales of Kings products to VitaRx and Prison
Health Services, the Companys best price
lists, the pricing of the Companys pharmaceutical products
provided to governmental Medicaid agencies, the accrual and
payment of rebates on the product Altace®, the products
Fluogen® and Lorabid®, the King Benevolent Fund, Inc.,
the Companys calculations related to Medicaid rebates, and
the Audit Committees internal review of issues raised by
the SEC investigation. The Company has cooperated, and will
continue to cooperate, in providing information to the SEC.

In connection with the Companys previously
announced determination that it has underpaid amounts due under
Medicaid and other governmental pricing programs during the
period from 1998 to 2002, the Company contacted the Centers for
Medicare and Medicaid Services, the Public Health Service, the
Office of Inspector General at the Department of Health and
Human Services, the Department of Justice, and the Department of
Veterans Affairs. In August 2003, the Company met with
representatives of several of these agencies, including the
Office of Inspector General, and provided detailed briefings on
the results of the reviews conducted by the Company and its
Audit Committee. The Company expects to engage in more detailed
discussions with these and other appropriate agencies in order
to determine the precise amount of the underpayments. The
Company currently expects to make the requisite payments in 2004.

On November 13, 2003, the Company received a
subpoena duces tecum from the Office of Inspector General at the
Department of Health and Human Services requesting the
production of documents related to the matters being
investigated by the SEC and to the Companys sales,
marketing and other business practices for Altace®,
Aplisol® and Levoxyl®. The Company intends to
cooperate in providing information to the Office of Inspector
General.

The SEC, the Office of Inspector General at the
Department of Health and Human Services, the Centers for
Medicare and Medicaid Services, the Public Health Service, the
Department of Justice, the Department of Veterans Affairs and
other governmental agencies that might be investigating or might
commence an investigation of the Company could impose, based on
a claim of violation of fraud and false claims laws or
otherwise, civil and/or criminal sanctions, including fines,
penalties and possible exclusion from federal health care
programs (including Medicaid and Medicare). Some of these laws
may impose liability even in the absence of specific intent to
defraud. The Company cannot predict or reasonably estimate the
likelihood or magnitude of any such sanctions at this time.

Subsequent to the announcement of the SEC
investigation described above, beginning in March 2003, 22
purported class action complaints were filed by holders of the
Companys securities against us, our directors, former
directors, executive officers, former executive officers, a
Company subsidiary, and one of its former officers in the United
States District Court for the Eastern District of Tennessee,
alleging violations of the Securities Act of 1933 and/or the
Securities Exchange Act of 1934. These 22 complaints have been
consolidated in the United States District Court for the Eastern
District of Tennessee. Plaintiffs in the consolidated action
filed a consolidated amended complaint on October 21, 2003
alleging that we, through some of our executive officers, former
executive officers, directors and former directors, made false
or misleading statements concerning our business, financial
condition and results of operations during periods

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KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

beginning February 16, 1999 and continuing
until March 10, 2003. Plaintiffs in the consolidated action
have also named the underwriters of Kings November 2001
public offering as defendants. In addition, holders of the
Companys securities filed two class action complaints
alleging violations of the Securities Act of 1933 in Tennessee
state court. We removed these two cases to the United States
District Court for the Eastern District of Tennessee where,
pursuant to the Private Securities Litigation Reform Act of
1995, these two cases were consolidated with the other class
actions. Plaintiffs in these actions have, however, moved to
remand these actions back to Tennessee state court.

Seven purported shareholder derivative complaints
have also been filed in federal and state courts in Tennessee
alleging a breach of fiduciary duty, among other things, by some
of our officers and directors. Additionally, a class action
complaint was filed in the United States District Court for the
Eastern District of Tennessee under the Employee Retirement
Income Security Act (ERISA). The complaint alleges
that the Company and certain executive officers, former
executive officers, directors and former directors of the
Company violated fiduciary duties that they allegedly owed the
Companys 401(k) Retirement Savings Plans
participants and beneficiaries under ERISA. The allegations
underlying each of these additional lawsuits are similar in many
respects to those in the class action litigation described
above. We intend to defend all of these lawsuits vigorously but
are unable currently to predict the outcome or reasonably
estimate the range of potential loss, if any.

If any governmental sanctions are imposed, or if
the Company were not to prevail in the securities litigation,
neither of which can be predicted or reasonably estimated at
this time, the Companys business, financial condition,
results of operations and cash flows could be materially
adversely affected. Responding to the government investigations,
resolving the amounts owed to governmental agencies in
connection with the underpayments and defending King in the
securities litigation have resulted, and is expected to continue
to result, in a significant diversion of managements
attention and resources and an increase in professional fees.

Other
Legal Proceedings

The Parkedale facility was one of six facilities
owned by Pfizer subject to a Consent Decree of Permanent
Injunction issued August 1993 in United States of America v.
Warner-Lambert Company and Melvin R. Goodes and Lodewijk J.R.
DeVink (U.S. Dist. Ct., Dist. of N.J.) (the Consent
Decree). The Company acquired the Parkedale facility in
February 1998. The Parkedale facility is currently manufacturing
pharmaceutical products subject to the Consent Decree that
prohibits the manufacture and delivery of specified drug
products unless, among other things, the products conform to
current good manufacturing practices and are produced in
accordance with an approved ANDA or NDA. The Company intends,
when appropriate, to petition for relief from the Consent Decree.

Cobalt Pharmaceuticals, Inc.
(Cobalt), a generic drug manufacturer located in
Mississauga, Ontario, Canada, has filed an ANDA with the FDA
seeking permission to market a generic version of Altace®.
The following U.S. patents are listed for Altace® in the
FDAs Approved Drug Products With Therapeutic
Equivalence Evaluations(the Orange Book): U.S.
Patent Nos. 4,587,258 (the 258 patent) and
5,061,722 (the 722 patent), two composition of
matter patents related to Altace®, and U.S. Patent
No. 5,403,856 (the 856 patent), a method
of use patent related to Altace®, with expiration dates of
January 2005, October 2008, and April 2012, respectively. Under
the federal Hatch-Waxman Act of 1984, any generic manufacturer
may file an ANDA with a certification (a Paragraph IV
certification) challenging the validity or infringement of
a patent listed in the FDAs Orange Book four years after
the pioneer company obtains approval of its NDA. Cobalt has
filed a Paragraph IV certification alleging invalidity of
the 722 patent, and the Company has filed suit to enforce
its rights under that patent. Pursuant to the Hatch-Waxman Act,
the filing of that suit provides the Company an automatic stay
of FDA approval of Cobalts ANDA for 30 months. Should
the court find in favor of a Cobalt summary judgment motion on
the 722 patent, however, the Company would not receive the
full benefit of that 30 month stay. The Company has also
recently amended its

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KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

complaint, without opposition, to include an
allegation of infringement of the 856 patent by Cobalt.
Pursuant to FDA regulations, however, Cobalt is not required to
certify against the 856 patent. The Company intends to
vigorously enforce its rights under the 722 and 856
patents.

Eon Labs, Inc. (Eon Labs) and
CorePharma, LLC (CorePharma) have each filed an ANDA
with the FDA seeking permission to market a generic version of
Skelaxin®. United States Patent No. 6,407,128 (the
128 patent), a method of use patent relating
to Skelaxin®, is listed in the FDAs Orange Book and
does not expire until December 3, 2021. Eon Labs and
CorePharma have each filed Paragraph IV certifications
alleging noninfringement and invalidity of the 128 patent.
The Company has filed separate suits against Eon Labs and
CorePharma and intends to vigorously enforce its rights under
the 128 patent to the full extent of the law.

Mylan Pharmaceuticals, Inc. (Mylan)
and KV Pharmaceutical Company (KV Pharmaceutical)
have each filed an ANDA with the FDA seeking permission to
market a generic version of Levoxyl®. United States Patent
No. 6,555,581 (the 581 patent), a utility
patent with formulation claims relating to Levoxyl®, was
issued to the Company on April 29, 2003. The 581
patent is listed in the FDAs Orange Book and does not
expire until February 15, 2022. No earlier than
April 30, 2003, the Company received notice of Mylans
Paragraph IV certification, which alleges noninfringement
of the 581 patent. On June 24, 2003, the Company
received notice of KV Pharmaceuticals Paragraph IV
certification, which alleges noninfringement and invalidity of
the 581 patent. The Company has filed separate suits
against Mylan and KV Pharmaceutical and intends to vigorously
enforce its rights under the 581 patent to the full extent
of the law.

Barr Laboratories Inc. (Barr) has
filed an ANDA, which included a Paragraph IV Certification,
with the FDA seeking permission to market a generic version of
Prefest®. United States Patent No. 5,108,995 (the
995 patent), a utility patent with method of
treatment claims relating to Prefest®, and United States
Patent No. 5,382,573 (the 573 patent), a
utility patent with pharmaceutical preparation claims relating
to Prefest®, were issued on April 28, 1992, and
January 17, 1995, respectively. The 995 patent and
the 573 patent are both listed in the Orange Book and do
not expire until April 28, 2009, and January 17, 2012,
respectively. On October 9, 2003, the Company received
notice of Barrs Paragraph IV certification, which
alleges noninfringement and invalidity of the 995 patent
and the 573 patent. Under the Hatch-Waxman Act, the
Company has until December 1, 2003, to sue Barr for
infringement of those patents to invoke a statutory 30-month
stay of FDA approval. The Company intends to vigorously enforce
its rights under both patents.

The Company is involved in various routine legal
proceedings incident to the ordinary course of its business.

9.     Segment
Information

The Companys business is classified into
five reportable segments: branded pharmaceuticals, Meridian
Medical Technologies, contract manufacturing, royalties, and all
other. Branded pharmaceuticals include a variety of branded
prescription products over eight therapeutic areas, including
cardiovascular, endocrinology/womens health, orthopedic,
critical care, neurology/central nervous system, anti-infective,
respiratory, and other. These branded prescription products have
been aggregated because of the similarity in regulatory
environment, manufacturing processes, methods of distribution,
and types of customer. The Meridian Medical Technologies segment
is a new segment in the first quarter of 2003 as a result of the
acquisition of Meridian on January 8, 2003. Meridian
develops, manufactures, and sells auto-injector pharmaceutical
products to both commercial and government markets. The
principal source of revenues in the commercial market is the
EpiPen® product line marketed by Dey, L.P., which is
primarily prescribed for the treatment of severe allergic
reactions. Government revenues are principally derived from the
sale of nerve agent antidotes and other emergency medicine
auto-injector products marketed to the U.S. Department of
Defense and other federal, state and local agencies,
particularly those involved in homeland security, as well as to
approved foreign governments. Contract manufacturing includes
pharmaceutical manufacturing services the Company provides

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KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

to third-party pharmaceutical and biotechnology
companies. Royalties include revenues the Company derives from
pharmaceutical products after the Company has transferred the
manufacturing or marketing rights to third parties in exchange
for licensing fees or royalty payments.

The Company primarily evaluates its segments
based on gross profit. Reportable segments were separately
identified based on revenues, gross profit (excluding
depreciation) and total assets. Revenues among the segments are
presented in the individual segments and removed through
eliminations in the information below. Substantially all of the
eliminations relate to sales from the contract manufacturing
segment to the branded pharmaceuticals segment.

The following represents selected information for
the Companys reportable segments for the periods indicated:

|                |                                    |                                 |   |                   |         |      |   |         |         |  |   |          |           |  |   |         |         | 
|--------------- | ---------------------------------- | ------------------------------- | - | ----------------- | ------- | ---- | - | ------- | ------- |  | - | -------- | --------- |  | - | ------- | ------- | 
|                |                                    |                                 |   |                  
|                |                                    | Three Months Ended              |   | Nine Months Ended
|                |                                    | September 30,                   |   | September 30,    
|                |                                    |                                 |   |                  
|                |                                    | 2003                            |   | 2002              |         | 2003 |   | 2002   
|                |                                    |                                 |   |                   |         |      |   |        
|Total revenues: |                                    |                                 |   |                   |         |      |   |         |         |  |   |          |           |  |   |        
|                | Branded pharmaceuticals            |                                 | $ | 363,892           |         |      | $ | 293,728 |         |  | $ | 972,941  |           |  | $ | 788,624 |        
|                | Meridian Medical Technologies      |                                 |   | 38,379            |         |      |   |        |         |  |   | 98,317   |           |  |   |        |        
|                | Royalties                          |                                 |   | 16,275            |         |      |   | 14,997  |         |  |   | 47,876   |           |  |   | 41,025  |        
|                | Contract manufacturing             |                                 |   | 58,425            |         |      |   | 27,767  |         |  |   | 215,594  |           |  |   | 97,842  |        
|                | All other                          |                                 |   |                  |         |      |   | 280     |         |  |   |         |           |  |   | 682     |        
|                | Eliminations                       |                                 |   | (52,767           | )       |      |   | (21,067 | )       |  |   | (195,971 | )         |  |   | (71,870 | )      
|                |                                    |                                 |   |                   |         |      |   |         |         |  |   |          |           |  |   |        
|                |                                    | Consolidated total net revenues |   | $                 | 424,204 |      |   | $       | 315,705 |  |   | $        | 1,138,757 |  |   | $       | 856,303 | 
|                |                                    |                                 |   |                   |         |      |   |         |         |  |   |          |           |  |   |        
|Segment profit: |                                    |                                 |   |                   |         |      |   |         |         |  |   |          |           |  |   |        
|                | Branded pharmaceuticals            |                                 | $ | 297,993           |         |      | $ | 241,667 |         |  | $ | 799,523  |           |  | $ | 657,917 |        
|                | Meridian Medical Technologies      |                                 |   | 22,272            |         |      |   |        |         |  |   | 45,545   |           |  |   |        |        
|                | Royalties                          |                                 |   | 13,788            |         |      |   | 12,197  |         |  |   | 39,919   |           |  |   | 33,674  |        
|                | Contract manufacturing             |                                 |   | (270              | )       |      |   | (1,328  | )       |  |   | (8,761   | )         |  |   | (2,142  | )      
|                | All other                          |                                 |   |                   |         |      |   | (393    | )       |  |   | (38      | )         |  |   | (44     | )      
|                |                                    |                                 |   |                   |         |      |   |         |         |  |   |          |           |  |   |        
|                |                                    | Consolidated segment profit     |   |                   | 333,783 |      |   |         | 252,143 |  |   |          | 876,188   |  |   |         | 689,405 | 
|                | Other operating costs and expenses |                                 |   | 173,377           |         |      |   | 122,176 |         |  |   | 780,452  |           |  |   | 329,753 |        
|                |                                    |                                 |   |                   |         |      |   |         |         |  |   |          |           |  |   |        
|                |                                    | Operating income                |   | $                 | 160,406 |      |   | $       | 129,967 |  |   | $        | 95,736    |  |   | $       | 359,652 | 
|                |                                    |                                 |   |                   |         |      |   |         |         |  |   |          |           |  |   |        

|              |                               |                           |   |              |           |  |   |           |           | 
|------------- | ----------------------------- | ------------------------- | - | ------------ | --------- |  | - | --------- | --------- | 
|              |                               | As of                     |   | As of       
|              |                               | September 30,             |   | December 31,
|              |                               | 2003                      |   | 2002        
|              |                               |                           |   |             
|Total assets: |                               |                           |   |              |           |  |   |          
|              | Branded pharmaceuticals       |                           | $ | 2,730,183    |           |  | $ | 2,597,499 |          
|              | Meridian Medical Technologies |                           |   | 254,032      |           |  |   |          |          
|              | Royalties                     |                           |   | 15,484       |           |  |   | 18,738    |          
|              | Contract manufacturing        |                           |   | 191,473      |           |  |   | 143,285   |          
|              | All other                     |                           |   | 5            |           |  |   | 11        |          
|              | Eliminations                  |                           |   | (81,372      | )         |  |   | (8,873    | )        
|              |                               |                           |   |              |           |  |   |          
|              |                               | Consolidated total assets |   | $            | 3,109,805 |  |   | $         | 2,750,660 | 
|              |                               |                           |   |              |           |  |   |          

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KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following represents branded pharmaceutical
revenues by therapeutic area:

|                |                                  |                                              |   |                   |         |      |   |         |         |  |   |         |         |  |   |         |         | 
|--------------- | -------------------------------- | -------------------------------------------- | - | ----------------- | ------- | ---- | - | ------- | ------- |  | - | ------- | ------- |  | - | ------- | ------- | 
|                |                                  |                                              |   |                  
|                |                                  | Three Months Ended                           |   | Nine Months Ended
|                |                                  | September 30,                                |   | September 30,    
|                |                                  |                                              |   |                  
|                |                                  | 2003                                         |   | 2002              |         | 2003 |   | 2002   
|                |                                  |                                              |   |                   |         |      |   |        
|Total revenues: |                                  |                                              |   |                   |         |      |   |         |         |  |   |         |         |  |   |        
|                | Cardiovascular                   |                                              | $ | 135,376           |         |      | $ | 141,075 |         |  | $ | 444,912 |         |  | $ | 366,921 |        
|                | Endocrinology/womens health     |                                              |   | 48,190            |         |      |   | 86,470  |         |  |   | 143,072 |         |  |   | 229,602 |        
|                | Orthopedic                       |                                              |   | 87,890            |         |      |   |        |         |  |   | 117,700 |         |  |   |        |        
|                | Critical care                    |                                              |   | 42,604            |         |      |   | 24,243  |         |  |   | 114,128 |         |  |   | 71,805  |        
|                | Neurology/central nervous system |                                              |   | 20,526            |         |      |   |        |         |  |   | 36,710  |         |  |   |        |        
|                | Anti-infective                   |                                              |   | 11,677            |         |      |   | 31,426  |         |  |   | 72,976  |         |  |   | 97,436  |        
|                | Respiratory                      |                                              |   | 10,868            |         |      |   | 267     |         |  |   | 26,173  |         |  |   | 1,677   |        
|                | Other branded                    |                                              |   | 6,761             |         |      |   | 10,247  |         |  |   | 17,270  |         |  |   | 21,183  |        
|                |                                  |                                              |   |                   |         |      |   |         |         |  |   |         |         |  |   |        
|                |                                  | Consolidated branded pharmaceutical revenues |   | $                 | 363,892 |      |   | $       | 293,728 |  |   | $       | 972,941 |  |   | $       | 788,624 | 
|                |                                  |                                              |   |                   |         |      |   |         |         |  |   |         |         |  |   |        

10.     Sale of
Animal Health Products

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

11.     Subsequent
Event

On October 21, 2003, the Company amended its
agreement with Eli Lilly concerning the supply and distribution
of Lorabid® and settled a disputed liability. As a result,
King obtained the rights to donate excess supply outside of the
United States, excluding specific countries. King also agreed to
the amendment of the supply contract with new specified purchase
requirements causing an increase in the required purchase
commitments in excess of expected demand. As a result of the
settlement agreement, King anticipates a special charge in the
fourth quarter of 2003 of approximately $10,000.

12.     Guarantor
Financial Statements

Each of the Companys subsidiaries (the
Guarantor Subsidiaries) has guaranteed, on a full,
unconditional, and joint and several basis, the Companys
performance under the $345,000, 2 3/4% Convertible
Debentures due 2021 and under the $400,000 Senior Secured
Revolving Credit Facility on a joint and several basis. There
are no restrictions under the Companys financing
arrangements on the ability of the Guarantor Subsidiaries to
distribute funds to the Company in the form of cash dividends,
loans or advances. The following combined financial data
provides information regarding the financial position, results
of operations and cash flows of the Guarantor Subsidiaries
(condensed consolidating financial data). Separate financial
statements and other disclosures concerning the Guarantor
Subsidiaries are not presented because management has determined
that such information would not be material to the holders of
the debt.

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KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

In January 2003, the Company formed Monarch
Pharmaceuticals Ireland Limited for the purpose of maintaining
certain of the Companys international assets. While
Monarch Pharmaceuticals Ireland Limited is not a guarantor
subsidiary, the assets, liabilities, income and expenses are not
material for the three and nine months ended September 30,
2003 and are included in the guarantor subsidiary column in the
guarantor subsidiary financial statements which follow.

