##### 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 1943 
|          
|           |  | For the quarterly period ended
    September 30, 2002                                       
|          
|or        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | For the transition period
    from           to                                             

Commission file no. 0-24425

King Pharmaceuticals, Inc.

(Exact name of registrant as specified in its
charter)


|                                                                            |  |                                                   
|--------------------------------------------------------------------------- |  | --------------------------------------------------
|Tennessee(State or other jurisdiction of
    incorporation or organization) |  | 54-1684963(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 þ          No o

Number of shares outstanding of Registrants
common stock as of November 11, 2002: 240,750,977



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TABLE OF CONTENTS



|                                                                                |                                                                                               |  |  |  |  |  |  | 
|------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I -- FINANCIAL INFORMATION                                                
|                                                                                | Item 1. Financial Statements                                                                 
|KING PHARMACEUTICALS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|PART I -- FINANCIAL INFORMATION                                                
|                                                                                | Item 2. Managements Discussion and Analysis of Results of Operations and Financial Condition
|                                                                                | Item 3. Quantitative and Qualitative Disclosure About Market Risk                            
|                                                                                | Item 4. Controls and Procedures                                                              
|PART II -- OTHER INFORMATION                                                   
|                                                                                | Item 1. Legal Proceedings                                                                    
|                                                                                | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                                                                                | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                                                                     
|CERTIFICATION OF CHIEF EXECUTIVE OFFICER                                       
|CERTIFICATION OF CHIEF FINANCIAL OFFICER                                       
|Sectio 906 Certification of the CEO                                            
|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

|                                                  |                                                                                      |                                            |                           |              |           |           |           |         |           |           | 
|------------------------------------------------- | ------------------------------------------------------------------------------------ | ------------------------------------------ | ------------------------- | ------------ | --------- | --------- | --------- | ------- | --------- | --------- | 
|                                                  |                                                                                      | September 30,                              |                           | December 31,
|                                                  |                                                                                      | 2002                                       |                           | 2001        
|                                                  |                                                                                      |                                            |                           |             
|                                                  |                                                                                      | (Unaudited)                                |                           |             
|                                                  |                                                                                      |                                           
|                                                  |                                                                                      | (In thousands)                            
|ASSETS                                           
|                                                 
|Current Assets:                                   |                                                                                      |                                            |                           |              |           |           |           |        
|                                                  | Cash and cash equivalents                                                            |                                            | $                         | 728,534      |           |           | $         | 874,602 |          
|                                                  | Marketable securities                                                                |                                            |                           | 190,292      |           |           |           | 49,880  |          
|                                                  | Accounts receivable, net of allowance for
    doubtful accounts of $7,142 and $6,047 |                                            |                           | 182,945      |           |           |           | 161,864 |          
|                                                  | Inventories                                                                          |                                            |                           | 137,994      |           |           |           | 111,578 |          
|                                                  | Deferred income taxes                                                                |                                            |                           | 52,073       |           |           |           | 31,556  |          
|                                                  | Prepaid expenses and other current assets                                            |                                            |                           | 7,609        |           |           |           | 8,079   |          
|                                                  |                                                                                      |                                            |                           |              |           |           |           |        
|                                                  |                                                                                      |                                            | Total current assets      |              |           | 1,299,447 |           |         |           | 1,237,559 | 
|                                                  |                                                                                      |                                            |                           |              |           |           |           |        
|Property, plant and equipment, net                |                                                                                      |                                            | 192,629                   |              |           |           | 164,116   |        
|Intangible assets, net                            |                                                                                      |                                            | 1,122,341                 |              |           |           | 1,037,795 |        
|Other assets                                      |                                                                                      |                                            | 53,209                    |              |           |           | 67,141    |        
|                                                  |                                                                                      |                                            |                           |              |           |           |           |        
|                                                  |                                                                                      |                                            | Total assets              |              | $         | 2,667,626 |           |         | $         | 2,506,611 | 
|                                                  |                                                                                      |                                            |                           |              |           |           |           |        
|                                                 
|LIABILITIES AND SHAREHOLDERS
    EQUITY         
|                                                 
|Current Liabilities:                              |                                                                                      |                                            |                           |              |           |           |           |        
|                                                  | Accounts payable                                                                     |                                            | $                         | 18,191       |           |           | $         | 22,870  |          
|                                                  | Accrued expenses                                                                     |                                            |                           | 201,100      |           |           |           | 119,498 |          
|                                                  | Income taxes payable                                                                 |                                            |                           | 24,931       |           |           |           | 7,718   |          
|                                                  | Current portion of long-term debt                                                    |                                            |                           | 1,289        |           |           |           | 1,357   |          
|                                                  |                                                                                      |                                            |                           |              |           |           |           |        
|                                                  |                                                                                      |                                            | Total current liabilities |              |           | 245,511   |           |         |           | 151,443   | 
|                                                  |                                                                                      |                                            |                           |              |           |           |           |        
|Long-term debt:                                   |                                                                                      |                                            |                           |              |           |           |           |        
|                                                  | Convertible debentures                                                               |                                            |                           | 345,000      |           |           |           | 345,000 |          
|                                                  | Senior subordinated notes                                                            |                                            |                           | 93           |           |           |           | 93      |          
|                                                  | Other                                                                                |                                            |                           | 1,165        |           |           |           | 1,304   |          
|Deferred income taxes                             |                                                                                      |                                            | 49,433                    |              |           |           | 37,021    |        
|Other liabilities                                 |                                                                                      |                                            | 55,148                    |              |           |           | 63,466    |        
|                                                  |                                                                                      |                                            |                           |              |           |           |           |        
|                                                  |                                                                                      |                                            | Total liabilities         |              |           | 696,350   |           |         |           | 598,327   | 
|                                                  |                                                                                      |                                            |                           |              |           |           |           |        
|Commitments and contingencies (notes 6
    and 9) |                                                                                      |                                            |                           |              |           |           |           |        
|Shareholders equity                              |                                                                                      |                                            | 1,971,276                 |              |           |           | 1,908,284 |        
|                                                  |                                                                                      |                                            |                           |              |           |           |           |        
|                                                  |                                                                                      | Total liabilities and shareholders equity |                           | $            | 2,667,626 |           |           | $       | 2,506,611 |          
|                                                  |                                                                                      |                                            |                           |              |           |           |           |        

See accompanying notes.

1



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##### Table of Contents



KING PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF
INCOME

|                                                                                       |                                                                                      |                                                                       |                                                         |                   |      |         |        |         |      |         |         |         |      |         |         |         |      |         | 
|-------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------ | --------------------------------------------------------------------- | ------------------------------------------------------- | ----------------- | ---- | ------- | ------ | ------- | ---- | ------- | ------- | ------- | ---- | ------- | ------- | ------- | ---- | ------- | 
|                                                                                       |                                                                                      |                                                                       |                                                         |                  
|                                                                                       |                                                                                      | Three Months Ended                                                    |                                                         | Nine Months Ended
|                                                                                       |                                                                                      | September 30,                                                         |                                                         | September 30,    
|                                                                                       |                                                                                      |                                                                       |                                                         |                  
|                                                                                       |                                                                                      | 2002                                                                  |                                                         | 2001              |      | 2002    |        | 2001   
|                                                                                       |                                                                                      |                                                                       |                                                         |                   |      |         |        |        
|                                                                                       |                                                                                      |                                                                      
|                                                                                       |                                                                                      | (Unaudited)                                                          
|                                                                                       |                                                                                      | (In thousands, except per share data)                                
|Revenues:                                                                              |                                                                                      |                                                                       |                                                         |                   |      |         |        |         |      |         |         |         |      |         |         |        
|                                                                                       | Net sales                                                                            |                                                                       | $                                                       | 300,708           |      |         | $      | 218,481 |      |         | $       | 815,278 |      |         | $       | 581,887 |     
|                                                                                       | Royalty revenue                                                                      |                                                                       |                                                         | 14,997            |      |         |        | 11,608  |      |         |         | 41,025  |      |         |         | 36,028  |     
|                                                                                       |                                                                                      |                                                                       |                                                         |                   |      |         |        |         |      |         |         |         |      |         |         |        
|                                                                                       |                                                                                      |                                                                       | Total revenues                                          |                   |      | 315,705 |        |         |      | 230,089 |         |         |      | 856,303 |         |         |      | 617,915 | 
|                                                                                       |                                                                                      |                                                                       |                                                         |                   |      |         |        |         |      |         |         |         |      |         |         |        
|Operating costs and expenses:                                                          |                                                                                      |                                                                       |                                                         |                   |      |         |        |         |      |         |         |         |      |         |         |        
|                                                                                       | Cost of revenues, including royalty expense of
    $2,852, $2,113, $7,716 and $8,230 |                                                                       |                                                         | 62,356            |      |         |        | 47,348  |      |         |         | 163,865 |      |         |         | 129,108 |     
|                                                                                       | Inventory recall                                                                     |                                                                       |                                                         | 1,206             |      |         |        |        |      |         |         | 3,033   |      |         |         |        |     
|                                                                                       | Nonrecurring change  inventory
    write-off                                        |                                                                       |                                                         |                  |      |         |        | 2,059   |      |         |         |        |      |         |         | 2,059   |     
|                                                                                       |                                                                                      |                                                                       |                                                         |                   |      |         |        |         |      |         |         |         |      |         |         |        
|                                                                                       |                                                                                      |                                                                       | Total cost of revenues                                  |                   |      | 63,562  |        |         |      | 49,407  |         |         |      | 166,898 |         |         |      | 131,167 | 
|                                                                                       | Selling, general and administrative                                                  |                                                                       |                                                         | 46,473            |      |         |        | 36,922  |      |         |         | 132,484 |      |         |         | 109,771 |     
|                                                                                       | Co-promotion fees                                                                    |                                                                       |                                                         | 53,652            |      |         |        | 24,703  |      |         |         | 134,747 |      |         |         | 62,552  |     
|                                                                                       |                                                                                      |                                                                       |                                                         |                   |      |         |        |         |      |         |         |         |      |         |         |        
|                                                                                       |                                                                                      |                                                                       | Total selling, general, and administrative
    expenses |                   |      | 100,125 |        |         |      | 61,625  |         |         |      | 267,231 |         |         |      | 172,323 | 
|                                                                                       | Depreciation and amortization                                                        |                                                                       |                                                         | 15,603            |      |         |        | 12,685  |      |         |         | 43,743  |      |         |         | 35,481  |     
|                                                                                       | Research and development                                                             |                                                                       |                                                         | 6,448             |      |         |        | 7,417   |      |         |         | 18,779  |      |         |         | 17,932  |     
|                                                                                       | Research and development  special
    license rights                                |                                                                       |                                                         |                  |      |         |        |        |      |         |         |        |      |         |         | 3,000   |     
|                                                                                       | Restructuring and other nonrecurring                                                 |                                                                       |                                                         |                  |      |         |        | 3,279   |      |         |         |        |      |         |         | 3,279   |     
|                                                                                       |                                                                                      |                                                                       |                                                         |                   |      |         |        |         |      |         |         |         |      |         |         |        
|                                                                                       |                                                                                      |                                                                       | Total operating costs and expenses                      |                   |      | 185,738 |        |         |      | 134,413 |         |         |      | 496,651 |         |         |      | 363,182 | 
|                                                                                       |                                                                                      |                                                                       |                                                         |                   |      |         |        |         |      |         |         |         |      |         |         |        
|                                                                                       | Operating income                                                                     |                                                                       |                                                         | 129,967           |      |         |        | 95,676  |      |         |         | 359,652 |      |         |         | 254,733 |     
|                                                                                       |                                                                                      |                                                                       |                                                         |                   |      |         |        |         |      |         |         |         |      |         |         |        
|Other income (expense):                                                                |                                                                                      |                                                                       |                                                         |                   |      |         |        |         |      |         |         |         |      |         |         |        
|                                                                                       | Interest income                                                                      |                                                                       |                                                         | 5,952             |      |         |        | 2,164   |      |         |         | 17,410  |      |         |         | 7,743   |     
|                                                                                       | Interest expense                                                                     |                                                                       |                                                         | (3,143            | )    |         |        | (3,358  | )    |         |         | (9,028  | )    |         |         | (8,949  | )   
|                                                                                       | Valuation charge  convertible notes
    receivable                                  |                                                                       |                                                         | 548               |      |         |        |        |      |         |         | (27,378 | )    |         |         |        |     
|                                                                                       | Other, net                                                                           |                                                                       |                                                         | 87                |      |         |        | 3,558   |      |         |         | (994    | )    |         |         | 6,502   |     
|                                                                                       |                                                                                      |                                                                       |                                                         |                   |      |         |        |         |      |         |         |         |      |         |         |        
|                                                                                       |                                                                                      |                                                                       | Total other income (expense)                            |                   |      | 3,444   |        |         |      | 2,364   |         |         |      | (19,990 | )       |         |      | 5,296   | 
|                                                                                       |                                                                                      |                                                                       |                                                         |                   |      |         |        |         |      |         |         |         |      |         |         |        
|Income before income taxes and cumulative effect
    of change in accounting principle |                                                                                      |                                                                       | 133,411                                                 |                   |      |         | 98,040 |         |      |         | 339,662 |         |      |         | 260,029 |        
|Income tax expense                                                                     |                                                                                      |                                                                       | 49,166                                                  |                   |      |         | 36,569 |         |      |         | 125,699 |         |      |         | 96,991  |        
|                                                                                       |                                                                                      |                                                                       |                                                         |                   |      |         |        |         |      |         |         |         |      |         |         |        
|Income before cumulative effect of change in
    accounting principle                  |                                                                                      |                                                                       | 84,245                                                  |                   |      |         | 61,471 |         |      |         | 213,963 |         |      |         | 163,038 |        
|Cumulative effect of change in accounting
    principle, net of taxes of $325          |                                                                                      |                                                                       |                                                        |                   |      |         |       |         |      |         |        |         |      |         | (545    | )      
|                                                                                       |                                                                                      |                                                                       |                                                         |                   |      |         |        |         |      |         |         |         |      |         |         |        
|Net income                                                                             |                                                                                      | $                                                                     | 84,245                                                  |                   |      | $       | 61,471 |         |      | $       | 213,963 |         |      | $       | 162,493 |        
|                                                                                       |                                                                                      |                                                                       |                                                         |                   |      |         |        |         |      |         |         |         |      |         |         |        
|Income per common share:                                                               |                                                                                      |                                                                       |                                                         |                   |      |         |        |         |      |         |         |         |      |         |         |        
|                                                                                       | Basic:                                                                               |                                                                       |                                                         |                   |      |         |        |         |      |         |         |         |      |         |         |         |     
|                                                                                       |                                                                                      | Income before cumulative effect of change in
    accounting principle |                                                         | $                 | 0.35 |         |        | $       | 0.27 |         |         | $       | 0.87 |         |         | $       | 0.71 |        
|                                                                                       |                                                                                      | Cumulative effect of change in accounting
    principle               |                                                         |                   |     |         |        |         |     |         |         |         |     |         |         |         |     |        
|                                                                                       |                                                                                      |                                                                       |                                                         |                   |      |         |        |         |      |         |         |         |      |         |         |        
|                                                                                       |                                                                                      | Net income                                                            |                                                         | $                 | 0.35 |         |        | $       | 0.27 |         |         | $       | 0.87 |         |         | $       | 0.71 |        
|                                                                                       |                                                                                      |                                                                       |                                                         |                   |      |         |        |         |      |         |         |         |      |         |         |        
|                                                                                       | Diluted:                                                                             |                                                                       |                                                         |                   |      |         |        |         |      |         |         |         |      |         |         |         |     
|                                                                                       |                                                                                      | Income before cumulative effect of change in
    accounting principle |                                                         | $                 | 0.35 |         |        | $       | 0.27 |         |         | $       | 0.87 |         |         | $       | 0.70 |        
|                                                                                       |                                                                                      | Cumulative effect of change in accounting
    principle               |                                                         |                   |     |         |        |         |     |         |         |         |     |         |         |         |     |        
|                                                                                       |                                                                                      |                                                                       |                                                         |                   |      |         |        |         |      |         |         |         |      |         |         |        
|                                                                                       |                                                                                      | Net income                                                            |                                                         | $                 | 0.35 |         |        | $       | 0.27 |         |         | $       | 0.87 |         |         | $       | 0.70 |        
|                                                                                       |                                                                                      |                                                                       |                                                         |                   |      |         |        |         |      |         |         |         |      |         |         |        

See accompanying notes.

