##### 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 June 30,
    2003                                           

OR



| |      |                                                                                             
| | ---- | --------------------------------------------------------------------------------------------
| | [  ] | 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 August 11, 2003: 241,065,396



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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


(Unaudited)


(In thousands)


|                                         |                                                                                      |                                            |           |              |           |  |           |           |           | 
|---------------------------------------- | ------------------------------------------------------------------------------------ | ------------------------------------------ | --------- | ------------ | --------- |  | --------- | --------- | --------- | 
|                                         |                                                                                      | June 30,                                   |           | December 31,
|                                         |                                                                                      | 2003                                       |           | 2002        
|                                         |                                                                                      |                                            |           |             
|ASSETS                                  
|CURRENT ASSETS:                          |                                                                                      |                                            |           |              |           |  |           |          
|                                         | Cash and cash equivalents                                                            |                                            | $         | 123,742      |           |  | $         | 588,225   |          
|                                         | Marketable securities                                                                |                                            |           |             |           |  |           | 227,263   |          
|                                         | Accounts receivable, net of allowance for
    doubtful accounts of $8,582 and $7,513 |                                            |           | 196,046      |           |  |           | 159,987   |          
|                                         | Inventories                                                                          |                                            |           | 252,584      |           |  |           | 167,153   |          
|                                         | Deferred income taxes                                                                |                                            |           | 123,032      |           |  |           | 106,168   |          
|                                         | Prepaid expenses and other current assets                                            |                                            |           | 12,273       |           |  |           | 12,906    |          
|                                         |                                                                                      |                                            |           |              |           |  |           |          
|                                         |                                                                                      | Total current assets                       |           |              | 707,677   |  |           |           | 1,261,702 | 
|                                         |                                                                                      |                                            |           |              |           |  |           |          
|Property, plant and equipment, net       |                                                                                      |                                            | 245,166   |              |           |  | 217,114   |          
|Intangible assets, net                   |                                                                                      |                                            | 1,767,454 |              |           |  | 1,219,571 |          
|Goodwill                                 |                                                                                      |                                            | 125,799   |              |           |  | 12,742    |          
|Other assets                             |                                                                                      |                                            | 213,218   |              |           |  | 39,531    |          
|                                         |                                                                                      |                                            |           |              |           |  |           |          
|                                         |                                                                                      | Total assets                               |           | $            | 3,059,314 |  |           | $         | 2,750,660 | 
|                                         |                                                                                      |                                            |           |              |           |  |           |          
|LIABILITIES AND SHAREHOLDERS
    EQUITY
|CURRENT LIABILITIES:                     |                                                                                      |                                            |           |              |           |  |           |          
|                                         | Accounts payable                                                                     |                                            | $         | 49,980       |           |  | $         | 49,889    |          
|                                         | Accrued expenses                                                                     |                                            |           | 399,164      |           |  |           | 297,528   |          
|                                         | Income taxes payable                                                                 |                                            |           | 8,759        |           |  |           | 21,247    |          
|                                         | Current portion of long-term debt                                                    |                                            |           | 1,204        |           |  |           | 1,300     |          
|                                         |                                                                                      |                                            |           |              |           |  |           |          
|                                         |                                                                                      | Total current liabilities                  |           |              | 459,107   |  |           |           | 369,964   | 
|                                         |                                                                                      |                                            |           |              |           |  |           |          
|Long-term debt:                          |                                                                                      |                                            |           |              |           |  |           |          
|                                         | Convertible debentures                                                               |                                            |           | 345,000      |           |  |           | 345,000   |          
|                                         | Senior secured revolving credit facility                                             |                                            |           | 125,000      |           |  |           |          |          
|                                         | Senior subordinated notes                                                            |                                            |           | 93           |           |  |           | 93        |          
|Deferred income taxes                    |                                                                                      |                                            | 7,301     |              |           |  | 33,596    |          
|Other long-term liabilities              |                                                                                      |                                            | 230,228   |              |           |  | 70,824    |          
|                                         |                                                                                      |                                            |           |              |           |  |           |          
|                                         |                                                                                      | Total liabilities                          |           |              | 1,166,729 |  |           |           | 819,477   | 
|                                         |                                                                                      |                                            |           |              |           |  |           |          
|Commitments and contingencies (note 8)   |                                                                                      |                                            |           |              |           |  |           |          
|                                         | Shareholders equity                                                                 |                                            |           | 1,892,585    |           |  |           | 1,931,183 |          
|                                         |                                                                                      |                                            |           |              |           |  |           |          
|                                         |                                                                                      | Total liabilities and shareholders equity |           | $            | 3,059,314 |  |           | $         | 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 |                                            | Six Months Ended
|                                |                                                               | June 30,           |                                            | June 30,        
|                                |                                                               |                    |                                            |                 
|                                |                                                               | 2003               |                                            | 2002             |       | 2003    |        | 2002   
|                                |                                                               |                    |                                            |                  |       |         |        |        
|Revenues:                       |                                                               |                    |                                            |                  |       |         |        |         |      |         |         |         |       |         |         |        
|                                | Net sales                                                     |                    | $                                          | 354,534          |       |         | $      | 268,014 |      |         | $       | 682,953 |       |         | $       | 514,570 |     
|                                | Royalty revenue                                               |                    |                                            | 16,176           |       |         |        | 14,519  |      |         |         | 31,600  |       |         |         | 26,028  |     
|                                |                                                               |                    |                                            |                  |       |         |        |         |      |         |         |         |       |         |         |        
|                                |                                                               |                    | Total revenues                             |                  |       | 370,710 |        |         |      | 282,533 |         |         |       | 714,553 |         |         |      | 540,598 |  
|                                |                                                               |                    |                                            |                  |       |         |        |         |      |         |         |         |       |         |         |        
|Operating costs and expenses:   |                                                               |                    |                                            |                  |       |         |        |         |      |         |         |         |       |         |         |        
|                                | Cost of revenues, exclusive of depreciation shown
    below   |                    |                                            | 92,109           |       |         |        | 55,228  |      |         |         | 172,149 |       |         |         | 103,336 |     
|                                |                                                               |                    |                                            |                  |       |         |        |         |      |         |         |         |       |         |         |        
|                                | Selling, general and administrative                           |                    |                                            | 71,133           |       |         |        | 45,397  |      |         |         | 121,809 |       |         |         | 86,011  |     
|                                | Co-promotion fees                                             |                    |                                            | 55,241           |       |         |        | 43,244  |      |         |         | 116,941 |       |         |         | 81,095  |     
|                                |                                                               |                    |                                            |                  |       |         |        |         |      |         |         |         |       |         |         |        
|                                |                                                               |                    | Total selling, general, and administrative |                  |       | 126,374 |        |         |      | 88,641  |         |         |       | 238,750 |         |         |      | 167,106 |  
|                                |                                                               |                    |                                            |                  |       |         |        |         |      |         |         |         |       |         |         |        
|                                | Research and development                                      |                    |                                            | 11,093           |       |         |        | 6,688   |      |         |         | 20,729  |       |         |         | 12,331  |     
|                                | Research and development  in process
    upon acquisition    |                    |                                            | 175,000          |       |         |        |        |      |         |         | 193,000 |       |         |         |        |     
|                                |                                                               |                    |                                            |                  |       |         |        |         |      |         |         |         |       |         |         |        
|                                |                                                               |                    | Total research and development             |                  |       | 186,093 |        |         |      | 6,688   |         |         |       | 213,729 |         |         |      | 12,331  |  
|                                |                                                               |                    |                                            |                  |       |         |        |         |      |         |         |         |       |         |         |        
|                                | Depreciation and amortization                                 |                    |                                            | 23,345           |       |         |        | 14,552  |      |         |         | 43,626  |       |         |         | 28,140  |     
|                                | Intangible asset impairment                                   |                    |                                            |                 |       |         |        |        |      |         |         | 110,970 |       |         |         |        |     
|                                |                                                               |                    |                                            |                  |       |         |        |         |      |         |         |         |       |         |         |        
|                                |                                                               |                    | Total operating costs and expenses         |                  |       | 427,921 |        |         |      | 165,109 |         |         |       | 779,224 |         |         |      | 310,913 |  
|                                |                                                               |                    |                                            |                  |       |         |        |         |      |         |         |         |       |         |         |        
|                                | Operating (loss) income                                       |                    |                                            | (57,211          | )     |         |        | 117,424 |      |         |         | (64,671 | )     |         |         | 229,685 |     
|                                |                                                               |                    |                                            |                  |       |         |        |         |      |         |         |         |       |         |         |        
|Other income (expense):         |                                                               |                    |                                            |                  |       |         |        |         |      |         |         |         |       |         |         |        
|                                | Interest income                                               |                    |                                            | 2,199            |       |         |        | 6,800   |      |         |         | 4,693   |       |         |         | 11,458  |     
|                                | Interest expense                                              |                    |                                            | (3,435           | )     |         |        | (3,135  | )    |         |         | (6,469  | )     |         |         | (5,885  | )   
|                                | Valuation (benefit)
    charge  convertible notes receivable |                    |                                            | 7,647            |       |         |        | (27,926 | )    |         |         | 15,614  |       |         |         | (27,926 | )   
|                                | Other, net                                                    |                    |                                            | (15              | )     |         |        | (298    | )    |         |         | (98     | )     |         |         | (1,081  | )   
|                                |                                                               |                    |                                            |                  |       |         |        |         |      |         |         |         |       |         |         |        
|                                |                                                               |                    | Total other income (expense)               |                  |       | 6,396   |        |         |      | (24,559 | )       |         |       | 13,740  |         |         |      | (23,434 | )
|                                |                                                               |                    |                                            |                  |       |         |        |         |      |         |         |         |       |         |         |        
|(Loss) income before income tax |                                                               |                    | (50,815                                    | )                |       |         | 92,865 |         |      |         | (50,931 | )       |       |         | 206,251 |        
|Income tax (benefit) expense    |                                                               |                    | (15,800                                    | )                |       |         | 34,467 |         |      |         | (8,723  | )       |       |         | 76,533  |        
|                                |                                                               |                    |                                            |                  |       |         |        |         |      |         |         |         |       |         |         |        
|Net (loss) income               |                                                               | $                  | (35,015                                    | )                |       | $       | 58,398 |         |      | $       | (42,208 | )       |       | $       | 129,718 |        
|                                |                                                               |                    |                                            |                  |       |         |        |         |      |         |         |         |       |         |         |        
|(Loss) income per common share: |                                                               |                    |                                            |                  |       |         |        |         |      |         |         |         |       |         |         |        
|                                | Basic:                                                        |                    |                                            |                  |       |         |        |         |      |         |         |         |       |         |         |         |     
|                                |                                                               | Net (loss) income  |                                            | $                | (0.15 | )       |        | $       | 0.24 |         |         | $       | (0.18 | )       |         | $       | 0.52 |        
|                                |                                                               |                    |                                            |                  |       |         |        |         |      |         |         |         |       |         |         |        
|                                | Diluted:                                                      |                    |                                            |                  |       |         |        |         |      |         |         |         |       |         |         |         |     
|                                |                                                               | Net (loss) income  |                                            | $                | (0.15 | )       |        | $       | 0.24 |         |         | $       | (0.18 | )       |         | $       | 0.52 |        
|                                |                                                               |                    |                                            |                  |       |         |        |         |      |         |         |         |       |         |         |        

See accompanying notes.

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##### Table of Contents



KING PHARMACEUTICALS, INC.




CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS EQUITY

AND OTHER COMPREHENSIVE INCOME


|                              |                                                          |                            |             |          |  |               |           |        |  |       |         |         |   |   |     |     |  |   |           |         |         |  
|----------------------------- | -------------------------------------------------------- | -------------------------- | ----------- | -------- |  | ------------- | --------- | ------ |  | ----- | ------- | ------- | - | - | --- | --- |  | - | --------- | ------- | ------- | -
|                              |                                                          |                            |             |          |  | 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                                               |                            |             |         |  |               |           |       |  |       |         | 129,718 |   |   |     |    |  |   |           | 129,718 |        
|                              | Unrealized gain on marketable securities, net of
    tax |                            |             |         |  |               |           |       |  |       |         |        |   |   |     | 991 |  |   |           | 991     |        
|                              |                                                          |                            |             |          |  |               |           |        |  |       |         |         |   |   |     |     |  |   |           |        
|                              |                                                          | Total comprehensive income |             |          |  |               |           |        |  |       |         |         |   |   |     |     |  |   |           |         | 130,709 |  
|Stock repurchases             |                                                          |                            | (4,333,680  | )        |  |               | (105,692  | )      |  |       |        |         |   |   |    |     |  |   | (105,692  | )      
|Exercise of stock options     |                                                          |                            | 322,838     |          |  |               | 3,284     |        |  |       |        |         |   |   |    |     |  |   | 3,284     |        
|                              |                                                          |                            |             |          |  |               |           |        |  |       |         |         |   |   |     |     |  |   |           |        
|Balance at June 30, 2002.     |                                                          |                            | 243,682,142 |          |  | $             | 1,259,155 |        |  | $     | 676,439 |         |   | $ | 991 |     |  | $ | 1,936,585 |        
|                              |                                                          |                            |             |          |  |               |           |        |  |       |         |         |   |   |     |     |  |   |           |        
|Balance at December 31, 2002. |                                                          |                            | 240,624,751 |          |  | $             | 1,201,897 |        |  | $     | 729,241 |         |   | $ | 45  |     |  | $ | 1,931,183 |        
|Comprehensive income:         |                                                          |                            |             |          |  |               |           |        |  |       |         |         |   |   |     |     |  |   |           |        
|                              | Net loss                                                 |                            |             |         |  |               |           |       |  |       |         | (42,208 | ) |   |     |    |  |   |           | (42,208 | )      
|                              | Unrealized gain on marketable securities, net of
    tax |                            |             |         |  |               |           |       |  |       |         |        |   |   |     | 742 |  |   |           | 742     |        
|                              | Foreign currency translation                             |                            |             |         |  |               |           |       |  |       |         |        |   |   |     | 83  |  |   |           | 83      |        
|                              |                                                          |                            |             |          |  |               |           |        |  |       |         |         |   |   |     |     |  |   |           |        
|                              |                                                          | Total comprehensive loss   |             |          |  |               |           |        |  |       |         |         |   |   |     |     |  |   |           |         | (41,383 | )
|Exercise of stock options     |                                                          |                            | 404,701     |          |  |               | 2,785     |        |  |       |        |         |   |   |    |     |  |   | 2,785     |        
|                              |                                                          |                            |             |          |  |               |           |        |  |       |         |         |   |   |     |     |  |   |           |        
|Balance at June 30, 2003.     |                                                          |                            | 241,029,452 |          |  | $             | 1,204,682 |        |  | $     | 687,033 |         |   | $ | 870 |     |  | $ | 1,892,585 |        
|                              |                                                          |                            |             |          |  |               |           |        |  |       |         |         |   |   |     |     |  |   |           |        

See accompanying notes.