18



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KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

GUARANTOR SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE
SHEETS

(In thousands)


|                                         |                                           |                                            |           |                   |           |             |           |              |           |      |            |              |            |             |           |              |           |  |           |         |           |  |           |         |          |   |            |        |            |   |           |         |           | 
|---------------------------------------- | ----------------------------------------- | ------------------------------------------ | --------- | ----------------- | --------- | ----------- | --------- | ------------ | --------- | ---- | ---------- | ------------ | ---------- | ----------- | --------- | ------------ | --------- |  | --------- | ------- | --------- |  | --------- | ------- | -------- | - | ---------- | ------ | ---------- | - | --------- | ------- | --------- | 
|                                         |                                           |                                            |           |                  
|                                         |                                           | September 30, 2003                         |           | December 31, 2002
|                                         |                                           |                                            |           |                  
|                                         |                                           |                                            |           | Guarantor         |           | Eliminating |           | King         |           |      |            | Guarantor    |            | Eliminating |           | King        
|                                         |                                           | King                                       |           | Subsidiaries      |           | Entries     |           | Consolidated |           | King |            | Subsidiaries |            | Entries     |           | Consolidated
|                                         |                                           |                                            |           |                   |           |             |           |              |           |      |            |              |            |             |           |             
|                                         |                                           |                                            |           |                   |           |             |           |              |           |      |            |              |            |            
|                                         |                                           |                                            |           | (Unaudited)       |           |             |           |              |           |      |            |              |            |            
|ASSETS                                   |                                           |                                            |           |                   |           |             |           |              |           |      |            |              |            |             |           |              |           |  |           |         |           |  |           |         |          |   |            |        |            |   |           |        
|Current assets:                          |                                           |                                            |           |                   |           |             |           |              |           |      |            |              |            |             |           |              |           |  |           |         |           |  |           |         |          |   |            |        |            |   |           |        
|                                         | Cash and cash equivalents                 |                                            | $         | 117,148           |           |             | $         | 1,356        |           |      | $          |             |            |             | $         | 118,504      |           |  | $         | 594,385 |           |  | $         | (6,160  | )        |   | $          |       |            |   | $         | 588,225 |          
|                                         | Restricted cash                           |                                            |           | 48,083            |           |             |           | 74,170       |           |      |            |             |            |             |           | 122,253      |           |  |           |        |           |  |           |        |          |   |            |       |            |   |           |        |          
|                                         | Marketable securities                     |                                            |           |                  |           |             |           |             |           |      |            |             |            |             |           |             |           |  |           | 227,263 |           |  |           |        |          |   |            |       |            |   |           | 227,263 |          
|                                         | Accounts receivable, net                  |                                            |           | 4,645             |           |             |           | 224,660      |           |      |            |             |            |             |           | 229,305      |           |  |           | 17,352  |           |  |           | 151,469 |          |   |            | (8,834 | )          |   |           | 159,987 |          
|                                         | Inventories                               |                                            |           | 107,543           |           |             |           | 144,185      |           |      |            |             |            |             |           | 251,728      |           |  |           | 45,761  |           |  |           | 121,392 |          |   |            |       |            |   |           | 167,153 |          
|                                         | Deferred income taxes                     |                                            |           | 17,486            |           |             |           | 84,030       |           |      |            |             |            |             |           | 101,516      |           |  |           | 36,328  |           |  |           | 69,840  |          |   |            |       |            |   |           | 106,168 |          
|                                         | Prepaid expenses and other current assets |                                            |           | 5,905             |           |             |           | 8,228        |           |      |            |             |            |             |           | 14,133       |           |  |           | 7,996   |           |  |           | 4,910   |          |   |            |       |            |   |           | 12,906  |          
|                                         |                                           |                                            |           |                   |           |             |           |              |           |      |            |              |            |             |           |              |           |  |           |         |           |  |           |         |          |   |            |        |            |   |           |        
|                                         |                                           | Total current assets                       |           |                   | 300,810   |             |           |              | 536,629   |      |            |              |           |             |           |              | 837,439   |  |           |         | 929,085   |  |           |         | 341,451  |   |            |        | (8,834     | ) |           |         | 1,261,702 | 
|                                         |                                           |                                            |           |                   |           |             |           |              |           |      |            |              |            |             |           |              |           |  |           |         |           |  |           |         |          |   |            |        |            |   |           |        
|Property, plant, and equipment, net      |                                           |                                            | 53,456    |                   |           |             | 193,699   |              |           |      |           |              |            |             | 247,155   |              |           |  | 51,587    |         |           |  | 165,527   |         |          |   |           |        |            |   | 217,114   |        
|Intangible assets, net                   |                                           |                                            | 15,731    |                   |           |             | 1,896,723 |              |           |      |           |              |            |             | 1,912,454 |              |           |  | 892,793   |         |           |  | 339,520   |         |          |   |           |        |            |   | 1,232,313 |        
|Investment in subsidiaries               |                                           |                                            | 2,282,786 |                   |           |             |          |              |           |      | (2,282,786 | )            |            |             |          |              |           |  | 1,126,245 |         |           |  |          |         |          |   | (1,126,245 | )      |            |   |          |        
|Other assets                             |                                           |                                            | 51,597    |                   |           |             | 51,873    |              |           |      |           |              |            |             | 103,470   |              |           |  | 25,254    |         |           |  | 14,277    |         |          |   |           |        |            |   | 39,531    |        
|Deferred income tax assets               |                                           |                                            | 4,071     |                   |           |             | 5,216     |              |           |      |           |              |            |             | 9,287     |              |           |  |          |         |           |  |          |         |          |   |           |        |            |   |          |        
|                                         |                                           |                                            |           |                   |           |             |           |              |           |      |            |              |            |             |           |              |           |  |           |         |           |  |           |         |          |   |            |        |            |   |           |        
|                                         |                                           | Total assets                               |           | $                 | 2,708,451 |             |           | $            | 2,684,140 |      |            | $            | (2,282,786 | )           |           | $            | 3,109,805 |  |           | $       | 3,024,964 |  |           | $       | 860,775  |   |            | $      | (1,135,079 | ) |           | $       | 2,750,660 | 
|                                         |                                           |                                            |           |                   |           |             |           |              |           |      |            |              |            |             |           |              |           |  |           |         |           |  |           |         |          |   |            |        |            |   |           |        
|LIABILITIES AND SHAREHOLDERS
    EQUITY |                                           |                                            |           |                   |           |             |           |              |           |      |            |              |            |             |           |             
|Current liabilities:                     |                                           |                                            |           |                   |           |             |           |              |           |      |            |              |            |             |           |              |           |  |           |         |           |  |           |         |          |   |            |        |            |   |           |        
|                                         | Accounts payable                          |                                            | $         | 19,280            |           |             | $         | 36,449       |           |      | $          |             |            |             | $         | 55,729       |           |  | $         | 26,119  |           |  | $         | 32,604  |          |   | $          | (8,834 | )          |   | $         | 49,889  |          
|                                         | Accrued expenses                          |                                            |           | 33,718            |           |             |           | 459,312      |           |      |            |             |            |             |           | 493,030      |           |  |           | 42,542  |           |  |           | 254,986 |          |   |            |       |            |   |           | 297,528 |          
|                                         | Income taxes payable                      |                                            |           | 56,849            |           |             |           | 5,406        |           |      |            |             |            |             |           | 62,255       |           |  |           | 18,870  |           |  |           | 2,377   |          |   |            |       |            |   |           | 21,247  |          
|                                         | Current portion of long-term debt         |                                            |           | 1,176             |           |             |           |             |           |      |            |             |            |             |           | 1,176        |           |  |           | 1,300   |           |  |           |        |          |   |            |       |            |   |           | 1,300   |          
|                                         |                                           |                                            |           |                   |           |             |           |              |           |      |            |              |            |             |           |              |           |  |           |         |           |  |           |         |          |   |            |        |            |   |           |        
|                                         |                                           | Total current liabilities                  |           |                   | 111,023   |             |           |              | 501,167   |      |            |              |           |             |           |              | 612,190   |  |           |         | 88,831    |  |           |         | 289,967  |   |            |        | (8,834     | ) |           |         | 369,964   | 
|                                         |                                           |                                            |           |                   |           |             |           |              |           |      |            |              |            |             |           |              |           |  |           |         |           |  |           |         |          |   |            |        |            |   |           |        
|Long-term debt                           |                                           |                                            | 345,093   |                   |           |             |          |              |           |      |           |              |            |             | 345,093   |              |           |  | 345,093   |         |           |  |          |         |          |   |           |        |            |   | 345,093   |        
|Deferred income taxes                    |                                           |                                            |          |                   |           |             |          |              |           |      |           |              |            |             |          |              |           |  | 11,991    |         |           |  | 21,605    |         |          |   |           |        |            |   | 33,596    |        
|Other liabilities                        |                                           |                                            | 63,255    |                   |           |             | 89,145    |              |           |      |           |              |            |             | 152,400   |              |           |  | 70,074    |         |           |  | 750       |         |          |   |           |        |            |   | 70,824    |        
|Intercompany (receivable) payable        |                                           |                                            | 188,958   |                   |           |             | (188,958  | )            |           |      |           |              |            |             |          |              |           |  | 577,792   |         |           |  | (577,792  | )       |          |   |           |        |            |   |          |        
|                                         |                                           |                                            |           |                   |           |             |           |              |           |      |            |              |            |             |           |              |           |  |           |         |           |  |           |         |          |   |            |        |            |   |           |        
|                                         |                                           | Total liabilities                          |           |                   | 708,329   |             |           |              | 401,354   |      |            |              |           |             |           |              | 1,109,683 |  |           |         | 1,093,781 |  |           |         | (265,470 | ) |            |        | (8,834     | ) |           |         | 819,477   | 
|                                         |                                           |                                            |           |                   |           |             |           |              |           |      |            |              |            |             |           |              |           |  |           |         |           |  |           |         |          |   |            |        |            |   |           |        
|Shareholders equity                     |                                           |                                            | 2,000,122 |                   |           |             | 2,282,786 |              |           |      | (2,282,786 | )            |            |             | 2,000,122 |              |           |  | 1,931,183 |         |           |  | 1,126,245 |         |          |   | (1,126,245 | )      |            |   | 1,931,183 |        
|                                         |                                           |                                            |           |                   |           |             |           |              |           |      |            |              |            |             |           |              |           |  |           |         |           |  |           |         |          |   |            |        |            |   |           |        
|                                         |                                           | Total liabilities and shareholders equity |           | $                 | 2,708,451 |             |           | $            | 2,684,140 |      |            | $            | (2,282,786 | )           |           | $            | 3,109,805 |  |           | $       | 3,024,964 |  |           | $       | 860,775  |   |            | $      | (1,135,079 | ) |           | $       | 2,750,660 | 
|                                         |                                           |                                            |           |                   |           |             |           |              |           |      |            |              |            |             |           |              |           |  |           |         |           |  |           |         |          |   |            |        |            |   |           |        

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KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

GUARANTOR SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF
INCOME

(Unaudited)


(In thousands, except per share
data)


|                                  |                                                     |                                       |         |                                       |         |             |         |              |         |      |         |              |         |             |         |              |         |  |         |         |         |  |         |         |         |   |          |          |          |   |         |         |         | 
|--------------------------------- | --------------------------------------------------- | ------------------------------------- | ------- | ------------------------------------- | ------- | ----------- | ------- | ------------ | ------- | ---- | ------- | ------------ | ------- | ----------- | ------- | ------------ | ------- |  | ------- | ------- | ------- |  | ------- | ------- | ------- | - | -------- | -------- | -------- | - | ------- | ------- | ------- | 
|                                  |                                                     |                                       |         |                                      
|                                  |                                                     | Three Months Ended September 30, 2003 |         | Three Months Ended September 30, 2002
|                                  |                                                     |                                       |         |                                      
|                                  |                                                     |                                       |         | Guarantor                             |         | Eliminating |         | King         |         |      |         | Guarantor    |         | Eliminating |         | King        
|                                  |                                                     | King                                  |         | Subsidiaries                          |         | Entries     |         | Consolidated |         | King |         | Subsidiaries |         | Entries     |         | Consolidated
|                                  |                                                     |                                       |         |                                       |         |             |         |              |         |      |         |              |         |             |         |             
|Revenues:                         |                                                     |                                       |         |                                       |         |             |         |              |         |      |         |              |         |             |         |              |         |  |         |         |         |  |         |         |         |   |          |          |          |   |         |        
|                                  | Net sales                                           |                                       | $       | 41,615                                |         |             | $       | 407,884      |         |      | $       | (41,570      | )       |             | $       | 407,929      |         |  | $       | 12,495  |         |  | $       | 300,297 |         |   | $        | (12,,084 | )        |   | $       | 300,708 |        
|                                  | Royalty revenue                                     |                                       |         |                                      |         |             |         | 16,275       |         |      |         |             |         |             |         | 16,275       |         |  |         |        |         |  |         | 14,997  |         |   |          |         |          |   |         | 14,997  |        
|                                  |                                                     |                                       |         |                                       |         |             |         |              |         |      |         |              |         |             |         |              |         |  |         |         |         |  |         |         |         |   |          |          |          |   |         |        
|                                  |                                                     | Total revenues                        |         |                                       | 41,615  |             |         |              | 424,159 |      |         |              | (41,570 | )           |         |              | 424,204 |  |         |         | 12,495  |  |         |         | 315,294 |   |          |          | (12,084  | ) |         |         | 315,705 | 
|                                  |                                                     |                                       |         |                                       |         |             |         |              |         |      |         |              |         |             |         |              |         |  |         |         |         |  |         |         |         |   |          |          |          |   |         |        
|Operating costs and expenses:     |                                                     |                                       |         |                                       |         |             |         |              |         |      |         |              |         |             |         |              |         |  |         |         |         |  |         |         |         |   |          |          |          |   |         |        
|                                  | Costs of revenues                                   |                                       |         | 30,925                                |         |             |         | 101,066      |         |      |         | (41,570      | )       |             |         | 90,421       |         |  |         | 9,372   |         |  |         | 66,274  |         |   |          | (12,084  | )        |   |         | 63,562  |        
|                                  | Selling, general and administrative                 |                                       |         | 19,199                                |         |             |         | 116,034      |         |      |         |             |         |             |         | 135,233      |         |  |         | 4,454   |         |  |         | 95,671  |         |   |          |         |          |   |         | 100,125 |        
|                                  | Depreciation and amortization                       |                                       |         | 1,822                                 |         |             |         | 37,876       |         |      |         |             |         |             |         | 39,698       |         |  |         | 9,674   |         |  |         | 5,929   |         |   |          |         |          |   |         | 15,603  |        
|                                  | Research and development                            |                                       |         | 225                                   |         |             |         | 8,533        |         |      |         |             |         |             |         | 8,758        |         |  |         |        |         |  |         | 6,448   |         |   |          |         |          |   |         | 6,448   |        
|                                  | Intangible asset impairment                         |                                       |         |                                      |         |             |         |             |         |      |         |             |         |             |         |             |         |  |         |        |         |  |         |        |         |   |          |         |          |   |         |        |        
|                                  | Gain on sale of products                            |                                       |         | (5                                    | )       |             |         | (10,307      | )       |      |         |             |         |             |         | (10,312      | )       |  |         |        |         |  |         |        |         |   |          |         |          |   |         |        |        
|                                  |                                                     |                                       |         |                                       |         |             |         |              |         |      |         |              |         |             |         |              |         |  |         |         |         |  |         |         |         |   |          |          |          |   |         |        
|                                  |                                                     | Total operating costs and expenses    |         |                                       | 52,166  |             |         |              | 253,202 |      |         |              | (41,570 | )           |         |              | 263,798 |  |         |         | 23,500  |  |         |         | 174,322 |   |          |          | (12,084  | ) |         |         | 185,738 | 
|                                  |                                                     |                                       |         |                                       |         |             |         |              |         |      |         |              |         |             |         |              |         |  |         |         |         |  |         |         |         |   |          |          |          |   |         |        
|Operating (loss) income           |                                                     |                                       | (10,551 | )                                     |         |             | 170,957 |              |         |      |        |              |         |             | 160,406 |              |         |  | (11,005 | )       |         |  | 140,972 |         |         |   |         |          |          |   | 129,967 |        
|                                  |                                                     |                                       |         |                                       |         |             |         |              |         |      |         |              |         |             |         |              |         |  |         |         |         |  |         |         |         |   |          |          |          |   |         |        
|Other income (expense):           |                                                     |                                       |         |                                       |         |             |         |              |         |      |         |              |         |             |         |              |         |  |         |         |         |  |         |         |         |   |          |          |          |   |         |        
|                                  | Interest income                                     |                                       |         | 607                                   |         |             |         | 430          |         |      |         |             |         |             |         | 1,037        |         |  |         | 5,600   |         |  |         | 352     |         |   |          |         |          |   |         | 5,952   |        
|                                  | Interest expense                                    |                                       |         | (3,669                                | )       |             |         |             |         |      |         |             |         |             |         | (3,669       | )       |  |         | (3,143  | )       |  |         |        |         |   |          |         |          |   |         | (3,143  | )      
|                                  | Valuation change  convertible notes
    receivable |                                       |         | 9,338                                 |         |             |         |             |         |      |         |             |         |             |         | 9,338        |         |  |         | 548     |         |  |         |        |         |   |          |         |          |   |         | 548     |        
|                                  | Other, net                                          |                                       |         | 11                                    |         |             |         | (47          | )       |      |         |             |         |             |         | (36          | )       |  |         | 161     |         |  |         | (74     | )       |   |          |         |          |   |         | 87      |        
|                                  | Equity in earnings of subsidiaries                  |                                       |         | 116,298                               |         |             |         |             |         |      |         | (116,298     | )       |             |         |             |         |  |         | 105,791 |         |  |         |        |         |   |          | (105,791 | )        |   |         |        |        
|                                  | Intercompany reclassification(1)                    |                                       |         |                                      |         |             |         | (74,481      | )       |      |         | 74,481       |         |             |         |             |         |  |         |        |         |  |         |        |         |   |          |         |          |   |         |        |        
|                                  | Intercompany interest income (expense)              |                                       |         | 5,298                                 |         |             |         | (5,298       | )       |      |         |             |         |             |         |             |         |  |         | 8,243   |         |  |         | (8,243  | )       |   |          |         |          |   |         |        |        
|                                  |                                                     |                                       |         |                                       |         |             |         |              |         |      |         |              |         |             |         |              |         |  |         |         |         |  |         |         |         |   |          |          |          |   |         |        
|                                  |                                                     | Total other income (expense)          |         |                                       | 127,883 |             |         |              | (79,396 | )    |         |              | (41,817 | )           |         |              | 6,670   |  |         |         | 117,200 |  |         |         | (7,965  | ) |          |          | (105,791 | ) |         |         | 3,444   | 
|                                  |                                                     |                                       |         |                                       |         |             |         |              |         |      |         |              |         |             |         |              |         |  |         |         |         |  |         |         |         |   |          |          |          |   |         |        
|(Loss) income before income taxes |                                                     |                                       | 117,332 |                                       |         |             | 91,561  |              |         |      | (41,817 | )            |         |             | 167,076 |              |         |  | 106,195 |         |         |  | 133,007 |         |         |   | (105,791 | )        |          |   | 133,411 |        
|Income tax expense                |                                                     |                                       | 11,245  |                                       |         |             | 49,744  |              |         |      |        |              |         |             | 60,989  |              |         |  | 21,950  |         |         |  | 27,216  |         |         |   |         |          |          |   | 49,166  |        
|                                  |                                                     |                                       |         |                                       |         |             |         |              |         |      |         |              |         |             |         |              |         |  |         |         |         |  |         |         |         |   |          |          |          |   |         |        
|                                  |                                                     | Net (loss) income                     |         | $                                     | 106,087 |             |         | $            | 41,817  |      |         | $            | (41,817 | )           |         | $            | 106,087 |  |         | $       | 84,245  |  |         | $       | 105,791 |   |          | $        | (105,791 | ) |         | $       | 84,245  | 
|                                  |                                                     |                                       |         |                                       |         |             |         |              |         |      |         |              |         |             |         |              |         |  |         |         |         |  |         |         |         |   |          |          |          |   |         |        



---



|    |                                                                                     
|--- | ------------------------------------------------------------------------------------
|(1) | Intercompany reclassification caused by the
    formation of two new legal entities.