2



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##### Table of Contents



KING PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS EQUITY

AND OTHER COMPREHENSIVE INCOME


|                              |                                                          |                                   |             |         |  |          |           |               |  |       |         |         |  |   |     |     |  |   |           |         |         | 
|----------------------------- | -------------------------------------------------------- | --------------------------------- | ----------- | ------- |  | -------- | --------- | ------------- |  | ----- | ------- | ------- |  | - | --- | --- |  | - | --------- | ------- | ------- | 
|                              |                                                          |                                   |             |         |  |          |           | Accumulated   |  |      
|                              |                                                          |                                   |             |         |  |          |           | Other         |  |      
|                              |                                                          |                                   |             | Paid in |  | Retained |           | Comprehensive |  |      
|                              |                                                          | Shares                            |             | Capital |  | Earnings |           | Income        |  | Total
|                              |                                                          |                                   |             |         |  |          |           |               |  |      
|                              |                                                          |                                  
|                              |                                                          | (Unaudited)                      
|                              |                                                          | (In thousands, except share data)
|Balance at December 31, 2001  |                                                          |                                   | 247,692,984 |         |  | $        | 1,361,563 |               |  | $     | 546,721 |         |  | $ |    |     |  | $ | 1,908,284 |        
|Comprehensive income:         |                                                          |                                   |             |         |  |          |           |               |  |       |         |         |  |   |     |     |  |   |           |        
|                              | Net income                                               |                                   |             |        |  |          |           |              |  |       |         | 213,963 |  |   |     |    |  |   |           | 213,963 |        
|                              | Unrealized gain on marketable securities, net of
    tax |                                   |             |        |  |          |           |              |  |       |         |        |  |   |     | 423 |  |   |           | 423     |        
|                              |                                                          |                                   |             |         |  |          |           |               |  |       |         |         |  |   |     |     |  |   |           |        
|                              |                                                          | Total comprehensive income        |             |         |  |          |           |               |  |       |         |         |  |   |     |     |  |   |           |         | 214,386 | 
|                              |                                                          |                                   |             |         |  |          |           |               |  |       |         |         |  |   |     |     |  |   |           |        
|Stock repurchases             |                                                          |                                   | (6,828,680  | )       |  |          | (155,390  | )             |  |       |        |         |  |   |    |     |  |   | (155,390  | )      
|Exercise of stock options     |                                                          |                                   | 397,916     |         |  |          | 3,996     |               |  |       |        |         |  |   |    |     |  |   | 3,996     |        
|                              |                                                          |                                   |             |         |  |          |           |               |  |       |         |         |  |   |     |     |  |   |           |        
|Balance at September 30, 2002 |                                                          |                                   | 241,262,220 |         |  | $        | 1,210,169 |               |  | $     | 760,684 |         |  | $ | 423 |     |  | $ | 1,971,276 |        
|                              |                                                          |                                   |             |         |  |          |           |               |  |       |         |         |  |   |     |     |  |   |           |        

See accompanying notes.

3



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##### Table of Contents



KING PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                               |                                                                                |                                                         |          |          |          |   |         |          |          |  
|---------------------------------------------- | ------------------------------------------------------------------------------ | ------------------------------------------------------- | -------- | -------- | -------- | - | ------- | -------- | -------- | -
|                                               |                                                                                |                                                        
|                                               |                                                                                | Nine Months Ended                                      
|                                               |                                                                                | September 30,                                          
|                                               |                                                                                |                                                        
|                                               |                                                                                | 2002                                                    |          | 2001    
|                                               |                                                                                |                                                         |          |         
|                                               |                                                                                |                                                        
|                                               |                                                                                | (Unaudited)                                            
|                                               |                                                                                | (In thousands)                                         
|Cash flows from operating activities           |                                                                                | $                                                       | 325,552  |          |          | $ | 250,623 |         
|                                               |                                                                                |                                                         |          |          |          |   |         |         
|Cash flows from investing activities:          |                                                                                |                                                         |          |          |          |   |         |         
|                                               | Purchase of investment securities                                              |                                                         |          | (597,873 | )        |   |         |         |         
|                                               | Proceeds from maturity and sale of investment
    securities                   |                                                         |          | 457,461  |          |   |         |         |         
|                                               | Convertible senior notes                                                       |                                                         |          | (10,044  | )        |   |         | (10,000  | )       
|                                               | Loans receivable                                                               |                                                         |          |         |          |   |         | (15,000  | )       
|                                               | Purchases of property, plant and equipment                                     |                                                         |          | (48,771  | )        |   |         | (20,222  | )       
|                                               | Purchase of intangible assets                                                  |                                                         |          | (120,300 | )        |   |         | (286,500 | )       
|                                               | Proceeds from sale of product rights                                           |                                                         |          |         |          |   |         | 3,332    |         
|                                               | Proceeds from sale of assets                                                   |                                                         |          | 4,358    |          |   |         | 1,446    |         
|                                               |                                                                                |                                                         |          |          |          |   |         |         
|                                               |                                                                                | Net cash used in investing activities                   |          |          | (315,169 | ) |         |          | (326,944 | )
|                                               |                                                                                |                                                         |          |          |          |   |         |         
|Cash flows from financing activities:          |                                                                                |                                                         |          |          |          |   |         |         
|                                               | Proceeds from issuance of common shares and
    exercise of stock options, net |                                                         |          | 3,996    |          |   |         | 21,689   |         
|                                               | Purchase of common stock                                                       |                                                         |          | (155,390 | )        |   |         |         |         
|                                               | Debt issuance costs                                                            |                                                         |          | (4,850   | )        |   |         |         |         
|                                               | Proceeds from revolving credit facility                                        |                                                         |          |         |          |   |         | 75,000   |         
|                                               | Payments on revolving credit facility                                          |                                                         |          |         |          |   |         | (75,000  | )       
|                                               | Payments on other long-term debt and capital
    lease obligations             |                                                         |          | (207     | )        |   |         | (384     | )       
|                                               | Other                                                                          |                                                         |          |         |          |   |         | (1,393   | )       
|                                               |                                                                                |                                                         |          |          |          |   |         |         
|                                               |                                                                                | Net cash (used in) provided by financing
    activities |          |          | (156,451 | ) |         |          | 19,912   |  
|                                               |                                                                                |                                                         |          |          |          |   |         |         
|Decrease in cash and cash equivalents          |                                                                                |                                                         | (146,068 | )        |          |   | (56,409 | )       
|Cash and cash equivalents, beginning of period |                                                                                |                                                         | 874,602  |          |          |   | 76,395  |         
|                                               |                                                                                |                                                         |          |          |          |   |         |         
|Cash and cash equivalents, end of period       |                                                                                | $                                                       | 728,534  |          |          | $ | 19,986  |         
|                                               |                                                                                |                                                         |          |          |          |   |         |         

See accompanying notes.

4



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##### Table of Contents






KING PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS

September 30, 2002 and 2001


(In thousands)


1.     General

The accompanying unaudited interim condensed
consolidated financial statements of King Pharmaceuticals, Inc.
(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 unless
otherwise disclosed) considered necessary for a fair
presentation have been included. Operating results for the nine
months ended September 30, 2002 are not necessarily
indicative of the results that may be expected for the year
ended December 31, 2002. These interim statements should be
read in conjunction with the financial statements and notes
thereto included in the Companys latest Annual Report on
Form 10-K. The year-end condensed balance sheet was derived
from audited financial statements, but does not include all
disclosures required by generally accepted accounting principles.

These consolidated financial statements include
the accounts of King and its wholly owned subsidiaries, Monarch
Pharmaceuticals, Inc.; Parkedale Pharmaceuticals, Inc.; King
Pharmaceuticals Research and Development, Inc.; Jones Pharma
Incorporated; and King Pharmaceuticals of Nevada, Inc. All
intercompany transactions and balances have been eliminated in
consolidation.

Certain amounts from the prior consolidated
financial statements have been reclassified to the presentation
adopted in 2002.

2.     Earnings Per
Share

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

|                                 |                                                             |                    |  |                   |  |      |  |         |  |  |  |         |  |  |  |         | 
|-------------------------------- | ----------------------------------------------------------- | ------------------ |  | ----------------- |  | ---- |  | ------- |  |  |  | ------- |  |  |  | ------- | 
|                                 |                                                             |                    |  |                  
|                                 |                                                             | Three Months Ended |  | Nine Months Ended
|                                 |                                                             | September 30,      |  | September 30,    
|                                 |                                                             |                    |  |                  
|                                 |                                                             | 2002               |  | 2001              |  | 2002 |  | 2001   
|                                 |                                                             |                    |  |                   |  |      |  |        
|Basic income per common share:   |                                                             |                    |  |                   |  |      |  |         |  |  |  |         |  |  |  |        
|                                 | Weighted average common shares                              |                    |  | 241,840           |  |      |  | 229,303 |  |  |  | 245,535 |  |  |  | 228,692 | 
|                                 |                                                             |                    |  |                   |  |      |  |         |  |  |  |         |  |  |  |        
|Diluted income per common share: |                                                             |                    |  |                   |  |      |  |         |  |  |  |         |  |  |  |        
|                                 | Weighted average common shares                              |                    |  | 241,840           |  |      |  | 229,303 |  |  |  | 245,535 |  |  |  | 228,692 | 
|                                 | Effect of stock options                                     |                    |  | 1,033             |  |      |  | 2,409   |  |  |  | 1,472   |  |  |  | 2,463   | 
|                                 |                                                             |                    |  |                   |  |      |  |         |  |  |  |         |  |  |  |        
|                                 | Weighted average common shares plus assumed
    conversions |                    |  | 242,873           |  |      |  | 231,712 |  |  |  | 247,007 |  |  |  | 231,155 | 
|                                 |                                                             |                    |  |                   |  |      |  |         |  |  |  |         |  |  |  |        

3.     Inventories

Inventory consists of the following:

|                                                                                     |  |               |         |              |  |   |         | 
|------------------------------------------------------------------------------------ |  | ------------- | ------- | ------------ |  | - | ------- | 
|                                                                                     |  | September 30, |         | December 31,
|                                                                                     |  | 2002          |         | 2001        
|                                                                                     |  |               |         |             
|Finished goods (including $17,006 and $18,426 of
    sample inventory, respectively) |  | $             | 92,071  |              |  | $ | 74,471  | 
|Work-in-process                                                                      |  |               | 11,177  |              |  |   | 9,424   | 
|Raw materials                                                                        |  |               | 34,746  |              |  |   | 27,683  | 
|                                                                                     |  |               |         |              |  |   |         | 
|                                                                                     |  | $             | 137,994 |              |  | $ | 111,578 | 
|                                                                                     |  |               |         |              |  |   |         | 

5



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##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

4.     Acquisitions

On May 29, 2002, the Company acquired the
exclusive rights to Ortho-Prefest® tablets in the United
States, its territories and possessions and the Commonwealth of
Puerto Rico, including the related new drug application,
investigational new drug application, copyrights, and patents or
licenses to the related patents from Ortho-McNeil
Pharmaceutical, Inc., a Johnson & Johnson subsidiary.
The Company paid $108,000 for the product rights upon closing
plus approximately $3,300 of expenses. The Company will pay
Ortho-McNeil an additional $7,000 upon receipt of the
U.S. Food and Drug Administrations approval to rename
the product PrefestTM. The acquisition
was financed with cash on hand. The Company has recorded the
acquisition of the product rights within intangible assets and
has preliminarily assigned a useful life of twenty years. The
purchase price allocation among the assets acquired, the
determination as to whether the useful life is indefinite or
finite and the assignment of lives to the intangibles designated
as having finite lives under Statement of Financial Accounting
Standards (SFAS) No. 142 are preliminary and
subject to further evaluation.

On August 8, 2001, the Company acquired
three branded pharmaceutical products and a fully paid license
to a fourth product from Bristol-Myers Squibb (BMS)
for $285,000 plus approximately $1,500 of expenses. The products
acquired include BMSs rights in the United States to
Corzide®, Delestrogen®, and Florinef®. King also
acquired a fully paid license to and trademark for Corgard®
in the United States. The acquisition was financed with a
combination of borrowings under its senior secured credit
facility and cash on hand.

The following unaudited pro forma summary
presents the financial information as if the acquisition of the
Corzide®, Delestrogen®, Florinef®, Corgard®
and Ortho-Prefest® product lines had occurred as of
January 1, 2001. 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, 2001, nor is it indicative of future results.

|                                                                      |  |                    |         |                   |  |      |         |      |  |   |         |  |  |   |         | 
|--------------------------------------------------------------------- |  | ------------------ | ------- | ----------------- |  | ---- | ------- | ---- |  | - | ------- |  |  | - | ------- | 
|                                                                      |  |                    |         |                  
|                                                                      |  | Three Months Ended |         | Nine Months Ended
|                                                                      |  | September 30,      |         | September 30,    
|                                                                      |  |                    |         |                  
|                                                                      |  | 2002               |         | 2001              |  | 2002 |         | 2001
|                                                                      |  |                    |         |                   |  |      |         |     
|Net revenues                                                          |  | $                  | 315,705 |                   |  | $    | 236,209 |      |  | $ | 864,624 |  |  | $ | 644,732 | 
|                                                                      |  |                    |         |                   |  |      |         |      |  |   |         |  |  |   |         | 
|Income before cumulative effect of change in
    accounting principle |  | $                  | 84,245  |                   |  | $    | 59,445  |      |  | $ | 215,961 |  |  | $ | 162,220 | 
|                                                                      |  |                    |         |                   |  |      |         |      |  |   |         |  |  |   |         | 
|Basic income per common share                                         |  | $                  | 0.35    |                   |  | $    | 0.26    |      |  | $ | 0.88    |  |  | $ | 0.71    | 
|                                                                      |  |                    |         |                   |  |      |         |      |  |   |         |  |  |   |         | 
|Diluted income per common share                                       |  | $                  | 0.35    |                   |  | $    | 0.26    |      |  | $ | 0.87    |  |  | $ | 0.70    | 
|                                                                      |  |                    |         |                   |  |      |         |      |  |   |         |  |  |   |         | 

5.     Accounting
Developments

The results for the three and nine months ended
September 30, 2002, include the effect of adopting SFAS
No. 141, Business Combinations and SFAS
No. 142 Goodwill and Other Intangible Assets in
the first quarter of 2002. SFAS No. 141 provides that all
business combinations initiated after June 30, 2001 shall
be accounted for using the purchase method. In addition, it
provides that the cost of an acquired entity must be allocated
to the assets acquired, including identifiable intangible
assets, and liabilities assumed based on their estimated fair
values at the date of acquisition. The excess cost over the fair
value of the net assets acquired must be recognized as goodwill.
SFAS No. 142 provides that goodwill is no longer amortized
and the value of an identifiable intangible asset must be
amortized over its useful life, unless the asset is determined
to have an indefinite useful life. Goodwill must be tested for
impairment as of the beginning of the fiscal year in which
SFAS No. 142 is adopted. In accordance with SFAS
No. 142, the Company has completed its impairment testing
resulting in no impairment of goodwill. Amounts assigned to
indefinite-life intangible

6



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##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

assets, included in intangible assets, primarily
represent the trade name for products acquired which meet
specified criteria and have a carrying value of $19,192.