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##### Table of Contents



KING PHARMACEUTICALS, INC.




CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS

(Unaudited)


(In thousands)


|                                               |                                                                              |                                                         |          |          |          |   |          |          |          |  
|---------------------------------------------- | ---------------------------------------------------------------------------- | ------------------------------------------------------- | -------- | -------- | -------- | - | -------- | -------- | -------- | -
|                                               |                                                                              |                                                        
|                                               |                                                                              | Six Months Ended                                       
|                                               |                                                                              | June 30,                                               
|                                               |                                                                              |                                                        
|                                               |                                                                              | 2003                                                    |          | 2002    
|                                               |                                                                              |                                                         |          |         
|Cash flows from operating activities           |                                                                              | $                                                       | 206,108  |          |          | $ | 148,655  |         
|                                               |                                                                              |                                                         |          |          |          |   |          |         
|Cash flows from investing activities:          |                                                                              |                                                         |          |          |          |   |          |         
|                                               | Purchases of marketable securities                                           |                                                         |          | (25,903  | )        |   |          | (283,885 | )       
|                                               | Proceeds from the sale of marketable securities                              |                                                         |          | 253,097  |          |   |          |         |         
|                                               | Loans receivable                                                             |                                                         |          | 6,187    |          |   |          |         |         
|                                               | Purchases of property, plant and equipment                                   |                                                         |          | (24,774  | )        |   |          | (33,216  | )       
|                                               | Purchase of product rights                                                   |                                                         |          | (9,000   | )        |   |          | (120,300 | )       
|                                               | Acquisition of primary care business of Elan                                 |                                                         |          | (760,212 | )        |   |          |         |         
|                                               | Convertible senior notes                                                     |                                                         |          |         |          |   |          | (10,044  | )       
|                                               | Acquisition of Meridian Medical Technologies,
    Inc., net of cash acquired |                                                         |          | (237,682 | )        |   |          |         |         
|                                               | Proceeds from sale of assets                                                 |                                                         |          | 241      |          |   |          | 4,338    |         
|                                               |                                                                              |                                                         |          |          |          |   |          |         
|                                               |                                                                              | Net cash used in investing activities                   |          |          | (798,046 | ) |          |          | (443,107 | )
|                                               |                                                                              |                                                         |          |          |          |   |          |         
|Cash flows from financing activities:          |                                                                              |                                                         |          |          |          |   |          |         
|                                               | Proceeds from exercise of stock options, net                                 |                                                         |          | 2,765    |          |   |          | 3,284    |         
|                                               | Purchase of common stock                                                     |                                                         |          |         |          |   |          | (80,458  | )       
|                                               | Debt issuance costs                                                          |                                                         |          | (214     | )        |   |          | (4,835   | )       
|                                               | Proceeds from revolving credit facility                                      |                                                         |          | 125,000  |          |   |          |         |         
|                                               | Payments on other long-term debt and capital
    lease obligations           |                                                         |          | (96      | )        |   |          | (142     | )       
|                                               |                                                                              |                                                         |          |          |          |   |          |         
|                                               |                                                                              | Net cash provided by (used in) financing
    activities |          |          | 127,455  |   |          |          | (82,151  | )
|                                               |                                                                              |                                                         |          |          |          |   |          |         
|Decrease in cash and cash equivalents          |                                                                              |                                                         | (464,483 | )        |          |   | (376,603 | )       
|Cash and cash equivalents, beginning of period |                                                                              |                                                         | 588,225  |          |          |   | 874,602  |         
|                                               |                                                                              |                                                         |          |          |          |   |          |         
|Cash and cash equivalents, end of period       |                                                                              | $                                                       | 123,742  | (1)      |          | $ | 497,999  |         
|                                               |                                                                              |                                                         |          |          |          |   |          |         




(1) Excludes restricted
cash  see Note 5.

See accompanying notes.

4



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##### Table of Contents



KING PHARMACEUTICALS, INC.






NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS


June 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 six months ended
June 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 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 decreased to the following pro forma
amounts:

|                                        |                                        |                    |   |                  |   |      |   |        |   |  |   |         |   |  |   |         |  
|--------------------------------------- | -------------------------------------- | ------------------ | - | ---------------- | - | ---- | - | ------ | - |  | - | ------- | - |  | - | ------- | -
|                                        |                                        |                    |   |                 
|                                        |                                        | Three Months Ended |   | Six Months Ended
|                                        |                                        | June 30,           |   | June 30,        
|                                        |                                        |                    |   |                 
|                                        |                                        | 2003               |   | 2002             |   | 2003 |   | 2002  
|                                        |                                        |                    |   |                  |   |      |   |       
|Net (loss) income:                      |                                        |                    |   |                  |   |      |   |        |   |  |   |         |   |  |   |        
|                                        | As reported                            |                    | $ | (35,015          | ) |      | $ | 58,398 |   |  | $ | (42,208 | ) |  | $ | 129,718 |  
|                                        | Compensation costs for options granted |                    |   | (51              | ) |      |   | (515   | ) |  |   | (115    | ) |  |   | (515    | )
|                                        |                                        |                    |   |                  |   |      |   |        |   |  |   |         |   |  |   |        
|                                        | Pro forma                              |                    | $ | (35,066          | ) |      | $ | 57,883 |   |  | $ | (42,323 | ) |  | $ | 129,203 |  
|                                        |                                        |                    |   |                  |   |      |   |        |   |  |   |         |   |  |   |        
|Diluted (loss) income per common share: |                                        |                    |   |                  |   |      |   |        |   |  |   |         |   |  |   |        
|Net (loss) income:                      |                                        |                    |   |                  |   |      |   |        |   |  |   |         |   |  |   |        
|                                        | As reported                            |                    | $ | (0.15            | ) |      | $ | 0.24   |   |  | $ | (0.18   | ) |  | $ | 0.52    |  
|                                        |                                        |                    |   |                  |   |      |   |        |   |  |   |         |   |  |   |        
|                                        | Pro forma                              |                    | $ | (0.15            | ) |      | $ | 0.23   |   |  | $ | (0.18   | ) |  | $ | 0.52    |  
|                                        |                                        |                    |   |                  |   |      |   |        |   |  |   |         |   |  |   |        

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 June 30, 2003 and 2002:

|                        |  |                    |       |      |  |  |       |  
|----------------------- |  | ------------------ | ----- | ---- |  |  | ----- | -
|                        |  |                   
|                        |  | Three Months Ended
|                        |  | June 30,          
|                        |  |                   
|                        |  | 2003               |       | 2002
|                        |  |                    |       |     
|Expected life of option |  |                    | 4.00  |      |  |  | 4.00  |  
|Risk-free interest rate |  |                    | 2.38  | %    |  |  | 4.30  | %
|Expected volatility     |  |                    | 72.29 | %    |  |  | 61.24 | %
|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 |  | Six Months Ended
|                                        |                                | June 30,           |  | June 30,        
|                                        |                                |                    |  |                 
|                                        |                                | 2003               |  | 2002             |  | 2003 |  | 2002   
|                                        |                                |                    |  |                  |  |      |  |        
|Basic (loss) income per common share:   |                                |                    |  |                  |  |      |  |         |  |  |  |         |  |  |  |        
|                                        | Weighted average common shares |                    |  | 240,954          |  |      |  | 246,931 |  |  |  | 240,866 |  |  |  | 247,382 | 
|                                        |                                |                    |  |                  |  |      |  |         |  |  |  |         |  |  |  |        
|Diluted (loss) income per common share: |                                |                    |  |                  |  |      |  |         |  |  |  |         |  |  |  |        
|                                        | Weighted average common shares |                    |  | 240,954          |  |      |  | 246,931 |  |  |  | 240,866 |  |  |  | 247,382 | 
|                                        | Effect of stock options        |                    |  |                 |  |      |  | 1,482   |  |  |  |        |  |  |  | 1,692   | 
|                                        |                                |                    |  |                  |  |      |  |         |  |  |  |         |  |  |  |        
|                                        | Weighted average common shares |                    |  | 240,954          |  |      |  | 248,413 |  |  |  | 240,866 |  |  |  | 249,074 | 
|                                        |                                |                    |  |                  |  |      |  |         |  |  |  |         |  |  |  |        

For the three and six months ended June 30,
2003, options to purchase 1,178 and 1,292 shares of common
stock, respectively, were not included in the computation of
diluted earnings per share because their inclusion would have
been antidilutive and would have reduced the loss per share. The
Companys convertible debentures could also be converted
into 6,877,990 shares of common stock in the future, subject to
certain contingencies outlined in the indenture. 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:

|                                                                                     |  |          |         |              |  |   |         |  
|------------------------------------------------------------------------------------ |  | -------- | ------- | ------------ |  | - | ------- | -
|                                                                                     |  | June 30, |         | December 31,
|                                                                                     |  | 2003     |         | 2002        
|                                                                                     |  |          |         |             
|Finished goods (including $14,536 and $17,951 of
    sample inventory, respectively) |  | $        | 135,260 |              |  | $ | 110,623 |  
|Work-in-process                                                                      |  |          | 14,018  |              |  |   | 7,810   |  
|Raw materials                                                                        |  |          | 114,349 |              |  |   | 56,778  |  
|                                                                                     |  |          |         |              |  |   |         |  
|                                                                                     |  |          | 263,627 |              |  |   | 175,211 |  
|Inventory valuation allowance                                                        |  |          | (11,043 | )            |  |   | (8,058  | )
|                                                                                     |  |          |         |              |  |   |         |  
|                                                                                     |  | $        | 252,584 |              |  | $ | 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

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##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Skelaxin®, together with Elans United
States primary care field sales force. The Company believes that
the 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 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. 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 this territory, of both
Wyeth and Elan to the extent they relate to new formulations of
Sonata®, other than for use in animals. The total estimated
purchase price of $759,669, includes the cost of acquisition,
assumed liabilities, and a portion of contingent liabilities.
See the allocation of the purchase price below. The identifiable
assets have been assigned useful lives with a weighted-average
range of 16.6 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. 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
other assets as restricted cash. Of the $163,416 placed into
escrow, $106,250 was included as a long-term liability and as
part of the estimated purchase price since it is payable to
Wyeth without any contingency and the remainder of $57,166 was
included as a reduction of the intangible asset since it is
contingent upon providing supply of product. These deferred
obligations are payable on a quarterly basis through March 2005.
The Company also will pay royalties on net sales of the current
formulation of Skelaxin® from the date of closing, certain
significant development milestones of a reformulated version of
Sonata®, including regulatory. 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.

As mentioned above, $175,000 of the purchase
price was allocated to an acquired in-process research and
development project associated with our 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, the success of the

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##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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, it
could materially adversely affect the Companys business,
financial position, results of operations and cash flows.

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

|                                                  |                      |   |         |         | 
|------------------------------------------------- | -------------------- | - | ------- | ------- | 
|Cash consideration, including transaction fees(1) |                      | $ | 596,796 |        
|Liabilities acquired                              |                      |   | 162,873 |        
|                                                  |                      |   |         |        
|                                                  | Total purchase price |   | $       | 759,669 | 
|                                                  |                      |   |         |        

|                                                                        |  |   |         | 
|----------------------------------------------------------------------- |  | - | ------- | 
|Allocation                                                              |  |   |         | 
|Intangibles                                                             |  | $ | 544,834 | 
|In process research and development (net of tax
    benefit of $61,250) |  |   | 113,750 | 
|Inventory                                                               |  |   | 39,835  | 
|Deferred tax asset                                                      |  |   | 61,250  | 
|                                                                        |  |   |         | 
|                                                                        |  | $ | 759,669 | 
|                                                                        |  |   |         | 




(1) Excludes restricted cash placed in escrow

The following unaudited pro forma summary
presents the financial information as if the acquisition of the
primary care business of Elan had occurred on January 1,
2003 for the three and six months ended June 30, 2003 and
on January 1, 2002 for the three and six months ended
June 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 are they
indicative of future results.

|                                  |  |                    |         |                  |  |      |         |      |  |   |         |   |  |   |         | 
|--------------------------------- |  | ------------------ | ------- | ---------------- |  | ---- | ------- | ---- |  | - | ------- | - |  | - | ------- | 
|                                  |  |                    |         |                 
|                                  |  | Three Months Ended |         | Six Months Ended
|                                  |  | June 30,           |         | June 30,        
|                                  |  |                    |         |                 
|                                  |  | 2003               |         | 2002             |  | 2003 |         | 2002
|                                  |  |                    |         |                  |  |      |         |     
|Total revenues                    |  | $                  | 434,619 |                  |  | $    | 349,376 |      |  | $ | 830,783 |   |  | $ | 664,515 | 
|                                  |  |                    |         |                  |  |      |         |      |  |   |         |   |  |   |         | 
|Net income                        |  | $                  | 97,280  |                  |  | $    | 75,007  |      |  | $ | (11,833 | ) |  | $ | 50,210  | 
|                                  |  |                    |         |                  |  |      |         |      |  |   |         |   |  |   |         | 
|Basic earnings per common share   |  | $                  | 0.40    |                  |  | $    | 0.30    |      |  | $ | (0.05   | ) |  | $ | 0.20    | 
|                                  |  |                    |         |                  |  |      |         |      |  |   |         |   |  |   |         | 
|Diluted earnings per common share |  | $                  | 0.40    |                  |  | $    | 0.30    |      |  | $ | (0.05   | ) |  | $ | 0.20    | 
|                                  |  |                    |         |                  |  |      |         |      |  |   |         |   |  |   |         | 

On January 8, 2003, the Company completed
its acquisition of 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 $246,800, and incurred
$6,500 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 $113,057 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.