20



---



##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

GUARANTOR SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF
INCOME

(Unaudited)

(In thousands, except per share
data)


|                                  |                                                     |                                      |                |                                      |         |             |        |              |           |           |         |              |          |             |         |              |           |           |         |         |         |        |         |         |         |         |          |          |          |         |         |         |         |         | 
|--------------------------------- | --------------------------------------------------- | ------------------------------------ | -------------- | ------------------------------------ | ------- | ----------- | ------ | ------------ | --------- | --------- | ------- | ------------ | -------- | ----------- | ------- | ------------ | --------- | --------- | ------- | ------- | ------- | ------ | ------- | ------- | ------- | ------- | -------- | -------- | -------- | ------- | ------- | ------- | ------- | ------- | 
|                                  |                                                     |                                      |                |                                     
|                                  |                                                     | Nine Months Ended September 30, 2003 |                | Nine Months Ended September 30, 2002
|                                  |                                                     |                                      |                |                                     
|                                  |                                                     |                                      |                | Guarantor                            |         | Eliminating |        | King         |           |           |         | Guarantor    |          | Eliminating |         | King        
|                                  |                                                     | King                                 |                | Subsidiaries                         |         | Entries     |        | Consolidated |           | King      |         | Subsidiaries |          | Entries     |         | Consolidated
|                                  |                                                     |                                      |                |                                      |         |             |        |              |           |           |         |              |          |             |         |             
|Revenues:                         |                                                     |                                      |                |                                      |         |             |        |              |           |           |         |              |          |             |         |              |           |           |         |         |         |        |         |         |         |         |          |          |          |         |         |        
|                                  | Net sales                                           |                                      | $              | 142,435                              |         |             | $      | 1,090,614    |           |           | $       | (142,168     | )        |             | $       | 1,090,881    |           |           | $       | 48,480  |         |        | $       | 820,764 |         |         | $        | (53,966  | )        |         | $       | 815,278 |        
|                                  | Royalty revenue                                     |                                      |                |                                     |         |             |        | 47,876       |           |           |         |             |          |             |         | 47,876       |           |           |         |        |         |        |         | 41,025  |         |         |          |         |          |         |         | 41,025  |        
|                                  |                                                     |                                      |                |                                      |         |             |        |              |           |           |         |              |          |             |         |              |           |           |         |         |         |        |         |         |         |         |          |          |          |         |         |        
|                                  |                                                     |                                      | Total revenues |                                      |         | 142,435     |        |              |           | 1,138,490 |         |              |          | (142,168    | )       |              |           | 1,138,757 |         |         |         | 48,480 |         |         |         | 861,789 |          |          |          | (53,966 | )       |         |         | 856,303 | 
|                                  |                                                     |                                      |                |                                      |         |             |        |              |           |           |         |              |          |             |         |              |           |           |         |         |         |        |         |         |         |         |          |          |          |         |         |        
|Operating costs and expenses:     |                                                     |                                      |                |                                      |         |             |        |              |           |           |         |              |          |             |         |              |           |           |         |         |         |        |         |         |         |         |          |          |          |         |         |        
|                                  | Costs of revenues                                   |                                      |                | 66,096                               |         |             |        | 338,641      |           |           |         | (142,168     | )        |             |         | 262,569      |           |           |         | 48,933  |         |        |         | 171,931 |         |         |          | (53,966  | )        |         |         | 166,898 |        
|                                  | Selling, general and administrative                 |                                      |                | 44,477                               |         |             |        | 329,507      |           |           |         |             |          |             |         | 373,984      |           |           |         | 7,283   |         |        |         | 259,948 |         |         |          |         |          |         |         | 267,231 |        
|                                  | Depreciation and amortization                       |                                      |                | 5,781                                |         |             |        | 77,542       |           |           |         |             |          |             |         | 83,323       |           |           |         | 26,132  |         |        |         | 17,611  |         |         |          |         |          |         |         | 43,743  |        
|                                  | Research and development                            |                                      |                | 675                                  |         |             |        | 221,812      |           |           |         |             |          |             |         | 222,487      |           |           |         | 225     |         |        |         | 18,554  |         |         |          |         |          |         |         | 18,779  |        
|                                  | Intangible asset impairment                         |                                      |                |                                     |         |             |        | 110,970      |           |           |         |             |          |             |         | 110,970      |           |           |         |        |         |        |         |        |         |         |          |         |          |         |         |        |        
|                                  | Gain on sale of products                            |                                      |                | (5                                   | )       |             |        | (10,307      | )         |           |         |             |          |             |         | (10,312      | )         |           |         |        |         |        |         |        |         |         |          |         |          |         |         |        |        
|                                  |                                                     |                                      |                |                                      |         |             |        |              |           |           |         |              |          |             |         |              |           |           |         |         |         |        |         |         |         |         |          |          |          |         |         |        
|                                  |                                                     | Total operating costs and expenses   |                |                                      | 117,024 |             |        |              | 1,068,165 |           |         |              | (142,168 | )           |         |              | 1,043,021 |           |         |         | 82,573  |        |         |         | 468,044 |         |          |          | (53,966  | )       |         |         | 496,651 |        
|                                  |                                                     |                                      |                |                                      |         |             |        |              |           |           |         |              |          |             |         |              |           |           |         |         |         |        |         |         |         |         |          |          |          |         |         |        
|Operating (loss) income           |                                                     |                                      | 25,411         |                                      |         |             | 70,325 |              |           |           |        |              |          |             | 95,736  |              |           |           | (34,093 | )       |         |        | 393,745 |         |         |         |         |          |          |         | 359,652 |        
|                                  |                                                     |                                      |                |                                      |         |             |        |              |           |           |         |              |          |             |         |              |           |           |         |         |         |        |         |         |         |         |          |          |          |         |         |        
|Other income (expense):           |                                                     |                                      |                |                                      |         |             |        |              |           |           |         |              |          |             |         |              |           |           |         |         |         |        |         |         |         |         |          |          |          |         |         |        
|                                  | Interest income                                     |                                      |                | 5,138                                |         |             |        | 591          |           |           |         |             |          |             |         | 5,729        |           |           |         | 16,347  |         |        |         | 1,063   |         |         |          |         |          |         |         | 17,410  |        
|                                  | Interest expense                                    |                                      |                | (10,135                              | )       |             |        | (2           | )         |           |         |             |          |             |         | (10,137      | )         |           |         | (9,009  | )       |        |         | (19     | )       |         |          |         |          |         |         | (9,028  | )      
|                                  | Valuation change  convertible notes
    receivable |                                      |                | 24,952                               |         |             |        |             |           |           |         |             |          |             |         | 24,952       |           |           |         | (27,378 | )       |        |         |        |         |         |          |         |          |         |         | (27,378 | )      
|                                  | Other, net                                          |                                      |                | (57                                  | )       |             |        | (77          | )         |           |         |             |          |             |         | (134         | )         |           |         | (190    | )       |        |         | (804    | )       |         |          |         |          |         |         | (994    | )      
|                                  | Equity in earnings of subsidiaries                  |                                      |                | 35,409                               |         |             |        |             |           |           |         | (35,409      | )        |             |         |             |           |           |         | 234,722 |         |        |         |        |         |         |          | (234,722 | )        |         |         |        |        
|                                  | Intercompany income (expense)                       |                                      |                | 11,591                               |         |             |        | (11,591      | )         |           |         |             |          |             |         |             |           |           |         | 31,924  |         |        |         | (31,924 | )       |         |          |         |          |         |         |        |        
|                                  |                                                     |                                      |                |                                      |         |             |        |              |           |           |         |              |          |             |         |              |           |           |         |         |         |        |         |         |         |         |          |          |          |         |         |        
|                                  |                                                     | Total other income (expense)         |                |                                      | 66,898  |             |        |              | (11,079   | )         |         |              | (35,409  | )           |         |              | 20,410    |           |         |         | 246,416 |        |         |         | (31,684 | )       |          |          | (234,722 | )       |         |         | (19,990 | )      
|                                  |                                                     |                                      |                |                                      |         |             |        |              |           |           |         |              |          |             |         |              |           |           |         |         |         |        |         |         |         |         |          |          |          |         |         |        
|(Loss) income before income taxes |                                                     |                                      | 92,309         |                                      |         |             | 59,246 |              |           |           | (35,409 | )            |          |             | 116,146 |              |           |           | 212,323 |         |         |        | 362,061 |         |         |         | (234,722 | )        |          |         | 339,662 |        
|Income tax expense (benefit)      |                                                     |                                      | 28,430         |                                      |         |             | 23,837 |              |           |           |        |              |          |             | 52,267  |              |           |           | (1,640  | )       |         |        | 127,339 |         |         |         |         |          |          |         | 125,699 |        
|                                  |                                                     |                                      |                |                                      |         |             |        |              |           |           |         |              |          |             |         |              |           |           |         |         |         |        |         |         |         |         |          |          |          |         |         |        
|                                  |                                                     | Net (loss) income                    |                | $                                    | 63,879  |             |        | $            | 35,409    |           |         | $            | (35,409  | )           |         | $            | 63,879    |           |         | $       | 213,963 |        |         | $       | 234,722 |         |          | $        | (234,722 | )       |         | $       | 213,963 |        
|                                  |                                                     |                                      |                |                                      |         |             |        |              |           |           |         |              |          |             |         |              |           |           |         |         |         |        |         |         |         |         |          |          |          |         |         |        

21



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##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

GUARANTOR SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF CASH
FLOWS

(Unaudited)


(In thousands)


|                                                        |                                                             |                                      |          |                                      |   |             |          |              |   |      |   |              |  |             |          |              |   |   |          |          |   |   |          |          |   |   |   |   |  |   |          |          |  
|------------------------------------------------------- | ----------------------------------------------------------- | ------------------------------------ | -------- | ------------------------------------ | - | ----------- | -------- | ------------ | - | ---- | - | ------------ |  | ----------- | -------- | ------------ | - | - | -------- | -------- | - | - | -------- | -------- | - | - | - | - |  | - | -------- | -------- | -
|                                                        |                                                             |                                      |          |                                     
|                                                        |                                                             | Nine Months Ended September 30, 2003 |          | Nine Months Ended September 30, 2002
|                                                        |                                                             |                                      |          |                                     
|                                                        |                                                             |                                      |          | Guarantor                            |   | Eliminating |          | King         |   |      |   | Guarantor    |  | Eliminating |          | King        
|                                                        |                                                             | King                                 |          | Subsidiaries                         |   | Entries     |          | Consolidated |   | King |   | Subsidiaries |  | Entries     |          | Consolidated
|                                                        |                                                             |                                      |          |                                      |   |             |          |              |   |      |   |              |  |             |          |             
|Cash flows from operating activities                    |                                                             | $                                    | 16,443   |                                      |   | $           | 352,042  |              |   | $    |  |              |  | $           | 368,485  |              |   | $ | (134,241 | )        |   | $ | 459,793  |          |   | $ |  |   |  | $ | 325,552  |         
|                                                        |                                                             |                                      |          |                                      |   |             |          |              |   |      |   |              |  |             |          |              |   |   |          |          |   |   |          |          |   |   |   |   |  |   |          |         
|Cash flows from investing activities:                   |                                                             |                                      |          |                                      |   |             |          |              |   |      |   |              |  |             |          |              |   |   |          |          |   |   |          |          |   |   |   |   |  |   |          |         
|                                                        | Purchases of marketable securities                          |                                      |          | (25,903                              | ) |             |          |             |   |      |   |             |  |             |          | (25,903      | ) |   |          | (597,873 | ) |   |          |         |   |   |   |  |  |   |          | (597,873 | )
|                                                        | Proceeds from sale of marketable securities                 |                                      |          | 253,097                              |   |             |          |             |   |      |   |             |  |             |          | 253,097      |   |   |          | 457,461  |   |   |          |         |   |   |   |  |  |   |          | 457,461  |  
|                                                        | Transfer (to)/from restricted cash                          |                                      |          | (48,083                              | ) |             |          |             |   |      |   |             |  |             |          | (48,083      | ) |   |          |         |   |   |          |         |   |   |   |  |  |   |          |         |  
|                                                        | Proceeds from loans receivable                              |                                      |          |                                     |   |             |          | 8,668        |   |      |   |             |  |             |          | 8,668        |   |   |          |         |   |   |          |         |   |   |   |  |  |   |          |         |  
|                                                        | Purchases of property, plant and equipment                  |                                      |          | (6,044                               | ) |             |          | (27,486      | ) |      |   |             |  |             |          | (33,530      | ) |   |          | (11,110  | ) |   |          | (37,661  | ) |   |   |  |  |   |          | (48,771  | )
|                                                        | Purchases of product rights                                 |                                      |          | (9,000                               | ) |             |          |             |   |      |   |             |  |             |          | (9,000       | ) |   |          | (120,300 | ) |   |          |         |   |   |   |  |  |   |          | (120,300 | )
|                                                        | Acquisition of primary case business of Elan                |                                      |          |                                     |   |             |          | (761,745     | ) |      |   |             |  |             |          | (761,745     | ) |   |          |         |   |   |          |         |   |   |   |  |  |   |          |         |  
|                                                        | Convertible senior note                                     |                                      |          |                                     |   |             |          |             |   |      |   |             |  |             |          |             |   |   |          | (10,044  | ) |   |          |         |   |   |   |  |  |   |          | (10,044  | )
|                                                        | Intercompany transfer of property, plant, and
    equipment |                                      |          |                                     |   |             |          |             |   |      |   |             |  |             |          |             |   |   |          | (323     | ) |   |          | 323      |   |   |   |  |  |   |          |         |  
|                                                        | Investment in Meridian                                      |                                      |          | (253,908                             | ) |             |          | 15,410       |   |      |   |             |  |             |          | (238,498     | ) |   |          |         |   |   |          |         |   |   |   |  |  |   |          |         |  
|                                                        | Proceeds from sale of products                              |                                      |          | 13,310                               |   |             |          |             |   |      |   |             |  |             |          | 13,310       |   |   |          |         |   |   |          |         |   |   |   |  |  |   |          |         |  
|                                                        | Proceeds from sale of assets                                |                                      |          | 12                                   |   |             |          | 249          |   |      |   |             |  |             |          | 261          |   |   |          | 19       |   |   |          | 4,339    |   |   |   |  |  |   |          | 4,358    |  
|                                                        |                                                             |                                      |          |                                      |   |             |          |              |   |      |   |              |  |             |          |              |   |   |          |          |   |   |          |          |   |   |   |   |  |   |          |         
|Net cash used in investing activities                   |                                                             |                                      | (76,519  | )                                    |   |             | (764,904 | )            |   |      |  |              |  |             | (841,423 | )            |   |   | (282,170 | )        |   |   | (32,999  | )        |   |   |  |   |  |   | (315,169 | )       
|                                                        |                                                             |                                      |          |                                      |   |             |          |              |   |      |   |              |  |             |          |              |   |   |          |          |   |   |          |          |   |   |   |   |  |   |          |         
|Cash flows from financing activities:                   |                                                             |                                      |          |                                      |   |             |          |              |   |      |   |              |  |             |          |              |   |   |          |          |   |   |          |          |   |   |   |   |  |   |          |         
|                                                        | Proceeds from exercise of stock options, net                |                                      |          | 3,555                                |   |             |          |             |   |      |   |             |  |             |          | 3,555        |   |   |          | 3,996    |   |   |          |         |   |   |   |  |  |   |          | 3,996    |  
|                                                        | Purchase of common stock                                    |                                      |          |                                     |   |             |          |             |   |      |   |             |  |             |          |             |   |   |          | (155,390 | ) |   |          |         |   |   |   |  |  |   |          | (155,390 | )
|                                                        | Debt issuance costs                                         |                                      |          | (214                                 | ) |             |          |             |   |      |   |             |  |             |          | (214         | ) |   |          | (4,850   | ) |   |          |         |   |   |   |  |  |   |          | (4,850   | )
|                                                        | Proceeds from revolving credit facility                     |                                      |          | 125,000                              |   |             |          |             |   |      |   |             |  |             |          | 125,000      |   |   |          |         |   |   |          |         |   |   |   |  |  |   |          |         |  
|                                                        | Payments on revolving credit facility                       |                                      |          | (125,000                             | ) |             |          |             |   |      |   |             |  |             |          | (125,000     | ) |   |          |         |   |   |          |         |   |   |   |  |  |   |          |         |  
|                                                        | Payments on other long-term debt                            |                                      |          | (124                                 | ) |             |          |             |   |      |   |             |  |             |          | (124         | ) |   |          | (194     | ) |   |          | (13      | ) |   |   |  |  |   |          | (207     | )
|                                                        | Other Intercompany                                          |                                      |          | (420,378                             | ) |             |          | 420,378      |   |      |   |             |  |             |          |             |   |   |          | 425,796  |   |   |          | (425,796 | ) |   |   |  |  |   |          |         |  
|                                                        |                                                             |                                      |          |                                      |   |             |          |              |   |      |   |              |  |             |          |              |   |   |          |          |   |   |          |          |   |   |   |   |  |   |          |         
|Net cash provided by (used in) financing
    activities |                                                             |                                      | (417,161 | )                                    |   |             | 420,378  |              |   |      |  |              |  |             | 3,217    |              |   |   | 269,358  |          |   |   | (425,809 | )        |   |   |  |   |  |   | (156,451 | )       
|                                                        |                                                             |                                      |          |                                      |   |             |          |              |   |      |   |              |  |             |          |              |   |   |          |          |   |   |          |          |   |   |   |   |  |   |          |         
|Increase (decrease) in cash and cash equivalents        |                                                             |                                      | (477,237 | )                                    |   |             | 7,516    |              |   |      |  |              |  |             | (469,721 | )            |   |   | (147,053 | )        |   |   | 985      |          |   |   |   |   |  |   | (146,068 | )       
|Cash and cash equivalents, beginning of period          |                                                             |                                      | 594,385  |                                      |   |             | (6,160   | )            |   |      |  |              |  |             | 588,225  |              |   |   | 882,391  |          |   |   | (7,789   | )        |   |   |  |   |  |   | 874,602  |         
|                                                        |                                                             |                                      |          |                                      |   |             |          |              |   |      |   |              |  |             |          |              |   |   |          |          |   |   |          |          |   |   |   |   |  |   |          |         
|Cash and cash equivalents, end of period                |                                                             | $                                    | 117,148  |                                      |   | $           | 1,356    |              |   | $    |  |              |  | $           | 118,504  |              |   | $ | 735,338  |          |   | $ | (6,804   | )        |   | $ |  |   |  | $ | 728,534  |         
|                                                        |                                                             |                                      |          |                                      |   |             |          |              |   |      |   |              |  |             |          |              |   |   |          |          |   |   |          |          |   |   |   |   |  |   |          |         

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PART I  FINANCIAL
INFORMATION




Item 2.     Managements
Discussion and Analysis of Results of Operations and Financial
Condition

The following discussion contains certain
forward-looking statements that reflect managements
current views of future events and operations. This discussion
should be read in conjunction with the following:
(a) Risk Factors set out below and other
sections of our Annual Report on Form 10-K for the year
ended December 31, 2002, which are supplemented by the
discussion which follows; (b) our audited consolidated
financial statements and related notes which are included in our
Annual Report on Form 10-K for the year ended
December 31, 2002; and (c) our unaudited consolidated
financial statements and related notes which are included in
this report on Form 10-Q. Please see the sections entitled
Risk Factors and A Warning About
Forward-Looking Statements for a discussion of the
uncertainties, risks and assumptions associated with these
statements.

Overview



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

The following summarizes net revenues by
reportable segment (in thousands).

|                              |       |                      |         |                     |  |      |         |         |  |   |         |           |  |   |         |         | 
|----------------------------- | ----- | -------------------- | ------- | ------------------- |  | ---- | ------- | ------- |  | - | ------- | --------- |  | - | ------- | ------- | 
|                              |       |                      |         |                    
|                              |       | For the Three Months |         | For the Nine Months
|                              |       | Ended September 30,  |         | Ended September 30,
|                              |       |                      |         |                    
|                              |       | 2003                 |         | 2002                |  | 2003 |         | 2002   
|                              |       |                      |         |                     |  |      |         |        
|Branded pharmaceuticals       |       | $                    | 363,892 |                     |  | $    | 293,728 |         |  | $ | 972,941 |           |  | $ | 788,624 |        
|Meridian Medical Technologies |       |                      | 38,379  |                     |  |      |        |         |  |   | 98,317  |           |  |   |        |        
|Royalties                     |       |                      | 16,275  |                     |  |      | 14,997  |         |  |   | 47,876  |           |  |   | 41,025  |        
|Contract manufacturing        |       |                      | 5,658   |                     |  |      | 6,700   |         |  |   | 19,623  |           |  |   | 25,972  |        
|Other                         |       |                      |        |                     |  |      | 280     |         |  |   |        |           |  |   | 682     |        
|                              |       |                      |         |                     |  |      |         |         |  |   |         |           |  |   |         |        
|                              | Total |                      | $       | 424,204             |  |      | $       | 315,705 |  |   | $       | 1,138,757 |  |   | $       | 856,303 | 
|                              |       |                      |         |                     |  |      |         |         |  |   |         |           |  |   |         |        

Results of Operations

Three Months Ended September 30, 2003
and 2002

Revenues

Total revenues increased $108.5 million, or
34.4%, to $424.2 million in 2003 from $315.7 million
in 2002, due primarily to our acquisition of Sonata® and
Skelaxin® from Elan Corporation, plc on June 12, 2003,
our acquisition of Meridian Medical Technologies, Inc.
(Meridian) on January 8, 2003, and increased
net sales of some of our branded pharmaceutical products.

Net sales from branded pharmaceuticals increased
$70.2 million, or 23.9%, to $363.9 million in 2003
from $293.7 million in 2002. This increase was primarily
due to our acquisition of Sonata® and Skelaxin® from
Elan Corporation, plc on June 12, 2003, our acquisition of
Intal®, Tilade® and Synercid® from Aventis on
December 30, 2002, and the growth in net sales of some of
our pharmaceutical products, in particular Thrombin-JMI®,
partially offset by lower sales, of Levoxyl®, and some of
our anti-infective and womens health products.

