##### Table of Contents



UNITED STATES SECURITIES AND
    EXCHANGE COMMISSION
 Washington, D.C.
    20549
      Form 10-Q
  (Mark One)þ

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended
    September 30, 2006ORo

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the transition period
    from          
    to   Commission File
    No. 001-15875
  King Pharmaceuticals,
    Inc.
 (Exact name of registrant as
    specified in its charter)
  Tennessee(State or other
    jurisdiction of
    incorporation or organization)

54-1684963(I.R.S. Employer
    Identification No.)501 Fifth Street, Bristol,
    TN(Address of principal
    executive offices)

37620(Zip
    Code)   (423) 989-8000
 (Registrants telephone
    number, including area code)
   þ o
  Rule 12b-2
 þ o o
  Rule 12b-2 o þ




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##### 



TABLE OF
    CONTENTS
  PageReferencePart I 
    Financial InformationItem 1.


Financial
    Statements


3Condensed
    Consolidated Balance Sheets


3Condensed
    Consolidated Statements of Operations


4Condensed
    Consolidated Statements of Changes in Shareholders Equity
    and Other Comprehensive Income


5Condensed
    Consolidated Statements of Cash Flows


6Notes to Condensed
    Consolidated Financial Statements


7Item 2.


Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations


37Item 3.


Quantitative and
    Qualitative Disclosures about Market Risk


86Item 4.


Controls and
    Procedures


86Part II 
    Other InformationItem 1.


Legal
    Proceedings


87Item 1A.


Risk
    Factors


87Item 6.


Exhibits.


87Signatures


88Ex-10.1 Amended Co-Promotion AgreementEx-10.2 July 31, 2006 Settelement AgreementEx-10.4 Form of Restricted Unit Certificate/Grant AgreementEx-31.1 Section 302 CertificationEx-31.2 Section 302 CertificationEx-32.1 Section 906 CertificationEx-32.2 Section 906 Certification   2




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##### Table of Contents



PART I 
    FINANCIAL INFORMATION  Item 1.
    Financial
    Statements  KING
    PHARMACEUTICALS, INC.
  CONDENSED CONSOLIDATED BALANCE SHEETS
 (In thousands)
  September 30,


December 31,2006


2005(Unaudited)ASSETSCurrent Assets:Cash and cash equivalents

$
138,054


$
30,014Investments in debt securities


779,545



494,663Restricted cash






130,400Accounts receivable, net of
    allowance for doubtful accounts of $5,602 and $12,280,
    respectively


255,746



223,581Inventories


186,770



228,063Deferred income tax assets


69,153



81,777Prepaid expenses and other current
    assets


102,356



59,291Total current assets


1,531,624



1,247,789Property, plant and equipment, net


303,822



302,474Intangible assets, net


924,828



967,194Goodwill


121,152



121,152Marketable securities


13,508



18,502Deferred income tax assets


258,498



231,032Other assets (includes restricted
    cash of $15,807 and $14,129, respectively)


94,112



77,099Total assets

$
3,247,544


$
2,965,242LIABILITIES AND
    SHAREHOLDERS EQUITYCurrent Liabilities:Accounts payable

$
80,810


$
84,539Accrued expenses


471,695



519,620Income taxes payable


20,617



22,301Current portion of long-term debt


4,257



345,000Total current liabilities


577,379



971,460Long-term debt


400,000



Other liabilities


23,894



20,360Total liabilities


1,001,273



991,820Commitments and contingencies
    (Note 9)Shareholders equity


2,246,271



1,973,422Total liabilities and
    shareholders equity

$
3,247,544


$
2,965,242    3




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  CONDENSED CONSOLIDATED STATEMENTS OF
    OPERATIONS
 (Unaudited)
 (In thousands, except per share data)
  Three Months Ended


Nine Months EndedSeptember 30,


September 30,2006


2005


2006


2005Revenues:Net sales

$
472,570


$
495,688


$
1,415,729


$
1,289,619Royalty revenue


19,136



22,344



59,857



59,977Total revenues


491,706



518,032



1,475,586



1,349,596Operating costs and expenses:Cost of revenues, exclusive of
    depreciation, amortization and impairments shown below


106,473



92,257



305,925



255,677Selling, general and
    administrative, exclusive of co-promotion fees and Mylan
    transaction costs


107,300



111,638



319,480



305,911Mylan transaction costs






466







3,898Co-promotion fees


50,294



70,346



162,615



162,588Total selling, general and
    administrative expense


157,594



182,450



482,095



472,397Research and development


38,419



24,049



102,931



53,021Research and development-in process
    upon acquisition


25,000







110,000



Total research and development


63,419



24,049



212,931



53,021Depreciation and amortization
    (Note 13)


37,833



31,352



110,745



112,698Intangible asset impairment










279



126,923Restructuring charges (Note 13)


3,202



597



3,194



2,603Gain on sale of products






(20
)






(1,458
)Total operating costs and expenses


368,521



330,685



1,115,169



1,021,861Operating income


123,185



187,347



360,417



327,735Other income (expense):Interest income


8,489



5,253



22,842



11,463Interest expense


(1,894
)


(3,136
)


(7,925
)


(8,876
)Gain (loss) on investment






1,040







(6,182
)(Loss) gain on early extinguishment
    of debt


(11
)






698



Other, net


101



(751
)


(613
)


(2,047
)Total other income (expense)


6,685



2,406



15,002



(5,642
)Income from continuing operations
    before income taxes


129,870



189,753



375,419



322,093Income tax expense


40,020



67,109



123,931



111,302Income from continuing operations


89,850



122,644



251,488



210,791Discontinued operations
    (Note 17):Income (loss) from discontinued
    operations


865



(1,226
)


775



2,607Income tax expense (benefit)


310



(439
)


278



989Total income (loss) from
    discontinued operations, net


555



(787
)


497



1,618Net income

$
90,405


$
121,857


$
251,985


$
212,409Income per common share:Basic:Income from continuing operations

$
0.37


$
0.50


$
1.04


$
0.87Total income (loss) from
    discontinued operations














0.01Net income

$
0.37


$
0.50


$
1.04


$
0.88Diluted:Income from continuing operations

$
0.37


$
0.50


$
1.04


$
0.87Total income (loss) from
    discontinued operations














0.01Net income

$
0.37


$
0.50


$
1.04


$
0.88    4




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
    SHAREHOLDERS EQUITY
 AND OTHER COMPREHENSIVE INCOME
 (Unaudited)
 (In thousands, except share data)
  AccumulatedOtherCommon Stock


Unearned


Retained


ComprehensiveShares


Amount


Compensation


Earnings


Income (Loss)


TotalBalance at December 31, 2004


241,706,583


$
1,210,647


$



$
637,120


$
1,023


$
1,848,790Comprehensive income:Net Income














212,409







212,409Net unrealized gain on marketable
    securities, net of tax of $10


















75



75Foreign currency translation


















(79
)


(79
)Total comprehensive income






















212,405Stock option activity


79,399



682















682Balance at September 30, 2005


241,785,982


$
1,211,329


$



$
849,529


$
1,019


$
2,061,877Balance at December 31, 2005


242,493,416


$
1,222,246


$
(8,764
)

$
754,953


$
4,987


$
1,973,422Adoption of Statement of Financial
    Accounting Standard 123(R)






(8,764
)


8,764











Comprehensive income:Net income














251,985







251,985Net unrealized loss on marketable
    securities, net of tax of $1,978


















(3,872
)


(3,872
)Foreign currency translation


















(317
)


(317
)Total comprehensive income






















247,796Stock-based compensation expense






18,774















18,774Exercise of stock options


421,245



6,279















6,279Issuance of restricted stock awards


199,005



















Balance at September 30, 2006


243,113,666


$
1,238,535


$



$
1,006,938


$
798


$
2,246,271    5




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  CONDENSED CONSOLIDATED STATEMENTS OF CASH
    FLOWS
 (In thousands)
 (Unaudited)
  Nine Months EndedSeptember 30,2006


2005Cash flows provided by operating
    activities

$
297,257


$
404,823Cash flows from investing
    activities:Transfers from (to) restricted cash


128,722



(73,544
)Purchases of investments in debt
    securities


(1,170,272
)


(879,379
)Proceeds from maturities and sales
    of investments in debt securities


885,390



470,872Purchases of property, plant and
    equipment


(31,220
)


(32,334
)Proceeds from sale of property and
    equipment






1Proceeds from sale of marketable
    securities






6,453Palatin collaboration






(10,000
)Purchases of product rights


(24,886
)


Arrow International Limited
    collaboration


(35,000
)


Net cash used in investing
    activities


(247,266
)


(517,931
)Cash flows from financing
    activities:Proceeds from exercise of stock
    options, net


6,844



682Excess tax benefits from
    stock-based compensation


425



Proceeds from issuance of
    long-term debt


400,000



Payments on long-term debt


(338,434
)


Debt issuance costs


(10,786
)


Net cash provided by financing
    activities


58,049



682Increase (decrease) in cash and
    cash equivalents


108,040



(112,426
)Cash and cash equivalents,
    beginning of period


30,014



192,656Cash and cash equivalents, end of
    period

$
138,054


$
80,230    6




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 September 30, 2006 and 2005
 (In thousands, except share and per share data)
 (Unaudited)
  1.
    General  Form 10-Q Rule 10-01 Regulation S-X Form 10-K
    2.
    Stock-Based
    Compensation     7