8



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KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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, 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 following table summarizes financial
information regarding Meridian as of January 8, 2003 and
reflects the preliminary allocation of the purchase price
described above:

|                              |                   |   |         |         | 
|----------------------------- | ----------------- | - | ------- | ------- | 
|Current assets                |                   | $ | 38,574  |        
|Property, plant and equipment |                   |   | 15,791  |        
|Goodwill                      |                   |   | 113,057 |        
|Intangible assets             |                   |   | 140,400 |        
|Other assets                  |                   |   | 662     |        
|                              |                   |   |         |        
|                              | Total assets      |   | $       | 308,484 | 
|                              |                   |   |         |        
|Current liabilities           |                   | $ | 14,505  |        
|Deferred income taxes         |                   |   | 57,612  |        
|Other liabilities             |                   |   | 1,275   |        
|                              |                   |   |         |        
|                              | Total liabilities |   | $       | 73,392  | 
|                              |                   |   |         |        

The following unaudited pro forma summary
presents the financial information as if the acquisition of
Meridian had occurred on January 1, 2003 for the three and
six months ended June 30, 2003 and on January 1, 2002
for the three and six months ended June 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 |         | Six Months Ended
|                                  |  | June 30,           |         | June 30,        
|                                  |  |                    |         |                 
|                                  |  | 2003               |         | 2002             |  | 2003 |         | 2002
|                                  |  |                    |         |                  |  |      |         |     
|Total revenues                    |  | $                  | 370,710 |                  |  | $    | 306,498 |      |  | $ | 715,088 |   |  | $ | 586,482 | 
|                                  |  |                    |         |                  |  |      |         |      |  |   |         |   |  |   |         | 
|Net income                        |  | $                  | (35,015 | )                |  | $    | 60,311  |      |  | $ | (43,376 | ) |  | $ | 118,338 | 
|                                  |  |                    |         |                  |  |      |         |      |  |   |         |   |  |   |         | 
|Basic earnings per common share   |  | $                  | (0.15   | )                |  | $    | 0.24    |      |  | $ | (0.18   | ) |  | $ | 0.48    | 
|                                  |  |                    |         |                  |  |      |         |      |  |   |         |   |  |   |         | 
|Diluted earnings per common share |  | $                  | (0.15   | )                |  | $    | 0.24    |      |  | $ | (0.18   | ) |  | $ | 0.48    | 
|                                  |  |                    |         |                  |  |      |         |      |  |   |         |   |  |   |         | 

9



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KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

6.     Intangible
Assets

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

|                              |                         |          |           |              |  |   |         |         | 
|----------------------------- | ----------------------- | -------- | --------- | ------------ |  | - | ------- | ------- | 
|                              |                         | Gross    |           |             
|                              |                         | Carrying |           | Accumulated 
|                              |                         | Amount   |           | Amortization
|                              |                         |          |           |             
|Trademarks and product rights |                         | $        | 1,713,083 |              |  | $ | 148,097 |        
|Patents                       |                         |          | 299,523   |              |  |   | 42,588  |        
|Goodwill                      |                         |          | 129,308   |              |  |   | 3,509   |        
|Other intangibles             |                         |          | 10,346    |              |  |   | 7,647   |        
|                              |                         |          |           |              |  |   |         |        
|                              | Total intangible assets |          | $         | 2,152,260    |  |   | $       | 201,841 | 
|                              |                         |          |           |              |  |   |         |        

Amortization expense for the three months ended
June 30, 2003 and 2002 was $19,131 and $11,903,
respectively. Estimated annual amortization expense at
June 30, 2003 for each of the five succeeding fiscal years
is as follows:

|                               |  |        |         | 
|------------------------------ |  | ------ | ------- | 
|Fiscal Year Ended December 31: |  | Amount
|                               |  |       
|2003                           |  | $      | 102,345 | 
|2004                           |  |        | 137,095 | 
|2005                           |  |        | 116,936 | 
|2006                           |  |        | 97,854  | 
|2007                           |  |        | 95,393  | 

During January 2003, the Company was notified of
the approval by the FDA of a second generic fludrocortisone
acetate, USP, a product that will represent 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.

During the fourth quarter of 2002, the Company
recorded a charge related to the liability associated with the
amount of the purchase commitments in excess of expected demand
for the Lorabid® product. At June 30, 2003, the excess
purchase commitment accrual is $49,877.

7.     Accounting
Developments

In January 2003, the Financial Accounting
Standards Board issued SFAS No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure,
an amendment of FASB Statement No. 123. SFAS
No. 148 provides alternative methods of transition to the
fair value based method of accounting for stock-based employee
compensation. It also amends the disclosure requirements of SFAS
No. 123. The disclosure provisions of SFAS No. 148 were adopted
by the Company for the fiscal year ended December 31, 2002
and did not have any impact on the Companys financial
statements. See Note 2 for the new required disclosures of
stock compensation resulting from SFAS No. 148.

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-compensation contract. SFAS No. 146
supercedes Emerging Issues Task Force Issue No. 94-3,
Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including

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KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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.

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.

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 601 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

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KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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.

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.



| |                                                
| | -----------------------------------------------
| | SEC Investigation and Securities
    Litigation

On March 10, 2003, the Company received a
subpoena duces tecum from the Securities and Exchange Commission
(SEC) with respect to an SEC investigation of King.
The subpoena requested the production of documents focusing on
the years 1999 and 2000 and included all documents related to
sales of Kings products to VitaRx and Prison Health
Services during 1999 and 2000, the Companys best
price lists, all documents related to the pricing of the
Companys pharmaceutical products provided to any
governmental Medicaid agency during 1999, the accrual and
payment of rebates on Altace® from 2000 to the present, and
other general requests. On May 14, 2003, the SEC issued
another subpoena duces tecum, requesting additional documents
pertaining to 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
determination that it has underpaid amounts due under Medicaid
and other governmental pricing programs during the period from
1998 to 2002, the Company has contacted the Centers for Medicare
and Medicaid Services, the Office of Inspector General at the
Department of Health and Human Services, and the Department of
Justice. The Company expects to engage in more detailed
discussions with these and other appropriate agencies in order
to determine the precise amount of the

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KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

underpayments. The Company currently expects to
make the requisite payments in the third or fourth quarter of
2003. The SEC, the Centers for Medicare and Medicaid Services,
the Office of Inspector General, the Department of Justice and
other governmental agencies that might be investigating or might
commence an investigation of the Company 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. 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 have been filed by holders of
the Companys securities against the Company, its
directors, former 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. Plaintiffs allege that the Company, through some of its
executive officers, former executive officers, directors and
former directors, made false or misleading statements concerning
the Companys business, financial condition and results of
operations during periods beginning March 31, 1999 and
continuing until March 11, 2003. Additionally, seven
purported shareholder derivative complaints have been filed in
federal and state courts in Tennessee alleging a breach of
fiduciary duty, among other things, by some of the
Companys officers and directors. The allegations in these
lawsuits are similar to those in the class action litigation
described above. 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.

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 SEC in its investigation,
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.



| |                        
| | -----------------------
| | 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 against 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

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KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 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. Regardless of the
outcome of the lawsuit involving the 722 and 856
patents, however, Cobalt has not challenged the validity of the
258 patent and, therefore, cannot market a generic version
of Altace® prior to the expiration of that patent in
January 2005.

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.

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



| |                          
| | -------------------------
| | Government Agency Pricing

The Company and other pharmaceutical
manufacturers are required to provide statutorily defined
rebates to various state and federal government agencies in
order to participate in Medicaid, the veterans health care
program and other government-funded programs. Several government
agencies have placed restrictions on physician prescription
levels and patient reimbursements, emphasized greater use of
generic drugs and enacted across-the-board price cuts as methods
to control costs. The Company is unable to predict the final
form and timing of any future governmental or other health care
initiatives, and therefore, their effect on operations and cash
flows cannot be reasonably estimated. Similarly, the effect on
operations and cash flows of decisions of government entities,
managed care groups, and other groups concerning formularies and
pharmaceutical reimbursement policies cannot be reasonably
estimated.

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

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KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

commercial and government markets. The principal
source of revenues in the commercial market are presently
derived from the EpiPen® product line marketed by Dey,
L.P., which are 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 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              |   | Six Months
|                |                                    | June 30,                        |   | Ended     
|                |                                    |                                 |   |           
|                |                                    | 2003                            |   | 2002       |         | 2003 |   | 2002   
|                |                                    |                                 |   |            |         |      |   |        
|Total revenues: |                                    |                                 |   |            |         |      |   |         |         |  |   |          |         |   |   |        
|                | Branded pharmaceuticals            |                                 | $ | 312,664    |         |      | $ | 257,846 |         |  | $ | 609,049  |         |   | $ | 494,896 |        
|                | Meridian Medical Technologies      |                                 |   | 34,298     |         |      |   |        |         |  |   | 59,938   |         |   |   |        |        
|                | Royalties                          |                                 |   | 16,176     |         |      |   | 14,519  |         |  |   | 31,600   |         |   |   | 26,028  |        
|                | Contract manufacturing             |                                 |   | 64,908     |         |      |   | 32,761  |         |  |   | 157,170  |         |   |   | 70,075  |        
|                | All other                          |                                 |   |           |         |      |   | 402     |         |  |   |         |         |   |   | 402     |        
|                | Eliminations                       |                                 |   | (57,336    | )       |      |   | (22,995 | )       |  |   | (143,204 | )       |   |   | (50,803 | )      
|                |                                    |                                 |   |            |         |      |   |         |         |  |   |          |         |   |   |        
|                |                                    | Consolidated total net revenues |   | $          | 370,710 |      |   | $       | 282,533 |  |   | $        | 714,553 |   |   | $       | 540,598 | 
|                |                                    |                                 |   |            |         |      |   |         |         |  |   |          |         |   |   |        
|Segment profit: |                                    |                                 |   |            |         |      |   |         |         |  |   |          |         |   |   |        
|                | Branded pharmaceuticals            |                                 | $ | 253,829    |         |      | $ | 216,989 |         |  | $ | 501,527  |         |   | $ | 416,250 |        
|                | Meridian Medical Technologies      |                                 |   | 15,325     |         |      |   |        |         |  |   | 23,273   |         |   |   |        |        
|                | Royalties                          |                                 |   | 13,714     |         |      |   | 11,896  |         |  |   | 26,130   |         |   |   | 21,477  |        
|                | Contract manufacturing             |                                 |   | (4,229     | )       |      |   | (1,929  | )       |  |   | (8,488   | )       |   |   | (814    | )      
|                | All other                          |                                 |   | (38        | )       |      |   | 349     |         |  |   | (38      | )       |   |   | 349     |        
|                |                                    |                                 |   |            |         |      |   |         |         |  |   |          |         |   |   |        
|                |                                    | Consolidated segment profit     |   |            | 278,601 |      |   |         | 227,305 |  |   |          | 542,404 |   |   |         | 437,262 | 
|                | Other operating costs and expenses |                                 |   | 335,812    |         |      |   | 109,881 |         |  |   | 607,075  |         |   |   | 207,577 |        
|                |                                    |                                 |   |            |         |      |   |         |         |  |   |          |         |   |   |        
|                |                                    | Operating (loss) income         |   | $          | (57,211 | )    |   | $       | 117,424 |  |   | $        | (64,671 | ) |   | $       | 229,685 | 
|                |                                    |                                 |   |            |         |      |   |         |         |  |   |          |         |   |   |        

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KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|              |                               |                           |   |              |           |  |   |           |           | 
|------------- | ----------------------------- | ------------------------- | - | ------------ | --------- |  | - | --------- | --------- | 
|              |                               | As of                     |   | As of       
|              |                               | June 30,                  |   | December 31,
|              |                               | 2003                      |   | 2002        
|              |                               |                           |   |             
|Total assets: |                               |                           |   |              |           |  |   |          
|              | Branded pharmaceuticals       |                           | $ | 2,573,016    |           |  | $ | 2,597,499 |          
|              | Meridian Medical Technologies |                           |   | 314,899      |           |  |   |          |          
|              | Royalties                     |                           |   | 16,777       |           |  |   | 18,738    |          
|              | Contract manufacturing        |                           |   | 154,798      |           |  |   | 143,285   |          
|              | All other                     |                           |   | 22           |           |  |   | 11        |          
|              | Eliminations                  |                           |   | (198         | )         |  |   | (8,873    | )        
|              |                               |                           |   |              |           |  |   |          
|              |                               | Consolidated total assets |   | $            | 3,059,314 |  |   | $         | 2,750,660 | 
|              |                               |                           |   |              |           |  |   |          

The following represents branded pharmaceutical
revenues by therapeutic area:

|                |                                  |                                              |   |            |         |      |   |         |         |  |   |         |         |  |   |         |         | 
|--------------- | -------------------------------- | -------------------------------------------- | - | ---------- | ------- | ---- | - | ------- | ------- |  | - | ------- | ------- |  | - | ------- | ------- | 
|                |                                  |                                              |   |           
|                |                                  | Three Months                                 |   | Six Months
|                |                                  | Ended                                        |   | Ended     
|                |                                  | June 30,                                     |   | June 30,  
|                |                                  |                                              |   |           
|                |                                  | 2003                                         |   | 2002       |         | 2003 |   | 2002   
|                |                                  |                                              |   |            |         |      |   |        
|Total revenues: |                                  |                                              |   |            |         |      |   |         |         |  |   |         |         |  |   |        
|                | Cardiovascular                   |                                              | $ | 152,719    |         |      | $ | 119,123 |         |  | $ | 309,536 |         |  | $ | 225,846 |        
|                | Endocrinology/womens health     |                                              |   | 40,955     |         |      |   | 82,052  |         |  |   | 94,882  |         |  |   | 143,132 |        
|                | Orthopedic                       |                                              |   | 29,810     |         |      |   |        |         |  |   | 29,810  |         |  |   |        |        
|                | Critical care                    |                                              |   | 36,161     |         |      |   | 22,902  |         |  |   | 71,524  |         |  |   | 47,562  |        
|                | Neurology/central nervous system |                                              |   | 16,184     |         |      |   |        |         |  |   | 16,184  |         |  |   |        |        
|                | Anti-infective                   |                                              |   | 29,621     |         |      |   | 28,307  |         |  |   | 61,299  |         |  |   | 66,010  |        
|                | Respiratory                      |                                              |   | 3,227      |         |      |   | 832     |         |  |   | 15,305  |         |  |   | 1,411   |        
|                | Other branded                    |                                              |   | 3,987      |         |      |   | 4,630   |         |  |   | 10,509  |         |  |   | 10,935  |        
|                |                                  |                                              |   |            |         |      |   |         |         |  |   |         |         |  |   |        
|                |                                  | Consolidated branded pharmaceutical revenues |   | $          | 312,664 |      |   | $       | 257,846 |  |   | $       | 609,049 |  |   | $       | 494,896 | 
|                |                                  |                                              |   |            |         |      |   |         |         |  |   |         |         |  |   |        

10.     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.