Revenues from Meridian totaled $38.4 million
for the quarter ended September 30, 2003. This is a new
segment in 2003 due to our acquisition of Meridian on
January 8, 2003.

Revenues from royalties is derived from payments
we receive based on sales of Adenoscan® and
Adenocard®. Revenue from royalties increased
$1.3 million, or 8.7%, to $16.3 million in 2003 from
$15.0 million in 2002 primarily due to royalty revenue
derived from increased sales of Adenoscan®.

Revenues from contract manufacturing decreased
$1.0 million, or 14.9%, to $5.7 million in 2003 from
$6.7 million in 2002 primarily due to a lower unit volume
of products manufactured for third parties in 2003.

23



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

Total operating costs and expenses increased
$78.1 million, or 42.1%, to $263.8 million in 2003
from $185.7 million in 2002. The increase was primarily due
to cost of revenues associated with increased unit sales of some
of our branded pharmaceutical products and costs of revenues,
depreciation, and amortization associated with our acquisition
of additional branded pharmaceutical products and Meridian.
Special items included in operating costs and expenses during
the third quarter of 2003 consist of a $10.3 million gain
on the sale of our animal health products to Virbac Corporation,
charges totaling $8.6 million primarily related to
professional fees that are primarily related to the ongoing
Securities and Exchange Commission, which we refer to in this
report as the SEC, investigation of our company and
the completed internal review conducted by the Audit Committee
of our Board of Directors, and $0.7 million of recall expenses.
Special items included in operating costs and expenses during
the third quarter of 2002 consists of a $1.2 million charge
primarily related to an increase in the reserve for our
voluntary recall during 2001 of products manufactured for us by
DSM Pharmaceuticals, Inc.

Sales of Nordette®, a womens health
product, have continued to decline over the past year. The
Nordette® product right has net intangible assets
associated with it of $97.1 million. Management currently
believes that this asset is not impaired based on estimated
undiscounted future cash flows, however, if revenue declines
exceed current expectations, we may have to write-off a portion
or all of the intangible assets associated with this product
right.

On October 21, 2003, we amended our
agreement with Eli Lilly concerning the supply and distribution
of Lorabid® and settled a disputed liability. As a result,
we obtained the rights to donate excess supply outside of the
United States, excluding specific countries. We also agreed to
the amendment of the supply contract with new specified purchase
requirements causing an increase in the required purchase
commitments in excess of expected demand. As a result of the
settlement agreement, we anticipate a special charge in the
fourth quarter of 2003 of approximately $10.0 million.

Special items are those particular material
income or expense items that our management believes are not
related to our ongoing, underlying business, are not recurring,
or are not generally predictable. These items include, but are
not limited to, merger and restructuring expenses;
non-capitalized expenses associated with acquisitions, such as
in-process research and development charges and one-time
inventory valuation adjustment charges; charges resulting from
the early extinguishments of debt; asset impairment charges;
expenses of drug recalls; and gains and losses resulting from
the divestiture of assets. We believe the identification of
special items enhances an analysis of our on-going, underlying
business and an analysis of our financial results when comparing
those results to that of a previous or subsequent like period.
However, it should be noted that the determination of whether to
classify an item as a special charge involves judgments by us.

Cost of revenues increased $26.8 million, or
42.1%, to $90.4 million in 2003 from $63.6 million in
2002. This increase was primarily due to our acquisition of
Sonata® and Skelaxin® and our acquisition of Meridian.
As a percentage of revenues, cost of revenues increased to 21.3%
for the third quarter of 2003 from 20.1% in 2002 primarily due
to the acquisition of Meridian, whose products have lower
margins, and differences associated with the mix of products we
sold during each of these periods.

Cost of revenues from branded pharmaceuticals
increased $13.8 million, or 26.5%, to $65.9 million in
2003 from $52.1 million in 2002. This increase was
primarily due to costs associated with unit sales of
Sonata® and Skelaxin®, which we acquired on
June 12, 2003.

Cost of revenues from Meridian Medical
Technologies was $16.1 million in 2003. This is a new
segment in 2003 due to our acquisition of Meridian on
January 8, 2003.

Cost of revenues from royalties was
$2.5 million in 2003 compared to $2.8 million in 2002.

Cost of revenues associated with contract
manufacturing decreased $2.1 million, or 26.3%, to
$5.9 million in 2003 from $8.0 million in 2002
primarily due to a lower unit volume of products manufactured
for third parties in 2003.

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Selling, general and administrative expenses
increased $35.1 million, or 35.1%, to $135.2 million
in 2003 from $100.1 million in 2002. This increase was
primarily attributable to an increase in the number of sales
representatives, and a special charge in the amount of
$7.9 million for professional fees that are primarily
related to the ongoing SEC investigation of the Company and the
completed internal review conducted by our Audit Committee,
partially offset by a decrease of $7.5 million in the fees
associated with the promotion of Altace under our Co-Promotion
Agreement with Wyeth. As a percentage of revenues, selling,
general, and administrative expenses increased to 31.9% in 2003
compared to 31.7% in 2002.

Depreciation and amortization expense increased
$24.1 million, or 154.5%, to $39.7 million in 2003
from $15.6 million in 2002. This increase was primarily
attributable to the amortization of the intangible assets
related to acquisitions during the past year including:
Intal®, Tilade® and Synercid® on
December 30, 2002; Meridian on January 8, 2003; and
Sonata® and Skelaxin® on June 12, 2003.

Research and development expense increased to
$8.8 million in the third quarter of 2003 from
$6.4 million in 2002.



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

Operating income for the third quarter of 2003
totaled $160.4 million, an increase of 23.4% from operating
income equaling $130.0 million in the same period of the
prior year.



| |             
| | ------------
| | Other Income

Interest income decreased $5.0 million, or
83.3%, to $1.0 million in 2003 from $6.0 million in
2002 primarily due to lower balances of invested cash, cash
equivalents and marketable securities during 2003 as compared to
2002.

Interest expense totaled $3.7 million in
2003, an increase of $0.6 million from $3.1 million in
2002.

Our financial results for the third quarter of
2003 include a special income item in the amount of
$9.3 million to reflect a decrease in the valuation
allowance for the convertible notes receivable from Novavax,
Inc. Statement of Financial Accounting Standards No. 114,
Accounting by Creditors for Impairment of a
Loan  an amendment of FASB Statements No. 5 and
15 which we refer to as SFAS No. 114,
requires that we treat the Novavax convertible notes as an
impaired loan because of the decline in the share price of
Novavax common stock to levels below that established by our
common stock conversion options associated with the convertible
notes. We will adjust the amount of the valuation allowance in
future periods based on the value of the underlying collateral
(Novavax common stock) as of the last business day of each
respective calendar quarter or until the loan is no longer
considered to be impaired. If the Novavax common stock price
declines, we may incur charges related to the investment in the
convertible notes. This accounting treatment may change under
Financial Accounting Standards Board Interpretation No. 46,
Consolidation of Variable Interest Entities. See
Note 7, Accounting Developments, in our Notes to Condensed
Consolidated Financial Statements included in this report.



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

During the third quarter of 2003 our income tax
expense equaled $61.0 million as compared to
$49.2 million during the same period of the prior year. The
effective tax rates of 36.5% in 2003 and of 36.9% in 2002 were
higher than the federal statutory rate of 35% due primarily to
permanent differences related to state income taxes.



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

Due to the factors set forth above, we had net
income of $106.1 million during the third quarter of 2003,
an increase of 26.0% from net income of $84.2 million in
2002.

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Nine Months Ended September 30, 2003
and 2002



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

Total revenues increased $282.5 million, or
33.0%, to $1,138.8 million for the nine months ended
September 30, 2003 from $856.3 million in 2002, due
primarily to our acquisition of Sonata® and Skelaxin®
on June 12, 2003, increased net sales of some of our
branded pharmaceutical products, particularly Altace® and
Thrombin-JMI®, and our acquisition of Meridian on
January 8, 2003.

Net sales from branded pharmaceuticals increased
$184.3 million, or 23.4%, to $972.9 million in 2003
from $788.6 million in 2002. This increase was primarily
due to our acquisition of Sonata® and Skelaxin®,
growth in net sales of some of our pharmaceutical products,
particularly Altace® and Thrombin-JMI®, partially
offset by lower sales of Levoxyl®, and our womens
health products.

Revenues from Meridian totaled $98.3 million
for the nine months ended September 30, 2003. This is a new
segment in 2003 due to our acquisition of Meridian on
January 8, 2003.

Revenues from royalties is derived from payments
we receive based on sales of Adenoscan® and
Adenocard®. Revenues from royalties increased
$6.9 million, or 16.8%, to $47.9 million in 2003 from
$41.0 million in 2002 primarily due to royalty revenues
derived from increased sales of Adenoscan®.

Revenues from contract manufacturing decreased
$6.4 million, or 24.6%, to $19.6 million in 2003 from
$26.0 million in 2002 due to a lower unit volume of
products manufactured for third parties in 2003.



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

Total operating costs and expenses increased
$546.3 million, or 110.0%, to $1,043.0 million in 2003
from $496.7 million in 2002. The increase was primarily due
to special items resulting in a net charge of
$322.3 million during the nine months ending
September 30, 2003, additional operating costs and expenses
associated with our acquisition of Meridian and our acquisition
of additional branded pharmaceutical products, increased fees
associated with the promotion of Altace® under our
Co-Promotion Agreement with Wyeth, and cost of revenues
associated with increased unit sales of some of our branded
pharmaceutical products. Special items included in operating
costs and expenses during the first nine months of 2003 consist
of charges totaling $193.0 million for acquired research
and development associated with our acquisition of rights to new
formulations of Sonata® presently under development and our
acquisition of Meridian, a $111.0 million intangible asset
impairment charge related to Florinef®, a
$22.2 million charge for professional fees that are
primarily related to the ongoing SEC investigation and the
completed internal review conducted by our Audit Committee,
special inventory charges totaling $6.5 million primarily
related to the recall of some lots of Levoxyl®, and a
$10.3 million gain on the sale of the Companys animal
health products to Virbac.

Sales of Nordette®, a womens health
product, have continued to decline over the past year. The
Nordette® product right has net intangible assets
associated with it of $97.1 million. Management currently
believes that this asset is not impaired based on estimated
undiscounted future cash flows, however, if revenue declines
exceed current expectations, we may have to write-off a portion
or all of the intangible assets associated with this product
right.

Cost of revenues increased $95.7 million, or
57.3%, to $262.6 million in 2003 from $166.9 million
in 2002. The increase was primarily due to our acquisition of
Meridian, our acquisition of additional branded pharmaceutical
products, and increased unit sales of some of our branded
pharmaceutical products, particularly Altace®.
Additionally, cost of revenues included special charges totaling
$6.5 million primarily related to the recall of some lots
of Levoxyl®. As a percentage of revenues, cost of revenues
increased to 23.1% for the first nine months of 2003 from 19.5%
in 2002 primarily due to the acquisition of Meridian, whose
products have lower margins, the special charges mentioned
above, and differences associated with the mix of products we
sold during each of these periods.

Cost of revenues from branded pharmaceuticals
increased $42.7 million, or 32.7%, to $173.4 million
in 2003 from $130.7 million in 2002. This increase was
primarily due to our acquisition of additional pharmaceutical
products, and increased unit sales of some of our pharmaceutical
products, particularly

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Altace®. Additionally, cost of revenues from
branded pharmaceuticals included special charges totaling
$4.3 million primarily related to our recall of some lots
of Levoxyl®.


Cost of revenues from Meridian Medical
Technologies was $52.8 million in 2003, including a
$2.2 million special inventory charge relating to our
acquisition of Meridian. Meridian Medical Technologies is a new
segment in the first nine months of 2003 due to our acquisition
of Meridian on January 8, 2003.

Cost of revenues from royalties totaled
$8.0 million in 2003, an increase of $0.6 million from
$7.4 million in 2002.

Cost of revenues associated with contract
manufacturing increased $0.3 million to $28.4 million in
2003 from $28.1 million in 2002.

Selling, general and administrative expenses
increased $106.8 million, or 40.0%, to $374.0 million
in 2003 from $267.2 million in 2002. This increase was
primarily attributable to fees and marketing expenses associated
with the promotion of Altace® under our Co-Promotion
Agreement with Wyeth, special charges totaling
$22.2 million for professional fees that are primarily
related to the ongoing SEC investigation of our company and the
completed internal review conducted by our Audit Committee, an
increase in the number of sales representatives, and selling,
general and administrative expenses associated with our
acquisition of Meridian. As a percentage of revenues, selling,
general, and administrative expenses increased to 32.8% in 2003
compared to 31.2% in 2002.

Depreciation and amortization expense increased
$39.6 million, or 90.6%, to $83.3 million in 2003 from
$43.7 million in 2002. This increase was primarily
attributable to the amortization of the intangible assets
associated with our acquisitions of Intal®, Tilade®
and Synercid® on December 30, 2002; Meridian on
January 8, 2003; and Sonata® and Skelaxin® on
June 12, 2003.

Research and development expense increased to
$222.5 million in the first nine months of 2003 from
$18.8 million in 2002. This increase was primarily due to
special charges totaling $193.0 million for acquired
in-process research and development associated with the
companys acquisition of the rights to new formulations of
Sonata® presently under development and our acquisition of
Meridian.



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

We had operating income of $95.7 million for
the first nine months of 2003, a decrease from operating income
totaling $359.7 million in the same period of the prior
year. This decrease was primarily due to the special items
described above, particularly special charges totaling $193.0
million for acquired in-process research and development
relating to our acquisition of rights to new formulations of
Sonata® presently under development and our acquisition of
Meridian, and a $111.0 million intangible asset impairment
special charge related to Florinef®.



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

Interest income decreased $11.7 million, or
67.2%, to $5.7 million in 2003 from $17.4 million in
2002 primarily due to lower balances of invested cash, cash
equivalents and marketable securities during 2003 as compared to
2002.

Interest expense totaled $10.1 million in
2003, an increase of $1.1 million from $9.0 million in
2002.

Our financial results in 2003 include a special
income item in the amount of $25.0 million to reflect the
decrease in the valuation allowance for the convertible notes
receivable from Novavax, Inc. SFAS 114 requires that we treat
the Novavax convertible notes as an impaired loan because of the
decline in the share price of Novavax common stock to levels
below that established by our common stock conversion options
associated with the convertible notes. We will adjust the amount
of the valuation allowance in future periods based on the value
of the underlying collateral (Novavax common stock) as of the
last business day of each respective calendar quarter or until
the loan is no longer considered to be impaired. This accounting
treatment may change under Financial Accounting Standards Board
Interpretation No. 46, Consolidation of Variable

27



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Interest Entities. See Note 7, Accounting
Developments, in our Notes to Condensed Consolidated
Financial Statements included in this report.




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

For the nine months ended September 30, 2003
the effective tax rate of 45.0% was higher than the federal
statutory rate due primarily to permanent differences related to
state income taxes and non-deductible in-process research and
development changes incurred in connection with our acquisition
of Meridian. The effective tax rate in 2002 of 37.0% was higher
than the federal statutory rate of 35% due primarily to
permanent differences related to state income taxes.



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

Due to the factors set forth above, we had net
income of $63.9 million during the nine months ending
September 30, 2003 as compared to net income of
$214.0 million during the nine months ending
September 30, 2002.

Liquidity and Capital Resources

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

On December 30, 2002 we acquired
Synercid® from Aventis. As part of our acquisition of
Synercid® we will potentially pay Aventis milestone
payments totaling $75.1 million, more specifically, we will
potentially pay Aventis milestone payments totaling
$50.1 million, payable in annual installments of
$10.3 million, $21.2 million, and $18.6 million
beginning on December 31, 2003, which relate to the
indication for the treatment of vancomycin-resistant
enterococcus faecium. The remaining $25.0 million milestone
is payable to Aventis if Synercid® should receive FDA
approval to treat methicillin-resistant staphylococcus aureus,
or we will pay Aventis a one-time payment of $5.0 million
the first time during any twelve-month period net sales of
Synercid® exceed $60.0 million, and a one-time payment
of $20.0 million the first time during any twelve-month
period net sales of Synercid® exceed $75.0 million.

On January 8, 2003, we completed our
acquisition of Meridian. We paid $44.50 per common share to
Meridian shareholders, totaling approximately $246.6 million. We
financed the acquisition using our available cash.

On June 12, 2003, we acquired the primary
care business of Elan and of some of its subsidiaries in the
United States and Puerto Rico, which includes the rights to two
branded prescription pharmaceutical products, including the
rights to potential new formulations, of Sonata® and
Skelaxin®, together with Elans United States primary
care field sales force. Product rights subject to the agreement
include those related to Sonata®, a nonbenzodiazepine
treatment for insomnia, and Skelaxin®, a muscle relaxant,
in the United States, its territories and possessions, and
Puerto Rico. Under the terms of the agreement, Elans sale
of Skelaxin® included the related NDAs, copyrights,
trademarks, patents and U.S. rights to potential new
formulations of Skelaxin®. Elans sale of Sonata®
included its rights to the product, as well as certain related
copyrights. We also acquired certain intellectual property,
regulatory, and other assets relating to Sonata® directly
from Wyeth. Under the terms of the agreement, we secured an
exclusive license to the intellectual property rights, in this
territory, of both Wyeth and Elan to the extent they relate to
new formulations of Sonata®, other than for use in animals.
We paid approximately $598.3 million, including transaction
costs, plus an additional $163.4 million which was placed
into escrow to satisfy the deferred obligations to Wyeth that we
assumed in connection with the acquisition. We financed the
acquisition through borrowings of $125.0 million under our

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senior secured revolving credit facility and with
cash on hand. The purchase price included the transfer of
inventory with a value of approximately $40.0 million. We
will also




| |   |                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------
| |  | pay royalties on the current formulation of
    Skelaxin® from the date of closing;                                                               
|
| |  | pay up to $71.0 million if Elan achieves
    certain milestones in connection with the development of a
    reformulated version of Sonata®;      
|
| |  | potentially pay $15.0 million if annual net
    sales of a reformulated version of Sonata® exceed
    $100.0 million; and                         
|
| |  | potentially pay an additional $25.0 million
    milestone payment to Elan relating to the ongoing exclusivity of
    Skelaxin® on January 2, 2004.

On March 10, 2003, we learned that the
Company was the subject of a formal SEC investigation. Over the
course of this continuing investigation, the SEC has requested
the production of documents and information related to, among
other things, sales of our products to VitaRx and Prison Health
Services, our best price lists, the pricing of our
pharmaceutical products provided to governmental Medicaid
agencies, the accrual and payment of rebates on the product
Altace®, the products Fluogen® and Lorabid®, the
King Benevolent Fund, Inc., our calculations related to Medicaid
rebates, and our Audit Committees internal review of
issues raised by the SEC investigation. We have cooperated, and
will continue to cooperate, in providing information to the SEC.

In connection with our previously announced
determination that we have underpaid amounts due under Medicaid
and other governmental pricing programs during the period from
1998 to 2002, we contacted the Centers for Medicare and Medicaid
Services, the Public Health Service, the Office of Inspector
General at the Department of Health and Human Services, the
Department of Justice, and the Department of Veterans Affairs.
In August 2003, we met with representatives of several of
these agencies, including the Office of Inspector General, and
provided detailed briefings on the results of the reviews
conducted by us and our Audit Committee. We expect to engage in
more detailed discussions with these and other appropriate
agencies in order to determine the precise amount of the
underpayments. We currently expect to make the requisite
payments in 2004.

On November 13, 2003, we received a subpoena
duces tecum from the Office of Inspector General at the
Department of Health and Human Services requesting the
production of documents related to the matters being
investigated by the SEC and to our sales, marketing and other
business practices for Altace®, Aplisol® and
Levoxyl®. We intend to cooperate in providing information
to the Office of Inspector General.

The SEC, the Office of Inspector General at the
Department of Health and Human Services, the Centers for
Medicare and Medicaid Services, the Public Health Service, the
Department of Justice, the Department of Veterans Affairs and
other governmental agencies that might be investigating or might
commence an investigation of us could impose, based on a claim
of violation of fraud and false claims laws or otherwise, civil
and/or criminal sanctions, including fines, penalties and
possible exclusion from federal health care programs (including
Medicaid and Medicare). Some of these laws may impose liability
even in the absence of specific intent to defraud. We cannot
predict or reasonably estimate the likelihood or magnitude of
any such sanctions at this time. For additional information,
please see the Risk Factors section under the
heading If we fail to comply with our reporting and
payment obligations under the Medicaid rebate program or other
governmental pricing programs, we could be subject to additional
reimbursements, penalties, sanctions and fines which could have
a material adverse effect on our business.