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Three Months


Nine MonthsEnded


EndedSeptember 30,


September 30,2005


2005Net income:As reported

$
121,857


$
212,409Less: pro forma compensation costs
    for options granted


(1,025
)


(3,892
)Pro forma

$
120,832


$
208,517Basic income per share:As reported

$
0.50


$
0.88Pro forma

$
0.50


$
0.86Diluted income per share:As reported

$
0.50


$
0.88Pro forma

$
0.50


$
0.86     Restricted
    Stock Awards, Restricted Stock Units and Long-Term Performance
    Unit Awards
           8




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
          WeightedAverageGrant-DateShares


Fair ValueRestricted Stock
    Awards:Nonvested balance at
    December 31, 2005


687,775


$
15.55Granted


229,155



18.95Vested


(40,133
)


15.60Forfeited


(30,150
)


16.25Nonvested balance at
    September 30, 2006


846,647


$
16.45Restricted Stock
    Units:Nonvested balance at
    December 31, 2005





$
Granted


40,250



17.39Vested






Forfeited


(5,750
)


17.39Nonvested balance at
    September 30, 2006


34,500


$
17.39Long-Term Performance Unit
    Awards (one year performance cycle):Nonvested balance at
    December 31, 2005





$
Granted


1,006,251



19.68Vested


(2,410
)


19.68Forfeited


(20,185
)


19.68Nonvested balance at
    September 30, 2006


983,656


$
19.68 9




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  WeightedAverageGrant-DateShares


Fair ValueLong-Term Performance Unit
    Awards (three year performance cycle):Nonvested balance at
    December 31, 2005





$
Granted


126,580



29.93Vested


(467
)


29.93Forfeited


(3,833
)


29.93Nonvested balance at
    September 30, 2006


122,280


$
29.93     Stock
    Options
      Three Months


Three Months


Nine Months


Nine MonthsEnded


Ended


Ended


EndedSeptember 30,


September 30,


September 30,


September 30,2006


2005


2006


2005Expected volatility






46.4
%


52.4
%


46.2
%Expected term (in years)






4



6



4Risk-free interest rate






3.96
%


4.64
%


3.89
%Expected dividend yield






0.00
%


0.00
%


0.00
%    10




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      WeightedAverageWeighted


Remaining


AggregateAverage


Contractual


IntrinsicShares


Exercise Price


Term (Years)


ValueOutstanding options,
    December 31, 2005,


7,073,966


$
18.83



7.65


$
8,106Granted


362,965



19.27Exercised


(424,260
)


16.15Expired


(363,602
)


24.58Forfeited


(144,251
)


16.24Outstanding options,
    September 30, 2006


6,504,818


$
18.77



7.18


$
8,327Exercisable, September 30,
    2006


4,212,764


$
20.07



6.43


$
5,684Expected to vest,
    September 30, 2006


2,115,566


$
16.37



8.58


$
2,440         2006

2005Total intrinsic value of stock
    options exercised

$
940


$
244Total fair value of stock awards
    vested

$
647


$
Total fair value of LPUs vested

$
47


$
     Review
    of Historical Equity-Based Compensation Grants
     11




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
          3.
    Earnings
    Per Share    Three Months Ended September 30,


Nine Months Ended September 30,2006


2005


2006


2005Basic income per common share:Weighted average common shares


242,256,408



241,754,708



242,162,602



241,736,842Diluted income per common share:Weighted average common shares


242,256,408



241,754,708



242,162,602



241,736,842Effect of stock options


279,433



151,994



313,234



94,101Effect of dilutive share awards


261,789







235,379



Weighted average common shares


242,797,630



241,906,702



242,711,215



241,830,943   3 4 1 4
 12




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    3 4
  4.
    Inventories    September 30,


December 31,2006


2005Raw materials

$
110,123


$
150,979Work-in-process


21,390



14,955Finished goods (including $7,668
    and $6,728 of sample inventory, respectively)


71,862



91,695203,375



257,629Inventory valuation allowance


(16,605
)


(29,566
)Total inventories

$
186,770


$
228,063   ®
  5.
    Property,
    Plant and Equipment  ®
   13




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    ®
  6.
    Acquisitions,
    Co-Promotions and Alliances  ® ® moderate-to-severe around-the-clock ® ®
    ® ® ®
    ® ® ® ®
 14




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    
    For 2006, 15% of
    Altace®
    net sales up to $165,000, 42.5% of
    Altace®
    net sales in excess of $165,000 and less than or equal to
    $465,000, and 52.5% of
    Altace®
    net sales that are in excess of $465,000 and less than or equal
    to $585,000. The fee in 2006 will not exceed $215,250.
    For 2007, 30% of
    Altace®
    net sales, with the fee not to exceed $178,500.
    For 2008, 22.5% of
    Altace®
    net sales, with the fee not to exceed $134,000.
    For 2009, 14.2% of
    Altace®
    net sales, with the fee not to exceed $84,500.
    For 2010, 25% of
    Altace®
    net sales, with the fee not to exceed $5,000.  ® ®
  ®
  ® ®
    Intangible assets

$
23,985Inventory


618Fixed assets


3$
24,606     ®
     15




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    ®
  7.
    Intangible
    Assets and Goodwill    September 30, 2006


December 31, 2005Gross





GrossCarrying


Accumulated


Carrying


AccumulatedAmount


Amortization


Amount


AmortizationTrademarks and product rights

$
1,199,545


$
352,410


$
1,174,028


$
296,801Patents


272,774



195,543



261,277



171,976Other intangibles


9,459



8,997



9,459



8,793Total intangible assets

$
1,481,778


$
556,950


$
1,444,764


$
477,570     ® ® ® ® ® ®
  ® ® ® and/or
    Branded

MeridianSegment

Segment

TotalGoodwill

$
12,742


$
108,410


$
121,152  16




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  8.
    Long-Term
    Debt    September 30,


December 31,2006


2005Convertible senior notes(a)

$
400,000


$
Convertible debentures(b)


4,257



345,000Senior secured revolving credit
    facility(c)






Total long-term debt


404,257



345,000Less current portion


4,257



345,000Long-term portion

$
400,000


$
     (a)
    
    During the first quarter of 2006, the Company issued $400,000 of
    11/4% Convertible
    Senior Notes due April 1, 2026 (Notes). The
    Notes are unsecured obligations and are guaranteed by each of
    the Companys domestic subsidiaries on a joint and several
    basis. The Notes accrue interest at an initial rate of
    11/4%.
    Beginning with the six-month interest period that commences on
    April 1, 2013, the Company will pay additional interest
    during any six-month interest period if the average trading
    price of the Notes during the five consecutive trading days
    ending on the second trading day immediately preceding the first
    day of such six-month period equals 120% or more of the
    principal amount of the Notes. Interest is payable on
    April 1 and October 1 of each year, beginning
    October 1, 2006.On or after April 5, 2013, the Company may redeem for cash
    some or all of the Notes at any time at a price equal to 100% of
    the principal amount of the Notes to be redeemed, plus any
    accrued and unpaid interest, and liquidated damages, if any, to
    but excluding the date fixed for redemption. Holders may require
    the Company to purchase for cash some or all of their Notes on
    April 1, 2013, April 1, 2016 and April 1, 2021,
    or upon the occurrence of a fundamental change (such as a change
    of control or a termination of trading), at 100% of the
    principal amount of the Notes to be purchased, plus any accrued
    and unpaid interest, and liquidated damages, if any, to but
    excluding the purchase date.Prior to April 1, 2012, the Notes are convertible under the
    following circumstances: if the price of the Companys common stock
    reaches a specified threshold during specified periods, if the Notes have been called for redemption, or if specified corporate transactions or other
    specified events occur.The Notes are convertible at any time on and after April 1,
    2012, until the close of business on the business day
    immediately preceding maturity. Subject to certain exceptions,
    the Company will deliver cash and shares of the Companys
    common stock, as follows: (i) an amount in cash equal to
    the lesser of (a) the principal amount of Notes surrendered
    for conversion and (b) the product of the conversion rate
    and the average price of the Companys common stock (the
    conversion value), and (ii) if the conversion
    value is greater than the principal amount, a specified amount
    in cash or shares of the Companys common stock, at the
    Companys election. The initial conversion price is
    approximately $20.83 per share of common stock. If certain
    corporate transactions occur on or prior to April 1, 2013,
    the Company will increase the conversion rate in certain
    circumstances.The Company has reserved 23,732,724 shares of common stock
    in the event the Notes are converted into shares of the
    Companys common stock.In connection with the issuance of the Notes, the Company
    incurred approximately $10,786 of deferred financing costs that
    are being amortized over seven years. 17




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  (b)
    
    During the fourth quarter of 2001, the Company issued $345,000
    of
    23/4% Convertible
    Debentures due November 15, 2021 (Debentures).
    On March 29, 2006, the Company repurchased $165,000 of the
    Debentures prior to maturity for $163,350, resulting in a gain
    of $1,650. In addition, the Company wrote off deferred financing
    costs of $628 relating to the repurchased Debentures. On
    June 2, 2006, the Company completed a tender offer,
    repurchasing $175,743 of the Debentures at a purchase price of
    $175,084, resulting in a gain of $659. In addition, the Company
    wrote off financing costs of $983 relating to the repurchased
    Debentures. On May 16, 2006, the interest rate on the
    Debentures was reset to 3.5%. On October 6, 2006, the
    Company sent a notice of redemption to the trustee of the
    Debentures that it will redeem all of the outstanding Debentures
    on November 20, 2006. In accordance with the optional
    redemption provisions of the indenture of the Debentures, the
    Company will redeem the Debentures at a price of 100% of the
    principal amount thereof plus accrued interest.(c)
    