The following table reflects consolidated results
adjusted as though the adoption of SFAS No. 142 occurred as
of January 1, 2001:

|                            |              |                                          |             |                   |   |        |   |        |     |        |   |         |   |         |   |         |      |         | 
|--------------------------- | ------------ | ---------------------------------------- | ----------- | ----------------- | - | ------ | - | ------ | --- | ------ | - | ------- | - | ------- | - | ------- | ---- | ------- | 
|                            |              |                                          |             |                  
|                            |              | Three Months Ended                       |             | Nine Months Ended
|                            |              | September 30,                            |             | September 30,    
|                            |              |                                          |             |                  
|                            |              | 2002                                     |             | 2001              |   | 2002   |   | 2001  
|                            |              |                                          |             |                   |   |        |   |       
|Net income:                 |              |                                          |             |                   |   |        |   |        |     |        |   |         |   |         |   |        
|                            | As reported: |                                          | $           | 84,245            |   |        | $ | 61,471 |     |        | $ | 213,963 |   |         | $ | 162,493 |     
|                            |              | Goodwill amortization                    |             |                   |  |        |   |        | 102 |        |   |         |  |         |   |         | 307  |        
|                            |              | Indefinite-life intangibles amortization |             |                   |  |        |   |        | 149 |        |   |         |  |         |   |         | 448  |        
|                            |              |                                          |             |                   |   |        |   |        |     |        |   |         |   |         |   |        
|                            |              |                                          | As adjusted |                   | $ | 84,245 |   |        | $   | 61,722 |   |         | $ | 213,963 |   |         | $    | 163,248 | 
|                            |              |                                          |             |                   |   |        |   |        |     |        |   |         |   |         |   |        
|Basic earnings per share:   |              |                                          |             |                   |   |        |   |        |     |        |   |         |   |         |   |        
|                            | As reported: |                                          | $           | 0.35              |   |        | $ | 0.27   |     |        | $ | 0.87    |   |         | $ | 0.71    |     
|                            |              | Goodwill amortization                    |             |                   |  |        |   |        |    |        |   |         |  |         |   |         |     |        
|                            |              | Indefinite-life intangibles amortization |             |                   |  |        |   |        |    |        |   |         |  |         |   |         |     |        
|                            |              |                                          |             |                   |   |        |   |        |     |        |   |         |   |         |   |        
|                            |              |                                          | As adjusted |                   | $ | 0.35   |   |        | $   | 0.27   |   |         | $ | 0.87    |   |         | $    | 0.71    | 
|                            |              |                                          |             |                   |   |        |   |        |     |        |   |         |   |         |   |        
|Diluted earnings per share: |              |                                          |             |                   |   |        |   |        |     |        |   |         |   |         |   |        
|                            | As reported: |                                          | $           | 0.35              |   |        | $ | 0.27   |     |        | $ | 0.87    |   |         | $ | 0.70    |     
|                            |              | Goodwill amortization                    |             |                   |  |        |   |        |    |        |   |         |  |         |   |         |     |        
|                            |              | Indefinite-life intangibles amortization |             |                   |  |        |   |        |    |        |   |         |  |         |   |         | 0.01 |        
|                            |              |                                          |             |                   |   |        |   |        |     |        |   |         |   |         |   |        
|                            |              |                                          | As adjusted |                   | $ | 0.35   |   |        | $   | 0.27   |   |         | $ | 0.87    |   |         | $    | 0.71    | 
|                            |              |                                          |             |                   |   |        |   |        |     |        |   |         |   |         |   |        

The following table reflects the components of
intangible assets as of September 30, 2002:

|                              |                         |          |           |              |  |   |         |         | 
|----------------------------- | ----------------------- | -------- | --------- | ------------ |  | - | ------- | ------- | 
|                              |                         | Gross    |           |             
|                              |                         | Carrying |           | Accumulated 
|                              |                         | Amount   |           | Amortization
|                              |                         |          |           |             
|Trademarks and product rights |                         | $        | 1,128,756 |              |  | $ | 113,995 |        
|Patents                       |                         |          | 119,000   |              |  |   | 27,061  |        
|Goodwill                      |                         |          | 16,251    |              |  |   | 3,509   |        
|Other intangibles             |                         |          | 9,526     |              |  |   | 6,627   |        
|                              |                         |          |           |              |  |   |         |        
|                              | Total intangible assets |          | $         | 1,273,533    |  |   | $       | 151,192 | 
|                              |                         |          |           |              |  |   |         |        

Amortization expense for the three and nine
months ended September 30, 2002 was $12,760 and $35,754
respectively. Estimated annual amortization expense for each of
the five succeeding fiscal years is as follows:

|                                |  |        |        | 
|------------------------------- |  | ------ | ------ | 
|Fiscal Year Ending December 31: |  | Amount
|                                |  |       
|2002                            |  | $      | 48,539 | 
|2003                            |  |        | 51,039 | 
|2004                            |  |        | 51,039 | 
|2005                            |  |        | 50,947 | 
|2006                            |  |        | 50,655 | 

7



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##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

In the first quarter of 2001, the Company adopted
SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, as amended by SFAS No. 138,
which establishes accounting and reporting standards for
derivative instruments and hedging activities. The cumulative
effect of the change in accounting principle was $870, or
$545 net of tax. In addition, income representing the
change in the value of the derivatives in the three and nine
months ended September 30, 2001 of $5,650 and $8,488,
respectively, was included in other expense. The Company had no
derivative financial instruments as of September 30, 2002.

In August 2001, the Financial Accounting
Standards Board issued SFAS No. 143, Accounting
for Asset Retirement Obligations and SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets. SFAS No. 143 addresses financial accounting
and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement
costs. SFAS No. 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets.
These standards were adopted by the Company effective
January 1, 2002. The implementation of these standards did
not have any impact on the Companys financial statements.

In May 2002, the Financial Accounting Standards
Board issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement
No. 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
adopting SFAS No. 145 will be that gains and losses
incurred upon the extinguishment of debt may no longer qualify
for extraordinary item treatment in the income statement.

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 Certain
Costs Incurred in a Restructuring). SFAS No. 146 will
be effective for exit or disposal activities of the Company that
are initiated after December 31, 2002.

6.     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 14 lawsuits which
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 it 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 its product

8



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##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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

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

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



| |                                        
| | ---------------------------------------
| | State of Wisconsin Investment
    Board

On November 30, 1999, the Company entered
into an agreement of merger with Medco Research, Inc.
(Medco) pursuant to which the Company acquired Medco
in an all stock, tax-free pooling of interests transaction,
which was subject to approval by the Medco shareholders. On
January 5, 2000, Medco issued to its stockholders a proxy
statement with respect to the proposed transaction and noticed a
meeting to approve the transaction for February 10, 2000.

On January 11, 2000, the State of Wisconsin
Investment Board, (SWIB), a Medco shareholder which
held approximately 11.6% of the outstanding stock of Medco,
filed suit on behalf of a proposed class of Medco shareholders
in the Court of Chancery for the State of Delaware, New Castle
County, (State of Wisconsin Investment Board v.
Bartlett, et al., C.A. No. 17727), against Medco
and members of Medcos board of directors to enjoin the
shareholder vote on the merger and the consummation of the
merger. SWIB alleged, among other things, that the proxy
materials filed by Medco failed to disclose all material
information and included misleading statements regarding the
transaction, its negotiation, and its approval by the Medco
board of directors; that the Medco directors were not adequately
informed and did not adequately inform themselves of all
reasonably available information before recommending the
transaction to Medco shareholders; and that the Medco directors
were disloyal and committed waste in allegedly enabling one of
the Medco directors to negotiate the transaction purportedly for
his own benefit and in agreeing to terms that precluded what the
complaint alleged were more beneficial alternative transactions.
SWIB also moved for a preliminary injunction

9



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##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

to enjoin the shareholder vote and the merger
based on the claims asserted in its complaint. Medco and the
other defendants denied all allegations and continue to deny
them.

After Medco distributed a supplemental proxy
statement on January 31, 2000 and the court postponed the
February 10, 2000 vote on the merger agreement for
15 days to allow shareholders sufficient time to consider
the supplemental disclosures, the court rejected SWIBs
claims in a February 24, 2000 Memorandum Opinion and denied
preliminary injunctive relief because SWIB had not shown a
reasonable likelihood of success following trial on the merits.
The court made a number of preliminary findings, including that
the Medco board of directors properly delegated to one of its
directors the responsibility to negotiate the merger; that the
payment of the negotiating fee was a proper exercise of business
judgment and did not constitute waste; that the other merger
provisions were also valid; that the Medco directors were
adequately informed of all material information reasonably
available to them prior to approving the merger agreement; that
the Medco directors acted independently and in good faith to
benefit the economic interests of the Medco shareholders; that
the alleged omissions in the proxy statements were not material;
and that the Medco board of directors fully met its duty of
complete disclosure with respect to the transaction.

SWIB subsequently filed an Application for a
Scheduling Order stating its intention to dismiss the case,
before a class had been certified. While SWIB indicated that it
did not intend to prosecute the merits of the case further, and
even though SWIB lost its motion for preliminary injunction,
SWIB still claimed that its attorneys were entitled to an award
of attorneys fees and costs. SWIB petitioned the court for
approximately $7,260 in attorneys fees and approximately
$270 in costs.

Two separate hearings on SWIBs petition to
dismiss and for attorneys fees and costs were held on
June 26, 2000 and January 31, 2001 in the Court of
Chancery for the State of Delaware. On April 10, 2002, the
court granted the motion to dismiss with prejudice and awarded
SWIB $234 in fees and $94 in costs, for a total award of $328.

SWIB appealed the courts decision to the
Delaware Supreme Court and filed its opening brief on
June 14, 2002. The Company timely responded, and argument
was heard before a panel of three justices on October 22,
2002. On October 25, 2002, the Delaware Supreme Court
promptly affirmed the decision of the Court of Chancery in all
respects. In light of the fact that the Company has already
satisfied the April 10, 2002 judgment of the Court of
Chancery, the Company believes that any further exposure in this
matter will be unlikely.



| |                                           
| | ------------------------------------------
| | Thimerosal/ Vaccine Related
    Litigation

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

In these cases, the plaintiffs attempt to link
the receipt of the mercury-based vaccinations to neurological
defects. The plaintiffs in these cases claim that the vaccines
in question would have had their beneficial effects with or
without thimerosal, and that thimerosal was a tool for
undercutting other products on the market, thereby increasing
defendants sales and profits. The plaintiffs also 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 vaccines 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 only vaccine that the Company has
manufactured, distributed, marketed and/or sold was the
Fluogen® vaccine, which did contain the mercury-based
preservative, thimerosal. Fluogen® was only distributed by
the Company for two flu seasons. The Companys product
liability insurance carrier, has been

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KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

given proper notice of all of these matters, and
defense counsel are vigorously defending the Companys
interests. The Company is moving to be dismissed from the
litigation due to lack of product identity in the
plaintiffs complaints. In 2001, the Company was dismissed
on this basis in a similar case.



| |                        
| | -----------------------
| | 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 Parkedale Facility is currently
manufacturing pharmaceutical products subject to the Consent
Decree which 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 abbreviated new drug application or
new drug application. The Company intends, when appropriate, to
petition for relief from the Consent Decree.

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



| |        
| | -------
| | Summary

Management believes that the outcome of all
pending legal proceedings in the aggregate will not have a
material adverse affect on the Companys consolidated
financial position, results of operations, or cash flow.

7.     Segment
Reporting

The Companys business is classified into
three reportable segments: Branded Pharmaceuticals, Contract
Manufacturing, and Royalties. Branded Pharmaceuticals include a
variety of branded prescription products over four therapeutic
areas, including cardiovascular, anti-infective, critical care
and womens health/ endocrinology. These branded
prescription products have been aggregated because of the
similarity in economic characteristics, regulatory environment,
manufacturing process, method of distribution, and type of
customer. Contract Manufacturing represents contract
manufacturing services provided for pharmaceutical and
biotechnology companies. Royalties represent products for which
the Company has transferred the manufacturing and marketing
rights to corporate partners in exchange for royalty payments on
product sales. The classification all other
primarily includes generic pharmaceutical products and
development services.

The Company primarily evaluates its segments
based on gross profit. Gross profit excludes manufacturing
depreciation. Reportable segments were separately identified
based on revenues, gross profit 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 of
contract manufacturing to the branded pharmaceutical segment.

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KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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

|                |                         |                             |   |                   |         |      |   |         |         |  |   |         |         |  |   |         |         | 
|--------------- | ----------------------- | --------------------------- | - | ----------------- | ------- | ---- | - | ------- | ------- |  | - | ------- | ------- |  | - | ------- | ------- | 
|                |                         |                             |   |                  
|                |                         | Three Months Ended          |   | Nine Months Ended
|                |                         | September 30,               |   | September 30,    
|                |                         |                             |   |                  
|                |                         | 2002                        |   | 2001              |         | 2002 |   | 2001   
|                |                         |                             |   |                   |         |      |   |        
|Total revenues: |                         |                             |   |                   |         |      |   |         |         |  |   |         |         |  |   |        
|                | Branded pharmaceuticals |                             | $ | 293,728           |         |      | $ | 211,479 |         |  | $ | 788,624 |         |  | $ | 560,096 |        
|                | Royalties               |                             |   | 14,997            |         |      |   | 11,608  |         |  |   | 41,025  |         |  |   | 36,028  |        
|                | Contract manufacturing  |                             |   | 27,767            |         |      |   | 22,252  |         |  |   | 97,842  |         |  |   | 53,450  |        
|                | All other               |                             |   | 280               |         |      |   | 702     |         |  |   | 682     |         |  |   | 2,204   |        
|                | Eliminations            |                             |   | (21,067           | )       |      |   | (15,952 | )       |  |   | (71,870 | )       |  |   | (33,863 | )      
|                |                         |                             |   |                   |         |      |   |         |         |  |   |         |         |  |   |        
|                |                         | Consolidated total revenues |   | $                 | 315,705 |      |   | $       | 230,089 |  |   | $       | 856,303 |  |   | $       | 617,915 | 
|                |                         |                             |   |                   |         |      |   |         |         |  |   |         |         |  |   |        
|Gross profit:   |                         |                             |   |                   |         |      |   |         |         |  |   |         |         |  |   |        
|                | Branded pharmaceuticals |                             | $ | 241,667           |         |      | $ | 172,518 |         |  | $ | 657,917 |         |  | $ | 462,841 |        
|                | Royalties               |                             |   | 12,197            |         |      |   | 9,961   |         |  |   | 33,674  |         |  |   | 29,218  |        
|                | Contract manufacturing  |                             |   | (1,328            | )       |      |   | (1,793  | )       |  |   | (2,142  | )       |  |   | (5,461  | )      
|                | All other               |                             |   | (393              | )       |      |   | (4      | )       |  |   | (44     | )       |  |   | 150     |        
|                |                         |                             |   |                   |         |      |   |         |         |  |   |         |         |  |   |        
|                |                         | Consolidated gross profit   |   | $                 | 252,143 |      |   | $       | 180,682 |  |   | $       | 689,405 |  |   | $       | 486,748 | 
|                |                         |                             |   |                   |         |      |   |         |         |  |   |         |         |  |   |        

|              |                         |                           |   |              |           |  |   |           |           | 
|------------- | ----------------------- | ------------------------- | - | ------------ | --------- |  | - | --------- | --------- | 
|              |                         | As of                     |   | As of       
|              |                         | September 30,             |   | December 31,
|              |                         | 2002                      |   | 2001        
|              |                         |                           |   |             
|Total assets: |                         |                           |   |              |           |  |   |          
|              | Branded pharmaceuticals |                           | $ | 2,537,016    |           |  | $ | 2,397,062 |          
|              | Royalties               |                           |   | 15,273       |           |  |   | 11,326    |          
|              | Contract manufacturing  |                           |   | 126,418      |           |  |   | 103,268   |          
|              | All other               |                           |   | 203          |           |  |   | 98        |          
|              | Eliminations            |                           |   | (11,284      | )         |  |   | (5,143    | )        
|              |                         |                           |   |              |           |  |   |          
|              |                         | Consolidated total assets |   | $            | 2,667,626 |  |   | $         | 2,506,611 | 
|              |                         |                           |   |              |           |  |   |          

The following represents revenues by therapeutic
area:

|                |                                      |                             |   |                   |         |      |   |        |         |  |   |         |         |  |   |         |         | 
|--------------- | ------------------------------------ | --------------------------- | - | ----------------- | ------- | ---- | - | ------ | ------- |  | - | ------- | ------- |  | - | ------- | ------- | 
|                |                                      |                             |   |                  
|                |                                      | Three Months Ended          |   | Nine Months Ended
|                |                                      | September 30,               |   | September 30,    
|                |                                      |                             |   |                  
|                |                                      | 2002                        |   | 2001              |         | 2002 |   | 2001  
|                |                                      |                             |   |                   |         |      |   |       
|Total revenues: |                                      |                             |   |                   |         |      |   |        |         |  |   |         |         |  |   |        
|                | Cardiovascular (including royalties) |                             | $ | 156,072           |         |      | $ | 93,480 |         |  | $ | 407,946 |         |  | $ | 246,534 |        
|                | Anti-infective                       |                             |   | 31,426            |         |      |   | 36,268 |         |  |   | 97,436  |         |  |   | 107,792 |        
|                | Critical care                        |                             |   | 24,243            |         |      |   | 24,500 |         |  |   | 71,805  |         |  |   | 63,476  |        
|                | Womens health/endocrinology         |                             |   | 86,470            |         |      |   | 61,361 |         |  |   | 229,602 |         |  |   | 156,916 |        
|                | Other                                |                             |   | 17,494            |         |      |   | 14,480 |         |  |   | 49,514  |         |  |   | 43,197  |        
|                |                                      |                             |   |                   |         |      |   |        |         |  |   |         |         |  |   |        
|                |                                      | Consolidated total revenues |   | $                 | 315,705 |      |   | $      | 230,089 |  |   | $       | 856,303 |  |   | $       | 617,915 | 
|                |                                      |                             |   |                   |         |      |   |        |         |  |   |         |         |  |   |        

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KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

8.     Novavax
Convertible Notes Receivable

During the period from December 2000 through June
2002, the Company provided $40,000 in financing to Novavax in
the form of notes receivable convertible to common stock of
Novavax, including $10,000 that was provided in June 2002. The
loan is impaired as defined under SFAS 114,
Accounting by Creditors for Impairment of a Loan.
SFAS 114 requires the creditor to evaluate the cash flows
available from any collateral (in Kings situation, the
Novavax common stock obtainable upon conversion) in order to
determine the amount of any valuation allowance for an impaired
loan. Because of the recent significant decline in the share
price of Novavax common stock to levels below that established
by Kings common stock conversion options associated with
the Novavax convertible notes, the Company recorded a valuation
allowance in the second quarter of 2002. As of
September 30, 2002, the valuation allowance for the Novavax
convertible notes equaled $27,378. The Company determined the
amount of the valuation allowance by reference to the
September 30, 2002 quoted market price of the Novavax
common stock. 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 such time as the loan
is no longer considered to be impaired.