Subsequent to the announcement of the SEC
investigation described above, beginning in March 2003, 22
purported class action complaints were filed by holders of our
securities against us, our directors, former directors,
executive officers, former executive officers, a company
subsidiary and one of its former officers in the United States
District Court for the Eastern District of Tennessee, alleging
violations of the Securities Act of 1933 and/or the Securities
Exchange Act of 1934. These 22 complaints have been consolidated
in the United States District Court for the Eastern District of
Tennessee. Plaintiffs in the consolidated action filed a
consolidated amended complaint on October 21, 2003 alleging
that we, through some of our executive officers,

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former executive officers, directors and former
directors, made false or misleading statements concerning our
business, financial condition and results of operations during
periods beginning February 16, 1999 and continuing until
March 10, 2003. Plaintiffs in the consolidated action have
also named the underwriters of Kings November 2001 public
offering as defendants. In addition, holders of our securities
filed two class action complaints alleging violations of the
Securities Act of 1933 in Tennessee state court. We removed
these two cases to the United States District Court for the
Eastern District of Tennessee where, pursuant to the Private
Securities Litigation Reform Act of 1995, these two cases were
consolidated with the other class actions. Plaintiffs in these
actions have, however, moved to remand these actions back to
Tennessee state court.


Seven purported shareholder derivative complaints
have also been filed in federal and state courts in Tennessee
alleging a breach of fiduciary duty, among other things, by some
of our officers and directors. Additionally, a class action
complaint was filed in the United States District Court for the
Eastern District of Tennessee under the Employee Retirement
Income Security Act (ERISA). The complaint alleges
that we and certain of our executive officers, former executive
officers, directors and former directors violated fiduciary
duties that they allegedly owed our 401(k) Retirement Savings
Plans participants and beneficiaries under ERISA. The
allegations underlying each of these additional lawsuits are
similar in many respects to those in the class action litigation
described above. We intend to defend all of these lawsuits
vigorously but are unable currently to predict the outcome or
reasonably estimate the range of potential loss, if any.

If any governmental sanctions are imposed, or if
we were not to prevail in the securities litigation, neither of
which can be predicted or reasonably estimated at this time, our
business, financial condition, results of operations and cash
flows could be materially adversely affected. Responding to the
government investigations, resolving the amounts owed to
governmental agencies in connection with the underpayments and
defending King in the securities litigation has resulted, and is
expected to continue to result, in a significant diversion of
managements attention and resources and an increase in
professional fees.

We have placed $46.5 million of our cash on
hand in an interest-bearing escrow account. This amount, which
we accrued in the fourth quarter of 2002, represents our best
estimate of the extent to which we underpaid amounts due under
Medicaid and other governmental pricing programs during the
period from 1998 to 2002 and is included in restricted cash in
our financial statements. The accrual adjustment relates solely
to the estimated underpayments and excludes any interest, fines,
penalties or other amounts that might be owed in connection with
the underpayments, as we cannot predict or reasonably estimate
their likelihood or magnitude at this time. We contacted the
Centers for Medicare and Medicaid Services, the Public Health
Service, the Office of Inspector General at the Department of
Health and Human Services, the Department of Justice, and the
Department of Veterans Affairs in connection with the
underpayments and expect to engage in more detailed discussions
with these and other appropriate agencies in order to determine
the precise amount of the underpayments. We expect to make the
requisite payments in 2004.

We drew down a total of $125.0 million on
our $400.0 million senior secured revolving credit facility
on June 3 and June 6, 2003, the proceeds of which were used
to fund a portion of the Elan acquisition on June 12, 2003.
During the third quarter of 2003, we paid off the principal
balance and have no outstanding balance as of September 30,
2003.

Nine Months Ended September 30,
2003

We generated net cash from operations of
$368.5 million for the nine months ended September 30,
2003. Our net cash provided from operations was primarily the
result of $63.9 million net income, adjusted for non-cash
depreciation and amortization of $84.0 million, a decrease
in prepaid expenses of $43.2 million, an increase in
accrued expenses of $59.3 million, the non-cash write-off
of in-process research and development of $193.0 million,
an increase in income taxes payable of $39.5 million, and a
non-cash impairment charge for intangible assets of
$111.0 million. Net cash provided from operations was
decreased by an increase in accounts receivable of
$66.3 million, an increase in inventory of
$37.9 million, a change in deferred taxes of
$93.7 million, a non-cash decrease in the reserve for the
Novavax convertible senior notes of $25.0 million, and

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a gain of $10.3 million on the sale of our
animal health products, all of which offset the items previously
described.


Investing activities reduced cash flow by
$841.4 million which amount primarily consisted of
$238.5 million for our purchase of Meridian, $48.1 million
for our transfer of cash to restricted cash, $33.5 million
for our purchase of property, plant and equipment, and
$761.7 million for our purchase of the primary care
business of Elan, partially offset by net proceeds from the sale
of marketable securities of $227.2.

Financing activities contributed
$3.2 million to cash flow due primarily to proceeds in the
amount of $3.6 million from the exercise of employee stock
options.



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

As of September 30, 2003, we had
$346.3 million of long-term debt (including current
portion), up to $400.0 million available under our
revolving credit facility, and $616.0 million available
under our universal shelf registration. As described above, on
June 3 and June 6, 2003, we drew down a total of
$125.0 million under our senior secured revolving credit
facility to fund a portion of our acquisition of Elans
primary care business on June 12, 2003. During the third
quarter of 2003, we paid off the principal balance owing on our
senior secured revolving credit facility and have no outstanding
balance as of September 30, 2003.

On September 20, 2001, we registered a
$1.3 billion universal shelf registration statement on
Form S-3 with the Securities and Exchange Commission. This
universal shelf registration statement allows us to sell any
combination of debt and/or equity securities in one or more
offerings up to a total of $1.3 billion. During November 2001,
we completed the sale of 17,992,000 newly issued shares of
common stock for $38.00 per share ($36.67 per share net of
commissions and expenses) resulting in net proceeds of
$659.8 million. At September 30, 2003, approximately
$616.0 million remains available to us under the
$1.3 billion universal shelf registration statement.
Additionally, during November 2001, we issued
$345.0 million of 2 3/4% Convertible Debentures due
November 15, 2021 in a private placement.

On April 23, 2002, we established a
$400.0 million five year senior secured revolving credit
facility. The facility has been collateralized in general by all
real estate with a value of $5.0 million or more and all of
our personal property and that of our significant subsidiaries.
Our obligations under the senior secured revolving credit
facility are unconditionally guaranteed on a senior basis by
most of our subsidiaries. The senior secured revolving credit
facility accrues interest at our option, at either (a) the
base rate, which is based on the prime rate or the federal funds
rate plus one-half of 1%, plus an applicable spread ranging from
0.0% to 0.75% (based on a leverage ratio) or (b) the
applicable LIBOR rate plus an applicable spread ranging from
1.0% to 1.75% (based on a leverage ratio). In addition, the
lenders under the senior secured revolving credit facility are
entitled to customary facility fees based on (a) unused
commitments under the facility and (b) letters of credit
outstanding. We incurred $4.9 million of deferred financing
costs, which are being amortized over five years, the life of
the senior secured revolving credit facility. This facility
requires us to maintain a minimum net worth of no less than
$1.2 billion plus 50% of our consolidated net income for
each fiscal quarter after April 23, 2002, excluding any
fiscal quarter for which consolidated income is negative; an
EBITDA to interest expense ratio of no less than 3.00 to 1.00;
and a funded debt to EBITDA ratio of no greater than 3.50 to
1.00 prior to April 24, 2004 and of no greater than 3.00 to
1.00 on or after April 24, 2004. As of September 30,
2003, we have complied with these covenants. As of
September 30, 2003, there was no outstanding balance under
this facility.



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

Capital expenditures, including capital lease
obligations, were $33.5 million and $48.8 million for
the nine months ended September 30, 2003 and 2002,
respectively. The principal capital expenditures during the nine
months ended September 30, 2003 included property and
equipment purchases, new information technology system
implementation costs and building improvements for facility
upgrades and increased capacity.

We anticipate capital expenditures, including
capital lease obligations, for the year ending December 31,
2003 of approximately $55 million. The principal capital
expenditures are anticipated to include property and

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equipment purchases, new information technology
system implementation costs, building improvements for facility
upgrades, cost associated with improving our production
capabilities, and costs associated with moving production of
some of our pharmaceutical products to our facilities in St.
Louis, Missouri, and Rochester, Michigan.


Impact of Inflation

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

Critical Accounting Policies

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

The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States requires that management make estimates and
assumptions. Assets, liabilities, revenues and expenses, and
disclosure of contingent assets and liabilities are affected by
such estimates and assumptions. The most significant assumptions
are employed in estimates used in determining allowances for
doubtful accounts, values of inventories and intangible assets,
impairment, accruals for rebates, returns and chargebacks, as
well as estimates used in applying the revenue recognition
policy and accounting for the Novavax convertible senior notes
and the Co-Promotion Agreement with Wyeth. We are subject to
risks and uncertainties that may cause actual results to differ
from those estimates, such as changes in the healthcare
environment, competition, legislation and regulation. We believe
the following accounting policies are the most critical because
they involve the most significant judgments and estimates used
in preparation of our consolidated financial statements.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Allowance for doubtful
    accounts.We maintain an allowance for
    doubtful receivables for estimated losses resulting from the
    inability of our trade customers to make required payments. We
    provide an allowance for specific customer accounts where
    collection is doubtful and also provide a general allowance for
    other accounts based on historical collection and write-off
    experience. Judgment is necessary and if the financial condition
    of our customers were to worsen, additional allowances may be
    required.                                                                                                                                                                                              
|
| |  | Inventories.Our
    inventories are valued at the lower of cost or market value. We
    evaluate all of our inventory for short dated or slow moving
    product and inventory commitments under supply agreements based
    on projections of future demand and market conditions. For those
    units in inventory that are so identified, we estimate their
    market value or net sales value based on current realization
    trends. If the projected net realizable value is less than cost,
    on a product basis, we provide a provision to reflect the lower
    value of that inventory. This methodology recognizes projected
    inventory losses at the time such losses are evident rather than
    at the time goods are actually sold.
|
| |  | Intangible assets.When we purchase products we classify the purchase price,
    including expenses and assumed liabilities, as intangible
    assets. The purchase price is allocated to product rights,
    trademarks, patents, acquired research and development and other
    intangibles using the assistance of valuation experts. We
    estimate the useful lives of the assets by factoring in the
    characteristics of the products such as: patent protection,
    competition by products prescribed for similar indications,
    estimated future introductions of competing products, and other
    issues. The factors that drive the estimate of the life of the
    asset are inherently uncertain.                                   
|
| |  | Long-lived assets.We review our property and intangible assets for possible
    impairment whenever events or circumstances indicate that the
    carrying amount of an asset may not be recoverable. We review
    our goodwill for possible impairment annually, or whenever
    events or circumstances indicate that the carrying amount may
    not be recoverable. Assumptions and estimates used in the
    evaluation of impairment may affect the carrying value of
    long-lived assets, which could result in impairment                                                                                                                                                                                                                     

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | charges in future periods. Such assumptions
    include projections of future cash flows and, in some cases, the
    current fair value of the asset. In addition, our depreciation
    and amortization policies reflect judgments on the estimated
    useful lives of assets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | Accruals for rebates, returns, and
    chargebacks.We establish accruals for
    rebates, returns, and chargebacks in the same period we
    recognize the related sales. The accruals reduce revenues and
    are included in accrued expenses. Accrued rebates include
    amounts due under Medicaid, managed care rebates and other
    commercial contractual rebates. We estimate accrued rebates
    based on a percentage of selling price determined from
    historical experience. With respect to accruals for estimated
    Medicaid rebates, we evaluate our historical rebate payments by
    product as a percentage of historical sales, product pricing and
    current contracts. At the time of rebate payment, which
    generally occurs with a delay after the related sale, we record
    a reduction to accrued expenses and, at the end of each quarter,
    adjust accrued expenses for any differences between estimated
    and actual payments. Due to estimates and assumptions inherent
    in determining the amount of the rebate, rebate payments remain
    subject to retroactive adjustment. Returns are accrued based on
    historical experience. Chargebacks are based on the estimated
    days of unprocessed claims using historical experience. In all
    cases, judgment is required in estimating these reserves, and
    actual claims for rebates, returns and chargebacks could be
    different from the estimates. Medicaid and certain other
    governmental pricing programs involve particularly difficult
    interpretations of relevant statutes and regulatory guidance,
    which are complex and, in certain respects, ambiguous. Moreover,
    prevailing interpretations of these statutes and guidance can
    change over time.
|
| |  | Revenue recognition.Revenue is recognized when title and risk of loss are
    transferred to customers, collection of sales is reasonably
    assured, and we have no further performance obligations. This is
    generally at the time products are received by the customer.
    Accruals for estimated returns, rebates and chargebacks,
    determined based on historical experience, reduce revenues at
    the time of sale and are included in accrued expenses. Medicaid
    and certain other governmental pricing programs involve
    particularly difficult interpretations of relevant statutes and
    regulatory guidance, which are complex and, in certain respects,
    ambiguous. Moreover, prevailing interpretations of these
    statutes and guidance can change over time. Royalty revenue is
    recognized based on a percentage of sales (namely, contractually
    agreed-upon royalty rates) reported by third parties. For the
    year ended December 31, 2002, we deferred recognition of
    revenue associated with a purchase of our products by the King
    Benevolent Fund. We have and will recognize the deferred revenue
    as the purchased products are distributed by the King Benevolent
    Fund.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | Novavax convertible senior
    notes.Our Novavax 4% convertible
    senior notes are carried at cost, with a valuation allowance
    which reduces the convertible senior notes to estimated fair
    value. The estimated fair value was determined by the quoted
    market price of the underlying securities at the end of the
    period. The amount of the valuation allowance will be adjusted
    in future periods based on the value of the underlying
    collateral (Novavax common stock) as of the last business day of
    each respective calendar quarter or until the time the loan is
    no longer considered to be impaired. This accounting treatment
    may change under Financial Accounting Standards Board
    Interpretation No. 46, Consolidation of Variable
    Interest Entities. See Note 7, Accounting Developments, in
    our Notes to Condensed Consolidated Financial
    Statements included in this report.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | Co-Promotion Agreement with
    Wyeth.We have a Co-Promotion
    Agreement with Wyeth to promote Altace®. A
    $75.0 million upfront fee was paid to us by Wyeth and this
    fee is being amortized on a straight line basis over the life of
    the agreement as a reduction of co-promotion marketing expenses.
    Co-promotion fees are paid to Wyeth based on a percentage of net
    sales of Altace®. We accrue co-promotion fees paid by us at
    the rate expected for the entire year. The rate is adjusted
    during the year, if necessary, as it becomes clearer what the
    actual rate will be. Co-promotion marketing expenses are
    marketing costs incurred by either us or Wyeth in accordance
    with the Co-Promotion Agreement. Co-promotion marketing expenses
    are expensed ratably throughout the year based on our expected
    portion of the total co-marketing expenses incurred by both
    parties.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

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RISK FACTORS

Before you purchase our securities, you should
carefully consider the risks described below and the other
information contained in this report, including our unaudited
consolidated financial statements and related notes. You should
also consider the information contained in our annual report on
Form 10-K for the year ended December 31, 2002,
including our audited consolidated financial statements and
related notes. The risks described below are not the only ones
facing our company. Additional risks not presently known to us
or that we currently deem immaterial may also impair our
business operations. If any of the adverse events described in
this Risk Factors section or other sections of this
report or our annual report on Form 10-K for the year ended
December 31, 2002 actually occurs, our business, results of
operations and financial condition could be materially adversely
affected, the trading price, if any, of our securities could
decline and you might lose all or part of your
investment.

Risks Related to our Business



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

On March 10, 2003, we learned that the
Company was the subject of a formal SEC investigation. Over the
course of this continuing investigation, the SEC has requested
the production of documents and information related to, among
other things, sales of our products to VitaRx and Prison Health
Services, our best price lists, the pricing of our
pharmaceutical products provided to governmental Medicaid
agencies, the accrual and payment of rebates on the product
Altace®, the products Fluogen® and Lorabid®, the
King Benevolent Fund, Inc., our calculations related to Medicaid
rebates, and our Audit Committees internal review of
issues raised by the SEC investigation. We have cooperated, and
will continue to cooperate, in providing information to the SEC.

In connection with our previously announced
determination that we have underpaid amounts due under Medicaid
and other governmental pricing programs during the period from
1998 to 2002, we contacted the Centers for Medicare and Medicaid
Services, the Public Health Service, the Office of Inspector
General at the Department of Health and Human Services, the
Department of Justice, and the Department of Veterans Affairs.
In August 2003, we met with representatives of several of
these agencies, including the Office of Inspector General, and
provided detailed briefings on the results of the reviews
conducted by us and our Audit Committee. We expect to engage in
more detailed discussions with these and other appropriate
agencies in order to determine the precise amount of the
underpayments. We currently expect to make the requisite
payments in 2004.

On November 13, 2003, we received a subpoena
duces tecum from the Office of Inspector General at the
Department of Health and Human Services requesting the
production of documents related to the matters being
investigated by the SEC and to our sales, marketing and other
business practices for Altace®, Aplisol® and
Levoxyl®. We intend to cooperate in providing information
to the Office of Inspector General.

The SEC, the Office of Inspector General at the
Department of Health and Human Services, the Centers for
Medicare and Medicaid Services, the Public Health Service, the
Department of Justice, the Department of Veterans Affairs and
other governmental agencies that might be investigating or might
commence an investigation of us could impose, based on a claim
of a violation of fraud and false claims laws or otherwise,
civil and/or criminal sanctions, including fines, penalties and
possible exclusion from federal health care programs (including
Medicaid and Medicare). Some of these laws may impose liability
even in the absence of specific intent to defraud. We cannot
predict or reasonably estimate the likelihood or magnitude of
any such sanctions at this time. For additional information,
please see this Risk Factors section under the
heading If we fail to comply with our reporting and
payment obligations under the Medicaid rebate program or other
governmental pricing programs, we could be subject to additional
reimbursements, penalties, sanctions and fines which could have
a material adverse effect on our business.

Subsequent to the announcement of the SEC
investigation described above, beginning in March 2003, 22
purported class action complaints were filed by holders of our
securities against us, our directors, former

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directors, executive officers and former
executive officers in the United States District Court for the
Eastern District of Tennessee, alleging violations of the
Securities Act of 1933 and/or the Securities Exchange Act of
1934. These 22 complaints have been consolidated in the United
States District Court for the Eastern District of Tennessee.
Plaintiffs in the consolidated action filed a consolidated
amended complaint on October 21, 2003 alleging that we,
through some of our executive officers, former executive
officers, directors and former directors, made false or
misleading statements concerning our business, financial
condition and results of operations during periods beginning
February 16, 1999 and continuing until March 10, 2003.
Plaintiffs in the consolidated action have also named the
underwriters of Kings November 2001 public offering as
defendants. In addition, holders of our securities filed two
class action complaints alleging violations of the Securities
Act of 1933 in Tennessee state court. We removed these two cases
to the United States District Court for the Eastern District of
Tennessee where, pursuant to the Private Securities Litigation
Reform Act of 1995, these two cases were consolidated with the
other class actions. Plaintiffs in these actions have, however,
moved to remand these actions back to Tennessee state court.


Seven purported shareholder derivative complaints
have also been filed in federal and state courts in Tennessee
alleging a breach of fiduciary duty, among other things, by some
of our officers and directors. Additionally, a class action
complaint was filed in the United States District Court for the
Eastern District of Tennessee under the Employee Retirement
Income Security Act (ERISA). The complaint alleges
that we and certain of our executive officers, former executive
officers, directors and former directors violated fiduciary
duties that they allegedly owed our 401(k) Retirement Savings
Plans participants and beneficiaries under ERISA. The
allegations underlying each of these additional lawsuits are
similar in many respects to those in the class action litigation
described above. We intend to defend all of these lawsuits
vigorously but are unable currently to predict the outcome or
reasonably estimate the range of potential loss, if any.

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



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

Altace®, Thrombin-JMI®, Levoxyl®
and royalty revenues for the last twelve months ended
September 30, 2003 accounted for 37.5%, 10.0%, 9.0% and
4.6% of our total revenues, respectively, or 61.1% in total. In
addition, we acquired Sonata® and Skelaxin® on
June 12, 2003, which together had net sales in the United
States and Puerto Rico of approximately $238.0 million in
2002. We believe that sales of these products may constitute a
significant portion of our revenues for the foreseeable future.
Accordingly, any factor adversely affecting sales of any of
these products or products for which we receive royalty payments
could have a material adverse effect on our business, financial
condition, results of operations and cash flows.



| |                                                                                                                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we cannot successfully enforce our
    rights under the patents relating to three of our largest
    products, Altace®,
    Levoxyl®and
    Skelaxin®, or relating to our product Prefest® against
    generic drug manufacturers, our results of operations could be
    materially adversely affected.