    On April 23, 2002, the Company established a $400,000 five
    year Senior Secured Revolving Credit Facility which matures in
    April 2007.  9.
    Contingencies  Fen/Phen
    Litigation
  In re and/or
  ®
  ®
 18




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Thimerosal/Childrens
    Vaccine Related Litigation
       19




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Hormone
    Replacement Therapy
  In re:
  Average
    Wholesale Price Litigation
  In re:
     20




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Settlement
    of Governmental Pricing Investigation
             21




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  SEC
    Investigation
      Securities
    Litigation
  and/or
     22




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
              Other
    Legal Proceedings
  ® ® Approved Drug Products With Therapeutic
    Equivalence Evaluations method-of-use
 23




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  ®
    ® ®
  ® ® ®
  ® ® method-of-use ®
 24




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    ®
  ®
  ® ® ®
    ® method-of-use ® ®
 25




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  ® method-of-use ® ®
  ® ® ®
    Other
    Contingencies
  ® ® ® and/or
  10.
    Accounting
    Developments     26




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Accounting for Uncertainty in Income Taxes  an
    interpretation of FASB Statement No. 109
       27




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    11.
    Income
    Taxes      12.
    Segment
    Information  ®
   28




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Three Months Ended


Nine Months EndedSeptember 30,


September 30,2006


2005


2006


2005Total revenues:Branded pharmaceuticals

$
432,887


$
454,548


$
1,269,625


$
1,176,627Meridian Medical Technologies


37,125



38,366



132,292



96,998Royalties


19,136



22,344



59,857



59,977Contract manufacturing and other


137,979



229,112



409,170



478,323Eliminations


(135,421
)


(226,338
)


(395,358
)


(462,329
)Consolidated total net revenues

$
491,706


$
518,032


$
1,475,586


$
1,349,596Segment profit:Branded pharmaceuticals

$
349,662


$
387,360


$
1,045,306


$
995,154Meridian Medical Technologies


19,801



19,948



71,965



50,425Royalties


16,799



20,194



52,594



53,140Contract manufacturing and other


(1,029
)


(1,727
)


(204
)


(4,800
)Other operating costs and expense


(262,048
)


(238,428
)


(809,244
)


(766,184
)Other income (expense)


6,685



2,406



15,002



(5,642
)Income from continuing operations
    before tax

$
129,870


$
189,753


$
375,419


$
322,093   As of


As ofSeptember 30,


December 31,2006


2005Total assets:Branded pharmaceuticals

$
2,908,521


$
2,654,782Meridian Medical Technologies


302,279



261,956Royalties


20,117



20,444Contract manufacturing and other


16,627



26,840Other






1,220Consolidated total assets

$
3,247,544


$
2,965,242     Three Months Ended


Nine Months EndedSeptember 30,


September 30,2006


2005


2006


2005Total revenues:Cardiovascular/metabolic

$
198,962


$
228,399


$
603,968


$
564,710Neuroscience


124,592



135,515



365,875



333,021Hospital/acute care


93,241



75,209



257,652



238,504Other


16,092



15,425



42,130



40,392Consolidated branded
    pharmaceutical revenues

$
432,887


$
454,548


$
1,269,625


$
1,176,627  29




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  13.
    Restructuring
    Activities  ®
      Accrued











Accrued











AccruedBalance at


Income








Balance at


Income








Balance atDecember 31,


Statement








June 30,


Statement








September 30,2005


Impact


Payments


Non-Cash


2006


Impact


Payments


Non-Cash


2006Third quarter of 2006
    actionEmployee separation payments

$



$



$



$



$



$
3,202


$



$



$
3,202Accelerated
    depreciation(1)






















1,472







(1,472
)


Fourth quarter of 2005
    actionEmployee separation payments


1,509



(8
)


(980
)






521















521$
1,509


$
(8
)

$
(980
)

$



$
521


$
4,674


$



$
(1,472
)

$
3,723     (1)
    
    Included in depreciation and amortization on the Condensed
    Consolidated Statement of Operations.      14.
    Investments
    in Debt Securities    15.
    Marketable
    Securities   30




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    16.
    Change in
    Estimate    ®
  ®
 31




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  ® ®
    17.
    Discontinued
    Operations  ® ®
  ® ® ® ®
    Three Months Ended


Nine Months EndedSeptember 30,


September 30,2006


2005


2006


2005Total revenues

$
865


$
(1,228
)

$
772


$
2,606Operating income (loss)


865



(1,226
)


775



2,607Net income (loss)

$
555


$
(787
)

$
497


$
1,618     18.
    Guarantor
    Financial Statements   32




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  GUARANTOR
    SUBSIDIARIES
  CONDENSED
    CONSOLIDATING BALANCE SHEETS
 (In thousands)
 (Unaudited)
  September 30, 2006


December 31, 2005Non














NonGuarantor


Guarantor


Eliminating


King





Guarantor


Guarantor


Eliminating


KingKing


Subsidiaries


Subsidiaries


Entries


Consolidated


King


Subsidiaries


Subsidiaries


Entries


ConsolidatedASSETSCurrent assets:Cash and cash equivalents

$
123,119


$
11,489


$
3,446


$



$
138,054


$
26,802


$
1,071


$
2,141


$



$
30,014Investments in debt securities


779,545















779,545



494,663















494,663Restricted cash






















130,400















130,400Accounts receivable, net


98



254,161



1,487







255,746



1,221



221,854



506







223,581Inventories


148,558



37,899



313







186,770



195,421



31,877



765







228,063Deferred income tax assets


10,214



58,939











69,153



21,524



60,253











81,777Prepaid expenses and other current
    assets


99,306



3,050











102,356



50,724



8,566



1







59,291Total current assets


1,160,840



365,538



5,246







1,531,624



920,755



323,621



3,413







1,247,789Property, plant and equipment, net


110,033



193,789











303,822



108,712



193,762











302,474Intangible assets, net






921,802



3,026







924,828



44



963,944



3,206







967,194Goodwill






121,152











121,152







121,152











121,152Marketable securities


13,508















13,508



18,502















18,502Deferred income tax assets


(28,147
)


285,538



1,107







258,498



(9,483
)


239,452



1,063







231,032Other assets


38,911



55,201











94,112



30,225



46,874











77,099Investments in subsidiaries


2,565,693











(2,565,693
)






2,299,835











(2,299,835
)


Total assets

$
3,860,838


$
1,943,020


$
9,379


$
(2,565,693
)

$
3,247,544


$
3,368,590


$
1,888,805


$
7,682


$
(2,299,835
)

$
2,965,242LIABILITIES AND
    SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable

$
50,977


$
29,737


$
96


$



$
80,810


$
60,700


$
23,762


$
77


$



$
84,539Accrued expenses


82,850



388,844



1







471,695



151,125



368,491



4







519,620Income taxes payable


17,134



3,604



(121
)






20,617



24,123



(1,701
)


(121
)






22,301Current portion of long-term debt


4,257















4,257



345,000















345,000Total current liabilities


155,218



422,185



(24
)






577,379



580,948



390,552



(40
)






971,460Long-term debt


400,000















400,000



















Other liabilities


17,280



6,614











23,894



17,371



2,989











20,360Intercompany payable (receivable)


1,042,069



(1,054,542
)


12,473











796,849



(808,256
)


11,407







Total liabilities


1,614,567



(625,743
)


12,449







1,001,273



1,395,168



(414,715
)


11,367







991,820Shareholders equity


2,246,271



2,568,763



(3,070
)


(2,565,693
)


2,246,271



1,973,422



2,303,520



(3,685
)


(2,299,835
)


1,973,422Total liabilities and
    shareholders equity

$
3,860,838


$
1,943,020


$
9,379


$
(2,565,693
)

$
3,247,544


$
3,368,590


$
1,888,805


$
7,682


$
(2,299,835
)

$
2,965,242  33




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  GUARANTOR
    SUBSIDIARIES
  CONDENSED
    CONSOLIDATED STATEMENTS OF OPERATIONS
 (In thousands)
 (Unaudited)
  Three Months Ended September 30, 2006


Three Months Ended September 30, 2005Non














NonGuarantor


Guarantor





King





Guarantor


Guarantor





KingKing


Subsidiaries


Subsidiaries


Eliminations


Consolidated


King


Subsidiaries


Subsidiaries


Eliminations


ConsolidatedRevenues:Net sales

$
106,996


$
472,276


$
(157
)

$
(106,545
)

$
472,570


$
200,301


$
495,280


$
221


$
(200,114
)

$
495,688Royalty revenue






19,136











19,136







22,344











22,344Total revenues


106,996



491,412



(157
)


(106,545
)


491,706



200,301



517,624



221



(200,114
)


518,032Operating costs and expenses:Cost of revenues


36,358



176,660







(106,545
)


106,473



34,162



258,087



122



(200,114
)


92,257Selling, general and administrative


57,653



99,883



58







157,594



59,403



121,027



1,554







181,984Mylan transaction costs






















466















466Research and development


181



63,238











63,419



174



23,875











24,049Depreciation and amortization


5,395



32,378



60







37,833



3,959



27,226



167







31,352Restructuring charges


202



3,000











3,202







597











597Gain on sale of products


























(20
)