9.     Purchase
Commitment

The Company has a supply agreement with a third
party to produce Lorabid®. This supply agreement requires
the Company to purchase certain minimum levels of inventory of
Lorabid® annually through December 2006. Management
currently believes it will be able to recover the cost of
minimum levels of inventory required through future sales of
Lorabid®. However, in the event Lorabid® prescriptions
decline there may be a material adverse effect upon our results
of operations and cash flows, including, but not limited to a
potential significant write-off of excess inventory.

10.     Subsequent
Events

On October 21, 2002, the Company entered
into an agreement with Meridian Medical Technologies, Inc.
(Meridian) to purchase the common stock of Meridian
for a cash price of $44.50 per share, totaling
approximately $247,800. Meridian is the leading manufacturer of
auto-injectors for the self-administration of injectable drugs.
The Company will finance the acquisition using available cash.
Closing of the transaction is subject to approval by the holders
of a majority of the outstanding common stock of Meridian,
appropriate governmental approvals, and other customary
conditions, and is expected to be completed before the end of
January 2003. This transaction will be accounted for using
the purchase method of accounting.

11.     Guarantor
Financial Statements

The Companys wholly-owned subsidiaries
Monarch Pharmaceuticals, Inc.; King Pharmaceuticals Research and
Development, Inc.; Parkedale Pharmaceuticals, Inc.; Jones Pharma
Incorporated and King Pharmaceuticals of Nevada, Inc. (the
Guarantor Subsidiaries) have guaranteed the
Companys performance under the $345,000,
2 3/4% Convertible Debentures due 2021 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 notes.

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KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

GUARANTOR SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE
SHEETS

|                                         |                                           |                                            |           |                   |           |             |           |              |          |      |            |              |            |             |           |              |           |  |           |         |           |  |           |         |          |   |            |        |            |   |           |         |           | 
|---------------------------------------- | ----------------------------------------- | ------------------------------------------ | --------- | ----------------- | --------- | ----------- | --------- | ------------ | -------- | ---- | ---------- | ------------ | ---------- | ----------- | --------- | ------------ | --------- |  | --------- | ------- | --------- |  | --------- | ------- | -------- | - | ---------- | ------ | ---------- | - | --------- | ------- | --------- | 
|                                         |                                           |                                            |           |                  
|                                         |                                           | September 30, 2002                         |           | December 31, 2001
|                                         |                                           |                                            |           |                  
|                                         |                                           |                                            |           | Guarantor         |           | Eliminating |           | King         |          |      |            | Guarantor    |            | Eliminating |           | King        
|                                         |                                           | King                                       |           | Subsidiaries      |           | Entries     |           | Consolidated |          | King |            | Subsidiaries |            | Entries     |           | Consolidated
|                                         |                                           |                                            |           |                   |           |             |           |              |          |      |            |              |            |             |           |             
|                                         |                                           |                                            |           |                   |           |             |           |              |          |     
|                                         |                                           | (Unaudited)                                |           |                   |           |             |           |              |          |     
|ASSETS                                  
|Current assets:                          |                                           |                                            |           |                   |           |             |           |              |          |      |            |              |            |             |           |              |           |  |           |         |           |  |           |         |          |   |            |        |            |   |           |        
|                                         | Cash and cash equivalents                 |                                            | $         | 735,338           |           |             | $         | (6,804       | )        |      | $          |             |            |             | $         | 728,534      |           |  | $         | 882,391 |           |  | $         | (7,789  | )        |   | $          |       |            |   | $         | 874,602 |          
|                                         | Marketable securities                     |                                            |           | 190,292           |           |             |           |             |          |      |            |             |            |             |           | 190,292      |           |  |           | 49,880  |           |  |           |        |          |   |            |       |            |   |           | 49,880  |          
|                                         | Accounts receivable, net                  |                                            |           | 18,222            |           |             |           | 175,968      |          |      |            | (11,245      | )          |             |           | 182,945      |           |  |           | 12,735  |           |  |           | 154,272 |          |   |            | (5,143 | )          |   |           | 161,864 |          
|                                         | Inventories                               |                                            |           | 26,883            |           |             |           | 111,111      |          |      |            |             |            |             |           | 137,994      |           |  |           | 18,683  |           |  |           | 92,895  |          |   |            |       |            |   |           | 111,578 |          
|                                         | Deferred income taxes                     |                                            |           | 10,791            |           |             |           | 41,282       |          |      |            |             |            |             |           | 52,073       |           |  |           | 28,928  |           |  |           | 2,628   |          |   |            |       |            |   |           | 31,556  |          
|                                         | Prepaid expenses and other current assets |                                            |           | 3,839             |           |             |           | 3,770        |          |      |            |             |            |             |           | 7,609        |           |  |           | 1,898   |           |  |           | 6,181   |          |   |            |       |            |   |           | 8,079   |          
|                                         |                                           |                                            |           |                   |           |             |           |              |          |      |            |              |            |             |           |              |           |  |           |         |           |  |           |         |          |   |            |        |            |   |           |        
|                                         |                                           | Total current assets                       |           |                   | 985,365   |             |           |              | 325,327  |      |            |              | (11,245    | )           |           |              | 1,299,447 |  |           |         | 994,515   |  |           |         | 248,187  |   |            |        | (5,143     | ) |           |         | 1,237,559 | 
|                                         |                                           |                                            |           |                   |           |             |           |              |          |      |            |              |            |             |           |              |           |  |           |         |           |  |           |         |          |   |            |        |            |   |           |        
|Property, plant, and equipment, net      |                                           |                                            | 48,651    |                   |           |             | 143,978   |              |          |      |           |              |            |             | 192,629   |              |           |  | 38,964    |         |           |  | 125,152   |         |          |   |           |        |            |   | 164,116   |        
|Intangible assets net                    |                                           |                                            | 778,982   |                   |           |             | 343,359   |              |          |      |           |              |            |             | 1,122,341 |              |           |  | 682,875   |         |           |  | 354,920   |         |          |   |           |        |            |   | 1,037,795 |        
|Investment in subsidiaries               |                                           |                                            | 1,579,437 |                   |           |             |          |              |          |      | (1,579,437 | )            |            |             |          |              |           |  | 1,158,458 |         |           |  |          |         |          |   | (1,158,458 | )      |            |   |          |        
|Other assets                             |                                           |                                            | 34,589    |                   |           |             | 18,620    |              |          |      |           |              |            |             | 53,209    |              |           |  | 49,577    |         |           |  | 17,564    |         |          |   |           |        |            |   | 67,141    |        
|                                         |                                           |                                            |           |                   |           |             |           |              |          |      |            |              |            |             |           |              |           |  |           |         |           |  |           |         |          |   |            |        |            |   |           |        
|                                         |                                           | Total assets                               |           | $                 | 3,427,024 |             |           | $            | 831,284  |      |            | $            | (1,590,682 | )           |           | $            | 2,667,626 |  |           | $       | 2,924,389 |  |           | $       | 745,823  |   |            | $      | (1,163,601 | ) |           | $       | 2,506,611 | 
|                                         |                                           |                                            |           |                   |           |             |           |              |          |      |            |              |            |             |           |              |           |  |           |         |           |  |           |         |          |   |            |        |            |   |           |        
|                                        
|LIABILITIES AND SHAREHOLDERS
    EQUITY
|Current liabilities:                     |                                           |                                            |           |                   |           |             |           |              |          |      |            |              |            |             |           |              |           |  |           |         |           |  |           |         |          |   |            |        |            |   |           |        
|                                         | Accounts payable                          |                                            | $         | 5,718             |           |             | $         | 23,718       |          |      | $          | (11,245      | )          |             | $         | 18,191       |           |  | $         | 4,347   |           |  | $         | 23,666  |          |   | $          | (5,143 | )          |   | $         | 22,870  |          
|                                         | Accrued expenses                          |                                            |           | 2,551             |           |             |           | 198,549      |          |      |            |             |            |             |           | 201,100      |           |  |           | 6,700   |           |  |           | 112,798 |          |   |            |       |            |   |           | 119,498 |          
|                                         | Income taxes payable                      |                                            |           | 24,780            |           |             |           | 151          |          |      |            |             |            |             |           | 24,931       |           |  |           | (4,719  | )         |  |           | 12,437  |          |   |            |       |            |   |           | 7,718   |          
|                                         | Liability for stock repurchase            |                                            |           |                  |           |             |           |             |          |      |            |             |            |             |           |             |           |  |           |        |           |  |           |        |          |   |            |       |            |   |           |        |          
|                                         | Current portion of long-term debt         |                                            |           | 1,289             |           |             |           |             |          |      |            |             |            |             |           | 1,289        |           |  |           | 1,344   |           |  |           | 13      |          |   |            |       |            |   |           | 1,357   |          
|                                         |                                           |                                            |           |                   |           |             |           |              |          |      |            |              |            |             |           |              |           |  |           |         |           |  |           |         |          |   |            |        |            |   |           |        
|                                         |                                           | Total current liabilities                  |           |                   | 34,338    |             |           |              | 222,418  |      |            |              | (11,245    | )           |           |              | 245,511   |  |           |         | 7,672     |  |           |         | 148,914  |   |            |        | (5,143     | ) |           |         | 151,443   | 
|                                         |                                           |                                            |           |                   |           |             |           |              |          |      |            |              |            |             |           |              |           |  |           |         |           |  |           |         |          |   |            |        |            |   |           |        
|Long-term debt                           |                                           |                                            | 346,258   |                   |           |             |          |              |          |      |           |              |            |             | 346,258   |              |           |  | 346,397   |         |           |  |          |         |          |   |           |        |            |   | 346,397   |        
|Deferred income taxes                    |                                           |                                            | 30,177    |                   |           |             | 19,256    |              |          |      |           |              |            |             | 49,433    |              |           |  | 34,539    |         |           |  | 2,482     |         |          |   |           |        |            |   | 37,021    |        
|Other liabilities                        |                                           |                                            | 55,148    |                   |           |             |          |              |          |      |           |              |            |             | 55,148    |              |           |  | 63,466    |         |           |  |          |         |          |   |           |        |            |   | 63,466    |        
|Intercompany (receivable) payable        |                                           |                                            | 989,827   |                   |           |             | (989,827  | )            |          |      |           |              |            |             |          |              |           |  | 564,031   |         |           |  | (564,031  | )       |          |   |           |        |            |   |          |        
|                                         |                                           |                                            |           |                   |           |             |           |              |          |      |            |              |            |             |           |              |           |  |           |         |           |  |           |         |          |   |            |        |            |   |           |        
|                                         |                                           | Total liabilities                          |           |                   | 1,455,748 |             |           |              | (748,153 | )    |            |              | (11,245    | )           |           |              | 696,350   |  |           |         | 1,016,105 |  |           |         | (412,635 | ) |            |        | (5,143     | ) |           |         | 598,327   | 
|                                         |                                           |                                            |           |                   |           |             |           |              |          |      |            |              |            |             |           |              |           |  |           |         |           |  |           |         |          |   |            |        |            |   |           |        
|Shareholders equity                     |                                           |                                            | 1,971,276 |                   |           |             | 1,579,437 |              |          |      | (1,579,437 | )            |            |             | 1,971,276 |              |           |  | 1,908,284 |         |           |  | 1,158,458 |         |          |   | (1,158,458 | )      |            |   | 1,908,284 |        
|                                         |                                           |                                            |           |                   |           |             |           |              |          |      |            |              |            |             |           |              |           |  |           |         |           |  |           |         |          |   |            |        |            |   |           |        
|                                         |                                           | Total liabilities and shareholders equity |           | $                 | 3,427,024 |             |           | $            | 831,284  |      |            | $            | (1,590,682 | )           |           | $            | 2,667,626 |  |           | $       | 2,924,389 |  |           | $       | 745,823  |   |            | $      | (1,163,601 | ) |           | $       | 2,506,611 | 
|                                         |                                           |                                            |           |                   |           |             |           |              |          |      |            |              |            |             |           |              |           |  |           |         |           |  |           |         |          |   |            |        |            |   |           |        

14



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##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