Cobalt Pharmaceuticals, Inc., a generic drug
manufacturer located in Mississauga, Ontario, Canada, has filed
an ANDA with the FDA seeking permission to market a generic
version of Altace®. The following U.S. patents are listed
for Altace® in the FDAs Approved Drug Products
With Therapeutic Equivalence Evaluations,which we refer to
as the FDAs Orange Book: U.S. Patent Nos.
4,587,258, the 258 patent, and 5,061,722, the 722
patent, two composition of matter patents related to
Altace®, and United States Patent No. 5,403,856, the
856 patent, a method of use patent related to
Altace®, with expiration dates of January 2005, October
2008, and April 2012, respectively. Under the federal
Hatch-Waxman Act of 1984, any generic manufacturer may file an
ANDA with a certification, which we refer to as a
Paragraph IV certification, challenging the
validity or infringement of a patent listed in the FDAs
Orange Book four years after the

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pioneer company obtains approval of its NDA.
Cobalt has filed a Paragraph IV certification alleging
invalidity of the 722 patent, and we have filed suit to
enforce our rights under that patent. Pursuant to the
Hatch-Waxman Act, the filing of that suit provides us an
automatic stay of FDA approval of Cobalts ANDA for
30 months. Should the court find in favor of a Cobalt
summary judgment motion on the 722 patent, however, we
would not receive the full benefit of that 30 month stay.
We have also recently amended our complaint, without opposition,
to include an allegation of infringement of the 856 patent
by Cobalt. Pursuant to FDA regulations, however, Cobalt is not
required to certify against the 856 patent. We intend to
vigorously enforce our rights under the 722 and 856
patents.


Eon Labs, Inc. and CorePharma, LLC have each
filed an ANDA with the FDA seeking permission to market a
generic version of Skelaxin®. United States Patent
No. 6,407,128, the 128 patent, a method of use patent
relating to Skelaxin®, is listed in the FDAs Orange
Book and does not expire until December 3, 2021. Eon Labs
and CorePharma have each filed Paragraph IV certifications
alleging noninfringement and invalidity of the 128 patent.
We have filed separate suits against Eon Labs and CorePharma and
intend to vigorously enforce our rights under the 128
patent to the full extent of the law.

Mylan Pharmaceuticals, Inc. and KV Pharmaceutical
Company have each filed an ANDA with the FDA seeking permission
to market a generic version of Levoxyl®. United States
Patent No. 6,555,581, the 581 patent, a utility patent
with formulation claims relating to Levoxyl®, was issued to
us on April 29, 2003. The 581 patent is listed in the
FDAs Orange Book and does not expire until
February 15, 2022. No earlier than April 30, 2003, we
received notice of Mylans Paragraph IV certification,
which alleges noninfringement of the 581 patent. On
June 24, 2003, we received notice of KV
Pharmaceuticals Paragraph IV certification, which
alleges noninfringement and invalidity of the 581 patent.
We have filed separate suits against Mylan and KV Pharmaceutical
and intend to vigorously enforce our rights under the 581
patent to the full extent of the law.

Barr Laboratories Inc. has filed an ANDA, which
included a Paragraph IV certification, with the FDA seeking
permission to market a generic version of Prefest®. United
States Patent No. 5,108,995, the 995 patent, a
utility patent with method of treatment claims relating to
Prefest®, and United States Patent No. 5,382,573, the
573 patent, a utility patent with pharmaceutical
preparation claims relating to Prefest®, were issued on
April 28, 1992, and January 17, 1995, respectively.
The 995 patent and the 573 patent are both listed in
the FDAs Orange Book and do not expire until
April 28, 2009, and January 17, 2012, respectively. On
October 9, 2003, we received notice of Barrs
Paragraph IV certification, which alleges noninfringement
and invalidity of the 995 patent and the 573 patent.
Under the Hatch-Waxman Act, we have until December 1, 2003,
to sue Barr for infringement of those patents to invoke a
statutory 30-month stay of FDA approval. We intend to vigorously
enforce our rights under both patents.



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

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



| |                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------
| | We may not achieve our intended benefits
    from the Co-Promotion Agreement with Wyeth for the promotion of
    Altace®.

We entered into the Co-Promotion Agreement with
Wyeth for Altace® partially because we believed a larger
pharmaceutical company with more sales representatives and, in
our opinion, with substantial

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experience in the promotion of pharmaceutical
products to physicians would significantly increase the sales
revenue potential of Altace®. By effectively co-marketing
the new indications for Altace® that were approved by the
FDA on October 4, 2000, we intend to increase the demand
for the product. In the agreement, both of us have incentives to
maximize the sales and profits of Altace® and to optimize
the marketing of the product by coordinating our promotional
activities.


Under the Co-Promotion Agreement, Wyeth and we
agreed to establish an annual budget of marketing expenses to
cover, among other things, direct-to-consumer advertising, such
as television advertisements and advertisements in popular
magazines and professional journals. One of the goals of the
direct-to-consumer advertising campaign is to encourage the
targeted audience to ask their own physicians about Altace®
and whether it might be of benefit for them. The
direct-to-consumer campaign may not be effective in achieving
this goal. Physicians may not prescribe Altace® for their
patients to the extent we might otherwise hope if patients for
whom Altace® is indicated do not ask their physicians about
Altace®.

It is possible that we or Wyeth or both of us
will not be successful in effectively promoting Altace® or
in optimizing its sales. The content of agreed-upon promotional
messages for Altace® may not sufficiently convey the merits
of Altace® and may not be successful in convincing
physicians to prescribe Altace® instead of other ACE
inhibitors or competing therapies. The targets for sales force
staffing, the number and frequency of details to physicians and
the physicians who are called upon may be inadequate to realize
our expectations for revenues from Altace®. Neither we nor
Wyeth may be able to overcome the perception by physicians of a
class effect, which we discuss below. Further, developments in
technologies, the introduction of other products or new
therapies may make it more attractive for Wyeth to concentrate
on the promotion of a product or products other than
Altace® or to lessen their emphasis on the marketing of
Altace®. Our strategic decisions in dealing with managed
health care organizations may not prove to be correct and we
could consequently lose sales in this market to competing ACE
inhibitor products or alternative therapies. If any of these
situations occurred, they could have a material adverse effect
on our business, financial condition, results of operations and
cash flows.



| |                                                                                                                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If our Bristol facility and the Aventis
    (USA) facility do not remain FDA-approved manufacturing and
    packaging sites for Altace®or if there is an interruption in the supply of raw
    material for Altace® or of the finished
    product, the distribution, marketing and subsequent sales of the
    product could be adversely affected.

Our Bristol facility is an FDA-approved
manufacturing and packaging site for Altace®. Aventis
(USA) in Kansas City, Missouri, is our alternative or
back-up FDA-approved manufacturing and packaging site for
Altace®. Aventis Pharma Deutscheland GmbH (Germany) is our
single supplier of ramipril, the active ingredient in
Altace®. Because the manufacture of ramipril is a patented
process, we cannot secure the raw material from another source.
We have entered into a long-term supply agreement with Aventis
(Germany) for ramipril and we believe that it adequately
protects our supply of raw material, but there can be no
guarantee that there will be no interruptions or delays in the
supply of the raw material. Any interruptions or delays in
manufacturing or receiving the finished product or raw material
used for the future production of Altace® or the failure to
maintain our Bristol facility and the Aventis
(USA) facility as FDA-approved manufacturing and packaging
sites for Altace® could have a material adverse effect on
our business, financial condition, results of operations and
cash flows.



| |                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Sales of
    Altace®may be affected
    by the perception of a class effect, and Altace®
    and our other products may be subject to various sources
    of competition from alternate therapies.

Although the FDA has approved indications for
Altace® that are unique among ACE inhibitors, we may be
unable to meet investors expectations regarding sales of
Altace® due to a perceived class effect or the inability to
market Altace®s differentiating uses and indications
effectively.

All prescription drugs currently marketed by
pharmaceutical companies may be grouped into existing drug
classes, but the criteria for inclusion vary from class to
class. For some classes, specific biochemical properties may be
the defining characteristic. For example, Altace®
(ramipril) is a member of a class of

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products known as ACE inhibitors because ramipril
is one of several chemicals that inhibit the production of
enzymes that convert angiotensin, which could otherwise lead to
hypertension.


When one drug from a class is demonstrated to
have a particularly beneficial or previously undemonstrated
effect (e.g., the benefit of Altace® as shown by the HOPE
trial), marketers of other drugs in the same class (for example,
other ACE inhibitors) will represent that their products offer
the same benefit simply by virtue of membership in the same drug
class. Consequently, other companies with ACE inhibitors that
compete with Altace® will represent that their products are
equivalent to Altace®. By doing so, these companies will
represent that their products offer the same efficacious results
demonstrated by the HOPE trial. Regulatory agencies do not
decide whether products within a class are quantitatively
equivalent in terms of efficacy or safety. Because comparative
data among products in the same drug class are rare, marketing
forces often dictate a physicians decision to use one ACE
inhibitor over another. We may not be able to overcome other
companies representations that their ACE inhibitors will
offer the same benefits as Altace® as demonstrated by the
HOPE trial. As a result, sales of Altace® may suffer from
the perception of a class effect.

Currently, there is no generic form of
Altace® available although Cobalt Pharmaceuticals has filed
a Paragraph IV certification pertaining to Altace®
which we have described above. That is, there is no product that
has the same active ingredient, ramipril, as Altace®.
Although no generic substitute for Altace® has been
approved by the FDA, there are other ACE inhibitors whose
patents have expired or will expire in the next few years and
there are generic forms of other ACE inhibitors. Also, there are
different therapeutic agents that may be used to treat certain
conditions treated by Altace®. For example, the group of
products known as angiotensin II receptor blockers, which
we refer to as an ARB, beta-blockers, calcium
channel blockers and diuretics, may be prescribed to treat
certain conditions that Altace® is used to treat. New ACE
inhibitors or other anti-hypertensive therapies, increased sales
of generic forms of other ACE inhibitors or of other therapeutic
agents that compete with Altace® may adversely affect the
sales of Altace®. In these events, our business, financial
condition, results of operations and cash flows could be
materially adversely affected.



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

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

If another company were to acquire, directly or
indirectly, over 50% of the combined voting power of
Wyeths voting securities or more than half of its total
assets, then Wyeth could assign its rights and obligations under
the Altace® Co-Promotion Agreement to a successor without
our prior consent. However, a successor would be required to
first assume in writing the obligations of Wyeth under the
Co-Promotion Agreement before the rights of Wyeth were assigned
to it. Another party might not market Altace® as
effectively or efficiently as Wyeth did. Also, a company that
acquires Wyeth might not place as much emphasis on the
Co-Promotion Agreement, might expend fewer marketing resources,
such as a fewer number of sales representatives, than Wyeth did,
or might have less experience or expertise in marketing
pharmaceutical products to physicians. In any of these cases,
there may be a material adverse effect on the sales of
Altace®.

When feasible, Wyeth must give us six
months written notice of its intent to sell, market or
distribute any product competitive with Altace®. Under the
Co-Promotion Agreement, a product competes with Altace® if
it is an ACE inhibitor, an ARB, or an ACE inhibitor or ARB in
combination with other cardiovascular agents in a single
product. However, an ARB alone or in combination with other
cardiovascular agents competes with Altace® only if the
level of promotional effort used by Wyeth for the ARB is greater
than 50% of that applied to Altace®. A product would not
compete with Altace® if in the last 12 months it had
net sales of less than $100.0 million or 15% of net sales
of Altace®, whichever was higher. Also, a product would not
compete with

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Altace® under the Co-Promotion Agreement if
the product were acquired by Wyeth through a merger with or
acquisition by a third party and the product were no longer
actively promoted by Wyeth or its successor through detailing
the product to physicians.


Once we have been notified in writing of
Wyeths intent to market, sell or distribute a competing
product, then Wyeth has 90 days to inform us as to whether
it intends to divest its interest in the competing product. If
Wyeth elects to divest the competing product, it must try to
identify a purchaser and to enter into a definitive agreement
with the purchaser as soon as practicable. If Wyeth elects not
to divest the competing product or fails to divest the product
within one year of providing notice to us of its plan to divest
the competing product, then both of us must attempt to establish
acceptable terms under which we would co-promote the competing
product for the remaining term of our Altace® Co-Promotion
Agreement. Alternatively, Wyeth and we could agree upon another
commercial relationship, such as royalties payable to us for the
sale of the competing product, or we could agree to adjust the
promotion fee we pay to Wyeth for the co-promotion of
Altace®. If Wyeth and we are unable to establish acceptable
terms under any of these options, then we have the option at our
sole discretion to reacquire all the marketing rights to
Altace® and terminate the Co-Promotion Agreement upon
180 days prior written notice to Wyeth. In the event we
decided to reacquire all the marketing rights to Altace® we
would be obligated to pay Wyeth an amount of cash equal to twice
the net sales of Altace® in the United States for the
12 month period preceding the reacquisition. The foregoing
could have a material effect on our business, financial
condition, results of operations and cash flows.



| |                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our sales of
    Levoxyl®could be
    affected by future actions of the FDA, the possible development
    and approval of a generic substitute for Levoxyl®
    and our ability to maintain effective patent protection
    for Levoxyl®.

On August 14, 1997, the FDA announced in the
Federal Register (62 FR 43535) that orally administered
levothyroxine sodium drug products are new drugs. The notice
stated that manufacturers who wish to continue to market these
products must submit applications as required by the FDC Act by
August 14, 2000. On April 26, 2000, the FDA issued a second
Federal Register notice extending the deadline for filing these
applications until August 14, 2001.

On May 25, 2001, the FDA approved our NDA
for Levoxyl®, our levothyroxine sodium drug product. Other
manufacturers of levothyroxine sodium drug products, including
Abbott Laboratories who manufactures the competing product
Synthroid®, have received FDA approval of NDAs for
their levothyroxine sodium products. The FDA has announced that
after August 14, 2001, it will not accept NDAs for
levothyroxine sodium drug products. However, the FDA has stated
it will continue to review applications which were submitted by
August 14, 2001. Other manufacturers who wish to submit an
application for an equivalent product after August 14, 2001
must submit an ANDA seeking approval of a generic substitute for
a levothyroxine sodium product with an approved NDA. A
manufacturer could submit an ANDA demonstrating in vivo
bioequivalence (in other words, the two products produce
identical effects on the body) to Levoxyl®. If the FDA were
to determine that another levothyroxine sodium product is
bioequivalent to Levoxyl®, generic substitution for
Levoxyl® may become possible which could result in a
decrease in sales of our product Levoxyl® and have a
material adverse effect upon our results of operations and cash
flows.

During 2001 and 2002, we filed with the U.S.
Patent and Trademark Office in excess of 40 applications for
U.S. patents concerning our FDA-approved product Levoxyl®.
We cannot assure you that any or all of the other patent
applications currently under review will be granted, or whether
any or all of the resulting patents will provide Levoxyl®
with additional protection from possible generic substitution.
As noted above, Mylan and KV Pharmaceutical have each filed an
ANDA with the FDA seeking permission to market a generic version
of Levoxyl®. The 581 patent, a utility patent with
formulation claims relating to Levoxyl®, was issued to us
on April 29, 2003. The 581 patent is listed in the
FDAs Orange Book and does not expire until
February 15, 2002. No earlier than April 30, 2003, we
received notice of Mylans Paragraph IV certification,
which alleges noninfringement of the 581 patent. On
June 24, 2003, we received notice of KVs Paragraph IV
certification, which alleges noninfringement and invalidity of
the 581 patent. We have filed separate suits against Mylan
and KV and intend to vigorously enforce our rights under the
581 patent to the full extent of

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the law. If we are not successful in enforcing
our patents, our business, financial condition, results of
operations and cash flows could be materially adversely affected.


On March 26, 2002, Jerome Stevens filed a
Petition for Stay of Action (assigned Docket No. 02P1035)
with the FDA seeking redress from the FDA for the public
disclosure on the FDAs website of alleged trade secrets
relating to the manufacturing process for Jerome Stevens
orally-administered levothyroxine sodium drug product Unithroid.
While Jerome Stevens does not specifically request that the FDA
stay any action with respect to our levothyroxine sodium drug
product Levoxyl®, Jerome Stevens does request, among other
broad remedies, that the FDA immediately and indefinitely
stay . . . all grants of drug pre-market authority that used,
relied on, or were based on Jerome confidential and trade secret
manufacturing information . . . . We have filed a Comment
on Jerome Stevens Petition with the FDA, stating that the
NDA for Levoxyl® was filed with the FDA before the
disclosure of Jerome Stevens alleged trade secrets, and
that the approval of the Levoxyl® NDA is unrelated to such
disclosure. Based on these facts, we do not believe that Jerome
Stevens Petition applies to Levoxyl®. However, if the
FDA were to determine that there is a valid legal basis for
suspension or withdrawal of substantial FDA approval of the
Levoxyl® NDA, it could have a material adverse effect on
our business, financial condition, results of operations and
cash flows.

We filed a Citizens Petition with the FDA
on March 28, 2003 requesting that the FDA refrain from
approving or accepting for filing any ANDA or supplemental ANDA
for levothyroxine sodium drug products until adequate standards
for establishing bioequivalence for levothyroxine sodium drug
products are adopted in accordance with FDA procedures. If the
FDA approves an ANDA for a generic equivalent of Levoxyl®
under the current standards, our business, financial condition,
results of operations and cash flows could be materially
adversely affected.



| |                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We cannot assure you that we will not have
    to take additional charges related to the divestiture of
    Lorabid®or that sales
    of Lorabid® will increase in the
    future.

Under the supply agreement with Eli Lilly, we
continue to be obligated to make minimum purchases of
Lorabid® inventory. Based on changes in estimated
prescription trends, we believe the minimum purchase commitments
under the supply agreement are greater than inventory quantities
we will be able to sell to our customers. As a result, during
the fourth quarter of 2002, we recorded a $49.9 million
charge related to the liability associated with the amount of
the purchase commitments in excess of expected demand.
Additionally, during the fourth quarter of 2002, we recorded an
intangible asset impairment charge in the amount of
$66.8 million and a charge in the amount of $15.2 million
attributable to inventory contributions, the latter resulting
from our decision to divest our rights to Lorabid®. On
October 21, 2003, we amended our agreement with Eli Lilly
concerning the supply and distribution of Lorabid® and
settled a disputed liability. As a result, we obtained the
rights to donate excess supply outside of the United States,
excluding specific countries. We also agreed to the amendment of
the supply contract with new specified purchase requirements
causing an increase in the required purchase commitments in
excess of expected demand. As a result of the agreement, we
anticipate a special charge in the fourth quarter of 2003 of
approximately $10 million. If sales of Lorabid®
continue to decline or if we are unable to secure adequate
Lorabid® inventory purchase commitments from a buyer of the
Lorabid® rights, we may incur additional losses in the
future. Further, in the event of further decline in the fair
value of Lorabid®, we may incur additional charges. We have
not been successful in divesting Lorabid® to date and we
cannot assure you that we will be able to divest our rights to
Lorabid® on acceptable terms or at all or that we will not
incur additional charges in connection with this product. These
charges and minimum purchase requirements could have a material
adverse effect on our business, financial condition, results of
operations and cash flows.



| |                                                                                                                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Sales of certain of our womens health
    products have been and may continue to be negatively affected by
    the perception of an increase in certain health risks associated
    with the use of combination hormone replacement therapies and
    oral estrogen replacement therapies.

From time to time studies on various aspects of
pharmaceutical products, therapies or classes of drugs are
conducted by academics or others, including government agencies,
the results of which when published may

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have dramatic effects on the markets for the
pharmaceutical products that are the subject of the study. For
example, an ongoing clinical trial entitled the Womens
Health Initiative is being conducted by the National Institutes
of Health. Data from that trial released in July 2002 indicated
that an increase in certain health risks may result from the
long-term use of a competitors combination hormone
replacement therapy for women. News of this data and the
perception it has created have negatively affected the entire
combination hormone replacement therapy and oral estrogen
replacement therapy markets generally, which include our
products Prefest®, Menest® and Delestrogen® and
may affect our future marketing efforts for Estrasorb. We
cannot assure you that sales of our currently marketed products
will not continue to be negatively affected by the perception
created by the data released to date or any additional data that
may be released in the future. If sales of these products
continue to be negatively affected by the perception created by
data associated with the Womens Health Initiative, there
may be a material adverse effect on our business, financial
condition, results of operations and cash flows including a
write-off of intangible assets associated with these products.