(20
)Total operating costs and expenses


99,789



375,159



118



(106,545
)


368,521



98,164



430,792



1,843



(200,114
)


330,685Operating income (loss)


7,207



116,253



(275
)






123,185



102,137



86,832



(1,622
)






187,347Other income (expense):Interest income


8,434



53



2







8,489



5,244



9











5,253Interest expense


(1,881
)


(13
)










(1,894
)


(3,105
)


(31
)










(3,136
)Gain on investment






















1,040















1,040Loss on early extinguishment of debt


(11
)














(11
)


















Other, net


5



68



28







101



(312
)


(425
)


(14
)






(751
)Equity in earnings of subsidiaries


100,267











(100,267
)






69,255











(69,255
)


Intercompany interest (expense)
    income


(10,533
)


10,646



(113
)










(18,952
)


19,122



(170
)






Total other income (expense)


96,281



10,754



(83
)


(100,267
)


6,685



53,170



18,675



(184
)


(69,255
)


2,406Income (loss) from continuing
    operations before income taxes


103,488



127,007



(358
)


(100,267
)


129,870



155,307



105,507



(1,806
)


(69,255
)


189,753Income tax expense (benefit)


13,083



27,106



(169
)






40,020



33,450



34,291



(632
)






67,109Income (loss) from continuing
    operations


90,405



99,901



(189
)


(100,267
)


89,850



121,857



71,216



(1,174
)


(69,255
)


122,644Discontinued operations:Income (loss) from discontinued
    operations






865











865







(1,226
)










(1,226
)Income tax expense (benefit)






310











310







(439
)










(439
)Total income (loss) from
    discontinued operations, net






555











555







(787
)










(787
)Net income (loss)

$
90,405


$
100,456


$
(189
)

$
(100,267
)

$
90,405


$
121,857


$
70,429


$
(1,174
)

$
(69,255
)

$
121,857  34




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  GUARANTOR
    SUBSIDIARIES
  CONDENSED
    CONSOLIDATED STATEMENTS OF OPERATIONS
 (In thousands)
 (Unaudited)
  Nine Months Ended September 30, 2006


Nine Months Ended September 30, 2005Non














NonGuarantor


Guarantor





King





Guarantor


Guarantor





KingKing


Subsidiaries


Subsidiaries


Eliminations


Consolidated


King


Subsidiaries


Subsidiaries


Eliminations


ConsolidatedRevenues:Net sales

$
317,821


$
1,413,603


$
1,254


$
(316,949
)

$
1,415,729


$
396,709


$
1,287,531


$
805


$
(395,426
)

$
1,289,619Royalty revenue






59,857











59,857







59,977











59,977Total revenues


317,821



1,473,460



1,254



(316,949
)


1,475,586



396,709



1,347,508



805



(395,426
)


1,349,596Operating costs and expenses:Cost of revenues


119,801



502,262



811



(316,949
)


305,925



106,187



544,478



438



(395,426
)


255,677Selling, general and administrative


160,528



322,274



(707
)






482,095



151,341



315,477



1,681







468,499Mylan transaction costs






















3,898















3,898Research and development


3,102



209,829











212,931



466



52,555











53,021Depreciation and amortization


16,164



94,401



180







110,745



11,768



100,431



499







112,698Intangible asset impairment






279











279







126,923











126,923Restructuring charges


202



2,992











3,194



322



2,281











2,603Gain on sale of products


























(1,458
)










(1,458
)Total operating costs and expenses


299,797



1,132,037



284



(316,949
)


1,115,169



273,982



1,140,687



2,618



(395,426
)


1,021,861Operating income (loss)


18,024



341,423



970







360,417



122,727



206,821



(1,813
)






327,735Other income (expense): Interest
    income


22,650



190



2







22,842



10,966



497











11,463Interest expense


(7,769
)


(156
)










(7,925
)


(8,827
)


(49
)










(8,876
)Loss on investment






















(6,182
)














(6,182
)Gain on early extinguishment of debt


698















698



















Other, net


(225
)


(711
)


323







(613
)


(494
)


(1,178
)


(375
)






(2,047
)Equity in earnings of subsidiaries


266,175











(266,175
)






172,344











(172,344
)


Intercompany interest (expense)
    income


(36,226
)


36,643



(417
)










(47,942
)


48,412



(470
)






Total other income (expenses)


245,303



35,966



(92
)


(266,175
)


15,002



119,865



47,682



(845
)


(172,344
)


(5,642
)Income (loss) from continuing
    operations before income taxes


263,327



377,389



878



(266,175
)


375,419



242,592



254,503



(2,658
)


(172,344
)


322,093Income tax expense (benefit)


11,342



112,325



264







123,931



30,183



82,049



(930
)






111,302Income (loss) from continuing
    operations


251,985



265,064



614



(266,175
)


251,488



212,409



172,454



(1,728
)


(172,344
)


210,791Discontinued operations:Income from discontinued operations






775











775







2,607











2,607Income tax expense






278











278







989











989Total income from discontinued
    operations






497











497







1,618











1,618Net income (loss)

$
251,985


$
265,561


$
614


$
(266,175
)

$
251,985


$
212,409


$
174,072


$
(1,728
)

$
(172,344
)

$
212,409  35




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  GUARANTOR
    SUBSIDIARIES
  CONDENSED
    CONSOLIDATING STATEMENTS OF CASH FLOWS
 (In thousands)
 (Unaudited)
  Nine Months Ended September 30, 2006


Nine Months Ended September 30, 2005Non











NonGuarantor


Guarantor


King





Guarantor


Guarantor


KingKing


Subsidiaries


Subsidiaries


Consolidated


King


Subsidiaries


Subsidiaries


ConsolidatedCash flows (used in) provided by
    operating activities

$
(39,643
)

$
336,660


$
240


$
297,257


$
122,662


$
282,310


$
(149
)

$
404,823Cash flows from investing
    activities:Transfers from (to) restricted cash


128,722











128,722



(75,126
)


1,582







(73,544
)Purchases of investments in debt
    securities


(1,170,272
)










(1,170,272
)


(879,379
)










(879,379
)Proceeds from maturities and sales
    of investments in debt securities


885,390











885,390



470,872











470,872Purchases of property, plant and
    equipment


(17,512
)


(13,708
)






(31,220
)


(6,941
)


(25,393
)






(32,334
)Proceeds from sale of property and
    equipment


















1











1Purchases of product rights






(24,886
)






(24,886
)














Arrow International Limited
    collaboration






(35,000
)






(35,000
)














Proceeds from sale of marketable
    securities


















6,453











6,453Palatin collaboration


















(10,000
)










(10,000
)Net cash used in investing
    activities


(173,672
)


(73,594
)






(247,266
)


(494,120
)


(23,811
)






(517,931
)Cash flows from financing
    activities:Proceeds from exercise of stock
    options, net


6,844











6,844



682











682Excess tax benefit from stock-based
    compensation


425











425















Proceeds from issuance of long-term
    debt


400,000











400,000















Payments on long-term debt


(338,434
)










(338,434
)














Debt issuance costs


(10,786
)










(10,786
)














Intercompany


251,583



(252,648
)


1,065







284,575



(285,717
)


1,142



Net cash provided by (used in)
    financing activities


309,632



(252,648
)


1,065



58,049



285,257



(285,717
)


1,142



682Increase (decrease) in cash and
    cash equivalents


96,317



10,418



1,305



108,040



(86,201
)


(27,218
)


993



(112,426
)Cash and cash equivalents,
    beginning of period


26,802



1,071



2,141



30,014



164,451



27,035



1,170



192,656Cash and cash equivalents, end of
    period

$
123,119


$
11,489


$
3,446


$
138,054


$
78,250


$
(183
)

$
2,163


$
80,230  36




---



##### Table of Contents



Item 2.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  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 in our Annual Report on
    Form 10-K
    for the year ended December 31, 2005, 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, 2005; 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
  Our
    Business
       37




---



##### Table of Contents



RESULTS
    OF OPERATIONS
  Three
    and Nine Months Ended September 30, 2006 and
    2005
    For the Three Months


For the Nine MonthsEnded September 30,


Ended September 30,2006


2005


2006


2005(In thousands)


(In thousands)Total RevenuesBranded pharmaceuticals

$
432,887


$
454,548


$
1,269,625


$
1,176,627Meridian Medical Technologies


37,125



38,366



132,292



96,998Royalties


19,136



22,344



59,857



59,977Contract manufacturing and other


2,558



2,774



13,812



15,994Total revenues

$
491,706


$
518,032


$
1,475,586


$
1,349,596Cost of RevenuesBranded pharmaceuticals

$
83,225


$
67,188


$
224,319


$
181,473Meridian Medical Technologies


17,324



18,418



60,327



46,573Royalties


2,337



2,150



7,263



6,837Contract manufacturing and other


3,587



4,501



14,016



20,794Total cost of revenues

$
106,473


$
92,257


$
305,925


$
255,677Gross ProfitBranded pharmaceuticals

$
349,662


$
387,360


$
1,045,306


$
995,154Meridian Medical Technologies


19,801



19,948



71,965



50,425Royalties


16,799



20,194



52,594



53,140Contract manufacturing and other


(1,029
)


(1,727
)


(204
)


(4,800
)Total gross profit

$
385,233


$
425,775


$
1,169,661


$
1,093,919     For the Three Months


For the Nine MonthsEnded September 30,


Ended September 30,2006


2005


2006


2005(In thousands)