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 months ended June 30, 2003 and are
included in the guarantor subsidiary column in the guarantor
subsidiary financial statements which follow.

16



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##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

GUARANTOR SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE
SHEETS

(In thousands)


|                                         |                                           |                                            |           |                   |           |             |           |              |           |      |            |              |            |             |           |              |           |  |           |         |           |  |           |         |          |   |            |        |            |   |           |         |           | 
|---------------------------------------- | ----------------------------------------- | ------------------------------------------ | --------- | ----------------- | --------- | ----------- | --------- | ------------ | --------- | ---- | ---------- | ------------ | ---------- | ----------- | --------- | ------------ | --------- |  | --------- | ------- | --------- |  | --------- | ------- | -------- | - | ---------- | ------ | ---------- | - | --------- | ------- | --------- | 
|                                         |                                           |                                            |           |                  
|                                         |                                           | June 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                 |                                            | $         | 113,089           |           |             | $         | 10,653       |           |      | $          |             |            |             | $         | 123,742      |           |  | $         | 594,385 |           |  | $         | (6,160  | )        |   | $          |       |            |   | $         | 588,225 |          
|                                         | Marketable securities                     |                                            |           |                  |           |             |           |             |           |      |            |             |            |             |           |             |           |  |           | 227,263 |           |  |           |        |          |   |            |       |            |   |           | 227,263 |          
|                                         | Accounts receivable, net                  |                                            |           | 6,311             |           |             |           | 189,933      |           |      |            | (198         | )          |             |           | 196,046      |           |  |           | 17,352  |           |  |           | 151,469 |          |   |            | (8,834 | )          |   |           | 159,987 |          
|                                         | Inventories                               |                                            |           | 70,513            |           |             |           | 182,071      |           |      |            |             |            |             |           | 252,584      |           |  |           | 45,761  |           |  |           | 121,392 |          |   |            |       |            |   |           | 167,153 |          
|                                         | Deferred income taxes                     |                                            |           | 46,702            |           |             |           | 76,330       |           |      |            |             |            |             |           | 123,032      |           |  |           | 36,328  |           |  |           | 69,840  |          |   |            |       |            |   |           | 106,168 |          
|                                         | Prepaid expenses and other current assets |                                            |           | 7,220             |           |             |           | 5,053        |           |      |            |             |            |             |           | 12,273       |           |  |           | 7,996   |           |  |           | 4,910   |          |   |            |       |            |   |           | 12,906  |          
|                                         |                                           |                                            |           |                   |           |             |           |              |           |      |            |              |            |             |           |              |           |  |           |         |           |  |           |         |          |   |            |        |            |   |           |        
|                                         |                                           | Total current assets                       |           |                   | 243,835   |             |           |              | 464,040   |      |            |              | (198       | )           |           |              | 707,677   |  |           |         | 929,085   |  |           |         | 341,451  |   |            |        | (8,834     | ) |           |         | 1,261,702 | 
|                                         |                                           |                                            |           |                   |           |             |           |              |           |      |            |              |            |             |           |              |           |  |           |         |           |  |           |         |          |   |            |        |            |   |           |        
|Property, plant, and equipment, net      |                                           |                                            | 54,540    |                   |           |             | 190,626   |              |           |      |           |              |            |             | 245,166   |              |           |  | 51,587    |         |           |  | 165,527   |         |          |   |           |        |            |   | 217,114   |        
|Intangible assets, net                   |                                           |                                            | 16,385    |                   |           |             | 1,876,868 |              |           |      |           |              |            |             | 1,893,253 |              |           |  | 892,793   |         |           |  | 339,520   |         |          |   |           |        |            |   | 1,232,313 |        
|Investment in subsidiaries               |                                           |                                            | 2,165,611 |                   |           |             |          |              |           |      | (2,165,611 | )            |            |             |          |              |           |  | 1,126,245 |         |           |  |          |         |          |   | (1,126,245 | )      |            |   |          |        
|Other assets                             |                                           |                                            | 41,568    |                   |           |             | 171,650   |              |           |      |           |              |            |             | 213,218   |              |           |  | 25,254    |         |           |  | 14,277    |         |          |   |           |        |            |   | 39,531    |        
|                                         |                                           |                                            |           |                   |           |             |           |              |           |      |            |              |            |             |           |              |           |  |           |         |           |  |           |         |          |   |            |        |            |   |           |        
|                                         |                                           | Total assets                               |           | $                 | 2,521,939 |             |           | $            | 2,703,184 |      |            | $            | (2,165,809 | )           |           | $            | 3,059,314 |  |           | $       | 3,024,964 |  |           | $       | 860,775  |   |            | $      | (1,135,079 | ) |           | $       | 2,750,660 | 
|                                         |                                           |                                            |           |                   |           |             |           |              |           |      |            |              |            |             |           |              |           |  |           |         |           |  |           |         |          |   |            |        |            |   |           |        
|LIABILITIES AND SHAREHOLDERS
    EQUITY |                                           |                                            |           |                   |           |             |           |              |           |      |            |              |            |             |           |             
|Current liabilities:                     |                                           |                                            |           |                   |           |             |           |              |           |      |            |              |            |             |           |              |           |  |           |         |           |  |           |         |          |   |            |        |            |   |           |        
|                                         | Accounts payable                          |                                            | $         | 20,919            |           |             | $         | 29,259       |           |      | $          | (198         | )          |             | $         | 49,980       |           |  | $         | 26,119  |           |  | $         | 32,604  |          |   | $          | (8,834 | )          |   | $         | 49,889  |          
|                                         | Accrued expenses                          |                                            |           | 38,342            |           |             |           | 360,822      |           |      |            |             |            |             |           | 399,164      |           |  |           | 42,542  |           |  |           | 254,986 |          |   |            |       |            |   |           | 297,528 |          
|                                         | Income taxes payable                      |                                            |           | 5,223             |           |             |           | 3,536        |           |      |            |             |            |             |           | 8,759        |           |  |           | 18,870  |           |  |           | 2,377   |          |   |            |       |            |   |           | 21,247  |          
|                                         | Current portion of long-term debt         |                                            |           | 1,204             |           |             |           |             |           |      |            |             |            |             |           | 1,204        |           |  |           | 1,300   |           |  |           |        |          |   |            |       |            |   |           | 1,300   |          
|                                         |                                           |                                            |           |                   |           |             |           |              |           |      |            |              |            |             |           |              |           |  |           |         |           |  |           |         |          |   |            |        |            |   |           |        
|                                         |                                           | Total current liabilities                  |           |                   | 65,688    |             |           |              | 393,617   |      |            |              | (198       | )           |           |              | 459,107   |  |           |         | 88,831    |  |           |         | 289,967  |   |            |        | (8,834     | ) |           |         | 369,964   | 
|                                         |                                           |                                            |           |                   |           |             |           |              |           |      |            |              |            |             |           |              |           |  |           |         |           |  |           |         |          |   |            |        |            |   |           |        
|Long-term debt                           |                                           |                                            | 470,093   |                   |           |             |          |              |           |      |           |              |            |             | 470,093   |              |           |  | 345,093   |         |           |  |          |         |          |   |           |        |            |   | 345,093   |        
|Deferred income taxes                    |                                           |                                            | 15,830    |                   |           |             | (8,529    | )            |           |      |           |              |            |             | 7,301     |              |           |  | 11,991    |         |           |  | 21,605    |         |          |   |           |        |            |   | 33,596    |        
|Other liabilities                        |                                           |                                            | 65,528    |                   |           |             | 164,700   |              |           |      |           |              |            |             | 230,228   |              |           |  | 70,074    |         |           |  | 750       |         |          |   |           |        |            |   | 70,824    |        
|Intercompany (receivable) payable        |                                           |                                            | 12,215    |                   |           |             | (12,215   | )            |           |      |           |              |            |             |          |              |           |  | 577,792   |         |           |  | (577,792  | )       |          |   |           |        |            |   |          |        
|                                         |                                           |                                            |           |                   |           |             |           |              |           |      |            |              |            |             |           |              |           |  |           |         |           |  |           |         |          |   |            |        |            |   |           |        
|                                         |                                           | Total liabilities                          |           |                   | 629,354   |             |           |              | 537,573   |      |            |              | (198       | )           |           |              | 1,166,729 |  |           |         | 1,093,781 |  |           |         | (265,470 | ) |            |        | (8,834     | ) |           |         | 819,477   | 
|                                         |                                           |                                            |           |                   |           |             |           |              |           |      |            |              |            |             |           |              |           |  |           |         |           |  |           |         |          |   |            |        |            |   |           |        
|Shareholders equity                     |                                           |                                            | 1,892,585 |                   |           |             | 2,165,611 |              |           |      | (2,165,611 | )            |            |             | 1,892,585 |              |           |  | 1,931,183 |         |           |  | 1,126,245 |         |          |   | (1,126,245 | )      |            |   | 1,931,183 |        
|                                         |                                           |                                            |           |                   |           |             |           |              |           |      |            |              |            |             |           |              |           |  |           |         |           |  |           |         |          |   |            |        |            |   |           |        
|                                         |                                           | Total liabilities and shareholders equity |           | $                 | 2,521,939 |             |           | $            | 2,703,184 |      |            | $            | (2,165,809 | )           |           | $            | 3,059,314 |  |           | $       | 3,024,964 |  |           | $       | 860,775  |   |            | $      | (1,135,079 | ) |           | $       | 2,750,660 | 
|                                         |                                           |                                            |           |                   |           |             |           |              |           |      |            |              |            |             |           |              |           |  |           |         |           |  |           |         |          |   |            |        |            |   |           |        

17



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##### 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)