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

As of September 30, 2003, we had
$1.9 billion of net intangible assets and goodwill.
Intangible assets primarily include the net book value of
various product rights, trademarks, patents and other intangible
rights. If future sales of a product decline significantly, it
could result in an impairment of the declining products
net book value, resulting in a non-cash impairment charge. For
example, during the fourth quarter of 2002, we decided to divest
our rights to Lorabid®, resulting in an impairment charge
of $66.8 million. Additionally, the FDA approved for sale
generic substitutes for our product Florinef® in March 2002
and in January 2003. During the first quarter of 2003, we
recorded an intangible asset impairment charge of
$111.0 million related to this product due to revised sales
projections for Florinef® triggered by the entry of a
second generic product into the market. Sales of Nordette®
and Prefest®, two of our womens health products, have
continued to decline over the past year due to the perception
created by data associated with the Womens Health
Initiative mentioned above and a second generic of
Nordette®. The Nordette® and Prefest® product
rights have net intangible assets associated with them of
$97.1 million and $110.1 million, respectively.
Management currently believes that these assets are not
presently impaired based on estimated undiscounted future cash
flows; however, if revenue declines exceed current expectations,
we may have to write-off a portion or all of the intangible
assets associated with these product rights. Any impairment of
the net book value of any product or combination of products,
depending on the size of the product or products, could result
in a material adverse effect on our business, financial
condition, results of operations and cash flows.



| |                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we cannot implement our strategy to grow
    our business through increased sales and acquisitions, our
    competitive position in the pharmaceutical industry may
    suffer.

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

Other companies, some of which have substantially
greater financial, marketing and sales resources than we do,
compete with us for the acquisition of FDA-approved products,
products in development or companies. We may not be able to
acquire rights to additional FDA-approved products, products in
development, or companies on acceptable terms, if at all, or be
able to obtain future financing for acquisitions on acceptable
terms, if at all. The inability to effect acquisitions of
additional branded FDA-approved products and products in
development could limit the overall growth of our business.
Furthermore, even if we obtain rights to a pharmaceutical
product or acquire a company, we may not be able to generate
sales sufficient to create a profit or otherwise avoid a loss.

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

We recently completed several acquisitions
including Intal®, Tilade® and Synercid® from
Aventis in December 2002 and Meridian in January 2003.
Additionally, we acquired a primary care business in the United
States and Puerto Rico from Elan on June 12, 2003, which
includes the products Sonata® and Skelaxin® and a
dedicated primary care field sales force consisting of over 350
individuals. The integration of these acquisitions into our
business requires significant management attention and may
require the further expansion of our existing sales force or
newly-acquired sales force. In order to manage our acquisitions
effectively, we must maintain adequate operational, financial
and management information systems and motivate and effectively
manage an increasing number of employees. Our acquisitions have
significantly expanded our product offerings, operations and
number of employees. Our future success will also depend in part
on our ability to retain or hire qualified employees to operate
our expanding facilities efficiently in accordance with
applicable regulatory standards. If we cannot integrate our
acquisitions successfully, these changes and acquisitions could
have a material adverse effect on our business, financial
condition, results of operations and cash flows.



| |                                                                                    
| | -----------------------------------------------------------------------------------
| | If we are not able to develop or license
    new products, our business may suffer.

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



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

For example, we are



| |   |                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | engaged in the development of a modified-release
    formulation of Sonata®;                                                                                                                                                                   
|
| |  | engaged in new formulation development for
    Skelaxin®;                                                                                                                                                                                      
|
| |  | in exclusive license agreements with Novavax to
    promote, market, distribute and sell Androsorb, once
    approved, a topical testosterone replacement therapy for
    testosterone deficient women, and other womens health
    products;
|
| |  | engaged in the development of binodenoson, a
    myocardial pharmacologic stress imaging agent, and T-62, an
    investigational drug for the treatment of neuropathic pain;                                                                   
|
| |  | engaged in the development of a new inhaler for
    Intal® using the alternative propellant hydrofluoro-alkane,
    or HFA, and a diazepam-filled auto-injector, each of
    which is under FDA review;                                      
|
| |  | in an exclusive licensing agreement with Beartown
    to manufacture, market, distribute and sell tetrac, once
    approved, as a compound for the suppression of pituitary
    secretion of thyroid stimulating hormone (TSH); and            
|
| |  | in a licensing agreement with SkyePharma PLC to
    develop and commercialize a modified-release formulation of
    Altace® utilizing SkyePharmas patented oral drug
    delivery technology Geomatrix®.                                      

However, we cannot assure you that we will be
successful in any or all of these projects. If we are not
successful, including the failure to obtain any necessary FDA
approval, our business, financial condition and results of
operations could be materially adversely affected.

Further, other companies may license or develop
products or may acquire technologies for the development of
products that are the same as or similar to the products we have
in development or that we

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license. Because there is rapid technological
change in the industry and because many other companies may have
more financial resources than we do, other companies may




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

and thereby have a negative impact on the sales
of our newly developed or licensed products. Technological
developments or the FDAs approval of new products or of
new therapeutic indications for existing products may make our
existing products or those products we are licensing or
developing obsolete or may make them more difficult to market
successfully, which could have a material adverse effect on our
business, financial condition, results of operations and cash
flows.



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

Although most of our revenue is generated by
products not subject to competition from generic products, there
is no proprietary protection for most of our branded
pharmaceutical products, and generic substitutes for many of
these products are sold by other pharmaceutical companies. Even
our products that currently have no generic substitute could
face generic competition if generics are developed by other
companies and approved by the FDA. For example, Florinef®
is subject to competition from two generics, one approved by the
FDA in March 2002 and the other approved in January 2003. We are
also aware that an ANDA for Cortisporin® ophthalmic
suspension which was previously inactive has been reactivated by
the FDA with a new sponsor. We understand the sponsor entered
the market as of April 14, 2003 with a generic equivalent
for Cortisporin® ophthalmic suspension. The entry of the
generic has negatively affected our market share for this
product. Accordingly, our business, financial condition, results
of operations and cash flows could be materially adversely
affected. In addition, governmental and other pressure to reduce
pharmaceutical costs may result in physicians prescribing
products for which there are generic substitutes. Also, our
branded products for which there is no generic form available
may face competition from different therapeutic agents used for
the same indications for which our branded products are used.
Increased competition from the sale of generic pharmaceutical
products or from different therapeutic agents used for the same
indications for which our branded products are used may cause a
decrease in revenue from our branded products and could have a
material adverse effect on our business, financial condition,
results of operations and cash flows.

Effective August 18, 2003, the FDA may
approve generic substitutes of branded pharmaceutical products
in a shorter period of time due to recent regulatory changes.
Previously, the FDA required that generic applicants claiming
patent invalidity or non-infringement give us notice each time
either an ANDA was submitted or amended to claim invalidity or
non-infringement of listed patents. If we filed a patent
infringement suit against the generic applicant within
45 days of receiving such notice, the FDA was barred from
approving the ANDA for 30 months unless specific events
occurred sooner. To avoid multiple 30-month stays for the same
branded drug, the FDAs new regulations now only require
one such notice. Under the new regulations, if an ANDA applicant
has already provided patent invalidity or non-infringement
notice to us about a particular branded drug, we will not get a
second notice or opportunity for another stay for that drug. As
a result, generic substitutes of our branded pharmaceutical
products could be approved sooner. The FDAs new rule,
however, is a regulatory rather than a statutory change and may
be subject to challenge.

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

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




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

We manufacture many of our products in facilities
we own and operate. These products include Altace®,
Levoxyl® and Thrombin-JMI®, which together represent
approximately 56.5% of our revenues for the last twelve months
ended September 30, 2003. Many of our production processes
are complex and require specialized and expensive equipment. Any
unforeseen delays or interruptions in our manufacturing
operations may reduce our profit margins and revenues. If we are
unable to resume manufacturing, after interruption, we may not
be able to distribute our products as planned. Furthermore,
growing demand for our products could exceed our ability to
supply the demand. If such situations occur, it may be necessary
for us to seek alternative manufacturers which could adversely
impact our ability to produce and distribute our products. We
cannot assure you that we would be able to utilize third-party
manufacturers for our products in a timely manner or at all. In
addition, our manufacturing output may decline as a result of
power outages, supply shortages, accidents, natural disasters or
other disruptions of the manufacturing process. Even though we
carry business interruption insurance policies, we may suffer
losses as a result of business interruptions that exceed the
coverage available under our insurance policies.

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

Our supply agreement for Bicillin® with
Wyeth expires on July 7, 2004. There are limitations on the
number of units over and above current estimated demand for this
product we can order under our supply agreement with Wyeth.
Furthermore, the expiration dating on this product is limited to
24 months. We do not anticipate extending our supply agreement
for Bicillin® with Wyeth. Instead, we have begun the
process of transferring the manufacturing of Bicillin® to
our Parkedale facility. If we are unable to transfer this
product to our Parkedale facility in accordance with our plan,
our gross margins on the product may be reduced and/or demand
for Bicillin® may eventually exceed our ability to supply
the product. If we are unable to adequately supply continued
demand for Bicillin®, net sales of the product may be
significantly reduced, the market for the product may be
permanently diminished and the carrying value of our
Bicillin® assets could become impaired, any of which could
have a material adverse affect on our business, financial
condition, results of operations, and cash flows.

We require a supply of quality raw materials and
components to manufacture and package pharmaceutical products
for us and for third parties with which we have contracted.
Currently, we rely on over 500 suppliers to deliver the
necessary raw materials and components. We have no reason to
believe that we will be unable to procure adequate supplies of
raw materials and components on a timely basis. However, if we
are unable to obtain sufficient quantities of any of the raw
materials or components required to produce and package our
products, we may not be able to distribute our products as
planned.

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



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

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



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

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



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

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

The Parkedale facility was inspected by the FDA
in February/March 2003 and by an FDA Team Biologics inspector in
August 2003. When an FDA inspector completes an authorized
inspection of a manufacturing facility, the inspector typically
provides the owner/operator of the facility with a written
report listing the inspectors observations of
objectionable conditions and practices. This written report is
known as an FDA Form 483 or simply as a
483. The observations in a 483 are reported to the
manufacturer in order to assist the manufacturer in complying
with the FDC Act and the regulations enforced by the FDA. Often
a pharmaceutical manufacturer receives a 483 after an inspection
and our Parkedale facility received a 483 following the March
2003 inspection. While no law or regulation requires us to
respond to a 483, we have submitted a written response detailing
our plan of action with respect to each of the observations made
on the 483 and our commitment to correct any objectionable
practice or condition. The risk to us of a 483, if left
uncorrected, could include, among other things, the imposition
of civil monetary penalties, the commencement of actions to
seize or prohibit the sale of unapproved or non-complying
products, or the cessation of manufacturing operations at the
Parkedale facility that are not in compliance with cGMPs. While
we believe the receipt of the 483 will not have a material
adverse effect on our business, financial condition, results of
operations and cash flows, we cannot assure you that future
inspections may not result in adverse regulatory actions which
could have a material adverse effect on our business, financial
condition, results of operations and cash flows. The 483 from
March 2003 does not require us to delay or discontinue the
production of any products made at the Parkedale facility. Our
Parkedale facility did not receive a 483 following the August
2003 inspection.

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

We are currently working on long-term strategies
to expand our production capacity for Thrombin-JMI® which
should potentially be completed in the next two to three years.
These long-term strategies may further expand our manufacturing
capacity for Thrombin-JMI® upon completion. We cannot
assure you that our plans to expand our production capacity for
Thrombin-JMI® will be successful and/or timely. If we
cannot successfully and timely expand our production capacity
for Thrombin-JMI®, our ability to increase production of
Thrombin-JMI® will be limited, thereby limiting our unit
sales growth for this product.



| |                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------
| | If we are unable to secure or enforce
    patent rights, trademarks, trade secrets or other intellectual
    property, our business could be harmed.

We may not be successful in securing or
maintaining proprietary patent protection for our products or
products and technologies we develop or license. In addition,
our competitors may develop products, including generic
products, similar to ours using methods and technologies that
are beyond the scope of our intellectual property protection,
which could reduce our sales. Some of our major branded
pharmaceutical products have proprietary patent protection,
including Altace® with composition of matter patents that
do not expire until January 2005 and October 2008, and a method
of use patent that does not expire until April 2012. All of
these patents are listed in the FDAs Orange Book. A
challenge to these patents can be subject to expensive
litigation. As we mentioned earlier, Cobalt has filed an ANDA
seeking permission from the FDA to market a generic version of
Altace® prior to the expiration of the 722 patent,
but not before January 2005, the expiration date of the
258 patent. Additionally, as mentioned above, Mylan and KV
Pharmaceutical have each filed ANDAs seeking permission from the
FDA to market a generic version of Levoxyl® prior to the
expiration of the 581 patent. Furthermore, as noted above,
each of Eon Labs and CorePharma has filed an ANDA with the FDA
seeking permission to market a generic version of Skelaxin®
prior to the expiration of the 128 patent. Finally, as
noted above, Barr has filed an ANDA with the FDA seeking
permission to market a generic version of Prefest® prior to
the expiration of the 995 patent and the 573 patent.

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

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



| |                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------
| | If the implementation of our new
    information technology system is not successful, our business
    could be disrupted.

In November 2000, we began the process of
implementing a new information technology system which became
operational at our Bristol facilities in July 2003. In
connection with its implementation, we have incurred related
costs of approximately $30 million. This system is
supporting many of our business functions, including
manufacturing, warehousing, distribution, logistics, sales
reporting, accounting, inventory, quality control, budgeting and
other company functions. In the event we do not successfully
convert our other sites in a timely manner from our existing
information system to the new one or in the event the new system
does not operate as expected, our business could be disrupted.
We could lose what we have invested and still have to incur
additional costs for another system. This disruption or
additional costs, if required, could have a material adverse
effect on our business, financial condition, results of
operations and cash flows.



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

Our results of operations, including, in
particular, product sales revenue, may vary from quarter to
quarter due to many factors. Wholesalers and distributors
represent a substantial portion of our sales. Buying patterns of
our wholesalers and distributors may vary from time to time. In
the event wholesalers and distributors with

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whom we do business determine to limit their
purchases of our inventory, sales of our products could be
adversely affected. For example, in advance of an anticipated or
announced price increase, many of our customers may order
pharmaceutical products in larger than normal quantities. The
ordering of excess quantities in any quarter could cause sales
of some of our branded pharmaceutical products to be lower in
subsequent quarters than they would have been otherwise. Other
factors include expenditures related to the acquisition, sale
and promotion of pharmaceutical products, a changing customer
base, the availability and cost of raw materials, interruptions
in supply by third-party manufacturers, new products introduced
by us or our competitors, the mix of products we sell, sales and
marketing expenditures, product recalls, competitive pricing
pressures and general economic and industry conditions that may
affect customer demand. We cannot assure you that we will be
successful in maintaining or improving our profitability or
avoiding losses in any future period.




| |                                                                                                                                                                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If the stock price of Novavax declines, our
    investment in Novavax convertible notes could result in
    additional special charges related to a valuation allowance for
    these notes. Upon implementation of Financial Accounting
    Standards Board Interpretation No. 46, we may be required
    to consolidate the financial results of Novavax,
    Inc.

During the period from December 2000 through June
2002, we provided $40.0 million in financing to Novavax in
the form of notes receivable convertible to common stock of
Novavax. The loan is impaired as defined under Statement of
Financial Accounting Standards No. 114, Accounting by
Creditors for Impairment of a Loan. We established a
valuation allowance in the second quarter of 2002 which was
adjusted in subsequent quarters during 2002 and 2003. As of
September 30, 2003, the valuation allowance for the Novavax
convertible notes equaled $10.5 million. We will adjust the
amount of the valuation allowance in future periods until the
loan is no longer considered to be impaired. We may incur
additional charges related to our investment in the convertible
notes. Accordingly, these charges may adversely impact our
earnings. This accounting treatment may change under Financial
Accounting Standards Board Interpretation No. 46,
Consolidation of Variable Interest Entities
(FIN 46).

We hold notes receivable convertible to common
stock of Novavax with a face value of $40.0 million at
September 30, 2003. We also have an exclusive worldwide
license to promote, market, distribute and sell Estrasorb
and Androsorb, products owned by Novavax, following
approval, except in the United States and Puerto Rico, where we
will co-market the products with Novavax. Once approved, we will
pay Novavax a royalty based on a percentage of net sales of the
products outside of the United States and Puerto Rico. Novavax
will pay us a co-promotion fee equal to 50% of net sales less
cost of revenues of the products within the United States and
Puerto Rico. The NDA for Estrasorb was approved by the FDA
during October 2003. We own approximately 1.1% of Novavax common
stock.

In January 2003, the Financial Accounting
Standards Board issued Interpretation No. 46,
Consolidation of Variable Interest Entities.
FIN 46 requires a variable interest entity to be
consolidated by a company if that company is required to absorb
a majority of the variable interest entitys expected
losses or entitled to receive a majority of the entitys
residual returns or both. We are in the process of assessing
what impact this pronouncement will have on our consolidated
financial statements. Based on our preliminary analysis of the
impact of FIN 46, we believe that it is reasonably possible
that Novavax could be a variable interest entity, and our
variable interest in Novavax may require that we consolidate
Novavax in the fourth quarter of 2003. At September 30,
2003, Novavax reported total assets of $61.6 million, total
liabilities of $48.7 million, revenues for the nine months ended
September 30, 2003 of $7.7 million, and a net loss of $14.2
million for the nine months ended September 30, 2003. The
consolidation of Novavax could have a material adverse effect on
our reported consolidated financial condition and reported
consolidated results of operations.



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

Our wholly owned subsidiary, Jones Pharma
Incorporated, is a defendant in 916 multi-defendant lawsuits
involving the manufacture and sale of dexfenfluramine,
fenfluramine and phentermine, which is usually

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




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

The source material for our product
Thrombin-JMI® comes from bovine plasma and lung tissue.
Bovine-sourced materials from outside the United States may be
of some concern because of potential transmission of bovine
spongiform encephalopathy, or BSE. However, we have
taken precautions to minimize the risks of contamination from
BSE in our source materials. Our principal precaution is the use
of bovine materials only from FDA-approved sources in the United
States. Although no BSE has been documented in the United
States, the United States is considered a Category II BSE-risk
country, meaning that the United States is probably BSE-free but
has some history of importing cattle from the United Kingdom and
Canada.

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

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

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

We issued 2 3/4% Convertible Debentures due
November 15, 2021 in February 2002 in an aggregate amount
of $345.0 million. The price at which the debentures are
convertible into common stock is $50.16, subject to adjustments
spelled out in the documents governing the debentures. If the
price of our stock has not reached that amount by
November 15, 2006, we may be required to repurchase all or
a portion of the debentures representing the $345.0 million
on November 15, 2006 if some or all of the holders of the
debentures request that we repurchase their debentures. We
cannot assure you that a significant repurchase requirement at
that time would not have a material adverse effect on our
business, financial condition, results of operations or cash
flows.



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

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



| |                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our relationship with the U.S. Department
    of Defense and other government entities is subject to risks
    associated with doing business with the
    government.

All U.S. government contracts provide that they
may be terminated for the convenience of the government as well
as for default. The unexpected termination of one or more of our
significant government contracts could result in a material
adverse effect on our business, financial condition, results of
operations and cash flows. A surge capability provision allows
for the coverage of defense mobilization requirements in the
event of rapid military deployment. If this surge capability
provision becomes operative, we may be required to devote more
of our Meridian Medical Technologies segment manufacturing
capacity to the production of products for the government which
could result in less manufacturing capacity being devoted to
products in this segment with higher profit margins. Our supply
contracts with the Department of Defense are subject to
post-award audit and potential price determination. These audits
may include a review of our performance on the contract, our
pricing practices, our cost structure and our compliance with
applicable laws, regulations and standards. Any costs found to
be improperly allocated to a specific contract will not be
reimbursed, while costs already reimbursed must be refunded.
Therefore, a post-award audit or price redetermination could
result in an adjustment to our revenues. From time to time the
Department of Defense makes claims for pricing adjustments with
respect to completed contracts. No claims are currently pending.
If a government audit uncovers improper or illegal activities,
we may be subject to civil and criminal penalties and
administrative sanctions, including termination of contracts,
forfeitures of profits, suspension of payments, fines and
suspension or disqualification from doing business with the
government.

Other risks involved in government sales include
the unpredictability in funding for various government programs
and the risks associated with changes in procurement policies
and priorities. Reductions in defense budgets may result in
reductions in our revenues. We also provide our nerve agent
antidote auto-injector to a number of state agencies and local
communities for homeland defense against chemical agent
terrorist attacks. Changes in governmental and agency
procurement policies and priorities may also result in a
reduction in government funding for programs involving our
auto-injectors. A significant loss in government funding of

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




| |                                                                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our sales depend on payment and
    reimbursement from third-party payors, and if they reduce or
    refuse payment or reimbursement, the use and sales of our
    products will suffer, we may not increase our market share, and
    our revenues and profitability will suffer.