(In thousands)Gross Sales

$
607,543


$
633,562


$
1,831,972


$
1,697,919Commercial Rebates


47,306



63,733



144,350



145,248Medicaid Rebates


2,882



4,143



21,194



59,947Medicare Part D Rebates


15,586







41,456



Chargebacks


24,193



31,291



76,440



71,028Returns


2,511



(2,971
)


10,053



2,758Trade Discounts/Other


22,494



20,562



62,121



66,736492,571



516,804



1,476,358



1,352,202Discontinued Operations


865



(1,228
)


772



2,606Net Sales

$
491,706


$
518,032


$
1,475,586


$
1,349,596    38




---



##### Table of Contents



®
    Accrual
    for Rebates, including Administrative Fees (in
    thousands):
  2006


2005Balance at January 1, net of
    prepaid amounts

$
126,240


$
179,062Current provision related to sales
    made in current period


79,690



62,504Current provision related to sales
    made in prior periods


(3,532
)


(7,481
)Rebates paid


(115,999
)


(83,196
)Balance at March 31, net of
    prepaid amounts

$
86,399


$
150,889Current provision related to sales
    made in current period


69,912



79,696Current provision related to sales
    made in prior periods


(4,844
)


2,600Rebates paid


(82,158
)


(80,423
)Balance at June 30, net of
    prepaid amounts

$
69,309


$
152,762Current provision related to sales
    made in current period


76,684



92,178Current provision related to sales
    made in prior periods


(10,910
)


(24,302
)Rebates paid


(76,460
)


(76,579
)Balance at September 30, net
    of prepaid amounts

$
58,623


$
144,059          39




---



##### Table of Contents



Accrual
    for Returns (in thousands):
  2006


2005Balance at January 1

$
50,902


$
122,863Current provision


(702
)


(4,438
)Actual returns


(7,692
)


(45,394
)Ending balance at March 31

$
42,508


$
73,031Current provision


8,244



10,167Actual returns


(4,410
)


(15,009
)Ending balance at June 30

$
46,342


$
68,189Current provision


2,511



(2,971
)Actual returns


(6,760
)


(10,335
)Ending balance at September 30

$
42,093


$
54,883      40




---



##### Table of Contents



®
  ® ®
  Accrual
    for Chargebacks (in thousands):
  2006


2005Balance at January 1

$
13,153


$
27,953Current provision


29,390



18,558Actual chargebacks


(25,972
)


(22,048
)Ending balance at March 31

$
16,571


$
24,463Current provision


22,857



21,179Actual chargebacks


(25,402
)


(31,741
)Ending balance at June 30

$
14,026


$
13,901Current provision


24,193



31,291Actual chargebacks


(25,278
)


(30,518
)Ending balance at September 30

$
12,941


$
14,674   Branded
    Pharmaceuticals
  For the Three Months


Change


For the Nine Months


ChangeEnded September 30,


2006 vs. 2005


Ended September 30,


2006 vs. 20052006


2005


$


%


2006


2005


$


%(In thousands)








(In thousands)Branded Pharmaceutical revenue:Altace®

$
158,914


$
174,200


$
(15,286
)


(8.8
)%

$
471,604


$
404,103


$
67,501



16.7
%Skelaxin®


105,933



115,893



(9,960
)


(8.6
)


302,037



274,619



27,418



10.0Thrombin-JMI®


70,029



53,767



16,262



30.2



190,133



169,959



20,174



11.9Levoxyl®


24,644



36,080



(11,436
)


(31.7
)


84,726



117,373



(32,647
)


(27.8
)Sonata®


18,660



19,622



(962
)


(4.9
)


63,838



58,402



5,436



9.3Other


54,707



54,986



(279
)


(1.0
)


157,287



152,171



5,116



3.4Total revenue


432,887



454,548



(21,661
)


(4.8
)


1,269,625



1,176,627



92,998



7.9Cost of Revenues


83,225



67,188



16,037



23.9



224,319



181,473



42,846



23.6Gross Profit

$
349,662


$
387,360


$
(37,698
)


(9.7
)%

$
1,045,306


$
995,154


$
50,152



5.0
%Gross Profit Percent


80.8
%


85.2
%










82.3
%


84.6
%  41




---



##### Table of Contents



® ® ® ® ® ® ® ®
  Sales of
    Key Products
  Altace®
  ® ® ®
  ® ® ®
  ®
  Skelaxin®
  ® ® ®
  ® ®
 42




---



##### Table of Contents



® ® ®
  Thrombin-JMI®
  ® ®
  ®
  Levoxyl®
  ® ®
  ® ®
  ® ® ®
  Sonata®
  ® ®
  ® ®
 43




---



##### Table of Contents



®
  Other
    Branded Pharmaceutical Products
      Cost of
    Revenues
  ® ®
  ®
      Meridian
    Medical Technologies
  For the Three Months


Change


For the Nine Months


ChangeEnded September 30,


2006 vs. 2005


Ended September 30,


2006 vs. 20052006


2005


$


%


2006


2005


$


%(In thousands)








(In thousands)Meridian Medical Technologies
    revenue

$
37,125


$
38,366


$
(1,241
)


(3.2
)%

$
132,292


$
96,998


$
35,294



36.4
%Cost of Revenues


17,324



18,418



(1,094
)


(5.9
)


60,327



46,573



13,754



29.5Gross Profit

$
19,801


$
19,948


$
(147
)


<1.0
%

$
71,965


$
50,425


$
21,540



42.7
%Gross Profit Percent


53.3
%


52.0
%










54.4
%


52.0
%   ® ®
 44




---



##### Table of Contents



®
  ®
    Royalties
  For the Three Months


Change


For the Nine Months


2006 vs. 2005Ended September 30,


2006 vs. 2005


Ended September 30,


Change2006


2005


$


%


2006


2005


$


%(In thousands)








(In thousands)Royalty revenue

$
19,136


$
22,344


$
(3,208
)


(14.4
)%

$
59,857


$
59,977


$
(120
)


<1.0
%Cost of Revenues


2,337



2,150



187



8.7



7,263



6,837



426



6.2Gross Profit

$
16,799


$
20,194


$
(3,395
)


(16.8
)%

$
52,594


$
53,140


$
(546
)


(1.0
)%Gross Profit Percent


87.8
%


90.4
%










87.9
%


88.6
%   ® ®
  Contract
    Manufacturing and Other
  For the Three Months


Change


For the Nine Months


ChangeEnded September 30,


2006 vs. 2005


Ended September 30,


2006 vs. 20052006


2005


$


%


2006


2005


$


%(In thousands)








(In thousands)Contract manufacturing revenue

$
2,558


$
2,774


$
(216
)


(7.8
)%

$
13,812


$
15,994


$
(2,182
)


(13.6
)%Cost of Revenues


3,587



4,501



(914
)


(20.3
)


14,016



20,794



(6,778
)


(32.6
)Gross Profit

$
(1,029
)

$
(1,727
)

$
698



40.4
%

$
(204
)

$
(4,800
)

$
4,596



95.8
%      45




---



##### Table of Contents



Operating
    Costs and Expenses
  For the Three Months


Change


For the Nine Months


ChangeEnded September 30,


2006 vs. 2005


Ended September 30,


2006 vs. 20052006


2005


$


%


2006


2005


$


%(In thousands)








(In thousands)Total gross profit

$
385,233


$
425,775


$
(40,542
)


(9.5
)%

$
1,169,661


$
1,093,919


$
75,742



6.9
%Selling, general and administrative


157,594



182,450



(24,856
)


(13.6
)


482,095



472,397



9,698



2.1Research and development


63,419



24,049



39,370



>100.0



212,931



53,021



159,910



>100.0Depreciation and amortization


37,833



31,352



6,481



20.7



110,745



112,698



(1,953
)


(1.7
)Intangible asset impairment


















279



126,923



(126,644
)


(99.8
)Restructuring charges


3,202



597



2,605



>100.0



3,194



2,603



591



22.7Gain on sale of products






(20
)


20



100.00







(1,458
)


1,458



100.0Operating income

$
123,185


$
187,347


$
(64,162
)


(34.2
)%

$
360,417


$
327,735


$
32,682



10.0
%   Selling,
    General and Administrative Expenses
  For the Three Months


Change


For the Nine Months


ChangeEnded September 30,


2006 vs. 2005


Ended September 30,


2006 vs. 20052006


2005


$


%


2006


2005


$


%(In thousands)








(In thousands)Selling, general and
    administrative, exclusive of co-promotion fees and Mylan
    transaction costs

$
107,300


$
111,638


$
(4,338
)


(3.9
)%

$
319,480


$
305,911


$
13,569



4.4
%Mylan transaction costs






466



(466
)


(100.0
)






3,898



(3,898
)


(100.0
)Co-promotion fees


50,294



70,346



(20,052
)


(28.5
)


162,615



162,588



27



<1.0Total selling, general and
    administrative

$
157,594


$
182,450


$
(24,856
)