GUARANTOR SUBSIDIARIES

CONSOLIDATING STATEMENTS OF INCOME

|                              |                                                                           |                                       |         |                                       |         |             |         |              |         |      |          |              |          |             |         |              |         |  |         |        |        |  |         |         |         |   |         |         |         |   |         |         |         | 
|----------------------------- | ------------------------------------------------------------------------- | ------------------------------------- | ------- | ------------------------------------- | ------- | ----------- | ------- | ------------ | ------- | ---- | -------- | ------------ | -------- | ----------- | ------- | ------------ | ------- |  | ------- | ------ | ------ |  | ------- | ------- | ------- | - | ------- | ------- | ------- | - | ------- | ------- | ------- | 
|                              |                                                                           |                                       |         |                                      
|                              |                                                                           | Three Months Ended September 30, 2002 |         | Three Months Ended September 30, 2001
|                              |                                                                           |                                       |         |                                      
|                              |                                                                           |                                       |         | Guarantor                             |         | Eliminating |         | King         |         |      |          | Guarantor    |          | Eliminating |         | King        
|                              |                                                                           | King                                  |         | Subsidiaries                          |         | Entries     |         | Consolidated |         | King |          | Subsidiaries |          | Entries     |         | Consolidated
|                              |                                                                           |                                       |         |                                       |         |             |         |              |         |      |          |              |          |             |         |             
|                              |                                                                           |                                      
|                              |                                                                           | (Unaudited)                          
|Revenues:                     |                                                                           |                                       |         |                                       |         |             |         |              |         |      |          |              |          |             |         |              |         |  |         |        |        |  |         |         |         |   |         |         |         |   |         |        
|                              | Net sales                                                                 |                                       | $       | 12,495                                |         |             | $       | 300,297      |         |      | $        | (12,084      | )        |             | $       | 300,708      |         |  | $       | 7,220  |        |  | $       | 217,190 |         |   | $       | (5,929  | )       |   | $       | 218,481 |        
|                              | Royalty revenue                                                           |                                       |         |                                      |         |             |         | 14,997       |         |      |          |             |          |             |         | 14,997       |         |  |         |       |        |  |         | 11,608  |         |   |         |        |         |   |         | 11,608  |        
|                              |                                                                           |                                       |         |                                       |         |             |         |              |         |      |          |              |          |             |         |              |         |  |         |        |        |  |         |         |         |   |         |         |         |   |         |        
|                              |                                                                           | Total revenues                        |         |                                       | 12,495  |             |         |              | 315,294 |      |          |              | (12,084  | )           |         |              | 315,705 |  |         |        | 7,220  |  |         |         | 228,798 |   |         |         | (5,929  | ) |         |         | 230,089 | 
|                              |                                                                           |                                       |         |                                       |         |             |         |              |         |      |          |              |          |             |         |              |         |  |         |        |        |  |         |         |         |   |         |         |         |   |         |        
|Operating costs and expenses: |                                                                           |                                       |         |                                       |         |             |         |              |         |      |          |              |          |             |         |              |         |  |         |        |        |  |         |         |         |   |         |         |         |   |         |        
|                              | Costs of revenues                                                         |                                       |         | 9,372                                 |         |             |         | 66,274       |         |      |          | (12,084      | )        |             |         | 63,562       |         |  |         | 7,340  |        |  |         | 47,996  |         |   |         | (5,929  | )       |   |         | 49,407  |        
|                              | Selling, general and administrative (including
    co-promotion expenses) |                                       |         | 4,454                                 |         |             |         | 95,671       |         |      |          |             |          |             |         | 100,125      |         |  |         | 1,843  |        |  |         | 59,782  |         |   |         |        |         |   |         | 61,625  |        
|                              | Depreciation and amortization                                             |                                       |         | 9,674                                 |         |             |         | 5,929        |         |      |          |             |          |             |         | 15,603       |         |  |         | 6,199  |        |  |         | 6,486   |         |   |         |        |         |   |         | 12,685  |        
|                              | Research and development                                                  |                                       |         |                                      |         |             |         | 6,448        |         |      |          |             |          |             |         | 6,448        |         |  |         | 2,500  |        |  |         | 4,917   |         |   |         |        |         |   |         | 7,417   |        
|                              | Research and development special license rights                           |                                       |         |                                      |         |             |         |             |         |      |          |             |          |             |         |             |         |  |         |       |        |  |         |        |         |   |         |        |         |   |         |        |        
|                              | Restructuring and other nonrecurring charges                              |                                       |         |                                      |         |             |         |             |         |      |          |             |          |             |         |             |         |  |         | (361   | )      |  |         | 3,640   |         |   |         |        |         |   |         | 3,279   |        
|                              |                                                                           |                                       |         |                                       |         |             |         |              |         |      |          |              |          |             |         |              |         |  |         |        |        |  |         |         |         |   |         |         |         |   |         |        
|                              |                                                                           | Total operating costs and expenses    |         |                                       | 23,500  |             |         |              | 174,322 |      |          |              | (12,084  | )           |         |              | 185,738 |  |         |        | 17,521 |  |         |         | 122,821 |   |         |         | (5,929  | ) |         |         | 134,413 | 
|                              |                                                                           |                                       |         |                                       |         |             |         |              |         |      |          |              |          |             |         |              |         |  |         |        |        |  |         |         |         |   |         |         |         |   |         |        
|Operating income              |                                                                           |                                       | (11,005 | )                                     |         |             | 140,972 |              |         |      |         |              |          |             | 129,967 |              |         |  | (10,301 | )      |        |  | 105,977 |         |         |   |        |         |         |   | 95,676  |        
|                              |                                                                           |                                       |         |                                       |         |             |         |              |         |      |          |              |          |             |         |              |         |  |         |        |        |  |         |         |         |   |         |         |         |   |         |        
|Other income (expense):       |                                                                           |                                       |         |                                       |         |             |         |              |         |      |          |              |          |             |         |              |         |  |         |        |        |  |         |         |         |   |         |         |         |   |         |        
|                              | Interest income                                                           |                                       |         | 5,600                                 |         |             |         | 352          |         |      |          |             |          |             |         | 5,952        |         |  |         | 1,719  |        |  |         | 445     |         |   |         |        |         |   |         | 2,164   |        
|                              | Interest expense                                                          |                                       |         | (3,143                                | )       |             |         |             |         |      |          |             |          |             |         | (3,143       | )       |  |         | (3,442 | )      |  |         | 84      |         |   |         |        |         |   |         | (3,358  | )      
|                              | Valuation change  convertible notes
    receivable                       |                                       |         | 548                                   |         |             |         |             |         |      |          |             |          |             |         | 548          |         |  |         |       |        |  |         |        |         |   |         |        |         |   |         |        |        
|                              | Other, net                                                                |                                       |         | 161                                   |         |             |         | (74          | )       |      |          |             |          |             |         | 87           |         |  |         | 5,750  |        |  |         | (2,192  | )       |   |         |        |         |   |         | 3,558   |        
|                              | Equity in earnings of subsidiaries                                        |                                       |         | 105,791                               |         |             |         |             |         |      |          | (105,791     | )        |             |         |             |         |  |         | 62,810 |        |  |         |        |         |   |         | (62,810 | )       |   |         |        |        
|                              | Intercompany interest (expense)                                           |                                       |         | 8,243                                 |         |             |         | (8,243       | )       |      |          |             |          |             |         |             |         |  |         | 4,139  |        |  |         | (4,139  | )       |   |         |        |         |   |         |        |        
|                              |                                                                           |                                       |         |                                       |         |             |         |              |         |      |          |              |          |             |         |              |         |  |         |        |        |  |         |         |         |   |         |         |         |   |         |        
|                              |                                                                           | Total other income (expense)          |         |                                       | 117,200 |             |         |              | (7,965  | )    |          |              | (105,791 | )           |         |              | 3,444   |  |         |        | 70,976 |  |         |         | (5,802  | ) |         |         | (62,810 | ) |         |         | 2,364   | 
|                              |                                                                           |                                       |         |                                       |         |             |         |              |         |      |          |              |          |             |         |              |         |  |         |        |        |  |         |         |         |   |         |         |         |   |         |        
|Income before income taxes    |                                                                           |                                       | 106,195 |                                       |         |             | 133,007 |              |         |      | (105,791 | )            |          |             | 133,411 |              |         |  | 60,675  |        |        |  | 100,175 |         |         |   | (62,810 | )       |         |   | 98,040  |        
|Income tax (expense) benefit  |                                                                           |                                       | (21,950 | )                                     |         |             | (27,216 | )            |         |      |         |              |          |             | (49,166 | )            |         |  | 796     |        |        |  | (37,365 | )       |         |   |        |         |         |   | (36,569 | )      
|                              |                                                                           |                                       |         |                                       |         |             |         |              |         |      |          |              |          |             |         |              |         |  |         |        |        |  |         |         |         |   |         |         |         |   |         |        
|                              |                                                                           | Net income                            |         | $                                     | 84,245  |             |         | $            | 105,791 |      |          | $            | (105,791 | )           |         | $            | 84,245  |  |         | $      | 61,471 |  |         | $       | 62,810  |   |         | $       | (62,810 | ) |         | $       | 61,471  | 
|                              |                                                                           |                                       |         |                                       |         |             |         |              |         |      |          |              |          |             |         |              |         |  |         |        |        |  |         |         |         |   |         |         |         |   |         |        

15



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##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

GUARANTOR SUBSIDIARIES

CONSOLIDATING STATEMENTS OF INCOME

|                                                                                       |                                                                           |                                      |                                    |                                      |         |             |          |              |         |         |          |              |          |             |          |              |         |         |         |         |         |         |         |         |         |         |          |          |          |          |         |         |         |         | 
|-------------------------------------------------------------------------------------- | ------------------------------------------------------------------------- | ------------------------------------ | ---------------------------------- | ------------------------------------ | ------- | ----------- | -------- | ------------ | ------- | ------- | -------- | ------------ | -------- | ----------- | -------- | ------------ | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | -------- | -------- | -------- | -------- | ------- | ------- | ------- | ------- | 
|                                                                                       |                                                                           |                                      |                                    |                                     
|                                                                                       |                                                                           | Nine Months Ended September 30, 2002 |                                    | Nine Months Ended September 30, 2001
|                                                                                       |                                                                           |                                      |                                    |                                     
|                                                                                       |                                                                           |                                      |                                    | Guarantor                            |         | Eliminating |          | King         |         |         |          | Guarantor    |          | Eliminating |          | King        
|                                                                                       |                                                                           | King                                 |                                    | Subsidiaries                         |         | Entries     |          | Consolidated |         | King    |          | Subsidiaries |          | Entries     |          | Consolidated
|                                                                                       |                                                                           |                                      |                                    |                                      |         |             |          |              |         |         |          |              |          |             |          |             
|                                                                                       |                                                                           |                                     
|                                                                                       |                                                                           | (Unaudited)                         
|Revenues:                                                                              |                                                                           |                                      |                                    |                                      |         |             |          |              |         |         |          |              |          |             |          |              |         |         |         |         |         |         |         |         |         |         |          |          |          |          |         |        
|                                                                                       | Net sales                                                                 |                                      | $                                  | 48,480                               |         |             | $        | 820,764      |         |         | $        | (53,966      | )        |             | $        | 815,278      |         |         | $       | 18,978  |         |         | $       | 578,140 |         |         | $        | (15,231  | )        |          | $       | 581,887 |        
|                                                                                       | Royalty revenue                                                           |                                      |                                    |                                     |         |             |          | 41,025       |         |         |          |             |          |             |          | 41,025       |         |         |         |        |         |         |         | 36,028  |         |         |          |         |          |          |         | 36,028  |        
|                                                                                       |                                                                           |                                      |                                    |                                      |         |             |          |              |         |         |          |              |          |             |          |              |         |         |         |         |         |         |         |         |         |         |          |          |          |          |         |        
|                                                                                       |                                                                           |                                      | Total revenues                     |                                      |         | 48,480      |          |              |         | 861,789 |          |              |          | (53,966     | )        |              |         | 856,303 |         |         |         | 18,978  |         |         |         | 614,168 |          |          |          | (15,231  | )       |         |         | 617,915 | 
|                                                                                       |                                                                           |                                      |                                    |                                      |         |             |          |              |         |         |          |              |          |             |          |              |         |         |         |         |         |         |         |         |         |         |          |          |          |          |         |        
|Operating costs and expenses:                                                          |                                                                           |                                      |                                    |                                      |         |             |          |              |         |         |          |              |          |             |          |              |         |         |         |         |         |         |         |         |         |         |          |          |          |          |         |        
|                                                                                       | Costs of revenues                                                         |                                      |                                    | 48,933                               |         |             |          | 171,931      |         |         |          | (53,966      | )        |             |          | 166,898      |         |         |         | 18,738  |         |         |         | 127,660 |         |         |          | (15,231  | )        |          |         | 131,167 |        
|                                                                                       | Selling, general and administrative (including
    co-promotion expenses) |                                      |                                    | 7,283                                |         |             |          | 259,948      |         |         |          |             |          |             |          | 267,231      |         |         |         | 4,999   |         |         |         | 167,324 |         |         |          |         |          |          |         | 172,323 |        
|                                                                                       | Depreciation and amortization                                             |                                      |                                    | 26,132                               |         |             |          | 17,611       |         |         |          |             |          |             |          | 43,743       |         |         |         | 16,870  |         |         |         | 18,611  |         |         |          |         |          |          |         | 35,481  |        
|                                                                                       | Research and development                                                  |                                      |                                    | 225                                  |         |             |          | 18,554       |         |         |          |             |          |             |          | 18,779       |         |         |         | 5,198   |         |         |         | 12,734  |         |         |          |         |          |          |         | 17,932  |        
|                                                                                       | Research and development  special
    license rights                     |                                      |                                    |                                     |         |             |          |             |         |         |          |             |          |             |          |             |         |         |         |        |         |         |         |        |         |         |          |         |          |          |         |        |        
|                                                                                       | Nonrecurring charge-research and development                              |                                      |                                    |                                     |         |             |          |             |         |         |          |             |          |             |          |             |         |         |         | 3,000   |         |         |         |        |         |         |          |         |          |          |         | 3,000   |        
|                                                                                       | Restructuring and other nonrecurring charges                              |                                      |                                    |                                     |         |             |          |             |         |         |          |             |          |             |          |             |         |         |         | (361    | )       |         |         | 3,640   |         |         |          |         |          |          |         | 3,279   |        
|                                                                                       |                                                                           |                                      |                                    |                                      |         |             |          |              |         |         |          |              |          |             |          |              |         |         |         |         |         |         |         |         |         |         |          |          |          |          |         |        
|                                                                                       |                                                                           |                                      | Total operating costs and expenses |                                      |         | 82,573      |          |              |         | 468,044 |          |              |          | (53,966     | )        |              |         | 496,651 |         |         |         | 48,444  |         |         |         | 329,969 |          |          |          | (15,231  | )       |         |         | 363,182 | 
|                                                                                       |                                                                           |                                      |                                    |                                      |         |             |          |              |         |         |          |              |          |             |          |              |         |         |         |         |         |         |         |         |         |         |          |          |          |          |         |        
|Operating income                                                                       |                                                                           |                                      | (34,093                            | )                                    |         |             | 393,745  |              |         |         |         |              |          |             | 359,652  |              |         |         | (29,466 | )       |         |         | 284,199 |         |         |         |         |          |          |          | 254,733 |        
|                                                                                       |                                                                           |                                      |                                    |                                      |         |             |          |              |         |         |          |              |          |             |          |              |         |         |         |         |         |         |         |         |         |         |          |          |          |          |         |        
|Other income (expense):                                                                |                                                                           |                                      |                                    |                                      |         |             |          |              |         |         |          |              |          |             |          |              |         |         |         |         |         |         |         |         |         |         |          |          |          |          |         |        
|                                                                                       | Interest income                                                           |                                      |                                    | 16,347                               |         |             |          | 1,063        |         |         |          |             |          |             |          | 17,410       |         |         |         | 6,488   |         |         |         | 1,255   |         |         |          |         |          |          |         | 7,743   |        
|                                                                                       | Interest expense                                                          |                                      |                                    | (9,009                               | )       |             |          | (19          | )       |         |          |             |          |             |          | (9,028       | )       |         |         | (9,364  | )       |         |         | 415     |         |         |          |         |          |          |         | (8,949  | )      
|                                                                                       | Valuation change  convertible notes
    receivable                       |                                      |                                    | (27,378                              | )       |             |          |             |         |         |          |             |          |             |          | (27,378      | )       |         |         |        |         |         |         |        |         |         |          |         |          |          |         |        |        
|                                                                                       | Other, net                                                                |                                      |                                    | (190                                 | )       |             |          | (804         | )       |         |          |             |          |             |          | (994         | )       |         |         | 8,742   |         |         |         | (2,240  | )       |         |          |         |          |          |         | 6,502   |        
|                                                                                       | Equity in earnings of subsidiaries                                        |                                      |                                    | 234,722                              |         |             |          |             |         |         |          | (234,722     | )        |             |          |             |         |         |         | 199,002 |         |         |         |        |         |         |          | (199,002 | )        |          |         |        |        
|                                                                                       | Intercompany interest (expense)                                           |                                      |                                    | 31,924                               |         |             |          | (31,924      | )       |         |          |             |          |             |          |             |         |         |         | 10,671  |         |         |         | (10,671 | )       |         |          |         |          |          |         |        |        
|                                                                                       |                                                                           |                                      |                                    |                                      |         |             |          |              |         |         |          |              |          |             |          |              |         |         |         |         |         |         |         |         |         |         |          |          |          |          |         |        
|                                                                                       |                                                                           |                                      | Total other income (expense)       |                                      |         | 246,416     |          |              |         | (31,684 | )        |              |          | (234,722    | )        |              |         | (19,990 | )       |         |         | 215,539 |         |         |         | (11,241 | )        |          |          | (199,002 | )       |         |         | 5,296   | 
|                                                                                       |                                                                           |                                      |                                    |                                      |         |             |          |              |         |         |          |              |          |             |          |              |         |         |         |         |         |         |         |         |         |         |          |          |          |          |         |        
|Income before income taxes and cumulative effect
    of change in accounting principle |                                                                           |                                      | 212,323                            |                                      |         |             | 362,061  |              |         |         | (234,722 | )            |          |             | 339,662  |              |         |         | 186,073 |         |         |         | 272,958 |         |         |         | (199,002 | )        |          |          | 260,029 |        
|Income tax (expense) benefit                                                           |                                                                           |                                      | 1,640                              |                                      |         |             | (127,339 | )            |         |         |         |              |          |             | (125,699 | )            |         |         | (23,035 | )       |         |         | (73,956 | )       |         |         |         |          |          |          | (96,991 | )      
|                                                                                       |                                                                           |                                      |                                    |                                      |         |             |          |              |         |         |          |              |          |             |          |              |         |         |         |         |         |         |         |         |         |         |          |          |          |          |         |        
|Income before extraordinary item                                                       |                                                                           |                                      | 213,963                            |                                      |         |             | 234,722  |              |         |         | (234,722 | )            |          |             | 213,963  |              |         |         | 163,038 |         |         |         | 199,002 |         |         |         | (199,002 | )        |          |          | 163,038 |        
|Cumulative effect of change in accounting
    principle                                |                                                                           |                                      |                                   |                                      |         |             |         |              |         |         |         |              |          |             |         |              |         |         | (545    | )       |         |         |        |         |         |         |         |          |          |          | (545    | )      
|                                                                                       |                                                                           |                                      |                                    |                                      |         |             |          |              |         |         |          |              |          |             |          |              |         |         |         |         |         |         |         |         |         |         |          |          |          |          |         |        
|                                                                                       |                                                                           | Net income                           |                                    | $                                    | 213,963 |             |          | $            | 234,722 |         |          | $            | (234,722 | )           |          | $            | 213,963 |         |         | $       | 162,493 |         |         | $       | 199,002 |         |          | $        | (199,002 | )        |         | $       | 162,493 |        
|                                                                                       |                                                                           |                                      |                                    |                                      |         |             |          |              |         |         |          |              |          |             |          |              |         |         |         |         |         |         |         |         |         |         |          |          |          |          |         |        

16



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##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