The commercial success of some of our products is
dependent, in part, on whether third-party reimbursement is
available for the use of our products by hospitals, clinics,
doctors and patients. Third-party payors include state and
federal governments, under programs such as Medicaid and other
entitlement programs, managed care organizations, private
insurance plans and health maintenance organizations. Because of
the growing size of the patient population covered by managed
care organizations, it is important to our business that we
market our products to them and to the pharmacy benefit managers
that serve many of these organizations. Payment or reimbursement
of only a portion of the cost of our prescription products could
make our products less attractive, from a net-cost perspective,
to patients, suppliers and prescribing physicians. Managed care
organizations and other third-party payors try to negotiate the
pricing of products to control their costs. Managed care
organizations and pharmacy benefit managers typically develop
formularies to reduce their cost for medications. Formularies
can be based on the prices and therapeutic benefits of the
available products. Due to their lower costs, generics are often
favored. The breadth of the products covered by formularies
varies considerably from one managed care organization to
another, and many formularies include alternative and
competitive products or therapies for treatment of particular
medical conditions. Exclusion of a product from a formulary can
lead to its sharply reduced usage in the managed care
organization patient population. If our products are not
included within an adequate number of formularies or adequate
reimbursement levels are not provided, or if those policies
increasingly favor generic products, our market share and gross
margins could be negatively affected, as could our overall
business and financial condition.

We have expanded our contracts with managed care
organizations in an effort to increase the inclusion of our
products on formularies. To the extent that our products are
purchased by patients through a managed care group with which we
have a contract, our average selling price is lower than it
would be for a non-contracted managed care group. We take
reserves for the estimated amounts of rebates we will pay to
managed care organizations each quarter. Any increased usage of
our products through Medicaid or managed care programs will
increase the amount of rebates that we owe. We cannot assure you
that our products will be included on the formulary lists of
managed care organizations or that adverse reimbursement issues
will not have a material effect on our financial condition,
results of operations or cash flows.



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

As discussed in this Risk Factors
section under the heading Investigations by the SEC and
Office of Inspector General at the Department of Health and
Human Services, other possible governmental investigations, and
securities litigation could have a material adverse effect on
our business, and elsewhere in this report we determined
recently that we have underaccrued for estimated amounts due
under Medicaid and other governmental pricing programs and
recorded an adjustment of $46.5 million to net sales and
accrued expenses in the fourth quarter of 2002. This amount
represents our best estimate of the extent to which we underpaid
amounts due under Medicaid and other governmental pricing
programs during the period from 1998 to 2002, including amounts
owing to the Department of Veterans Affairs and the Public
Health Service. We contacted the Centers for Medicare and
Medicaid Services, the Public Health Service, the Office of
Inspector General at the Department of Health and Human
Services, the Department of Justice, and the Department of
Veterans Affairs in connection with the underpayments. In
August 2003, we met with representatives of several of
these agencies, including the Office of Inspector General at the
Department of Health and Human Services, and provided detailed
briefings on the results of the reviews conducted by us and our
Audit Committee. We expect to engage in more detailed
discussions with these and other appropriate agencies in order
to determine the precise amount of the underpayments. We
currently expect to make the

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requisite payments in 2004. We have placed
$46.5 million of our cash on hand in an interest-bearing
escrow account from which the requisite payment will be made.


On November 13, 2003, we received a subpoena
duces tecum from the Office of Inspector General at the
Department of Health and Human Services requesting the
production of documents related to the matters being
investigated by the SEC and to our sales, marketing and other
business practices for Altace®, Aplisol® and
Levoxyl®. We intend to cooperate in providing information
to the Office of Inspector General.

The SEC, the Office of Inspector General at the
Department of Health and Human Services, the Centers for
Medicare and Medicaid Services, the Public Health Service, the
Department of Justice, the Department of Veterans Affairs and
other governmental agencies that might be investigating or might
commence an investigation of King could impose, based on a claim
of violation of fraud and false claims laws or otherwise, civil
and/or criminal sanctions, including fines, penalties and
possible exclusion from federal health care programs (including
Medicaid and Medicare). Some of these laws may impose liability
even in the absence of specific intent to defraud. We cannot
predict or reasonably estimate the likelihood or magnitude of
any such sanctions at this time.

Although the new information technology system is
intended to significantly enhance the accuracy of our
calculations for estimating amounts due under Medicaid and other
governmental pricing programs, our processes for these
calculations will continue to involve considerable manual input,
and, as a result, these calculations will remain subject to the
risk of errors arising from manual processes at least until
mid-2004. Even thereafter, despite our best efforts, the system
could incorrectly calculate amounts due under Medicaid and other
governmental pricing programs.



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

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



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

We are highly dependent on the principal members
of our management staff, the loss of whose services might impede
the achievement of our strategic objectives. We cannot assure
you that we will be able to attract and retain key personnel in
sufficient numbers, with the requisite skills or on acceptable
terms necessary or advisable to support our continued growth and
integration. The loss of the services of key personnel could
have a material adverse effect on us, especially in light of our
recent growth. We do not maintain key-person life insurance on
any of our employees. In addition, we do not have employment
agreements with any of our key employees.



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

We have a shareholder rights plan that may have
the effect of discouraging unsolicited takeover proposals. The
rights issued under the shareholder rights plan would cause
substantial dilution to a person or group which attempts to
acquire us on terms not approved in advance by our Board of
Directors. In addition,

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our charter and bylaws contain provisions that
may discourage unsolicited takeover proposals that shareholders
may consider to be in their best interests. These provisions
include:




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

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



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

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



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

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

Risks Related to Our Industry



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

Virtually all aspects of our activities are
regulated by federal and state statutes and government agencies.
The manufacturing, processing, formulation, packaging, labeling,
distribution and advertising of our products, and disposal of
waste products arising from these activities, are subject to
regulation by one or more federal agencies, including the FDA,
the DEA, the FTC, the Consumer Product Safety Commission, the
U.S.

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Department of Agriculture, the Occupational
Safety and Health Administration, and the EPA, as well as by
foreign governments in countries where we distribute some of our
products.


Noncompliance with applicable FDA policies or
requirements could subject us to enforcement actions, such as
suspensions of manufacturing or distribution, seizure of
products, product recalls, fines, criminal penalties,
injunctions, failure to approve pending drug product
applications or withdrawal of product marketing approvals.
Similar civil or criminal penalties could be imposed by other
government agencies, such as the DEA, the EPA or various
agencies of the states and localities in which our products are
manufactured, sold or distributed, and could have ramifications
for our contracts with government agencies such as the
Veterans Administration or the Department of Defense.
These enforcement actions could have a material adverse effect
on our business, financial condition, results of operations and
cash flows.

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

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

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

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

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

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

We face an inherent business risk of exposure to
product liability claims in the event that the use of our
technologies or products are alleged to have resulted in adverse
effects. These risks will exist for those products in clinical
development and with respect to those products that receive
regulatory approval for commercial sale. While we have taken,
and will continue to take, what we believe are appropriate
precautions, we may not be able to avoid significant product
liability exposure. We currently have product liability
insurance in the amount of $60.0 million for aggregate
annual claims with a $10.0 million aggregate annual
deductible; however, we cannot assure you that the level or
breadth of any insurance coverage will be sufficient to cover
fully all potential claims. Also, adequate insurance coverage
might not be available in the future at acceptable costs, if at
all. For example, we are not able to obtain product liability
insurance with respect to our products Prefest®,
Menest®, Delestrogen®, Pitocin® and
Nordette®, each a womens healthcare product. With
respect to any product liability claims relating to these
products, we would be responsible for any monetary damages
awarded by any court or any voluntary monetary settlements.
Significant judgments against us for product liability for which
we have no insurance could have a material adverse effect on our
business, financial condition, results of operations and cash
flows.

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

Although product returns were approximately 4.2%
of gross sales for the last twelve months ended
September 30, 2003, we cannot assure you that actual levels
of returns will not increase or significantly exceed the amounts
we have anticipated.



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

Commercial success in producing, marketing and
selling products depends, in part, on the availability of
adequate reimbursement from third-party health care payors, such
as government and private health insurers and managed care
organizations. Third-party payors are increasingly challenging
the pricing of medical products and services. For example, many
managed health care organizations are now controlling the
pharmaceutical products that are on their formulary lists. The
resulting competition among pharmaceutical companies to place
their products on these formulary lists has reduced prices
across the industry. In addition, many managed care
organizations are considering formulary contracts primarily with
those pharmaceutical companies that can offer a full line of
products for a given therapy sector or disease state. We cannot
assure you that our products will be included on the formulary
lists of managed care organizations or that downward pricing
pressures in the industry generally will not negatively impact
our operations.



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

We are subject to various federal and state laws
pertaining to health care fraud and abuse, including
anti-kickback laws and false claims laws. Anti-kickback laws
make it illegal for a prescription drug manufacturer to solicit,
offer, receive, or pay any remuneration in exchange for, or to
include, the referral of business, including the purchase or
prescription of a particular drug. The federal government has
published regulations that identify safe harbors or
exemptions for certain payment arrangements that do not violate
the anti-kickback statutes. We seek to comply with the safe
harbors. Due to the breadth of the statutory

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provisions and the absence of guidance in the
form of regulations or court decisions addressing some of our
practices, it is possible that our practices might be challenged
under anti-kickback or similar laws. False claims laws prohibit
anyone from knowingly (in the civil context), or knowingly and
willfully (in the criminal context), presenting, or causing to
be presented for payment to third-party payors (including
Medicaid and Medicare) claims for reimbursed drugs or services
that are false or fraudulent, claims for items or services not
provided as claimed, or claims for medically unnecessary items
or services. Our activities relating to the sale and marketing
of our products may be subject to scrutiny under these laws. As
discussed in this Risk Factors section under the
heading The SEC investigation, other possible governmental
investigations, and securities litigation could have a material
adverse effect on our business and elsewhere in this
report, we are in the process of quantifying and reporting to
governmental agencies our underpayment of amounts due under
Medicaid and other governmental pricing programs.


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



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

From time to time studies or clinical trials on
various aspects of pharmaceutical products are conducted by
academics or others, including government agencies, the results
of which, when published, may have dramatic effects on the
markets for the pharmaceutical products that are the subject of
the study. The publication of negative results of studies or
clinical trials related to our products or the therapeutic areas
in which our products compete could adversely affect our sales,
the prescription trends for our products and the reputation of
our products. One example of these types of studies is the
Womens Health Initiative, which we discuss more fully in
this Risk Factors section under the heading of
Sales of certain of our womens health products have
been and may continue to be negatively affected by the
perception of an increase in certain health risks associated
with the use of combination hormone replacement therapies and
oral estrogen replacement therapies. In the event of the
publication of negative results of studies or clinical trials
related to our branded pharmaceutical products or the
therapeutic areas in which our products compete, our business,
financial condition, results of operations and cash flows could
be materially adversely affected.



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

A number of legislative and regulatory proposals
aimed at changing the health care system, including the cost of
prescription products, reimportation of prescription products
and changes in the levels at which pharmaceutical companies are
reimbursed for sales of their products, have been proposed.
While we cannot predict when or whether any of these proposals
will be adopted or the effect these proposals may have on our
business, the pending nature of these proposals, as well as the
adoption of any proposal, may exacerbate industry-wide pricing
pressures and could have a material adverse effect on our
business, financial condition, results of operations and cash
flows.



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

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



| |   |                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------
| |  | we will be able to continue to acquire
    commercially attractive pharmaceutical products, companies or
    technologies;
|
| |  | additional competitors will not enter the market;
    or                                                                  

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| |   |                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | competition for acquisition of products,
    companies, technologies and product lines will not have a
    material adverse effect on our business, financial condition and
    results of operations.

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

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



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

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

Our largest product Altace® competes in the
market with other cardiovascular therapies, including in
particular, the following ACE inhibitors or any generic
equivalents:



| |   |                                             
| | - | --------------------------------------------
| |  | Zestril® (AstraZeneca plc),                 
|
| |  | Acupril® (Pfizer, Inc.),                    
|
| |  | Prinivil® (Merck & Co., Inc.),              
|
| |  | Lotensin® (Novartis AG),                    
|
| |  | Monopril® (Bristol-Myers Squibb Company),   
|
| |  | Vasotec® (Biovail Corporation),             
|
| |  | Capoten® (Bristol-Myers Squibb Company), and
|
| |  | Mavik® (Abbott Laboratories).               

Our product Levoxyl® competes with
levothyroxine sodium products, including in particular the
following and any generic equivalents:



| |   |                                                       
| | - | ------------------------------------------------------
| |  | Synthroid® (Abbott Laboratories),                     
|
| |  | Levothroid® (Forest Laboratories, Inc.), and          
|
| |  | Unithroid® (Jerome Stevens Pharmaceuticals,
    Inc.).

Our product Sonata® competes with other
insomnia treatments, including in particular Ambien®, a
product of Sanofi-Synthelabo Inc.

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



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

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

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

A Warning About Forward-Looking
Statements

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

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

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



| |   |                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the future growth potential of, and prescription
    trends for our branded pharmaceutical products, particularly
    Altace®, Skelaxin®, Levoxyl®, Thrombin-JMI®
    and Sonata®;
|
| |  | expectations regarding the enforceability of
    product-related patents including in particular patents related
    to Altace®, Levoxyl® and Skelaxin®;                          
|
| |  | expected trends and projections with respect to
    particular income and expense line items;                                                                                     
|
| |  | the development and potential commercialization
    of Androsorb and other products by Novavax and King;                                                                         
|
| |  | the development and approval of binodenoson,
    pre-clinical programs, and product life-cycle development
    projects;                                                          
|
| |  | the development of a modified-release
    Altace®;                                                                                                                                
|
| |  | the development of a modified-release
    Sonata®;                                                                                                                                
|
| |  | the development of new formulations for
    Skelaxin®;                                                                                                                            
|
| |  | the development and approval of a diazepam-filled
    auto-injector, and new inhaler for Intal® and Tilade®
    using the alternative propellant HFA;                             
|
| |  | our continued successful execution of our growth
    strategies;                                                                                                                  
|
| |  | anticipated developments and expansions of our
    business;                                                                                                                      

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| |   |                                                                                                                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | anticipated expansion of our manufacturing
    capacity for Thrombin-JMI®;                                                                                                                                                                                                                                  
|
| |  | anticipated increases in sales of acquired
    products or royalty revenues;                                                                                                                                                                                                                                
|
| |  | the success of our Co-Promotion Agreement with
    Wyeth;                                                                                                                                                                                                                                                   
|
| |  | the high cost and uncertainty of research,
    clinical trials and other development activities involving
    pharmaceutical products;                                                                                                                                                                      
|
| |  | the development of product line extensions;                                                                                                                                                                                                                                                                 
|
| |  | the unpredictability of the duration or future
    findings and determinations of the FDA, including the pending
    applications related to our diazepam-filled auto-injector and a
    new Intal® inhaler formulation utilizing HFA, and other
    regulatory agencies worldwide;                         
|
| |  | the products which we expect to offer;                                                                                                                                                                                                                                                                      
|
| |  | the intent, belief or current expectations,
    primarily with respect to our future operating performance;                                                                                                                                                                                                 
|
| |  | expectations regarding sales growth, gross
    margins, manufacturing productivity, capital expenditures and
    effective tax rates;                                                                                                                                                                       
|
| |  | expectations regarding patent approvals including
    those patents pending for Levoxyl® and Tigan® 300mg
    capsules and the protections to be provided by these patents if
    issued;                                                                                                                   
|
| |  | expectations regarding the outcome of various
    pending legal proceedings including the Altace®,
    Levoxyl® and Skelaxin® patent challenges, the SEC
    investigation, other possible governmental investigations,
    securities litigation, and other legal proceedings described in
    this report;
|
| |  | the ongoing implementation of our new information
    technology system; and                                                                                                                                                                                                                                
|
| |  | expectations regarding our financial condition
    and liquidity as well as future cash flows and earnings.                                                                                                                                                                                                 

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






|        |                                                              
|------- | -------------------------------------------------------------
|Item 3. | Quantitative and Qualitative Disclosure
    about Market Risk

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

As of September 30, 2003, there were no
significant changes in our qualitative or quantitative market
risk since the prior reporting period.

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

The fair market value of long-term fixed interest
rate debt is subject to interest rate risk. Generally, the fair
market value of fixed interest rate debt will increase as
interest rates rise and decrease as interest rates fall. In
addition, the fair value of our convertible debentures are
affected by our stock price.






|        |                        
|------- | -----------------------
|Item 4. | Controls and Procedures

(a) Evaluation of Disclosure Controls and
Procedures. As of the end of the period covered by this
report, our chief executive officer and chief financial officer
have evaluated the effectiveness of the design and operation of
our disclosure controls and procedures (as defined in Exchange
Act Rule 13a-14(c)). Based on that evaluation, the chief
executive officer and chief financial officer have concluded
that our disclosure controls and procedures are effective to
ensure that material information relating to us and our
consolidated

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subsidiaries is made known to them by others
within these entities, particularly during the period this
quarterly report was prepared, in order to allow timely
decisions regarding required disclosure.


(b) Changes in Internal Controls. As
set forth in our 2002 Form 10-K in the
Managements Discussion and Analysis of Financial
Condition and Results of Operations section under the
heading Recent Developments, we have undertaken a
substantial process to enhance our compliance with Medicaid and
other governmental pricing program requirements. Also, effective
August 1, we appointed a corporate compliance officer whose
responsibilities include enhancement of internal controls. In
addition, during July 2003, we implemented a new information
technology system for selected locations of the company. This
implementation has resulted in certain changes to business
processes and internal controls impacting financial reporting.
We are taking the necessary steps to monitor and maintain
appropriate internal controls during this period of change.
These steps include deploying resources to mitigate internal
control risks and performing additional verifications and
testing to ensure data integrity. There have not been any
additional significant changes in our internal controls or in
other factors that could significantly affect these controls
subsequent to the date of their evaluation.

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PART II  OTHER
INFORMATION






|        |                  
|------- | -----------------
|Item 1. | Legal Proceedings

The information required by this Item is
incorporated by reference to Note 8 to the condensed
consolidated financial statements included elsewhere in this
report.




Item 6.     Exhibits
and Reports on Form 8-K

(a) Exhibits

| |      |  |  |   |  |                                                                                                                                                                                      
| | ---- |  |  | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 31.1 |  |  |  |  | Certification of Jefferson J. Gregory, Chairman
    and Chief Executive Officer of King Pharmaceuticals, Inc.
    Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.         
| | 31.2 |  |  |  |  | Certification of James R. Lattanzi, Chief
    Financial Officer of King Pharmaceuticals, Inc. Pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002.                         
| | 32.1 |  |  |  |  | Certification of Jefferson J. Gregory, the
    Chairman and Chief Executive Officer of King Pharmaceuticals,
    Inc., Pursuant to Section 906 of the Sarbanes-Oxley Act of
    2002.
| | 32.2 |  |  |  |  | Certification of James R. Lattanzi, Chief
    Financial Officer of King Pharmaceuticals, Inc. Pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.                         

(b) Reports on Form 8-K

We filed the following Current Reports on
Form 8-K during the quarter ended September 30, 2003:

(1) A Current Report on Form 8-K filed
July 29, 2003 reported under Item 5 the issuance of a
press release announcing the completion of the previously
announced internal review conducted by the Audit Committee of
our Board of Directors. Additionally, we reported under
Item 5 that we filed with the Securities and Exchange
Commission (the SEC) our form 10-K containing
the audited consolidated financial statements for the year ended
December 31, 2002 and our Form 10-Q containing the
unaudited consolidated financial statements for the first
quarter ended March 31, 2003.

(2) A Current Report on Form 8-K filed
July 29, 2003 furnished under Item 12 our financial
results for the quarter ended June 30, 2003.

(3) A Current Report on Form 8-K filed
August 26, 2003 amended the Current Report on Form 8-K
that we filed June 12, 2003 reporting under Item 2 the
acquisition of Elan Corporation, plcs primary care
business in the United States and Puerto Rico. This amendment
was filed to provide the financial statement information
required by Item 7(a) and Item 7(b) of Form 8-K
within the timeframe specified by Item 7 of Form 8-K
following the closing of the acquisition on June 12, 2003.

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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.



| |                           
| | --------------------------
| | KING PHARMACEUTICALS, INC.

Date: November 14, 2003

| |     |                         
| | --- | ------------------------
| | By: | /s/ JEFFERSON J. GREGORY

| |                        
| | -----------------------
| |                        
| | Jefferson J. Gregory   
| | Chief Executive Officer

Date: November 14, 2003

| |     |                      
| | --- | ---------------------
| | By: | /s/ JAMES R. LATTANZI

| |                        
| | -----------------------
| |                        
| | James R. Lattanzi      
| | Chief Financial Officer

61