(13.6
)%

$
482,095


$
472,397


$
9,698



2.1
%   ® ® ® ®
  ® ® ®
 46




---



##### Table of Contents



Review of
    Historical Equity-Based Compensation Grants
    
    A benefit of $5.5 million and $1.0 million in the
    third quarter of 2006 and the first nine months of 2006,
    respectively, and charges of $4.4 and $13.3 million in the
    third quarter of 2005 and the first nine months of 2005,
    respectively, primarily due to professional fees related to the
    now completed investigation of our company by the Office of
    Inspector General of the United States Department of Health and
    Human Services, the partially completed investigation by the
    U.S. Securities and Exchange Commission, and private
    plaintiff securities litigation. During the third quarter of
    2006, we recorded an anticipated insurance recovery of legal
    fees in the amount of $6.8 million related to the
    securities litigation. In November of 2006, we received payment
    for the recovery of these legal fees. For additional
    information, please see Settlement of Governmental Pricing
    Investigation, SEC Investigation and
    Securities Litigation included in Note 9,
    Contingencies, in Item 1, Financial
    Statements.
    A charge in the amount of $0.5 million and
    $3.9 million in the third quarter and the first nine months
    of 2005, respectively, for professional fees and expenses
    related to the terminated merger agreement with Mylan
    Laboratories, Inc.    Research
    and Development Expense
  For the Three Months


Change


For the Nine Months


ChangeEnded September 30,


2006 vs. 2005


Ended September 30,


2006 vs. 20052006


2005


$


2006


2005


$(In thousands)








(In thousands)Research and development

$
38,419


$
24,049


$
14,370


$
102,931


$
53,021


$
49,910Research and
    development  in process upon acquisition


25,000







25,000



110,000







110,000Total research and development

$
63,419


$
24,049


$
39,370


$
212,931


$
53,021


$
159,910    47




---



##### Table of Contents



®
  Depreciation
    and Amortization Expense
    ®
  ®
  ® ® ® and/or
  ® ® ® ® ® ®
  ®
 48




---



##### Table of Contents



Other
    Operating Expenses
    
    Intangible asset impairment charges of $0.3 million in the
    first nine months of 2006 and $126.9 million in the first
    nine months of 2005. The intangible asset impairment charge in
    2005 was related to
    Sonata®.
    As previously disclosed, a new competitor to
    Sonata®
    entered the market in April 2005. In the second quarter of 2005,
    the prescriptions for
    Sonata®
    did not meet our expectations. As a result, we lowered our
    future sales forecast for
    Sonata®
    which resulted in a decrease in the estimated undiscounted
    future cash flows associated with the carrying value of the
    Sonata®
    intangible assets on our balance sheet so as to reflect the
    estimated fair value of such assets. We determined the fair
    value of the intangible assets associated with
    Sonata®
    based on the estimated discounted future cash flows for this
    product.
    A restructuring charge in the amount of $2.6 million in the
    first nine months of 2005 primarily due to our decision to
    discontinue some relatively insignificant products associated
    with our Meridian Medical Technologies segment.
    A restructuring charge in the amount of $3.2 million in the
    third quarter of 2006 associated with separation payments
    primarily due to our decision to transfer the production of
    Levoxyl®
    from our St. Petersburg, Florida facility to the Bristol,
    Tennessee facility by the end of 2008.
    A gain of $1.5 million in first nine months of 2005
    primarily due to the sale of some of our assets.  Non-Operating
    Items
  For the Three Months


For the Nine MonthsEnded September 30,


Ended September 30,2006


2005


2006


2005(In thousands)


(In thousands)Interest income

$
8,489


$
5,253


$
22,842


$
11,463Interest expense


(1,894
)


(3,136
)


(7,925
)


(8,876
)Gain (loss) on investment






1,040







(6,182
)(Loss) gain on early
    extinguishment of debt


(11
)






698



Other, net


101



(751
)


(613
)


(2,047
)Total other income (expense)


6,685



2,406



15,002



(5,642
)Income tax expense


40,020



67,109



123,931



111,302Discontinued operations


555



(787
)


497



1,618   Other
    Income (Expense)
   49




---



##### Table of Contents




    A gain of $1.0 million in the third quarter of 2005 and a
    charge of $6.2 million in the first nine months of 2005
    related to our investment in Novavax, Inc. We sold our
    investment in Novavax, Inc. during the third quarter of 2005.
    Income of $0.7 million during the first nine months of 2006
    resulting from the early retirement of our
    23/4% Convertible
    Debentures due November 15, 2021.  Income
    Tax Expense
      Discontinued
    Operations
  ® ® ® ®
  LIQUIDITY
    AND CAPITAL RESOURCES
  General
    ® ® moderate-to-severe around-the-clock ® ®
 50




---



##### Table of Contents



® ® ®
    ® ® ® ®
  
    For 2006, 15% of
    Altace®
    net sales up to $165.0 million, 42.5% of
    Altace®
    net sales in excess of $165.0 million and less than or
    equal to $465.0 million, and 52.5% of
    Altace®
    net sales that are in excess of $465.0 million and less
    than or equal to $585.0 million. The fee in 2006 will not
    exceed $215.3 million.
    For 2007, 30% of
    Altace®
    net sales, with the fee not to exceed $178.5 million.
    For 2008, 22.5% of
    Altace®
    net sales, with the fee not to exceed $134.0 million.
    For 2009, 14.2% of
    Altace®
    net sales, with the fee not to exceed $84.5 million.
    For 2010, 25% of
    Altace®
    net sales, with the fee not to exceed $5.0 million.  ® ®
  ®
  tm  tm  tm  tm
 51




---



##### Table of Contents



tm tm
  ® ®
  ®
    ®
  ®
  tm  tm moderate-to-severe tm  tm  tm
    ® ® ®
 52




---



##### Table of Contents



® ® ® ® ® ®
  Settlement
    of Governmental Pricing Investigation
              Form 8-K
 53




---



##### Table of Contents



SEC
    Investigation
      Securities
    Litigation
  and/or
       54




---



##### Table of Contents



Patent
    Challenges
  ® ® ® ® ® ® ® ®
  Cash
    Flows
  Operating
    Activities
  For the Nine Months Ended September 30,2006


2005(In thousands)Net cash provided by operating
    activities

$
297,257


$
404,823  55




---



##### Table of Contents



For the Nine Months Ended September 30,2006


2005(In thousands)Accounts receivable, net of
    allowance

$
(31,015
)

$
(72,441
)Inventories


41,293



55,673Prepaid expenses and other current
    assets


(43,567
)


(9,180
)Accounts payable


(5,552
)


(32,810
)Accrued expenses and other
    liabilities


(114,547
)


(26,774
)Income taxes payable


(1,537
)


64,346Deferred revenue


(5,716
)


(6,819
)Other assets


(20,256
)


(2,894
)Deferred taxes


(13,853
)


(23,179
)Total changes in operating assets
    and liabilities and deferred taxes

$
(194,750
)

$
(54,078
)   Investing
    Activities
  For the Nine MonthsEnded September 30,2006

2005(In thousands)Net cash used in investing
    activities

$
(247,266
)

$
(517,931
)   ®
   56




---



##### Table of Contents



Financing
    Activities
  For the Nine MonthsEnded September 30,2006


2005(In thousands)Net cash provided by financing
    activities

$
58,049


$
682   1 4 3 4
  Certain
    Indebtedness and Other Matters
  1 4 1 4
    3 4
   57




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Form S-3 and/or
  Impact
    of Inflation
    RECENTLY
    ISSUED ACCOUNTING STANDARDS
  Form 10-K
 58




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Accounting for Uncertainty in Income Taxes  an
    interpretation of FASB Statement No. 109
        CRITICAL
    ACCOUNTING POLICIES AND ESTIMATES
       59




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
    Intangible assets, goodwill, and other long-lived
    assets.  When we acquire product rights in
    conjunction with either business or asset acquisitions, we
    allocate an appropriate portion of the purchase price to
    intangible assets, goodwill and other long-lived assets. The
    purchase price is allocated to product rights and trademarks,
    patents, acquired research and development, if any, and other
    intangibles using the assistance of valuation experts. We
    estimate the useful lives of the assets by factoring in the
    characteristics of the products such as: patent protection,
    competition from products prescribed for similar indications,
    estimated future introductions of competing products, and other
    issues. The factors that drive the estimate of the life of the
    asset are inherently uncertain. However, patents have specific
    legal lives over which they are amortized. Conversely,
    trademarks and product rights have no specific legal lives.
    Trademarks and product rights will continue to be an asset to us
    after the expiration of the patent, as their economic value is
    not tied exclusively to the patent. We believe that by
    establishing separate lives for the patent versus the trademark
    and product rights, we are in essence using an accelerated
    method of amortization for the product as a whole. This results
    in greater amortization in earlier years when the product is
    under patent protection, as we are amortizing both the patent
    and the trademark and product rights, and less amortization when
    the product faces potential generic competition, as the
    amortization on the patent is eliminated. Because we have no
    discernible evidence to show a decline in cash flows for
    trademarks and product rights, or for patents, we use the
    straight-line method of amortization for both intangibles.     60




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Accumulated


Net BookCost


Amortization


Value(In thousands)BrandedAltace®

$
276,150


$
81,246


$
194,904Other Cardiovascular/metabolic


80,770



43,598



37,172Cardiovascular/metabolic


356,920



124,844



232,076Intal®


106,192



20,572



85,620Other Hospital/acute care


191,114



54,920



136,194Hospital/acute care


297,306



75,492



221,814Skelaxin®


203,015



44,292



158,723Sonata®


23,146



23,146



Neuroscience


226,161



67,438



158,723Other


144,675



59,991



84,684Total Branded


1,025,062



327,765



697,297Meridian Medical
    Technologies


172,013



22,531



149,482Royalties


2,470



2,114



356Contract
    manufacturing










All other










Total trademarks and product rights

$
1,199,545


$
352,410


$
847,135     Three Months Ended





Three Months EndedSeptember 30, 2006





September 30, 2005Amortization


Life





AmortizationImpairments


Expense


(Years)