GUARANTOR SUBSIDIARIES

CONSOLIDATING STATEMENTS OF CASH
FLOWS

|                                                        |                                                                                |                                      |          |                                      |   |             |          |              |   |      |   |              |  |             |          |              |   |   |          |          |   |   |          |          |   |   |   |   |  |   |          |          |  
|------------------------------------------------------- | ------------------------------------------------------------------------------ | ------------------------------------ | -------- | ------------------------------------ | - | ----------- | -------- | ------------ | - | ---- | - | ------------ |  | ----------- | -------- | ------------ | - | - | -------- | -------- | - | - | -------- | -------- | - | - | - | - |  | - | -------- | -------- | -
|                                                        |                                                                                |                                      |          |                                     
|                                                        |                                                                                | Nine Months Ended September 30, 2002 |          | Nine Months Ended September 30, 2001
|                                                        |                                                                                |                                      |          |                                     
|                                                        |                                                                                |                                      |          | Guarantor                            |   | Eliminating |          | King         |   |      |   | Guarantor    |  | Eliminating |          | King        
|                                                        |                                                                                | King                                 |          | Subsidiaries                         |   | Entries     |          | Consolidated |   | King |   | Subsidiaries |  | Entries     |          | Consolidated
|                                                        |                                                                                |                                      |          |                                      |   |             |          |              |   |      |   |              |  |             |          |             
|                                                        |                                                                                |                                     
|                                                        |                                                                                | (Unaudited)                         
|Net cash flows provided by operating activities         |                                                                                | $                                    | (134,241 | )                                    |   | $           | 459,793  |              |   | $    |  |              |  | $           | 325,552  |              |   | $ | (55,396  | )        |   | $ | 306,019  |          |   | $ |  |   |  | $ | 250,623  |         
|                                                        |                                                                                |                                      |          |                                      |   |             |          |              |   |      |   |              |  |             |          |              |   |   |          |          |   |   |          |          |   |   |   |   |  |   |          |         
|Cash flows from investing activities:                   |                                                                                |                                      |          |                                      |   |             |          |              |   |      |   |              |  |             |          |              |   |   |          |          |   |   |          |          |   |   |   |   |  |   |          |         
|                                                        | Purchase of investment securities                                              |                                      |          | (597,873                             | ) |             |          |             |   |      |   |             |  |             |          | (597,873     | ) |   |          |         |   |   |          |         |   |   |   |  |  |   |          |         |  
|                                                        | Proceeds from maturity and sale of investment
    securities                   |                                      |          | 457,461                              |   |             |          |             |   |      |   |             |  |             |          | 457,461      |   |   |          |         |   |   |          |         |   |   |   |  |  |   |          |         |  
|                                                        | Convertible senior note                                                        |                                      |          | (10,044                              | ) |             |          |             |   |      |   |             |  |             |          | (10,044      | ) |   |          | (10,000  | ) |   |          |         |   |   |   |  |  |   |          | (10,000  | )
|                                                        | Loans receivable                                                               |                                      |          |                                     |   |             |          |             |   |      |   |             |  |             |          |             |   |   |          |         |   |   |          | (15,000  | ) |   |   |  |  |   |          | (15,000  | )
|                                                        | Purchases of property, plant and equipment                                     |                                      |          | (11,110                              | ) |             |          | (37,661      | ) |      |   |             |  |             |          | (48,771      | ) |   |          | (10,599  | ) |   |          | (9,623   | ) |   |   |  |  |   |          | (20,222  | )
|                                                        | Intercompany transfer of property, plant and
    equipment                     |                                      |          | (323                                 | ) |             |          | 323          |   |      |   |             |  |             |          |             |   |   |          | (223     | ) |   |          | 223      |   |   |   |  |  |   |          |         |  
|                                                        | Purchases of intangible assets                                                 |                                      |          | (120,300                             | ) |             |          |             |   |      |   |             |  |             |          | (120,300     | ) |   |          | (286,500 | ) |   |          |         |   |   |   |  |  |   |          | (286,500 | )
|                                                        | Proceeds from sale of products                                                 |                                      |          |                                     |   |             |          |             |   |      |   |             |  |             |          |             |   |   |          | 3,332    |   |   |          |         |   |   |   |  |  |   |          | 3,332    |  
|                                                        | Proceeds from sale of assets                                                   |                                      |          | 19                                   |   |             |          | 4,339        |   |      |   |             |  |             |          | 4,358        |   |   |          |         |   |   |          | 1,446    |   |   |   |  |  |   |          | 1,446    |  
|                                                        |                                                                                |                                      |          |                                      |   |             |          |              |   |      |   |              |  |             |          |              |   |   |          |          |   |   |          |          |   |   |   |   |  |   |          |         
|Net cash used in investing activities                   |                                                                                |                                      | (282,170 | )                                    |   |             | (32,999  | )            |   |      |  |              |  |             | (315,169 | )            |   |   | (303,990 | )        |   |   | (22,954  | )        |   |   |  |   |  |   | (326,944 | )       
|                                                        |                                                                                |                                      |          |                                      |   |             |          |              |   |      |   |              |  |             |          |              |   |   |          |          |   |   |          |          |   |   |   |   |  |   |          |         
|Cash flows from financing activities:                   |                                                                                |                                      |          |                                      |   |             |          |              |   |      |   |              |  |             |          |              |   |   |          |          |   |   |          |          |   |   |   |   |  |   |          |         
|                                                        | Proceeds from revolving credit facility                                        |                                      |          |                                     |   |             |          |             |   |      |   |             |  |             |          |             |   |   |          | 75,000   |   |   |          |         |   |   |   |  |  |   |          | 75,000   |  
|                                                        | Payments on revolving credit facility                                          |                                      |          |                                     |   |             |          |             |   |      |   |             |  |             |          |             |   |   |          | (75,000  | ) |   |          |         |   |   |   |  |  |   |          | (75,000  | )
|                                                        | Proceeds from issuance of common shares and
    exercise of stock options, net |                                      |          | 3,996                                |   |             |          |             |   |      |   |             |  |             |          | 3,996        |   |   |          | 21,689   |   |   |          |         |   |   |   |  |  |   |          | 21,689   |  
|                                                        | Purchase of common stock                                                       |                                      |          | (155,390                             | ) |             |          |             |   |      |   |             |  |             |          | (155,390     | ) |   |          |         |   |   |          |         |   |   |   |  |  |   |          |         |  
|                                                        | Debt issuance costs                                                            |                                      |          | (4,850                               | ) |             |          |             |   |      |   |             |  |             |          | (4,850       | ) |   |          |          |   |   |          |          |   |   |   |   |  |   |          |          |  
|                                                        | Payments on other long-term debt                                               |                                      |          | (194                                 | ) |             |          | (13          | ) |      |   |             |  |             |          | (207         | ) |   |          | (362     | ) |   |          | (22      | ) |   |   |  |  |   |          | (384     | )
|                                                        | Other                                                                          |                                      |          |                                     |   |             |          |             |   |      |   |             |  |             |          |             |   |   |          | (1,393   | ) |   |          |         |   |   |   |  |  |   |          | (1,393   | )
|                                                        | Intercompany                                                                   |                                      |          | 425,796                              |   |             |          | (425,796     | ) |      |   |             |  |             |          |             |   |   |          | 282,813  |   |   |          | (282,813 | ) |   |   |  |  |   |          |         |  
|                                                        |                                                                                |                                      |          |                                      |   |             |          |              |   |      |   |              |  |             |          |              |   |   |          |          |   |   |          |          |   |   |   |   |  |   |          |         
|Net cash provided by (used in) financing
    activities |                                                                                |                                      | 269,358  |                                      |   |             | (425,809 | )            |   |      |  |              |  |             | (156,451 | )            |   |   | 302,747  |          |   |   | (282,835 | )        |   |   |  |   |  |   | 19,912   |         
|                                                        |                                                                                |                                      |          |                                      |   |             |          |              |   |      |   |              |  |             |          |              |   |   |          |          |   |   |          |          |   |   |   |   |  |   |          |         
|Increase in cash and cash equivalents                   |                                                                                |                                      | (147,053 | )                                    |   |             | 985      |              |   |      |  |              |  |             | (146,068 | )            |   |   | (56,639  | )        |   |   | 230      |          |   |   |  |   |  |   | (56,409  | )       
|Cash and cash equivalents, beginning of period          |                                                                                |                                      | 882,391  |                                      |   |             | (7,789   | )            |   |      |  |              |  |             | 874,602  |              |   |   | 82,316   |          |   |   | (5,921   | )        |   |   |  |   |  |   | 76,395   |         
|                                                        |                                                                                |                                      |          |                                      |   |             |          |              |   |      |   |              |  |             |          |              |   |   |          |          |   |   |          |          |   |   |   |   |  |   |          |         
|Cash and cash equivalents, end of period                |                                                                                | $                                    | 735,338  |                                      |   | $           | (6,804   | )            |   | $    |  |              |  | $           | 728,534  |              |   | $ | 25,677   |          |   | $ | (5,691   | )        |   | $ |  |   |  | $ | 19,986   |         
|                                                        |                                                                                |                                      |          |                                      |   |             |          |              |   |      |   |              |  |             |          |              |   |   |          |          |   |   |          |          |   |   |   |   |  |   |          |         

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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, 2001, which are supplemented by the
discussion which follows; (b) our audited consolidated
financial statements which are included in our Annual Report on
Form 10-K for the year ended December 31, 2001; and
(c) our unaudited consolidated financial statements and
related notes thereto included in this report.

Overview



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

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

|                        |       |                      |         |                     |  |      |         |         |  |   |         |         |  |   |         |         | 
|----------------------- | ----- | -------------------- | ------- | ------------------- |  | ---- | ------- | ------- |  | - | ------- | ------- |  | - | ------- | ------- | 
|                        |       |                      |         |                    
|                        |       | For the Three Months |         | For the Nine Months
|                        |       | Ended September 30,  |         | Ended September 30,
|                        |       |                      |         |                    
|                        |       | 2002                 |         | 2001                |  | 2002 |         | 2001   
|                        |       |                      |         |                     |  |      |         |        
|Branded pharmaceuticals |       | $                    | 293,728 |                     |  | $    | 211,479 |         |  | $ | 788,624 |         |  | $ | 559,378 |        
|Royalties               |       |                      | 14,997  |                     |  |      | 11,608  |         |  |   | 41,025  |         |  |   | 36,028  |        
|Contract manufacturing  |       |                      | 6,700   |                     |  |      | 6,300   |         |  |   | 25,972  |         |  |   | 20,305  |        
|Other                   |       |                      | 280     |                     |  |      | 702     |         |  |   | 682     |         |  |   | 2,204   |        
|                        |       |                      |         |                     |  |      |         |         |  |   |         |         |  |   |         |        
|                        | Total |                      | $       | 315,705             |  |      | $       | 230,089 |  |   | $       | 856,303 |  |   | $       | 617,915 | 
|                        |       |                      |         |                     |  |      |         |         |  |   |         |         |  |   |         |        

Results of Operations



| |                                                   
| | --------------------------------------------------
| | Three Months Ended September 30, 2002
    and 2001



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

Total revenues increased $85.6 million, or
37.2%, to $315.7 million in 2002 from $230.1 million
in 2001, due primarily to the growth of our branded
pharmaceutical products and the acquisition of additional
branded pharmaceutical products.

Net sales from branded pharmaceutical products
increased $82.2 million, or 38.9%, to $293.7 million
in 2002 from $211.5 million in 2001. This increase was due
primarily to growth in net sales of Altace® and
Levoxyl® and the acquisition of Ortho-Prefest® from
Ortho-McNeil Pharmaceutical, Inc. on May 29, 2002. While we
expect continued growth in net sales of our branded
pharmaceuticals in the future, we refer you to the Risk
Factors that appear below.

Revenues from royalties is derived from payments
we receive based on sales of Adenoscan® and
Adenocard®. Revenue from royalties increased
$3.4 million, or 29.3%, to $15.0 million in 2002 from
$11.6 million in 2001.

Revenues from contract manufacturing increased
$0.4 million, or 6.3%, to $6.7 million in 2002 from
$6.3 million in 2001.



| |             
| | ------------
| | Gross Profit

Total gross profit (revenues less cost of
revenues, including royalty expense) increased
$71.4 million, or 39.5%, to $252.1 million in 2002
from $180.7 million in 2001. The increase was primarily due
to increased sales of higher margin branded pharmaceutical
products.

Gross profit from branded pharmaceutical products
increased $69.2 million, or 40.1%, to $241.7 million
in 2002 from $172.5 million in 2001. This increase was
primarily due to increased sales of Altace® and
Levoxyl® and additional sales arising from the acquisition
of Ortho-Prefest® from Ortho-McNeil on May 29, 2002.

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##### Table of Contents



Gross profit from royalties increased
$2.2 million, or 22.0%, to $12.2 million in 2002 from
$10.0 million in 2001.

Gross profit associated with contract
manufacturing increased $0.5 million to ($1.3) million
in 2002 from ($1.8) million in 2001.



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

Total operating costs and expenses increased
$51.3 million, or 38.2%, to $185.7 million in 2002
from $134.4 million in 2001. The increase was primarily due
to costs associated with increased unit sales of our branded
pharmaceutical products, including Altace® and
Levoxyl®, increased fees associated with the promotion of
Altace® under the Co-Promotion Agreement with Wyeth, and
the growth of our dedicated national field sales force.

Cost of revenues increased $14.2 million, or
28.7%, to $63.6 million in 2002 from $49.4 million in
2001. The increase was primarily due to costs associated with
increased unit sales of our branded pharmaceutical products,
including Altace® and Levoxyl® and the acquisition of
Ortho-Prefest® from Ortho-McNeil on May 29, 2002. Cost
of revenues during 2002 included a $1.2 million charge
primarily related to an increase in the reserve for our
voluntary recall during 2001 of products manufactured for us by
DSM Pharmaceuticals, Inc. Cost of revenues during 2001 included
a $2.1 million nonrecurring write-off of obsolete
Levoxyl® inventory. Pursuant to FDA guidance, after
August 14, 2001 we could only distribute the FDA approved
new formulation of Levoxyl®. As a percentage of revenues,
cost of revenues decreased to 20.1% in 2002 from 21.5% in 2001
due to an increase in sales of higher margin products. The
Company has a supply agreement with a third party to produce
Lorabid®. This supply agreement requires the Company to
purchase certain minimum levels of inventory of Lorabid®
annually through December 2006. Management currently
believes it will be able to recover the cost of minimum levels
of inventory required through future sales of Lorabid®.
These minimum commitments could likely have a negative effect on
our gross margins on sales of Lorabid® in future reporting
periods.

Selling, general and administrative expenses
increased $38.5 million, or 62.5%, to $100.1 million
in 2002 from $61.6 million in 2001. This increase was
primarily attributable to fees and marketing expenses associated
with the promotion of Altace® under the Co-Promotion
Agreement with Wyeth and the growth of our dedicated national
field sales force. As a percentage of revenues, selling,
general, and administrative expenses increased to 31.7% in 2002
compared to 26.8% in 2001.

Depreciation and amortization expense increased
$2.9 million, or 22.8%, to $15.6 million in 2002 from
$12.7 million in 2001. This increase was primarily
attributable to the amortization of the intangible assets
related to the acquisition of three branded pharmaceutical
products and a license to a fourth from Bristol-Myers Squibb in
August 2001 and the acquisition of Ortho-Prefest® from
Ortho-McNeil on May 29, 2002.

Research and development expense decreased to
$6.4 million in 2002 from $7.4 million in 2001.

During 2001, we incurred restructuring, and other
nonrecurring charges of $3.3 million related to employee
severance arising from the Jones merger.



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

Operating income increased $34.3 million, or
35.8%, to $130.0 million in 2002 from $95.7 million in
2001. This increase was primarily due to increased revenues from
Altace® and Levoxyl® plus the acquisition of
Ortho-Prefest® from Ortho-McNeil on May 29, 2002. As a
percentage of net revenues, operating income remained consistent
at 41.2% in 2002 and 41.6% in 2001.



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

Interest income increased $3.8 million, or
172.7%, to $6.0 million in 2002 from $2.2 million in
2001 due to higher balances of invested cash, cash equivalents,
and marketable securities during 2002 as compared to 2001.

19



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##### Table of Contents



Interest expense decreased $0.3 million, or
8.8%, to $3.1 million in 2002 from $3.4 million in
2001.

Other, net, decreased from $3.6 million in
2001 to $87 thousand in 2002 primarily due to the recognition of
an unrealized gain of approximately $6.2 million on a
$20.0 million convertible senior note from Novavax during
2001.



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

The effective tax rate of 36.9% in 2002 and 37.3%
in 2001 was higher than the federal statutory rate of 35.0% due
primarily to permanent differences related to state income taxes
in both 2002 and 2001.



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

Due to the factors set forth above, net income
increased $22.7 million, or 36.9%, to $84.2 million in
2002 from $61.5 million in 2001.



| |                                                  
| | -------------------------------------------------
| | Nine Months Ended September 30, 2002
    and 2001



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

Total revenues increased $238.4 million, or
38.6%, to $856.3 million in 2002 from $617.9 million
in 2001, due primarily to the growth of our branded
pharmaceutical products and the acquisition of additional
branded pharmaceutical products.

Net sales from branded pharmaceutical products
increased $229.2 million, or 41.0%, to $788.6 million
in 2002 from $559.4 million in 2001. This increase was due
primarily to growth in net sales of Altace® and
Levoxyl®, the acquisition of three branded pharmaceutical
products, along with a fully paid license to a fourth product,
from Bristol-Myers Squibb in August 2001, and the acquisition of
Ortho-Prefest® from Ortho-McNeil on May 29, 2002.
While we expect continued growth in net sales of our branded
pharmaceuticals in the future, we refer you to the Risk
Factors that appear below.