|                                  |                                                     |                                  |                                    |                                  |         |             |         |              |         |         |        |              |        |             |         |              |         |         |         |         |        |        |         |         |        |         |         |         |         |         |         |         |        |         |  
|--------------------------------- | --------------------------------------------------- | -------------------------------- | ---------------------------------- | -------------------------------- | ------- | ----------- | ------- | ------------ | ------- | ------- | ------ | ------------ | ------ | ----------- | ------- | ------------ | ------- | ------- | ------- | ------- | ------ | ------ | ------- | ------- | ------ | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------ | ------- | -
|                                  |                                                     |                                  |                                    |                                 
|                                  |                                                     | Three Months Ended June 30, 2003 |                                    | Three Months Ended June 30, 2002
|                                  |                                                     |                                  |                                    |                                 
|                                  |                                                     |                                  |                                    | Guarantor                        |         | Eliminating |         | King         |         |         |        | Guarantor    |        | Eliminating |         | King        
|                                  |                                                     | King                             |                                    | Subsidiaries                     |         | Entries     |         | Consolidated |         | King    |        | Subsidiaries |        | Entries     |         | Consolidated
|                                  |                                                     |                                  |                                    |                                  |         |             |         |              |         |         |        |              |        |             |         |             
|Revenues:                         |                                                     |                                  |                                    |                                  |         |             |         |              |         |         |        |              |        |             |         |              |         |         |         |         |        |        |         |         |        |         |         |         |         |         |         |        
|                                  | Net sales                                           |                                  | $                                  | 34,803                           |         |             | $       | 354,311      |         |         | $      | (34,580      | )      |             | $       | 354,534      |         |         | $       | 14,685  |        |        | $       | 267,403 |        |         | $       | (14,074 | )       |         | $       | 268,014 |       
|                                  | Royalty revenue                                     |                                  |                                    |                                 |         |             |         | 16,176       |         |         |        |             |        |             |         | 16,176       |         |         |         |        |        |        |         | 14,519  |        |         |         |        |         |         |         | 14,519  |       
|                                  |                                                     |                                  |                                    |                                  |         |             |         |              |         |         |        |              |        |             |         |              |         |         |         |         |        |        |         |         |        |         |         |         |         |         |         |        
|                                  |                                                     |                                  | Total revenues                     |                                  |         | 34,803      |         |              |         | 370,487 |        |              |        | (34,580     | )       |              |         | 370,710 |         |         |        | 14,685 |         |         |        | 281,922 |         |         |         | (14,074 | )       |         |        | 282,533 |  
|                                  |                                                     |                                  |                                    |                                  |         |             |         |              |         |         |        |              |        |             |         |              |         |         |         |         |        |        |         |         |        |         |         |         |         |         |         |        
|Operating costs and expenses:     |                                                     |                                  |                                    |                                  |         |             |         |              |         |         |        |              |        |             |         |              |         |         |         |         |        |        |         |         |        |         |         |         |         |         |         |        
|                                  | Costs of revenues                                   |                                  |                                    | 10,584                           |         |             |         | 116,105      |         |         |        | (34,580      | )      |             |         | 92,109       |         |         |         | 15,097  |        |        |         | 54,205  |        |         |         | (14,074 | )       |         |         | 55,228  |       
|                                  | Selling, general and administrative                 |                                  |                                    | 20,117                           |         |             |         | 106,257      |         |         |        |             |        |             |         | 126,374      |         |         |         | 1,788   |        |        |         | 86,853  |        |         |         |        |         |         |         | 88,641  |       
|                                  | Depreciation and amortization                       |                                  |                                    | 2,055                            |         |             |         | 21,290       |         |         |        |             |        |             |         | 23,345       |         |         |         | 8,527   |        |        |         | 6,025   |        |         |         |        |         |         |         | 14,552  |       
|                                  | Research and development                            |                                  |                                    | 225                              |         |             |         | 185,868      |         |         |        |             |        |             |         | 186,093      |         |         |         | 225     |        |        |         | 6,463   |        |         |         |        |         |         |         | 6,688   |       
|                                  | Intangible asset impairment                         |                                  |                                    |                                 |         |             |         |             |         |         |        |             |        |             |         |             |         |         |         |        |        |        |         |        |        |         |         |        |         |         |         |        |       
|                                  |                                                     |                                  |                                    |                                  |         |             |         |              |         |         |        |              |        |             |         |              |         |         |         |         |        |        |         |         |        |         |         |         |         |         |         |        
|                                  |                                                     |                                  | Total operating costs and expenses |                                  |         | 32,981      |         |              |         | 429,520 |        |              |        | (34,580     | )       |              |         | 427,921 |         |         |        | 25,637 |         |         |        | 153,546 |         |         |         | (14,074 | )       |         |        | 165,109 |  
|                                  |                                                     |                                  |                                    |                                  |         |             |         |              |         |         |        |              |        |             |         |              |         |         |         |         |        |        |         |         |        |         |         |         |         |         |         |        
|Operating (loss) income           |                                                     |                                  | 1,822                              |                                  |         |             | (59,033 | )            |         |         |       |              |        |             | (57,211 | )            |         |         | (10,952 | )       |        |        | 128,376 |         |        |         |        |         |         |         | 117,424 |        
|                                  |                                                     |                                  |                                    |                                  |         |             |         |              |         |         |        |              |        |             |         |              |         |         |         |         |        |        |         |         |        |         |         |         |         |         |         |        
|Other income (expense):           |                                                     |                                  |                                    |                                  |         |             |         |              |         |         |        |              |        |             |         |              |         |         |         |         |        |        |         |         |        |         |         |         |         |         |         |        
|                                  | Interest income                                     |                                  |                                    | 2,136                            |         |             |         | 63           |         |         |        |             |        |             |         | 2,199        |         |         |         | 6,512   |        |        |         | 288     |        |         |         |        |         |         |         | 6,800   |       
|                                  | Interest expense                                    |                                  |                                    | (3,435                           | )       |             |         |             |         |         |        |             |        |             |         | (3,435       | )       |         |         | (3,116  | )      |        |         | (19     | )      |         |         |        |         |         |         | (3,135  | )     
|                                  | Valuation change  convertible notes
    receivable |                                  |                                    | 7,647                            |         |             |         |             |         |         |        |             |        |             |         | 7,647        |         |         |         | (27,926 | )      |        |         |        |        |         |         |        |         |         |         | (27,926 | )     
|                                  | Other, net                                          |                                  |                                    | (4                               | )       |             |         | (11          | )       |         |        |              |        |             |         | (15          | )       |         |         | (119    | )      |        |         | (179    | )      |         |         |         |         |         |         | (298    | )     
|                                  | Equity in earnings of subsidiaries                  |                                  |                                    | (49,578                          | )       |             |         |             |         |         |        | 49,578       |        |             |         |             |         |         |         | 59,639  |        |        |         |         |        |         |         | (59,639 | )       |         |         |         |       
|                                  | Intercompany interest income (expense)              |                                  |                                    | 4,902                            |         |             |         | (4,902       | )       |         |        |             |        |             |         |             |         |         |         | 9,573   |        |        |         | (9,573  | )      |         |         |        |         |         |         |        |       
|                                  |                                                     |                                  |                                    |                                  |         |             |         |              |         |         |        |              |        |             |         |              |         |         |         |         |        |        |         |         |        |         |         |         |         |         |         |        
|                                  |                                                     |                                  | Total other income (expense)       |                                  |         | (38,332     | )       |              |         | (4,850  | )      |              |        | 49,578      |         |              |         | 6,396   |         |         |        | 44,563 |         |         |        | (9,483  | )       |         |         | (59,639 | )       |         |        | (24,559 | )
|                                  |                                                     |                                  |                                    |                                  |         |             |         |              |         |         |        |              |        |             |         |              |         |         |         |         |        |        |         |         |        |         |         |         |         |         |         |        
|(Loss) income before income taxes |                                                     |                                  | (36,510                            | )                                |         |             | (63,883 | )            |         |         | 49,578 |              |        |             | (50,815 | )            |         |         | 33,611  |         |        |        | 118,893 |         |        |         | (59,639 | )       |         |         | 92,865  |        
|                                  |                                                     |                                  |                                    |                                  |         |             |         |              |         |         |        |              |        |             |         |              |         |         |         |         |        |        |         |         |        |         |         |         |         |         |         |        
|Income tax expense                |                                                     |                                  | (1,495                             | )                                |         |             | (14,305 | )            |         |         |       |              |        |             | (15,800 | )            |         |         | (24,787 | )       |        |        | 59,254  |         |        |         |        |         |         |         | 34,467  |        
|                                  |                                                     |                                  |                                    |                                  |         |             |         |              |         |         |        |              |        |             |         |              |         |         |         |         |        |        |         |         |        |         |         |         |         |         |         |        
|                                  |                                                     | Net (loss) income                |                                    | $                                | (35,015 | )           |         | $            | (49,578 | )       |        | $            | 49,578 |             |         | $            | (35,015 | )       |         | $       | 58,398 |        |         | $       | 59,639 |         |         | $       | (59,639 | )       |         | $       | 58,398 |        
|                                  |                                                     |                                  |                                    |                                  |         |             |         |              |         |         |        |              |        |             |         |              |         |         |         |         |        |        |         |         |        |         |         |         |         |         |         |        

18



---



##### 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)


|                                  |                                                     |                                    |         |                                |         |             |        |              |         |      |       |              |          |             |         |              |         |   |         |         |         |  |         |         |         |   |          |          |          |   |         |         |         |  
|--------------------------------- | --------------------------------------------------- | ---------------------------------- | ------- | ------------------------------ | ------- | ----------- | ------ | ------------ | ------- | ---- | ----- | ------------ | -------- | ----------- | ------- | ------------ | ------- | - | ------- | ------- | ------- |  | ------- | ------- | ------- | - | -------- | -------- | -------- | - | ------- | ------- | ------- | -
|                                  |                                                     |                                    |         |                               
|                                  |                                                     | Six Months Ended June 30, 2003     |         | Six Months Ended June 30, 2002
|                                  |                                                     |                                    |         |                               
|                                  |                                                     |                                    |         | Guarantor                      |         | Eliminating |        | King         |         |      |       | Guarantor    |          | Eliminating |         | King        
|                                  |                                                     | King                               |         | Subsidiaries                   |         | Entries     |        | Consolidated |         | King |       | Subsidiaries |          | Entries     |         | Consolidated
|                                  |                                                     |                                    |         |                                |         |             |        |              |         |      |       |              |          |             |         |             
|Revenues:                         |                                                     |                                    |         |                                |         |             |        |              |         |      |       |              |          |             |         |              |         |   |         |         |         |  |         |         |         |   |          |          |          |   |         |        
|                                  | Net sales                                           |                                    | $       | 100,821                        |         |             | $      | 682,730      |         |      | $     | (100,598     | )        |             | $       | 682,953      |         |   | $       | 35,985  |         |  | $       | 520,467 |         |   | $        | (41,882  | )        |   | $       | 514,570 |        
|                                  | Royalty revenue                                     |                                    |         |                               |         |             |        | 31,600       |         |      |       |             |          |             |         | 31,600       |         |   |         |        |         |  |         | 26,028  |         |   |          |         |          |   |         | 26,028  |        
|                                  |                                                     |                                    |         |                                |         |             |        |              |         |      |       |              |          |             |         |              |         |   |         |         |         |  |         |         |         |   |          |          |          |   |         |        
|                                  |                                                     | Total revenues                     |         |                                | 100,821 |             |        |              | 714,330 |      |       |              | (100,598 | )           |         |              | 714,553 |   |         |         | 35,985  |  |         |         | 546,495 |   |          |          | (41,882  | ) |         |         | 540,598 |  
|                                  |                                                     |                                    |         |                                |         |             |        |              |         |      |       |              |          |             |         |              |         |   |         |         |         |  |         |         |         |   |          |          |          |   |         |        
|Operating costs and expenses:     |                                                     |                                    |         |                                |         |             |        |              |         |      |       |              |          |             |         |              |         |   |         |         |         |  |         |         |         |   |          |          |          |   |         |        
|                                  | Costs of revenues                                   |                                    |         | 35,172                         |         |             |        | 237,575      |         |      |       | (100,598     | )        |             |         | 172,149      |         |   |         | 39,561  |         |  |         | 105,657 |         |   |          | (41,882  | )        |   |         | 103,336 |        
|                                  | Selling, general and administrative                 |                                    |         | 25,276                         |         |             |        | 213,474      |         |      |       |             |          |             |         | 238,750      |         |   |         | 2,829   |         |  |         | 164,277 |         |   |          |         |          |   |         | 167,106 |        
|                                  | Depreciation and amortization                       |                                    |         | 13,843                         |         |             |        | 29,783       |         |      |       |             |          |             |         | 43,626       |         |   |         | 16,458  |         |  |         | 11,682  |         |   |          |         |          |   |         | 28,140  |        
|                                  | Research and development                            |                                    |         | 450                            |         |             |        | 213,279      |         |      |       |             |          |             |         | 213,729      |         |   |         | 225     |         |  |         | 12,106  |         |   |          |         |          |   |         | 12,331  |        
|                                  | Intangible asset impairment                         |                                    |         | 110,970                        |         |             |        |             |         |      |       |             |          |             |         | 110,970      |         |   |         |        |         |  |         |        |         |   |          |         |          |   |         |        |        
|                                  |                                                     |                                    |         |                                |         |             |        |              |         |      |       |              |          |             |         |              |         |   |         |         |         |  |         |         |         |   |          |          |          |   |         |        
|                                  |                                                     | Total operating costs and expenses |         |                                | 185,711 |             |        |              | 694,111 |      |       |              | (100,598 | )           |         |              | 779,224 |   |         |         | 59,073  |  |         |         | 293,722 |   |          |          | (41,882  | ) |         |         | 310,913 |  
|                                  |                                                     |                                    |         |                                |         |             |        |              |         |      |       |              |          |             |         |              |         |   |         |         |         |  |         |         |         |   |          |          |          |   |         |        
|Operating (loss) income           |                                                     |                                    | (84,890 | )                              |         |             | 20,219 |              |         |      |      |              |          |             | (64,671 | )            |         |   | (23,088 | )       |         |  | 252,773 |         |         |   |         |          |          |   | 229,685 |        
|                                  |                                                     |                                    |         |                                |         |             |        |              |         |      |       |              |          |             |         |              |         |   |         |         |         |  |         |         |         |   |          |          |          |   |         |        
|Other income (expense):           |                                                     |                                    |         |                                |         |             |        |              |         |      |       |              |          |             |         |              |         |   |         |         |         |  |         |         |         |   |          |          |          |   |         |        
|                                  | Interest income                                     |                                    |         | 4,533                          |         |             |        | 160          |         |      |       |             |          |             |         | 4,693        |         |   |         | 10,747  |         |  |         | 711     |         |   |          |         |          |   |         | 11,458  |        
|                                  | Interest expense                                    |                                    |         | (6,467                         | )       |             |        | (2           | )       |      |       |             |          |             |         | (6,469       | )       |   |         | (5,866  | )       |  |         | (19     | )       |   |          |         |          |   |         | (5,885  | )      
|                                  | Valuation change  convertible notes
    receivable |                                    |         | 15,614                         |         |             |        |             |         |      |       |             |          |             |         | 15,614       |         |   |         | (27,926 | )       |  |         |        |         |   |          |         |          |   |         | (27,926 | )      
|                                  | Other, net                                          |                                    |         | (68                            | )       |             |        | (30          | )       |      |       |             |          |             |         | (98          | )       |   |         | (351    | )       |  |         | (730    | )       |   |          |         |          |   |         | (1,081  | )      
|                                  | Equity in earnings of subsidiaries                  |                                    |         | (6,408                         | )       |             |        |             |         |      |       | 6,408        |          |             |         |             |         |   |         | 128,931 |         |  |         |        |         |   |          | (128,931 | )        |   |         |        |        
|                                  | Intercompany income (expense)                       |                                    |         | 6,293                          |         |             |        | (6,293       | )       |      |       |             |          |             |         |             |         |   |         | 23,681  |         |  |         | (23,681 | )       |   |          |         |          |   |         |        |        
|                                  |                                                     |                                    |         |                                |         |             |        |              |         |      |       |              |          |             |         |              |         |   |         |         |         |  |         |         |         |   |          |          |          |   |         |        
|                                  |                                                     | Total other income (expense)       |         |                                | 13,497  |             |        |              | (6,165  | )    |       |              | 6,408    |             |         |              | 13,740  |   |         |         | 129,216 |  |         |         | (23,719 | ) |          |          | (128,931 | ) |         |         | (23,434 | )
|                                  |                                                     |                                    |         |                                |         |             |        |              |         |      |       |              |          |             |         |              |         |   |         |         |         |  |         |         |         |   |          |          |          |   |         |        
|(Loss) income before income taxes |                                                     |                                    | (71,393 | )                              |         |             | 14,054 |              |         |      | 6,408 |              |          |             | (50,931 | )            |         |   | 106,128 |         |         |  | 229,054 |         |         |   | (128,931 | )        |          |   | 206,251 |        
|Income tax expense                |                                                     |                                    | (29,185 | )                              |         |             | 20,462 |              |         |      |      |              |          |             | (8,723  | )            |         |   | (23,590 | )       |         |  | 100,123 |         |         |   |         |          |          |   | 76,533  |        
|                                  |                                                     |                                    |         |                                |         |             |        |              |         |      |       |              |          |             |         |              |         |   |         |         |         |  |         |         |         |   |          |          |          |   |         |        
|                                  |                                                     | Net (loss) income                  |         | $                              | (42,208 | )           |        | $            | (6,408  | )    |       | $            | 6,408    |             |         | $            | (42,208 | ) |         | $       | 129,718 |  |         | $       | 128,931 |   |          | $        | (128,931 | ) |         | $       | 129,718 |  
|                                  |                                                     |                                    |         |                                |         |             |        |              |         |      |       |              |          |             |         |              |         |   |         |         |         |  |         |         |         |   |          |          |          |   |         |        