Impairments


Expense(In thousands)





(In thousands)BrandedAltace®

$



$
3,677



21


$



$
3,225Other Cardiovascular/metabolic






1,823











1,905Cardiovascular/metabolic






5,500











5,130Intal®






1,903



15







1,392Other Hospital/acute care






3,416











2,212Hospital/acute care






5,319











3,604Skelaxin®






3,887



13.5







3,887Sonata®


















1,566Neuroscience






3,887











5,453Other






2,038











1,948Total Branded






16,744











16,135Meridian Medical
    Technologies






1,933











1,291Royalties






10











11Contract
    manufacturing


















All other


















Total trademarks and product rights

$



$
18,687






$



$
17,437  61




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Nine Months Ended





Nine Months EndedSeptember 30, 2006





September 30, 2005Amortization


Life





AmortizationImpairments


Expense


(Years)


Impairments


Expense(In thousands)





(In thousands)BrandedAltace®

$



$
11,032



21


$



$
9,675Other Cardiovascular/metabolic






5,468











5,687Cardiovascular/metabolic






16,500











15,362Intal®






5,708



15







4,144Other Hospital/acute care


279



10,219











6,638Hospital/acute care


279



15,927











10,782Skelaxin®






11,661



13.5







11,661Sonata®














126,923



7,551Neuroscience






11,661







126,923



19,212Other






6,159











5,903Total Branded


279



50,247







126,923



51,259Meridian Medical
    Technologies






5,330











3,873Royalties






31











32Contract
    manufacturing


















All other


















Total trademark and product rights

$
279


$
55,608






$
126,923


$
55,164     Remaining Life at September 30, 2006Trademark &Patent

Product RightsAltace®

2 years 7 months

13 years 3 monthsSkelaxin®



10 years 3 monthsSonata®

3 months

Intal®



11 years 3 months   
    Inventories.  Our inventories are valued at the
    lower of cost or market value. Cost is determined using the
    first-in,
    first-out (FIFO) method. We include in our inventories an
    allocation of fixed production overhead costs which primarily
    consist of personnel costs and property taxes. We expense a
    portion of our fixed overhead costs associated with any facility
    operating at a level considered to be below normal capacity. We
    evaluate our entire 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 make a provision to reflect the lower
    value of that inventory. This methodology recognizes projected
    inventory losses at the time such losses are evident rather than
    at the time goods are actually sold. We maintain supply
    agreements with some of our vendors which contain minimum
    purchase requirements. We estimate future inventory requirements
    based on current facts and trends. Should our minimum purchase
    requirements under supply agreements or our estimated future
    inventory requirements exceed actual inventory quantities that
    we will be able to sell to our customers, we record a charge in
    costs of revenues. 62




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
    Accruals for rebates, returns, and
    chargebacks.  We establish accruals for returns,
    chargebacks and Medicaid, Medicare, and commercial rebates in
    the same period we recognize the related sales. The accruals
    reduce revenues and are included in accrued expenses. At the
    time a rebate or chargeback payment is made or a product return
    is received, which occurs with a delay after the related sale,
    we record a reduction to accrued expenses and, at the end of
    each quarter, adjust accrued expenses for differences between
    estimated and actual payments. Due to estimates and assumptions
    inherent in determining the amount of returns, chargebacks and
    rebates, the actual amount of product returns and claims for
    chargebacks and rebates may be different from our estimates.      
    Revenue recognition.  Revenue is recognized
    when title and risk of loss are transferred to customers,
    collection of sales is reasonably assured, and we have no
    further performance obligations. This is generally at the time
    products are received by the customer. Accruals for estimated
    returns, rebates and chargebacks, determined based on historical
    experience, reduce revenues at the time of sale and are included
    in accrued expenses. Medicaid and certain other governmental
    pricing programs involve particularly difficult interpretations
    of relevant statutes and regulatory guidance, which are complex
    and, in certain respects, ambiguous. Moreover, prevailing
    interpretations of these statutes and guidance can change over
    time. Royalty revenue is recognized based on a percentage of
    sales (namely, contractually agreed-upon royalty rates) reported
    by third parties. 63




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RISK
    FACTORS
  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, 2005, 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, 2005 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
  If we
    cannot successfully enforce our rights under the patents
    relating to three of our largest products,
    Altace®,
    Skelaxin®
    and
    Sonata®,
    and the patent relating to
    Adenoscan®,
    or if we are unable to secure or enforce our rights under other
    patents, trademarks, trade secrets or other intellectual
    property, our results of operations could be materially
    adversely affected.
  ® ® Approved Drug Products with Therapeutic
    Equivalence Evaluations composition-of-matter method-of-use ®
    ® ®
 64




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® ® ®
  ® ® method-of-use ®
  ®
   65




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® ® ® ®
  ® ® ® ® ®
  ® composition-of-matter ® ®
       66




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The
    securities and derivative litigation or the continuing SEC
    investigation could have a material adverse effect on our
    business.
  and/or
         67




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We
    have entered into agreements with manufacturers
    and/or
    distributors of generic pharmaceutical products with whom we are
    presently engaged, or have previously been engaged in
    litigation, and these agreements could subject us to claims that
    we have violated federal
    and/or state
    anti-trust laws.
  and/or and/or
    We
    cannot assure you that we will be able to comply with the terms
    and conditions of our corporate integrity agreement with the
    Office of Inspector General of the United States Department of
    Health and Human Services.
   68




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##### Table of Contents



We are
    subject to the risk of additional litigation and regulatory
    proceedings or actions in connection with the restatement of
    prior period financial statements.
    We
    cannot assure you that we will be able to maintain effective
    internal control over financial reporting.
  Form 10-K
     69




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If
    sales of our major products or royalty payments to us decrease,
    our results of operations 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. We may not be able to maintain existing levels of
    coverage, which could make it difficult to attract or retain
    qualified directors and officers.
    We are
    required annually, or on an interim basis as needed, to review
    the carrying value of our intangible assets and goodwill for
    impairment. If events such as generic competition or inability
    to manufacture or obtain sufficient supply of product occur that
    cause the sales of our products to decline, the intangible asset
    value of any declining product could become
    impaired.
    If we
    cannot implement our strategy to grow our business through
    increased sales, acquisitions, development and in-licensing, our
    business or competitive position in the pharmaceutical industry
    may suffer.
      
    Remoxytm,
    an investigational drug for the treatment of moderate-to-severe
    chronic pain; 70




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
    binodenoson, a myocardial pharmacologic stress imaging agent;
    Vanquixtm,
    a diazepam-filled auto-injector;
    bremelanotide, (which we previously referred to as PT-141), an
    investigational new drug for the treatment of erectile
    dysfunction and female sexual dysfunction;
    MRE0094, an investigational drug for the topical treatment of
    chronic diabetic foot ulcers;
    T-62, an investigational drug for the treatment of neuropathic
    pain;
    a new inhaler for
    Intal®
    using the alternative propellant hydrofluoroalkane
    (HFA) for which the FDA has issued an approvable
    letter;
    a potential new formulation of metaxalone;
    a novel formulation of ramipril for which an NDA is pending;
    an
    Altace®/diuretic
    combination product; and
    a program to evaluate the safety and efficacy of
    Altace®
    in children.    
    engage in product life-cycle management to develop new
    indications and line extensions for existing and acquired
    products,
    successfully develop, license or commercialize new products on a
    timely basis or at all,
    continue to develop products already in development in a cost
    effective manner, or
    obtain any FDA approvals necessary to successfully implement the
    strategies described above.      
    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,   71




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If we
    cannot integrate the business of companies or products we
    acquire, or appropriately and successfully manage and coordinate
    third-party collaborative development activities, our business
    may suffer.
    We do
    not have proprietary protection for most of our branded
    pharmaceutical products, and our sales could suffer from
    competition by generic substitutes.
    If we
    cannot sell our products in amounts greater than our minimum
    purchase requirements under some of our supply agreements or
    sell our products in accordance with our forecasts, our results
    of operations and cash flows may be adversely
    affected.
  ® ®
   72




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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.
  ® ® ® ®
  ® ® ® ® ® ® ®
  ® ® ® ® ® ®
     73




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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, or if we mismanage the development process,
    the introduction of new or reformulated products may not be
    successful.
    