Revenues from royalties is derived from payments
we receive based on sales of Adenoscan® and
Adenocard®. Revenue from royalties increased
$5.0 million, or 13.9%, to $41.0 million in 2002 from
$36.0 million in 2001.

Revenues from contract manufacturing increased
$5.7 million, or 28.1%, to $26.0 million in 2002 from
$20.3 million in 2001, primarily due to increased unit
sales under existing contracts.



| |             
| | ------------
| | Gross Profit

Total gross profit (revenues less cost of
revenues, including royalty expense) increased
$202.7 million, or 41.6%, to $689.4 million in 2002
from $486.7 million in 2001. The increase was primarily due
to increased sales of higher margin branded pharmaceutical
products.

Gross profit from branded pharmaceutical products
increased $195.1 million, or 42.2%, to $657.9 million
in 2002 from $462.8 million in 2001. This increase was
primarily due to increased sales of Altace® and
Levoxyl®, the additional sales arising from the acquisition
of three branded pharmaceutical products and a license to a
fourth from Bristol-Myers Squibb in August 2001, and additional
sales arising from the acquisition of Ortho-Prefest® from
Ortho-McNeil on May 29, 2002.

Gross profit from royalties increased
$4.5 million, or 15.4%, to $33.7 million in 2002 from
$29.2 million in 2001.

Gross profit associated with contract
manufacturing increased $3.4 million to ($2.1) million
in 2002 from ($5.5) million in 2001.



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

Total operating costs and expenses increased
$133.5 million, or 36.8%, to $496.7 million in 2002
from $363.2 million in 2001. The increase was primarily due
to an increase in cost of revenues associated with

20



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##### Table of Contents



increased unit sales of our branded
pharmaceutical products, including Altace® and
Levoxyl®, increased fees and marketing expenses associated
with the promotion of Altace® under the Co-Promotion
Agreement with Wyeth, and the growth of our dedicated national
field sales force.


Cost of revenues increased $35.7 million, or
27.2%, to $166.9 million in 2002 from $131.2 million
in 2001. The increase was primarily due to costs associated with
increased unit sales of our branded pharmaceutical products,
including Altace® and Levoxyl®, the acquisition of
three branded pharmaceutical products and a license to a fourth
from Bristol-Myers Squibb in August 2001, and the acquisition of
Ortho-Prefest® from Ortho-McNeil on May 29, 2002. As a
percentage of revenues, cost of revenues decreased to 19.5% in
2002 from 21.2% in 2001 due to the increase in sales of higher
margin products. The Company has a supply agreement with a third
party to produce Lorabid®. This supply agreement requires
the Company to purchase certain minimum levels of inventory of
Lorabid® annually through December 2006. Management
currently believes it will be able to recover the cost of
minimum levels of inventory required through future sales of
Lorabid®. These minimum commitments could likely have a
negative effect on our gross margins on sales of Lorabid®
in future reporting periods.

Selling, general and administrative increased
$94.9 million, or 55.1%, to $267.2 million in 2002
from $172.3 million in 2001. This increase was primarily
attributable to fees and marketing expenses associated with the
promotion of Altace® under the Co-Promotion Agreement with
Wyeth and the growth of our dedicated national field sales
force. As a percentage of revenues, selling, general, and
administrative expenses increased to 31.2% in 2002 from 27.9% in
2001.

Depreciation and amortization expense increased
$8.2 million, or 23.1%, to $43.7 million in 2002 from
$35.5 million in 2001. This increase was primarily
attributable to the amortization of the intangible assets
related to the acquisition of three branded pharmaceutical
products and a license to a fourth from Bristol-Myers Squibb in
August 2001, and the acquisition of Ortho-Prefest® from
Ortho-McNeil on May 29, 2002. Amortization expense was
reduced by $1.2 million in 2002 due to the implementation
of SFAS 142 (see Note 5 to financial statements).

Research and development expense increased to
$18.8 million in 2002 from $17.9 million in 2001.

In June 2001, we incurred a $3.0 million
expense designated Research and development 
special license rights for fees we paid Novavax as
consideration for an agreement which (1) expands our
exclusive license to promote, market, distribute and sell
EstrasorbTM worldwide, following approval, except in
the United States and Puerto Rico where the parties will
co-market the product; and (2) grants us an additional
exclusive worldwide license to promote, market and distribute
AndrosorbTM, following approval, except in the United
States and Puerto Rico where the parties will co-market the
product.

During 2001, we incurred restructuring, and other
nonrecurring charges of $3.3 million related to employee
severance arising from the Jones merger.



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

Operating income increased $105.0 million,
or 41.2%, to $359.7 million in 2002 from
$254.7 million in 2001. This increase was primarily due to
increased revenues from Altace® and Levoxyl®, and the
acquisition of three branded pharmaceutical products and a
license to a fourth from Bristol-Myers Squibb in August 2001. As
a percentage of net revenues, operating income increased to
42.0% in 2002 from 41.2% in 2001 primarily due to an increase in
sales of higher margin branded pharmaceutical products.



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

Interest income increased $9.7 million, or
126.0%, to $17.4 million in 2002 from $7.7 million in
2001 due to higher balances of invested cash, cash equivalents,
and marketable securities during the nine months ended
September 30, 2002 as compared to the nine months ended
September 30, 2001.

21



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##### Table of Contents



Interest expense remained relatively consistent
at $9.0 million in 2002 compared to $8.9 million in
2001.

Other, net, decreased from $6.5 million in
2001 to ($1.0) million in 2002 primarily due to the
recognition of an unrealized gain of approximately
$8.8 million on a $20.0 million convertible senior
note from Novavax during 2001.

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, including $10.0 million that was provided in June
2002. The loan is impaired as defined under SFAS 114,
Accounting by Creditors for Impairment of a Loan.
SFAS 114 requires the creditor to evaluate the cash flows
available from any collateral (in Kings situation, the
Novavax common stock obtainable upon conversion) in order to
determine the amount of any valuation allowance for an impaired
loan. Because of the recent significant decline in the share
price of Novavax common stock to levels below that established
by Kings common stock conversion options associated with
the Novavax notes, we recorded a valuation charge of
$27.4 million in the nine months ended September 30,
2002. We determined the amount of the charge by reference to the
quoted market price of the Novavax common stock. 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.



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

The effective tax rate of 37.0% in 2002 and of
37.3% in 2001 was higher than the federal statutory rate of 35%
primarily due to permanent differences related to state income
taxes in both 2002 and 2001.



| |                                           
| | ------------------------------------------
| | Cumulative Effect of Accounting
    Change

During the first quarter of 2001, we recorded a
charge of $0.9 million, or $0.5 million net of tax,
due to the cumulative effect of a change in accounting principle
as a result of the adoption of SFAS No. 133,
Accounting for Derivative Instruments and Hedging
Activities, as amended by SFAS No. 138, which
establishes accounting and reporting standards for derivative
instruments and hedging activities.



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

Due to the factors set forth above, net income
increased $51.5 million, or 31.7%, to $214.0 million
in 2002 from $162.5 million in 2001.

Liquidity and Capital Resources



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

We believe that existing balances of cash, cash
equivalents and marketable securities, cash generated from
operations, and an existing revolving credit facility are
sufficient to finance our current operations and working capital
requirements. 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 October 21, 2002, we entered into an
agreement with Meridian Medical Technologies, Inc.
(Meridian) to purchase the common stock of Meridian
for a cash price of $44.50 per share, totaling
$247.8 million. Meridian is the leading manufacturer of
auto-injectors for the self-administration of injectable drugs.
We will finance the acquisition using our available cash.
Closing of the transaction is subject to approval by the holders
of a majority of the outstanding common stock of Meridian,
appropriate governmental approvals, and other customary
conditions, and is expected to be completed before the end of
January 2003.

There are no other present agreements or
commitments with respect to any acquisition. Currently, however,
we are actively pursuing additional acquisitions that may
require the use of substantial capital resources.

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| |                                         
| | ----------------------------------------
| | Nine Months Ended September 30,
    2002

As of September 30, 2002 we had available up
to $400.0 million under a revolving line of credit.

We generated net cash from operations of
$325.6 million for the nine months September 30, 2002.
Our net cash provided from operations was primarily the result
of $214.0 million in net income, adjusted for non-cash
depreciation and amortization of $44.0 million, a valuation
allowance of $27.4 million on the Novavax convertible
senior notes we hold, an increase in accrued expenses of
$81.6 million, and an increase in income taxes payable of
$17.2 million. An increase in accounts receivable of
$24.3 million, and an increase in inventory of
$26.4 million offset the items previously described.

Cash flows used in investing activities for the
nine months ended September 30, 2002 was
$315.2 million primarily due to the purchase of marketable
securities of $597.9 million, the purchase of
Ortho-Prefest® and other intangible assets of
$120.3 million, $48.8 million of capital expenditures,
and the purchase of Novavax convertible notes of
$10.0 million. Proceeds from the maturity and sale of
marketable securities of $457.5 million offset the items
previously described.

Cash flows used in financing activities for the
nine months September 30, 2002 was $156.5 primarily due to
purchases of our common stock totaling $155.4 million.



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

As of September 30, 2002, we had
$347.5 million of long-term debt (including current
portion) and we have available up to $400.0 million under
our revolving credit facility.

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. Additionally, during November 2001, we
issued $345.0 million of 2 3/4% Convertible
Debentures due November 15, 2021 in a private placement. As
of September 30, 2002, $616.0 million remains
available to us under the $1.3 billion universal shelf
registration.

In April 2002, we established a
$400.0 million five year senior secured revolving credit
facility. This facility requires us to maintain a certain
minimum net worth, EBITDA to interest expense ratio above an
established minimum, and funded debt to EBITDA ratio below an
established maximum. As of September 30, 2002, we were in
compliance with these covenants.

On May 13, 2002, our Board of Directors
authorized a plan to repurchase up to 7.5 million shares of
our common stock. Under the plan, we may repurchase shares of
our common stock in the open-market from time to time, depending
on market conditions, share price and other factors. During the
nine months ended September 30, 2002, we repurchased
6.8 million shares of common stock.

On May 29, 2002, we acquired the exclusive
rights to Ortho-Prefest® tablets in the United States, its
territories and possessions and the Commonwealth of Puerto Rico,
including the related new drug application, investigational new
drug application, copyrights, and patents or licenses to related
patents from Ortho-McNeil. We paid $108.0 million for the
product rights upon closing plus approximately $3.3 million
of expenses. We will pay Ortho-McNeil an additional
$7.0 million upon receipt of the U.S. Food and Drug
Administrations (which we refer to in this report as the
FDA) approval to rename the product
PrefestTM. The acquisition was financed
with cash on hand. We recorded the acquisition of the product
rights within intangible assets and have preliminarily assigned
a useful life of twenty years. The purchase price allocation
among the assets acquired, the determination as to whether the
useful life is indefinite or finite and the assignment of lives
to the intangibles designated as having finite lives under SFAS
No. 142 are preliminary and subject to further evaluation.



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

Capital expenditures, including capital lease
obligations, were $15.6 million and $6.1 million for
the three months ended September 30, 2002 and 2001,
respectively, and $48.8 million and $20.2 million for
the nine months ended September 30, 2002 and 2001,
respectively. The principal capital expenditures included

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property and equipment purchases, new information
technology system implementation costs, and building
improvements for facility upgrades and increased capacity.


We are continuing the process of implementing a
new information technology system which we expect to complete
next year. This new system will support many of our business
functions including manufacturing, distribution, logistics,
sales reporting, accounting, inventory, quality control,
budgeting, and other company functions. During the fourth
quarter of 2002 and the first half of 2003 we anticipate that
capital expenditures associated with the implementation of this
new system will be approximately $20.4 million.

Impact of Inflation

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

Recent Accounting Pronouncements

In the first quarter of 2001, we adopted SFAS
No. 133, Accounting for Derivative Instruments and
Hedging Activities, as amended by SFAS No. 138, which
establishes accounting and reporting standards for derivative
instruments and hedging activities. The cumulative effect of the
change in accounting principle was $0.9 million, or
$0.5 million net of tax. In addition, the change in the
value of the derivatives in the quarter and nine months ended
September 30, 2001 of $5.6 million and
$8.5 million, respectively, was included in other income.

In the first quarter of 2002, we adopted SFAS
No. 141 Business Combinations, and SFAS
No. 142 Goodwill and Other Intangible Assets.
SFAS No. 141 requires all business combinations to be
accounted for under the purchase method of accounting. SFAS
No. 141 was effective for all business combinations
initiated after June 30, 2001. SFAS No. 142 modifies
the accounting and reporting for acquired intangible assets at
the time of acquisition and in subsequent periods. Intangible
assets which have finite lives must be amortized over their
estimated useful life. Intangible assets with indefinite lives
will not be amortized, but evaluated annually for impairment.
The results for the quarter and nine months ended
September 30, 2002 include the effect of adopting SFAS Nos.
141 and 142, which resulted in a $0.4 million and
$1.2 million reduction in expenses, respectively, or
$0.3 million and $0.8 million net of tax,
respectively, and no increase in basic and diluted earnings per
share.

In August 2001, the Financial Accounting
Standards Board issued SFAS No. 143, Accounting
for Asset Retirement Obligations and SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets. SFAS No. 143 addresses financial accounting
and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement
costs. SFAS No. 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets.
We adopted these standards effective January 1, 2002. The
implementation of these standards did not have any effect on our
financial statements.

In May 2002, the Financial Accounting Standards
Board issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement
No. 13 and Technical Corrections as of April 2002.
SFAS No. 145 is effective for fiscal periods beginning
after May 15, 2002. The primary effect of our adopting SFAS
No. 145 will be that gains and losses incurred upon the
extinguishment of debt may no longer qualify for extraordinary
items treatment in the income statement.

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 Certain
Costs Incurred in a Restructuring) SFAS No. 146 will
be effective for exit or disposal activities that we initiate
after December 31, 2002.

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

Altace® accounted for approximately 39.8%
and Levoxyl® accounted for approximately 14.9% of our
revenues for the nine months ended September 30, 2002, and
Altace®, Levoxyl®, Thrombin-JMI® and royalty
revenues collectively accounted for approximately 66.8% of our
revenues during the same period. We believe that sales of these
products will continue to 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.



| |                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------
| | 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
efficiently co-marketing the new indications for Altace®
which 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 the revenues from Altace®. Neither we
nor Wyeth may be able to overcome the perception by physicians
of a class effect, which we discuss below. Further, developments
in technologies, the introduction of other products or new
therapies may make it more attractive for Wyeth to concentrate
on the promotion of a product or products other than
Altace® or to lessen their emphasis on the marketing of
Altace®. Our strategic decisions in dealing with managed
health care organizations may not prove to be correct and we
could consequently lose sales in this market to competing ACE
inhibitor products or alternative therapies. If any of these
situations occurred, they could have a material adverse effect
on our business, financial condition, results of operations and
cash flows.

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| |                                                                                                                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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®, 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) and we believe that it adequately protects our supply
of raw material, but there can be no guarantee that there will
not be 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 new indications for
Altace®, 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 new
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
inhibits 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. That is, there is no product that has
the same active ingredient 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 blocker (which we refer to as an
ARB in this report), beta-blockers, calcium channel
blockers and diuretics, may be prescribed to treat certain
conditions that Altace® is used to treat. New ACE
inhibitors or other anti-hypertensive therapies, increased sales
of generic forms of other ACE inhibitors or of other therapeutic
agents that compete with Altace® may adversely affect the
sales of Altace®.

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| |                                                                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our Co-Promotion Agreement for Altace®
    with Wyeth could be terminated before we realize all of the
    benefits of the agreement or 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 which
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 was 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®, our
    ability to timely obtain and, if issued, maintain effective
    patent protection for Levoxyl®, and the FDAs approval
    of a New Drug Application for the competing product
    Synthroid®.

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
previously filed New Drug Application 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 New Drug
Applications for their levothyroxine sodium products. The FDA
has announced that after August 14, 2001, it will not
accept New Drug Applications 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 New Drug Applications
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
Abbreviated New Drug Application seeking approval of a generic
substitute for a levothyroxine sodium product with an approved
New Drug Application. A manufacturer could submit an Abbreviated
New Drug Application 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 we filed with the U.S. Patent
and Trademark Office in excess of 20 applications for
U.S. patents concerning our FDA-approved new formulation of
Levoxyl®. The pending patent applications generally cover,
among other things, formulation methodologies and equipment,
formulation technologies, biopharmaceutical characteristics,
drug delivery systems, and methods-of-use. If such applications
are granted, the resulting patents will potentially provide us
with patent protection on our FDA-approved new formulation of
Levoxyl® for 17 years or more from the date(s) these
patents issue. However, we cannot assure you that any or all of
the patent applications will be granted, or whether any or all
of the resulting patents will provide Levoxyl® with
protection from possible generic substitution. Until potential
patents issue that effectively provide Levoxyl® with
protection from possible generic substitution, the FDA may
approve an Abbreviated New Drug Application for a generic
substitute for Levoxyl®.