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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)


|                                                        |                                              |                                |          |                                |   |             |          |              |   |      |   |              |  |             |          |              |   |   |          |          |   |   |          |          |   |   |   |   |  |   |          |          |  
|------------------------------------------------------- | -------------------------------------------- | ------------------------------ | -------- | ------------------------------ | - | ----------- | -------- | ------------ | - | ---- | - | ------------ |  | ----------- | -------- | ------------ | - | - | -------- | -------- | - | - | -------- | -------- | - | - | - | - |  | - | -------- | -------- | -
|                                                        |                                              |                                |          |                               
|                                                        |                                              | Six Months Ended June 30, 2003 |          | Six Months Ended June 30, 2002
|                                                        |                                              |                                |          |                               
|                                                        |                                              |                                |          | Guarantor                      |   | Eliminating |          | King         |   |      |   | Guarantor    |  | Eliminating |          | King        
|                                                        |                                              | King                           |          | Subsidiaries                   |   | Entries     |          | Consolidated |   | King |   | Subsidiaries |  | Entries     |          | Consolidated
|                                                        |                                              |                                |          |                                |   |             |          |              |   |      |   |              |  |             |          |             
|Cash flows from operating activities                    |                                              | $                              | 6,791    |                                |   | $           | 199,317  |              |   | $    |  |              |  | $           | 206,108  |              |   | $ | (122,262 | )        |   | $ | 270,917  |          |   | $ |  |   |  | $ | 148,655  |         
|                                                        |                                              |                                |          |                                |   |             |          |              |   |      |   |              |  |             |          |              |   |   |          |          |   |   |          |          |   |   |   |   |  |   |          |         
|Cash flows from investing activities:                   |                                              |                                |          |                                |   |             |          |              |   |      |   |              |  |             |          |              |   |   |          |          |   |   |          |          |   |   |   |   |  |   |          |         
|                                                        | Purchases of marketable securities           |                                |          | (25,903                        | ) |             |          |             |   |      |   |             |  |             |          | (25,903      | ) |   |          | (283,885 | ) |   |          |         |   |   |   |  |  |   |          | (283,885 | )
|                                                        | Proceeds from sale of marketable securities  |                                |          | 253,097                        |   |             |          |             |   |      |   |             |  |             |          | 253,097      |   |   |          |         |   |   |          |         |   |   |   |  |  |   |          |         |  
|                                                        | Proceeds from loans receivable               |                                |          |                               |   |             |          | 6,187        |   |      |   |             |  |             |          | 6,187        |   |   |          |         |   |   |          |         |   |   |   |  |  |   |          |         |  
|                                                        | Purchases of property, plant and equipment   |                                |          | (4,748                         | ) |             |          | (20,026      | ) |      |   |             |  |             |          | (24,774      | ) |   |          | (6,023   | ) |   |          | (27,193  | ) |   |   |  |  |   |          | (33,216  | )
|                                                        | Purchases of product rights                  |                                |          | (9,000                         | ) |             |          |             |   |      |   |             |  |             |          | (9,000       | ) |   |          | (120,300 | ) |   |          |         |   |   |   |  |  |   |          | (120,300 | )
|                                                        | Acquisition of primary case business of Elan |                                |          |                               |   |             |          | (760,212     | ) |      |   |             |  |             |          | (760,212     | ) |   |          |         |   |   |          |         |   |   |   |  |  |   |          |         |  
|                                                        | Convertible senior note                      |                                |          |                               |   |             |          |             |   |      |   |             |  |             |          |             |   |   |          | (10,044  | ) |   |          |         |   |   |   |  |  |   |          | (10,044  | )
|                                                        | Investment in Meridian                       |                                |          | (253,092                       | ) |             |          | 15,410       |   |      |   |             |  |             |          | (237,682     | ) |   |          |         |   |   |          |         |   |   |   |  |  |   |          |         |  
|                                                        | Proceeds from sale of property and equipment |                                |          | 12                             |   |             |          | 229          |   |      |   |             |  |             |          | 241          |   |   |          | 15       |   |   |          | 4,323    |   |   |   |  |  |   |          | 4,338    |  
|                                                        |                                              |                                |          |                                |   |             |          |              |   |      |   |              |  |             |          |              |   |   |          |          |   |   |          |          |   |   |   |   |  |   |          |         
|Net cash used in investing activities                   |                                              |                                | (39,634  | )                              |   |             | (758,412 | )            |   |      |  |              |  |             | (798,046 | )            |   |   | (420,237 | )        |   |   | (22,870  | )        |   |   |  |   |  |   | (443,107 | )       
|                                                        |                                              |                                |          |                                |   |             |          |              |   |      |   |              |  |             |          |              |   |   |          |          |   |   |          |          |   |   |   |   |  |   |          |         
|Cash flows from financing activities:                   |                                              |                                |          |                                |   |             |          |              |   |      |   |              |  |             |          |              |   |   |          |          |   |   |          |          |   |   |   |   |  |   |          |         
|                                                        | Proceeds from exercise of stock options, net |                                |          | 2,765                          |   |             |          |             |   |      |   |             |  |             |          | 2,765        |   |   |          | 3,284    |   |   |          |         |   |   |   |  |  |   |          | 3,284    |  
|                                                        | Purchase of common stock                     |                                |          |                               |   |             |          |             |   |      |   |             |  |             |          |             |   |   |          | (80,458  | ) |   |          |         |   |   |   |  |  |   |          | (80,458  | )
|                                                        | Debt issuance costs                          |                                |          | (214                           | ) |             |          |             |   |      |   |             |  |             |          | (214         | ) |   |          | (4,835   | ) |   |          |         |   |   |   |  |  |   |          | (4,835   | )
|                                                        | Proceeds from revolving credit facility      |                                |          | 125,000                        |   |             |          |             |   |      |   |             |  |             |          | 125,000      |   |   |          |         |   |   |          |         |   |   |   |  |  |   |          |         |  
|                                                        | Payments on other long-term debt             |                                |          | (96                            | ) |             |          |              |   |      |   |              |  |             |          | (96          | ) |   |          | (129     | ) |   |          | (13      | ) |   |   |  |  |   |          | (142     | )
|                                                        | Other Intercompany                           |                                |          | (575,908                       | ) |             |          | 575,908      |   |      |   |             |  |             |          |             |   |   |          | 245,548  |   |   |          | (245,524 | ) |   |   |  |  |   |          |         |  
|                                                        |                                              |                                |          |                                |   |             |          |              |   |      |   |              |  |             |          |              |   |   |          |          |   |   |          |          |   |   |   |   |  |   |          |         
|Net cash provided by (used in) financing
    activities |                                              |                                | (448,453 | )                              |   |             | 575,908  |              |   |      |  |              |  |             | 127,455  |              |   |   | 163,410  |          |   |   | (245,561 | )        |   |   |  |   |  |   | (82,151  | )       
|                                                        |                                              |                                |          |                                |   |             |          |              |   |      |   |              |  |             |          |              |   |   |          |          |   |   |          |          |   |   |   |   |  |   |          |         
|Increase (decrease) in cash and cash
    equivalents    |                                              |                                | (481,296 | )                              |   |             | 16,813   |              |   |      |  |              |  |             | (464,484 | )            |   |   | (379,089 | )        |   |   | 2,486    |          |   |   |   |   |  |   | (376,603 | )       
|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                |                                              | $                              | 113,089  |                                |   | $           | 10,653   |              |   | $    |  |              |  | $           | 123,742  |              |   | $ | 503,302  |          |   | $ | (5,503   | )        |   | $ |  |   |  | $ | 497,999  |         
|                                                        |                                              |                                |          |                                |   |             |          |              |   |      |   |              |  |             |          |              |   |   |          |          |   |   |          |          |   |   |   |   |  |   |          |         

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##### Table of Contents






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 Six Months
|                              |       | Ended June 30,       |         | Ended June 30,    
|                              |       |                      |         |                   
|                              |       | 2003                 |         | 2002               |  | 2003 |         | 2002   
|                              |       |                      |         |                    |  |      |         |        
|Branded pharmaceuticals       |       | $                    | 312,661 |                    |  | $    | 257,846 |         |  | $ | 609,046 |         |  | $ | 494,896 |        
|Meridian Medical Technologies |       |                      | 34,298  |                    |  |      |        |         |  |   | 59,938  |         |  |   |        |        
|Royalties                     |       |                      | 16,176  |                    |  |      | 14,519  |         |  |   | 31,600  |         |  |   | 26,028  |        
|Contract manufacturing        |       |                      | 7,575   |                    |  |      | 9,766   |         |  |   | 13,969  |         |  |   | 19,272  |        
|Other                         |       |                      |        |                    |  |      | 402     |         |  |   |        |         |  |   | 402     |        
|                              |       |                      |         |                    |  |      |         |         |  |   |         |         |  |   |         |        
|                              | Total |                      | $       | 370,710            |  |      | $       | 282,533 |  |   | $       | 714,553 |  |   | $       | 540,598 | 
|                              |       |                      |         |                    |  |      |         |         |  |   |         |         |  |   |         |        

Results of Operations

Three Months Ended June 30, 2003 and
2002



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

Total revenues increased $88.2 million, or 31.2%,
to $370.7 million in 2003 from $282.5 million in 2002, due
primarily to the growth of some of our branded pharmaceutical
products, our acquisition of additional branded pharmaceutical
products, and our acquisition of Meridian Medical Technologies,
Inc. on January 8, 2003.

Net sales from branded pharmaceuticals increased
$54.8 million, or 21.3%, to $312.7 million in 2003 from $257.8
million in 2002. This increase was primarily due to the growth
in net sales of Altace® and Thrombin-JMI®, our
acquisition of Intal®, Tilade® and Synercid® from
Aventis on December 30, 2002 and our acquisition of
Sonata® and Skelaxin® from Elan Corporation, plc on
June 12, 2003, partially offset by lower sales of
Levoxyl®, Cortisporin®, Florinef®, and some of
our womens health products.

Revenues from Meridian Medical Technologies
totaled $34.3 million for the quarter ended June 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 $1.7 million,
or 11.4%, to $16.2 million in 2003 from $14.5 million in 2002
primarily due to increased royalty revenue from sales of
Adenoscan®.

Revenues from contract manufacturing decreased
$2.2 million, or 22.4%, to $7.6 million in 2003 from $9.8
million in 2002 primarily due to a lower unit volume of products
manufactured for third parties in 2003.

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##### Table of Contents





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

Total operating costs and expenses increased
$262.8 million, or 159.2%, to $427.9 million in 2003 from $165.1
million in 2002. The increase was primarily due to special items
resulting in a net charge of $190.8 million in 2003, our
acquisition of Meridian, increased fees associated with the
promotion of Altace® under our Co-Promotion Agreement with
Wyeth, cost of revenues associated with increased unit sales of
some of our branded pharmaceutical products, and costs of
revenues associated with our acquisition of additional branded
pharmaceutical products. Special items included in operating
costs and expenses during the second quarter of 2003 consist of
a $175.0 million charge for acquired in-process research and
development associated with our acquisition of Sonata®, a
$14.3 million charge for 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 a $1.5
million charge primarily related to the recall of some lots of
Levoxyl® 75 mcg tablets.

Special items are those particular 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 noted
that the determination of whether to classify an item as a
special charge involves judgments by us.

Cost of revenues increased $36.9 million, or
66.8%, to $92.1 million in 2003 from $55.2 million in 2002. This
increase was primarily due to our acquisition of Meridian,
increased unit sales of some of our branded pharmaceutical
products, particularly Altace® and Thrombin-JMI®,
costs associated with additional product sales due to our
acquisition of Intal®, Tilade®, and Synercid® and
our acquisition of Sonata® and Skelaxin®, and a $1.5
million special charge relating to the recall of some lots of
Levoxyl 75 mcg tablets. As a percentage of revenues, cost of
revenues increased to 24.8% for the second quarter of 2003 from
19.5% in 2002 primarily due to the acquisition of Meridian,
whose products have lower margins, the charge relating to the
recall of some lots of Levoxyl® mentioned above, and
differences associated with the mix of products we sold during
each of these periods.