    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.    We are
    near maximum capacity at our Middleton, Wisconsin facility,
    which limits our ability to increase production of
    Thrombin-JMI®.
  ® ® and/or ® ®
  Wholesaler
    and distributor buying patterns and other factors may cause our
    quarterly results to fluctuate, and these fluctuations may
    adversely affect our short-term profitability.
   74




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The
    insolvency of any of our principal customers, who are wholesale
    pharmaceutical distributors, could have a material adverse
    effect on our business, financial condition, results of
    operations and cash flows.
    Our
    wholly owned subsidiary, King Pharmaceuticals Research and
    Development, Inc., successor to Jones Pharma Incorporated, is a
    defendant in litigation which is currently being handled by its
    insurance carriers. Should this coverage be inadequate or
    subsequently denied or were we to lose some of these lawsuits,
    our results of operations could be adversely
    affected.
  In re and/or
  ®
  ®
 75




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Sales
    of
    Thrombin-JMI®
    may be affected by the perception of risks associated with some
    of the raw materials used in its manufacture; if we are unable
    to successfully develop purification procedures at our
    facilities that are in accordance with the FDAs
    expectations for biological products generally, the FDA could
    limit our ability to manufacture biological products at those
    facilities.
  ® ® ® ®
  ® ® ® ® ®
  ®
  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.
  ® ® ®
 76




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® ® ® ®
  Our
    relationships with the U.S. Department of Defense and other
    government entities are subject to risks associated with doing
    business with the government.
        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.
     77




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If our
    operations were disrupted by a natural disaster or other
    catastrophic event, our business could be harmed.
      If we
    are unable to obtain approval of new HFA propellants for
    Intal®
    and
    Tilade®,
    our sales of these products could be adversely
    affected.
  ® ® ® ® ® ®
  There
    are risks associated with our restructured agreement with Wyeth
    regarding
    Altace®.
  ® ® ® ® ®
  
    our ability to sell and market
    Altace®
    effectively;
    the successful transition of Wyeths marketing
    responsibilities to King during the remainder of 2006;
    the level of marketing and sales expenditures necessary to sell
    and market
    Altace®
    effectively; and
    Wyeths continued commitment to sell and market
    Altace®
    for the remainder of 2006.  ®
  The
    loss of our key personnel or an inability to attract new
    personnel could harm our business.
   78




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##### Table of Contents



Our
    shareholder rights plan, charter and bylaws discourage
    unsolicited takeover proposals and could prevent shareholders
    from realizing a premium on their common stock.
    
    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.    Our
    stock price is volatile, which could result in substantial
    losses for our investors.
    
    variations in our results of operations;
    perceived risks and uncertainties concerning our business;
    announcements of earnings;
    developments in the governmental investigations or securities
    litigation;
    the commencement of, or adverse developments in, any material
    litigation;
    failure to meet or exceed our own projections for revenue,
    product sales and earnings per share;
    failure to meet timelines for product development or other
    projections or forward-looking statements we may make to the
    public;
    failure to meet or exceed security analysts financial
    projections for our company;
    comments or recommendations made by securities analysts;
    general market conditions;
    perceptions about market conditions in the pharmaceutical
    industry;
    announcements of technological innovations or the results of
    clinical trials or studies;
    changes in marketing, product pricing and sales strategies or
    development of new products by us or our competitors;
    changes in domestic or foreign governmental regulations or
    regulatory approval processes; and
    announcements concerning regulatory compliance and government
    agency reviews.   79




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Risks
    Related to Our Industry
  Failure
    to comply with laws and government regulations could adversely
    affect our ability to operate our business.
      and/or and/or
       80




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An
    increase in product liability claims or product recalls could
    harm our business.
  ® ® ®
    Any
    reduction in reimbursement levels by managed care organizations
    or other third-party payors may have an adverse effect on our
    revenues.
   81




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and/or
    If we
    fail to comply with the safe harbors provided under various
    federal and state laws, our business could be adversely
    affected.
    and/or
 82




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In the
    future, the publication of negative results of studies or
    clinical trials may adversely impact our products.
    New
    legislation or regulatory proposals may adversely affect our
    revenues.
       83




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The
    pharmaceutical industry is highly competitive, and other
    companies in our industry have much greater resources than we
    do.
    
    we will be able to continue to acquire commercially attractive
    pharmaceutical products, companies or technologies;
    additional competitors will not enter the market; or
    competition for acquisition of products in development,
    currently marketed products, companies and technologies will not
    have a material adverse effect on our business, financial
    condition and results of operations.    Competition for Acquisitions and In-License
    Opportunities.
  
    we will be successful in the acquisition, or in-license of
    commercially attractive pharmaceutical opportunities, compounds,
    products, companies or technologies,
    additional competitors will not enter the market,
    competition for acquisition and in-license of pharmaceutical
    opportunities, compounds or products, including products in
    development, currently marketed products, companies and
    technologies will not have a material adverse effect on our
    business, financial condition and results of operations, or
    we will be successful in bringing compounds, products in
    development or other opportunities to commercial success.  Product Competition.
  ®
  ®
  ®
  ®
  ®
 84




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A WARNING
    ABOUT FORWARD-LOOKING STATEMENTS
        
    the future potential of, including anticipated net sales and
    prescription trends for, our branded pharmaceutical products,
    particularly
    Altace®,
    Skelaxin®,
    Thrombin-JMI®,
    Sonata®
    and
    Levoxyl®;
    expectations regarding the enforceability and effectiveness of
    product-related patents, including in particular patents related
    to
    Altace®,
    Skelaxin®,
    Sonata®
    and
    Adenoscan®;
    expected trends and projections with respect to particular
    products, reportable segments and income and expense line items;
    the timeliness and accuracy of wholesale inventory data provided
    by our customers;
    the adequacy of our liquidity and capital resources;
    anticipated capital expenditures;
    the development, approval and successful commercialization of
    Remoxytm,
    an investigational drug for the treatment of
    moderate-to-severe
    chronic pain; binodenoson, our next generation cardiac
    pharmacologic stress-imaging agent; bremelanotide, an
    investigational new drug for the treatment of erectile
    dysfunction and female sexual dysfunction; T-62, an
    investigational drug for the treatment of neuropathic pain;
    MRE0094, an investigational drug for the topical treatment of
    chronic diabetic foot ulcers; the development of a new
    formulation of
    Skelaxin®;
    pre-clinical programs; and product life-cycle development
    projects;
    the development, approval and successful commercialization of a
    diazepam-filled auto-injector, new inhaler for
    Intal®
    and
    Tilade®
    using the alternative propellant HFA, and an
    Altace®/diuretic
    combination product;
    our successful execution of our growth strategies;
    anticipated developments and expansions of our business;
    our plans for the manufacture of some of our products, including
    but not limited to, the anticipated expansion of our
    manufacturing capacity for
    Thrombin-JMI®;
    anticipated increases in sales of acquired products or royalty
    revenues;
    the success of our Amended Co-Promotion Agreement with Wyeth; 85




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
    the high cost and uncertainty of research, clinical trials and
    other development activities involving pharmaceutical products;
    the development of product line extensions;
    the unpredictability of the duration or future findings and
    determinations of the FDA, including the pending applications
    related to our diazepam-filled auto-injector and a new
    Intal®
    inhaler formulation utilizing HFA, and other regulatory agencies
    worldwide;
    products developed, acquired or in-licensed that may be
    commercialized;
    the intent, belief or current expectations, primarily with
    respect to our future operating performance;
    expectations regarding sales growth, gross margins,
    manufacturing productivity, capital expenditures and effective
    tax rates;
    expectations regarding the outcome of various pending legal
    proceedings including the
    Altace®
    and
    Skelaxin®
    patent challenges, the SEC and Office of Inspector General
    investigations, other possible governmental investigations,
    securities litigation, and other legal proceedings described in
    this report; and
    expectations regarding our financial condition and liquidity as
    well as future cash flows and earnings.    Item 3.
    Quantitative
    and Qualitative Disclosures about Market Risk          Item 4.
    Controls
    and Procedures  Rules 13a-15(e) 15d-15(e)
  Rules 13a-15(f) 15d-15(f)
 86




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PART II 
    OTHER INFORMATION  Item 1.
    Legal
    Proceedings    Item 1A.
    Risk
    Factors    Item 6.
    Exhibits  ExhibitNumber



Description10
.1



Amended and Restated
    Co-Promotion
    Agreement, dated July 5, 2006, between King
    Pharmaceuticals, Inc. and Wyeth10
.2



Settlement Agreement, dated
    July 31, 2006, between King Pharmaceuticals, Inc., the
    Affected Current and Former Officers and Directors and the
    Plaintiffs in the Consolidated Class Action10
.3(1)*



Amendment to the Director
    Compensation Policy for the Non-Employee Directors of King
    Pharmaceuticals, Inc., dated August 2, 200610
.4*



Form of Restricted Unit
    Certificate and Restricted Unit Grant Agreement10
.5(2)



Purchase Agreement for the
    Acquisition of the Rights in and to Avinza, dated
    September 6, 2006, between King Pharmaceuticals, Inc. and
    Ligand Pharmaceuticals, Inc.31
.1



Certification by Chief Executive
    Officer Pursuant to
    Rule 13a-14(a)
    or 15d-14(a) of the Securities Exchange Act of 1934, as adopted
    pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31
.2



Certification by Chief Financial
    Officer Pursuant to
    Rule 13a-14(a)
    or 15d-14(a) of the Securities Exchange Act of 1934, as adopted
    pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32
.1



Certification by Chief Executive
    Officer Pursuant to 18 U.S.C. Section 1350, as adopted
    pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32
.2



Certification by Chief Financial
    Officer Pursuant to 18 U.S.C. Section 1350, as adopted
    pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.     *
    
    Denotes Management Contract or Compensatory Plan or Arrangement1
    
    Incorporated by Reference to Kings Current Report on
    Form 8-K
    filed on August 8, 20062
    
    Incorporated by Reference to Kings Current Report on
    Form 8-K
    filed on September 12, 2006 87




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##### Table of Contents



SIGNATURES      By:
    /s/  BRIAN
    A. MARKISON    President and Chief Executive Officer
    By:
    /s/  JOSEPH
    SQUICCIARINO    Chief Financial Officer
   88