Cost of revenues from branded pharmaceuticals
increased $17.9 million, or 43.8%, to $58.8 million in 2003 from
$40.9 million in 2002. This increase was primarily due to costs
associated with increased unit sales of Altace® and
Thrombin-JMI®, costs associated with additional product
sales due to our acquisition of Intal®, Tilade®, and
Synercid® and our acquisition of Sonata® and
Skelaxin®, and a $1.5 million special charge relating to
the recall of some lots of Levoxyl 75 mcg tablets.

Cost of revenues from Meridian Medical
Technologies was $19.0 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 $2.6 million in 2002.

Cost of revenues associated with contract
manufacturing was $11.8 million in 2003 compared to $11.7
million in 2002.

Selling, general and administrative expenses
increased $37.8 million, or 42.7%, to $126.4 million in 2003
from $88.6 million in 2002. This increase was primarily
attributable to a $14.3 million special charge 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, fees and marketing expenses associated with
the promotion of Altace® under our Co-Promotion Agreement
with Wyeth and our acquisition of Meridian. As a percentage of
revenues, selling, general, and administrative expenses
increased to 34.1% in 2003 compared to 31.4% in 2002.

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Depreciation and amortization expense increased
$8.7 million, or 59.6%, to $23.3 million in 2003 from $14.6
million in 2002. This increase was primarily attributable to the
amortization of the intangible assets related to acquisitions
during the past year including: Prefest® on May 29, 2002;
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
$186.1 million in the second quarter of 2003 from $6.7 million
in 2002. This increase was primarily due to a $175.0 million
special charge during the second quarter of 2003 for acquired
in-process research and development associated with our
acquisition of the primary care business of Elan, including the
rights to new formulations of Sonata® presently under
development.



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

We had a $57.2 million operating loss for the
second quarter of 2003, a decrease from operating income
totaling $117.4 million in the same period of the prior year.
This decrease was primarily due to the special items and other
factors described above, particularly the $175.0 million special
charge for acquired in-process research and development
associated with our acquisition of rights to new formulations of
Sonata® presently under development.



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

Interest income decreased $4.6 million, or 67.6%,
to $2.2 million in 2003 from $6.8 million in 2002 primarily due
to lower balances of invested cash, cash equivalents, and
marketable securities, and lower rates of return during 2003 as
compared to 2002.

Interest expense increased $0.3 million, or 9.7%,
to $3.4 million in 2003 from $3.1 million in 2002.

Our financial results for the second quarter of
2003 include special income in the amount of $7.6 million to
reflect the decrease in the valuation allowance for the
convertible notes receivable from Novavax, Inc. Statement of
Financial Accounting Standards, which we refer to as
SFAS No. 114, Accounting by Creditors for
Impairment of a Loan  an amendment of FASB Statements
No. 5 and 15. 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. If the Novavax
common stock price declines, we may incur charges related to the
investment in the convertible notes.



| |                             
| | ----------------------------
| | Income Tax (Benefit) Expense

For the second quarter of 2003 we had an income
tax benefit of $7.6 million, which reflects a reduction of $5.8
million in the tax benefit due to the establishment of a
valuation allowance against state deferred tax assets generated
by the write-off of acquired in-process research and
development. Accordingly, our effective tax rate for the second
quarter of 2003 of 31.1% was lower than the federal statutory
rate of 35%. The effective tax rate of 37.1% in 2002 was higher
than the federal statutory rate of 35% due primarily to
permanent differences related to state income taxes.



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

Due to the factors set forth above, we had a net
loss of $35.0 million during the second quarter of 2003 as
compared to net income of $58.4 in 2002.

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##### Table of Contents



Six Months Ended June 30, 2003 and
2002



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

Total revenues increased $174.0 million, or
32.2%, to $714.6 million for the six months ended June 30,
2003 from $540.6 million in 2002, primarily due to the growth of
some of our branded pharmaceutical products, our acquisition of
additional branded pharmaceutical products, and our acquisition
of Meridian.

Net sales from branded pharmaceuticals increased
$114.2 million, or 23.1%, to $609.0 million in 2003
from $494.9 million in 2002. This increase was primarily
due to growth in net sales of Altace® and
Thrombin-JMI®, our acquisition of Intal®, Tilade®
and Synercid® and our acquisition of Sonata® and
Skelaxin®, partially offset by lower sales of
Levoxyl®, Cortisporin®, Florinef®, and some of
our womens health products.

Revenues from Meridian Medical Technologies
totaled $59.9 million for the six months ended
June 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
$5.6 million, or 21.4%, to $31.6 million in 2003 from
$26.0 million in 2002 primarily due to increased royalty
revenues from sales of Adenoscan®.

Revenues from contract manufacturing decreased
$5.3 million, or 27.5%, to $14.0 million in 2003 from
$19.3 million in 2002 due to a lower unit volume of
products manufactured for third parties in 2003. We estimate
that revenues from contract manufacturing for the year ending
December 31, 2003 should equal approximately
$25.0 million, a decrease from $35.9 million for the
year ended December 31, 2002 due to anticipated lower unit
sales.



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

Total operating costs and expenses increased
$468.3 million, or 150.6%, to $779.2 million in 2003
from $310.9 million in 2002. The increase was primarily due
to special items resulting in a net charge of
$324.1 million during the six months ending June 30,
2003, increased fees associated with the promotion of
Altace® under our Co-Promotion Agreement with Wyeth, our
acquisition of Meridian, cost of revenues associated with
increased unit sales of some of our branded pharmaceutical
products, and cost of revenues associated with our acquisition
of additional branded pharmaceutical products. Special items
included in operating costs and expenses during the first half
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 $14.3 million charge for professional
fees that are primarily related to the ongoing SEC investigation
and the completed internal review conducted by our Audit
Committee, and special inventory charges totaling
$5.8 million related to the recall of some lots of
Levoxyl® 75 mcg and 300 mcg tablets and our
acquisition of Meridian.

Cost of revenues increased $68.8 million, or
66.6%, to $172.1 million in 2003 from $103.3 million
in 2002. The increase was primarily due to our acquisition of
Meridian, costs associated with increased unit sales of some of
our branded pharmaceutical products, particularly Altace®
and Thrombin-JMI®, costs associated with additional product
sales due to our acquisition of Intal®, Tilade®, and
Synercid® and our acquisition of Sonata® and
Skelaxin® and special charges totaling $5.8 million
relating to the recall of some lots of Levoxyl® as
mentioned above and our acquisition of Meridian. As a percentage
of revenues, cost of revenues increased to 24.1% for the first
half of 2003 from 19.1% in 2002 primarily due to the acquisition
of Meridian, whose products have lower margins, the special
inventory 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 $28.9 million, or 36.8%, to $107.5 million
in 2003 from $78.6 million in 2002. This increase was
primarily due to increased unit sales of Altace® and
Thrombin-JMI®, costs associated with additional product
sales due to our acquisition of Intal®, Tilade®, and
Synercid® and our acquisition of Sonata® and
Skelaxin® and special inventory charges totaling
$3.6 million primarily related to our recall of some lots
of Levoxyl® 75 mcg and 300 mcg tablets.

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##### Table of Contents



Cost of revenues from Meridian Medical
Technologies was $36.7 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 half of 2003 due to our acquisition of
Meridian on January 8, 2003.

Cost of revenues from royalties increased
$0.9 million, or 19.6%, to $5.5 million in 2003 from
$4.6 million in 2002. The increase is primarily due to our
increased royalty expense that is directly related to the
increase in royalty revenue attributable to Adenoscan®.

Cost of revenues associated with contract
manufacturing increased $2.4 million, or 11.9%, to
$22.5 million in 2003 from $20.1 million in 2002 due
primarily to increases in fixed overhead costs.

Selling, general and administrative expenses
increased $71.7 million, or 42.9%, to $238.8 million
in 2003 from $167.1 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, and a special charge in the amount of
$14.3 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, and
our acquisition of Meridian. As a percentage of revenues,
selling, general, and administrative expenses increased to 33.4%
in 2003 compared to 30.9% in 2002.

Depreciation and amortization expense increased
$15.5 million, or 55.2%, to $43.6 million in 2003 from
$28.1 million in 2002. This increase was primarily
attributable to the amortization of the intangible assets
related to our acquisitions during the past year including:
Prefest® on May 29, 2002; 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
$213.7 million in the first six months of 2003 from
$12.3 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 primary care business of Elan,
including the rights to new formulations of Sonata®
presently under development and our acquisition of Meridian.



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

We had a $64.7 million operating loss for
the first six months of 2003, a decrease from operating income
totaling $229.7 million in the same period of the prior
year. This decrease was primarily due to the special items and
other factors 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 the $111.0 million intangible
asset impairment special charge related to Florinef®.



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

Interest income decreased $6.8 million, or
59.1%, to $4.7 million in 2003 from $11.5 million in
2002 primarily due to lower balances of invested cash, cash
equivalents, and marketable securities, and lower rates of
return during 2003 as compared to 2002.

Interest expense increased $0.6 million, or
10.2%, to $6.5 million in 2003 from $5.9 million in
2002.

Our financial results in 2003 include income in
the amount of $15.6 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.

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| |                             
| | ----------------------------
| | Income Tax (Benefit) Expense

For the six months ended June 30, 2003 we
had an income tax benefit of $8.7 million, which reflects a
reduction of $5.8 million in the tax benefit due to the
establishment of a valuation allowance against state deferred
tax assets and permanent differences generated by the write-off
of acquired in-process research and development. Accordingly,
our effective tax rate for the first half of 2003 was lower than
the federal statutory rate of 35%. The effective tax rate of
37.1% in 2002 was higher than the federal statutory rate of 35%
due primarily to permanent differences related to state income
taxes.



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

Due to the factors set forth above, we had a net
loss of $42.2 million during the six months ending
June 30, 2003 as compared to net income of
$129.7 million during the six months ending June 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 January 8, 2003, we completed our
acquisition of Meridian. We paid $44.50 per common share to
Meridian shareholders, totaling approximately
$246.8 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.
At the closing of this acquisition, we paid approximately $596.8
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 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, and 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.                                                                                  

Prior to the closing of this transaction, we
received a letter on March 13, 2003 from the Federal Trade
Commission, or the FTC, stating that it was
conducting an investigation to determine whether any person

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has engaged in unfair methods of competition with
respect to Elans product Skelaxin®. The focus of this
investigation was Elans listing in the U.S. Food and Drug
Administrations, Approved Drug Products with
Therapeutic Equivalence Evaluations, which is known as the
Orange Book, of at least one patent claiming a
method of using metaxalone, and other actions with regard to the
U.S. Food and Drug Administration, which we refer to as the
FDA, regulatory processes. As a result of this new
information, we commenced an investigation and asked Elan to
provide additional information. On March 17, 2003, Elan
filed a lawsuit in the Supreme Court of the State of New York
seeking to compel us to close the transaction. On May 8,
2003, the FTC advised Elan that it was discontinuing a portion
of its investigation with respect to this method of use patent.
On May 20, 2003, we reached an agreement with Elan that
restructured the terms of the transaction as described above,
and, as a result, the litigation has since been dismissed.


On March 10, 2003, we received a subpoena
duces tecum from the SEC with respect to an SEC investigation of
King. The subpoena requested the production of documents
focusing on the years 1999 and 2000 and included all documents
related to sales of our products to VitaRx and Prison Health
Services during 1999 and 2000, our best price lists,
all documents related to the pricing of our pharmaceutical
products provided to any governmental Medicaid agency during
1999, the accrual and payment of rebates on Altace® from
2000 to the present, and other general requests. On May 14,
2003, the SEC issued another subpoena duces tecum, requesting
additional documents pertaining to 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 determination that we have
underpaid amounts due under Medicaid and other governmental
pricing programs during the period from 1998 to 2002, we have
contacted the Centers for Medicare and Medicaid Services, the
Office of Inspector General at the Department of Health and
Human Services, and the Department of Justice. 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 the third or fourth quarter of 2003. The SEC, the
Centers for Medicare and Medicaid Services, the Office of
Inspector General, the Department of Justice 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 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 have been filed by holders of
our securities against us, our directors, former 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. Plaintiffs allege 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
March 31, 1999 and continuing until March 11, 2003.
Additionally, seven purported shareholder derivative complaints
have 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. The allegations in these lawsuits
are similar to those in the class action litigation described
above. We intend to defend these lawsuits vigorously but are
unable currently to predict the outcome or reasonably estimate
the range of potential loss, if any.

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
SEC in its investigation,

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##### Table of Contents



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. 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 have contacted
the Centers for Medicare and Medicaid Services, the Office of
Inspector General at the Department of Health and Human
Services, and the Department of Justice 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 the fourth quarter of 2003.

We drew down $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. As of August 13, 2003, the outstanding principal
balance owing under the senior secured revolving credit facility
is approximately $65.0 million.

Six Months Ended June 30,
2003

We generated net cash from operations of
$206.1 million for the six months ended June 30, 2003.
Our net cash provided from operations was primarily the result
of a $42.2 million net loss, adjusted for non-cash
depreciation and amortization of $44.1 million, an increase
in accrued expenses of $89.7 million, the write-off of in
process research and development of $193.0 million, and an
impairment charge for intangible assets of $111.0 million.
Primary uses of cash within operations included an increase in
accounts receivable of $31.6 million, an increase in
inventory of $30.5 million, a change in deferred taxes of
$98.6 million, a decrease in income taxes payable of
$14.0 million and the decrease in the reserve for the
Novavax convertible senior notes of $15.6 million, all of
which offset the items previously described.

Investing activities reduced cash flow by
$798.0 million primarily consisting of $237.7 million
for our purchase of Meridian, $24.8 million for our
purchase of property, plant and equipment, and $760.2 million
for our purchase of the primary case business of Elan, partially
offset by net proceeds from the sale of marketable securities of
$227.2 million.

Financing activities contributed
$127.5 million to cash flow due to the proceeds from
borrowings in the amount of $125.0 million under our senior
secured revolving credit facility, and proceeds in the amount of
$2.8 million from the exercise of employee stock options.



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

As of June 30, 2003, we had
$471.3 million of long-term debt (including current
portion), up to $275.0 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. As of
August 13, 2003, the outstanding principal balance under
the senior secured revolving credit facility is approximately
$65.0 million.

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 June 30, 2003, approximately
$616.0 million remains available to us under the
$1.3 billion universal shelf

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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 June 30, 2003,
we have complied with these covenants. As of June 30, 2003,
there was $125.0 million outstanding under this facility,
which we borrowed to fund a portion of our acquisition of
Elans primary care business.



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

Capital expenditures, including capital lease
obligations, were $24.8 million and $33.2 million for
the six months ended June 30, 2003 and 2002, respectively.
The principal capital expenditures during the six months ended
June 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 $60.0 million. The principal capital
expenditures are anticipated to include property and 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

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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 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 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | 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 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.                                                                                                                                                                                                                                                                                             
|
| |  | 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



| |                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| | The SEC investigation, other possible
    governmental investigations, and securities litigation could
    have a material adverse effect on our business.

On March 10, 2003, we received a subpoena
duces tecum from the SEC with respect to an SEC investigation of
King. The subpoena requested the production of documents
focusing on the years 1999 and 2000 and included all documents
related to sales of our products to VitaRx and Prison Health
Services during 1999 and 2000, our best price lists,
all documents related to the pricing of our pharmaceutical
products provided to any governmental Medicaid agency during
1999, the accrual and payment of rebates on Altace® from
2000 to the present, and other general requests. On May 14,
2003, the SEC issued another subpoena duces tecum, requesting
additional documents pertaining to the products Fluogen®
and Lorabid®, the King Benevolent Fund, 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 determination that we have
underpaid amounts due under Medicaid and other governmental
pricing programs during the period from 1998 to 2002, we have
contacted the Centers for Medicare and Medicaid Services, the
Office of Inspector General at the Department of Health and
Human Services, and the Department of Justice. 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 the third or fourth quarter of 2003. The SEC, the
Centers for Medicare and Medicaid Services, the Office of
Inspector General, the Department of Justice 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 and the
Managements Discussion and Analysis of Financial
Condition and Results of Operations section under the
heading Recent Developments  SEC Investigation,
Medicaid and Other Governmental Program Accrual Adjustment, and
Related Matters.

Subsequent to the announcement of the SEC
investigation described above, beginning in March 2003, 22
purported class action complaints have been filed by holders of
our securities against us, our directors, former 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. Plaintiffs allege 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
March 31, 1999 and continuing until March 11, 2003.
Additionally,

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seven purported shareholder derivative complaints
have 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. The allegations in these lawsuits
are similar to those in the class action litigation described
above. We intend to defend these lawsuits vigorously but are
unable currently to predict the outcome or reasonably estimate
the range of potential loss, if any.


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
SEC in its investigation, 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® accounted for approximately 41.0%
and Levoxyl® accounted for approximately 11.4% of our total
revenues for the last twelve months ended June 30, 2003,
and Altace®, Levoxyl®, Thrombin-JMI®, and royalty
revenues collectively accounted for approximately 66.9% of our
total revenues during the same period. 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®,
    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 abbreviated new drug application, or ANDA, with
the FDA seeking permission to market a generic version of
Altace®. The following U.S. patents are listed against
Altace® in 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 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
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 new drug application, or
NDA. This allegation is commonly known as a
Paragraph IV certification. 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. While we intend to vigorously enforce our rights under
the 722 and 856 patents, we cannot assure you that
we will be successful. If we are not successful in enforcing our
patents, our business, financial condition, results of
operations and cash flows could be materially adversely
affected. Regardless of the outcome of the lawsuit involving the
722 and 856 patents, however, Cobalt has not
challenged the validity of the 258 patent and, therefore,
cannot market a generic version of Altace® prior to the
expiration of that patent in January 2005.

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

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of the 128 patent. We have filed separate
suites against Eon Labs and CorePharma and intend to vigorously
enforce our rights under the 128 patent to the full extent
of 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.


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



| |                                                                                                                                                                                                                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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, 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 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

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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 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

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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 be terminated before we realize
all of the benefits of the agreement. Wyeth and we each have the
right to terminate the agreement if annualized net sales of
Altace® are not equal to or greater than
$300.0 million on October 4, 2003. There are other
reasons why either Wyeth or we could terminate the Co-Promotion
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 because of the reasons
mentioned above, 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 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.

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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. Further, the FDA is requiring a
phasing-out of the distribution of levothyroxine sodium products
for which NDAs were pending but not approved 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®.
The first U.S. patent on our FDA-approved Levoxyl®, the
581 patent, a utility patent with composition of matter
claims, was issued on April 29, 2003 and extends through
February 15, 2022. We cannot assure you that any or all of
the other patent applications currently under review will be
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 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.
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.

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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®. If sales of Lorabid® continue to decline, if
we terminate the supply agreement with Eli Lilly, 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 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 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. 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.



| |                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 June 30, 2003, we had
$2.0 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

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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. 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.



| |                                                                                                          
| | ---------------------------------------------------------------------------------------------------------
| | 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. We anticipate that the integration of these
acquisitions into our business will require 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.                                      

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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 Estrasorb, a topical
    transdermal estrogen replacement therapy, Androsorb, 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;                                                                                                                                                                                                 
|
| |  | 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 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

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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 newly listed patents. If we filed a patent
infringement suit against the generic applicant within 45 days
of receiving such notice, the FDA was barred 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 had 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 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 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 62.0% of our revenues for the last twelve months
ended June 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. Once approved, 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

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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 may not be able to extend our agreement with Wyeth
and we may not be able to secure a new manufacturing source for
sufficient quantities of Bicillin® on commercially
acceptable terms. If we are unable to extend the existing supply
agreement or if we are unable to secure a new source of supply,
then we may not be able to distribute this product as planned or
the value of the assets could be impaired, which could have a
material adverse effect on our business, financial condition,
results of operations and cash flows. For the twelve months
ended June 30, 2003, net sales of Bicillin® totaled
$42.0 million.

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.

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 March 2003 and by an FDA Team Biologics inspector in August
2003. When an FDA inspector completes an authorized inspection
of a manufacturing

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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.




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

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.

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| |                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------
| | 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 has
started to become operational. In connection with its
implementation, we have incurred related costs of over
$30.0 million. This system is intended to support many of
our business functions, including manufacturing, warehousing,
distribution, logistics, sales reporting, accounting, inventory,
quality control, budgeting and other company functions. 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. In the event we do not
successfully convert 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 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.

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 June 30,
2003, the valuation allowance for the Novavax convertible notes
equaled $19.8 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.



| |                                                                                                                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 601 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.

We participate in the federal Medicaid rebate
program established by the Omnibus Budget Reconciliation Act of
1990, as well as several state supplemental rebate programs.
Under the Medicaid rebate program, we pay a rebate to each state
Medicaid program for our products that are reimbursed by those
programs. As a manufacturer currently of single source,
innovator multiple source and non-innovator multiple source
products, rebate calculations vary among products and programs.
The calculations are complex and, in certain respects, subject
to interpretation by us, governmental or regulatory agencies and
the courts. The Medicaid rebate amount is computed each quarter
based on our submission to the Centers for Medicare and Medicaid
Services at the Department of Health and Human Services of our
current average manufacturer price and best price for each of
our products. Governmental agencies may make changes in program
interpretations, requirements or conditions of participation,
some of which may have implications for amounts previously
estimated or paid.

In November 2000, we began the process of
implementing a new information technology system which has
started to become operational. Although this 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

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manual input, and, as a result, these
calculations will remain subject to the risk of errors arising
from the 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.


Federal law requires that any company that
participates in the Medicaid rebate program extend comparable
discounts to qualified purchasers under the Public Health
Service, or PHS, pharmaceutical pricing program. The
PHS pricing program extends discounts comparable to the Medicaid
rebates to a variety of community health clinics and other
entities that receive health services grants from the PHS, as
well as hospitals that serve a disproportionate share of poor
Medicare and Medicaid beneficiaries.

In addition, we make our products available to
authorized users of the Federal Supply Schedule, or
FSS, of the General Services Administration under an
FSS contract negotiated by the Department of Veterans Affairs.
The Veterans Health Care Act of 1992, or VHCA,
imposes a requirement that the prices we charge to agencies
under the FSS be discounted by a minimum of 24% off the average
manufacturer price charged to non-federal customers. Our
computation of the average manufacturer price to non-federal
customers is used in establishing the FSS price for federal
purchasers. The government maintains the right to audit the
accuracy of our computations. Among the remedies available to
the government for failure to accurately calculate FSS pricing
and the average manufacturer price charged to non-federal
customers is recoupment of any overpayments made by FSS
purchasers as a result of errors in computations that affect the
FSS price.

Failure to comply with our obligations under the
Medicaid rebate program or other governmental pricing programs
could subject us to additional reimbursements, penalties,
sanctions and fines which could have a material adverse effect
on our business, financial condition, results of operations and
cash flows. The Medicaid rebate statute and the VHCA also
provide that, in addition to penalties that may be applicable
under other federal statutes, civil monetary penalties may be
assessed for knowingly providing false information in connection
with the pricing and reporting requirements under the 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
in the Managements Discussion and Analysis of
Financial Condition and Results of Operations section
under the heading Recent Developments  SEC
Investigation, Medicaid and Other Governmental Program Accrual
Adjustment, and Related Matters, we determined recently
that we had 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 PHS. We have contacted
the Centers for Medicare and Medicaid Services, the Office of
Inspector General at the Department of Health and Human
Services, and the Department of Justice 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 currently expect to
make the requisite payments in the third or fourth quarter of
2003. The SEC, the Centers for Medicare and Medicaid Services,
the Office of Inspector General, the Department of Justice and
other governmental agencies that might be investigating or might
commence an investigation of King 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.



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

Under government regulations, chlorofluorocarbon
compounds are being phased out because of environmental
concerns. Our products Intal® and Tilade® currently
use these compounds as propellants. A new inhaler for
Intal® using the alternative propellant hydrofluoroalkane,
or HFA, is under review by the FDA.

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In the event we cannot obtain approval for
alternative propellants for both Intal® and Tilade®
before the final phase-out date of chlorofluorocarbon compounds
or if we are unable to maintain an adequate supply of
chlorofluorocarbon compounds for the production of these
products prior to this date, our ability to market these
products could be materially adversely affected, which could
have a material adverse effect on our business, financial
condition, results of operations and cash flows.


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, 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;                                                                

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| |   |                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------
| |  | 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. 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

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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.



| |                                                                                                             
| | ------------------------------------------------------------------------------------------------------------
| | 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 2.8%
of gross sales for the last twelve months ended June 30,
2003, we cannot assure you that actual levels of returns will
not increase or significantly exceed the amounts we have
anticipated.

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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 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.

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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                                                                                                                                              
|
| |  | 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),      

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| |   |                                             
| | - | --------------------------------------------
| |  | 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.).

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



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

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

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| |   |                                                                                                                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 Estrasorb, 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 inhalers for Intal® and Tilade®
    using the alternative propellant HFA;                                                                                                                                                      
|
| |  | our continued successful execution of our growth
    strategies;                                                                                                                                                                                                                                            
|
| |  | anticipated developments and expansions of our
    business;                                                                                                                                                                                                                                                
|
| |  | 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 Estrasorb; 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.

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|        |                                                              
|------- | -------------------------------------------------------------
|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 June 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 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. This process
partially constitutes corrective action with respect to a
condition that our auditors, as part of their audit of the
consolidated financial statements for the year ended
December 31, 2002, have identified as a significant
deficiency (as defined under standards established by the
American Institute of Certified Public Accountants). In
addition, effective August 1, our chief executive officer,
appointed a corporate compliance officer. 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 June 30, 2003:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) A Current Report on Form 8-K filed
    April 8, 2003 reported under Item 5 additional information
    pertaining to our announcement on March 31, 2003 that we
    filed a Form 12b-25 with the Securities and Exchange
    Commission (the SEC) providing for a 15-calendar-day
    extension for submitting our Form 10-K for the year ended
    December 31, 2002, to the SEC.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| | (2) A Current Report on Form 8-K filed
    April 16, 2003 reported under Item 5 additional
    information pertaining to our announcement that, on
    March 11, 2003, we received a letter from the SEC with
    respect to an SEC investigation. The letter was accompanied by a
    subpoena requesting the production of documents. In light of the
    SEC investigation and as recommended by our management, the
    Audit Committee of our Board of Directors initiated its own
    related internal review and retained independent counsel, who
    retained an independent accounting firm, to assist the Audit
    Committee. On March 31, 2003, because the audit
    committees investigation was not complete and no
    conclusions had been reached, we filed a Form 12b-25 with
    the SEC to obtain a 15-day extension for filing our
    Form 10-K in order to provide the Audit Committee and its
    independent legal counsel with additional time to conduct a more
    thorough review.
|
| | (3) A Current Report on Form 8-K filed
    April 25, 2003 furnished under Item 9
    Regulation FD Disclosure pertaining to our issuance of a
    press release which provided a preview of our first quarter 2003
    financial results and our announced plans to release our first
    quarter 2003 results on May 6, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| | (4) A Current Report on Form 8-K filed
    May 6, 2003 furnished under Item 12 our financial
    results for the quarter ended March 31, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| | (5) A Current Report on Form 8-K filed
    May 21, 2003 reported under Item 5 the restructuring
    of the asset purchase agreement with Elan Corporation, plc and
    provided revised financial projections reflecting the proposed
    transaction.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| | (6) A Current Report on Form 8-K filed
    June 13, 2003, reported under Item 2 the acquisition
    of Elan Corporation, plcs primary care business in the
    United States and Puerto Rico, which includes two branded
    prescription pharmaceutical products, including rights to
    potential new formulations of the products, together with
    Elans experienced primary care field sales force.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

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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: August 14, 2003

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

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

Date: August 14, 2003

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

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

58