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
New Drug Application for Levoxyl® was filed with the FDA
before the disclosure of Jerome Stevens alleged trade
secrets, and that the approval of the Levoxyl® New Drug
Application 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 FDA approval of the Levoxyl® New Drug Application, it
could have a material adverse effect on our business, financial
condition, results of operations and cash flows.

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| |                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We cannot assure you that sales of
    Lorabid®will increase
    in the future. If sales do not increase, there may be a material
    adverse effect upon our results of operations.

Prior to our acquisition of Lorabid®, sales
of that product were on the decline because we believe that the
prior owner was not actively promoting the product. Increased
sales of Lorabid® depend upon effective marketing to
physicians which leads them to write prescriptions for our
product. Since the antibiotic market is very competitive, we
cannot assure you that sales of Lorabid® will increase in
the future. Eli Lilly and Company manufactures Lorabid® for
us under a supply agreement containing significant minimum
purchase requirements. If Lorabid® sales do not increase,
there may be a material adverse effect upon our results of
operations and cash flows, including, but not limited to, a
potential significant write-off of excess inventory.



| |                                                                                                                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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, oral
    estrogen replacement therapies, and oral contraceptives
    generally.

An ongoing clinical trial entitled the
Womens Health Initiative (WHI) is being conducted by
the National Institutes of Health (NIH). 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, oral estrogen replacement therapy, and oral
contraceptive markets generally, which include our products
Ortho-Prefest®, Menest®, and Nordette®. We cannot
assure you that sales of these 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
WHI, there may be a material adverse effect on our business,
results of operations, and cash flows.



| |                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Accordingly to SFAS 142 we are required to
    annually review the carrying value of our intangible assets for
    impairment. If sales of our products decline, the intangible
    asset value of any declining product could become
    impaired.

As of September 30, 2002, we have
$1.1 billion of intangible assets. 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. 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, and results of operations.



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

We have historically increased our sales and net
income through strategic acquisitions and related internal
growth initiatives intended to develop marketing opportunities
with respect to acquired product lines. Our strategy is focused
on increasing sales and enhancing our competitive standing
through acquisitions 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 product
development, we rely heavily on purchasing product lines 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 products or companies. We
may not be able to acquire rights to additional products 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
products 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.
For example, our marketing strategy, distribution channels and
levels of competition with respect to acquired products may be
different than those of our current products, limiting our
ability to compete favorably in those product categories.

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

We anticipate that the integration of newly
acquired companies and products into our business will require
significant management attention and expansion of our sales
force. In order to manage our acquisitions effectively, we must
maintain adequate operational, financial and management
information systems and motivate and effectively manage an
increasing number of employees. Our acquisitions have
significantly expanded our product offerings, operations and
number of employees. Our future success will also depend in part
on our ability to retain or hire qualified employees to operate
our expanding facilities efficiently in accordance with
applicable regulatory standards. If we cannot integrate our
acquisitions successfully, these changes and acquisitions could
have a material adverse effect on our business, financial
condition, results of operations and cash flows.



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

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



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

For example, we are



| |   |                                                                                                                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | in exclusive license agreements with Novavax to
    promote, market, distribute and sell EstrasorbTM, a
    topical transdermal estrogen replacement therapy, and
    AndrosorbTM, a topical testosterone replacement
    therapy for testosterone deficient women, upon their approval by
    the FDA;
|
| |  | engaged in the development of MRE-0470, a
    myocardial pharmacologic stress imaging agent; and                                                                                                                                                                                                       
|
| |  | in a licensing agreement with Novavax to develop
    recombinant human papillomavirus (HPC) virus-like particle
    (VLP) vaccines.                                                                                                                                                                    

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 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.

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| |                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 most of
these products are sold by other pharmaceutical companies. In
addition, governmental and other pressure to reduce
pharmaceutical costs may result in physicians prescribing
products for which there are generic substitutes. Increased
competition from the sale of generic pharmaceutical products may
cause a decrease in revenue from our branded products and could
have a material adverse effect on our business, financial
condition and results of operations. In addition, our branded
products for which there is no generic form available may face
competition from different therapeutic agents used for the same
indications for which our branded products are used.



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

We manufacture many of our products in facilities
we own and operate. These products include Altace®,
Levoxyl®, and Thrombin-JMI, which represent approximately
62.1% of our revenues for the nine months ended
September 30, 2002. Many of our production processes are
complex and require specialized and expensive equipment. Any
unforseen 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®, Lorabid®, Bicillin®,
Ortho-Prefest®, and Cortisporin®, are currently
manufactured by third parties. Once approved,
EstrasorbTM 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. If
for any reason we are unable to obtain or retain third-party
manufacturers on commercially acceptable terms, we may not be
able to distribute our products as planned. If we encounter
delays or difficulties with contract manufacturers in producing
or packaging our products, the distribution, marketing and
subsequent sales of these products would be adversely affected,
and we may have to seek alternative sources of supply or abandon
or sell product lines on unsatisfactory terms. We might not be
able to enter into alternative supply arrangements at
commercially acceptable rates, if at all. We also cannot assure
you that the manufacturers we utilize will be able to provide us
with sufficient quantities of our products or that the products
supplied to us will meet our specifications. The occurrence of
any of these events could have a material adverse effect on our
business, financial condition, results of operations and cash
flows.

DSM Pharmaceuticals, Inc. (formerly DSM
Catalytica Pharmaceuticals, Inc.), one of our third-party
manufacturers, informed us on November 21, 2001, that they
ceased operations at their sterile manufacturing facilities in
Greenville, North Carolina, as a result of FDA concerns relating
to compliance issues. Due to the compliance issues, DSM
Pharmaceuticals recommended that we initiate a voluntary recall
of all products that they manufacture for us. As a result, we
initiated a voluntary recall of these products on
December 18, 2001. The products affected were
Cortisporin® Otic Suspension, Cortisporin® Otic
Solution, Cortisporin® Ophthalmic Suspension,
Pediotic® Otic Suspension, Septra® IV Infusion, and
Neosporin® GU Irrigant. DSM Pharmaceuticals has since
notified us that it has addressed the compliance issues and has
resumed production of all our affected products, except
Septra® IV Infusion. However, we cannot assure you that
additional product recalls will not occur in the future. The
failure of DSM Pharmaceuticals to adequately address the

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compliance issues at its sterile manufacturing
facilities in Greenville, North Carolina in accordance with its
written assurances to us or additional product recalls could
have a material adverse effect on our business, financial
condition, results of operations and cash flows.


We require a supply of quality raw materials and
components to manufacture and package pharmaceutical products
for us and for third parties with which we have contracted.
Generally, we have not had difficulty obtaining raw materials
and components from suppliers in the past. 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. In this case, our business,
financial condition and results of operations 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. Prior to our acquisition of the Parkedale facility in
February 1998, it 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 was inspected by the FDA
in December 2001. When an FDA inspector completes an authorized
inspection of a manufacturing facility, the inspector 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 December 2001
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
December 483 and our commitment to correct the 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 current Good
Manufacturing Practices, which are commonly referred to as
cGMPs. While we believe the receipt of the 483 will
not have a material adverse effect on our business, financial
condition, results of operation and cash flows, we cannot assure
you that future inspections may not result in adverse regulatory
actions. The 483 from December 2001 does not require us to delay
or discontinue the production of any products made at the
Parkedale facility.



| |                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------
| | 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 solutions
to expand our production capacity for Thrombin®-JMI which
should potentially be completed in the next two to three years.
These long-term solutions 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.

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

We are in the process of implementing a new
information technology system which is to be effective next
year. This system will support many of our business functions
including manufacturing, distribution, logistics, sales
reporting, accounting, inventory, quality control, budgeting,
and other company functions. 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. This disruption
could have a material adverse effect on our business, financial
condition, results of operations and cash flows.



| |                                                                                                            
| | -----------------------------------------------------------------------------------------------------------
| | Our quarterly results may 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. These 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,
competitive pricing pressures and general economic and industry
conditions that may affect customer demand. 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 the subsequent quarter than they would
have been otherwise. 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 continues to
    decline, 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, including $10.0 million that was provided in June
2002. The loan is impaired as defined under SFAS 114,
Accounting by Creditors for Impairment of a Loan.
SFAS 114 requires the creditor to evaluate the cash flows
available from any collateral (in Kings situation, the
Novavax common stock obtainable upon conversion) in order to
determine the amount of any valuation allowance for an impaired
loan. Because of the recent significant decline in the share
price of Novavax common stock to levels below that established
by Kings common stock conversion options associated with
the Novavax convertible notes, we established a valuation
allowance in the second quarter of 2002. As of
September 30, 2002, the valuation allowance for the Novavax
convertible notes equaled $27.4 million. We determined the
amount of the valuation allowance by reference to the
September 30, 2002 quoted market price of the Novavax
common stock. 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
continues to decline, we may incur additional special charges
related to the investment in the convertible notes. Accordingly,
our earnings may be adversely impacted by these special charges.



| |                                                                                                             
| | ------------------------------------------------------------------------------------------------------------
| | 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 $100 thousand deductible per incident and a
$1.0 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.

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Product recalls 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. To date, however, 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.

Although product returns were approximately 2.6%
of gross sales for the nine months ended September 30,
2002, we cannot assure you that actual levels of returns will
not increase or significantly exceed the amounts we have
anticipated.



| |                                                                                                                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 647 multi-defendant lawsuits
involving the manufacture and sale of dexfenfluramine,
fenfluramine and phentermine, which is usually 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.

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 including, primarily, 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.

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 contaminants. 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. 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. 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 and
results of operations could be materially and adversely affected.

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| |                                                           
| | ----------------------------------------------------------
| | The loss of our key 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 acquisition and development objectives.
Although we believe that we are adequately staffed in key
positions and that we will be successful in retaining skilled
and experienced management, operational, scientific and
development personnel, we cannot assure you that we will be able
to attract and retain key personnel on acceptable terms. 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.



| |                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 we develop or technologies we 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. The validity of patents can be subject to
expensive litigation. Some of our major branded pharmaceutical
products have proprietary patent protection, including
Altace® with a composition of matter patent through October
2008. We can give you no assurance that our patents will not be
challenged. Competitors may be able to develop similar or
competitive products outside the scope of our patents which
could have a material adverse effect on sales of our products or
the amounts of royalty revenues we receive.

We also rely upon trade secrets, unpatented
proprietary know-how and continuing technological innovation,
where patent protection is not believed to be appropriate or
attainable, 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 or disclose the
technology, or that we can adequately protect our trade secrets.



| |                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 the board of directors to
    designate the terms of and issue new series of preferred stock;
|
| |  | advance notice requirements for nominations for
    election to the 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.

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| |                                                                                                               
| | --------------------------------------------------------------------------------------------------------------
| | 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



| |   |                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------
| |  | general market conditions;                                                                                                 
|
| |  | perceptions about market conditions in the
    pharmaceutical industry;                                                    
|
| |  | announcements of technological innovations;                                                                                
|
| |  | 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                          
|
| |  | variations in our results of operations.                                                                                   

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 Drug Enforcement Agency, which we refer to as the
DEA, the Federal Trade Commission, the Consumer
Product Safety Commission, the U.S. Department of
Agriculture, the Occupational Safety and Health Administration
and the U.S. Environmental Protection Agency, which we
refer to as 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 and results of operations.

All manufacturers of human pharmaceutical
products are subject to regulation by the FDA under the
authority of the Federal Food, Drug and Cosmetic Act, known as
the FDC Act, or the Public Health Service Act, known
as 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 and results of operations.

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,

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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 and results of operations.


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

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

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



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

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

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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 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 from other pharmaceutical companies.
We cannot assure you that



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

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

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



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

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Our second largest product Levoxyl® competes
with the following levothyroxine sodium products:



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

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 Tapazole® during 2000 and
Florinef® in March 2002.

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 protect market share and produce sustainable high
margins and cash flows. However, we cannot assure you that, for
any of the products, we can maintain exclusivity, protect market
share or produce high margins and cash flow as a result of these
efforts.

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 similar terms and
phrases, including references to assumptions. These statements
are contained in sections entitled Risk Factors,
Managements Discussion and Analysis of Financial
Condition and Results of Operations, and other sections of
this report.

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



| |   |                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the future growth potential of, and prescription
    trends for our branded pharmaceutical products, particularly
    Altace®, Levoxyl® and Thrombin-JMI®;
|
| |  | expected trends with respect to particular income
    and expense line items;                                                                             
|
| |  | the development and potential commercialization
    of HPV vaccines, EstrasorbTM and
    AndrosorbTM by Novavax and King;                                 
|
| |  | the development by King Pharmaceuticals Research
    and Development of MREO470, pre-clinical programs, and product
    life cycle development projects;  
|
| |  | our continued successful execution of our growth
    strategies;                                                                                          
|
| |  | anticipated developments and expansions of our
    business;                                                                                              
|
| |  | anticipated increases in sales of acquired
    products or royalty revenues;                                                                              

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| |   |                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the success of our co-promotion agreements 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
    application related to EstrasorbTM, 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;            
|
| |  | the planned 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 above in the section entitled Risk Factors.




Item 3.     Quantitative
and Qualitative Disclosure About Market Risk

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

As of September 30, 2002, 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 would be
impacted by our stock price.




Item 4.     Controls
and Procedures

(a) Evaluation of Disclosure Controls and
Procedures. The Companys chief executive officer and
chief financial officer have evaluated the effectiveness of the
design and operation of the Companys disclosure controls
and procedures (as defined in Exchange Act Rule 13a-14(c))
as of a date within 90 days of the filing date of this
quarterly report. Based on that evaluation, the chief executive
officer and chief financial officer have concluded that the
Companys disclosure controls and procedures are effective
to ensure that material information relating to the Company and
the Companys consolidated subsidiaries is made known to
such officers 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.
There have not been any significant changes in the
Companys internal controls or in other factors that could
significantly affect these controls subsequent to the date of
their evaluation.

40



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##### Table of Contents






PART II  OTHER
INFORMATION




Item 1.     Legal
Proceedings

The information required by this Item is
incorporated by reference to Note 6 to the Condensed
Consolidated Financial Statements included elsewhere in this
document.




Item 4.     Submission
of Matters to a Vote of Security Holders

None




Item 6.     Exhibits
and Reports on Form 8-K

(a) Exhibits

| |    |    |  |   |  |                                                                                                                                                                                                                                                                      
| | -- | -- |  | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 99 | .1 |  |  |  | Certification Pursuant to 18 U.S.C.
    Section 1350, as Adopted Pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002, signed by Jefferson J.
    Gregory, the Chairman and Chief Executive Officer of King
    Pharmaceuticals, Inc., on November 14, 2002.
| | 99 | .2 |  |  |  | Certification Pursuant to 18 U.S.C.
    Section 1350, as Adopted Pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002, signed by James R.
    Lattanzi, the Chief Financial Officer of King Pharmaceuticals,
    Inc., on November 14, 2002.                

(b) Reports on Form 8-K

None

41



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##### Table of Contents






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.



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

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

Date: November 14, 2002



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

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

Date: November 14, 2002

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##### Table of Contents






CERTIFICATION OF CHIEF EXECUTIVE
OFFICER

PURSUANT TO SECTION 302 OF THE


SARBANES-OXLEY ACT OF 2002


I, Jefferson J. Gregory, certify that:

1. I have reviewed this quarterly report on
Form 10-Q of King Pharmaceuticals, Inc. (King);

2. Based on my knowledge, this quarterly
report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period
covered by this quarterly report; and

3. Based on my knowledge, the financial
statements, and other financial information included in this
quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of
King as of, and for, the periods presented in this quarterly
report.

4. The registrants other certifying
officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:



| |                                                                                                                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this quarterly report is being prepared;
|
| | (b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this
    quarterly report (the Evaluation Date); and                                                                                                      
|
| | (c) presented in this quarterly report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                

5. The registrants other certifying
officer and I have disclosed, based on our most recent
evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons
performing the equivalent function):



| |                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | (b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    

6. The registrants other certifying
officer and I have indicated in this quarterly report
whether or not there were significant changes in internal
controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.



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

| |                                                      
| | -----------------------------------------------------
| |                                                      
| | Jefferson J. Gregory                                 
| | Chairman of the Board and Chief Executive
    Officer

Date: November 14, 2002

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##### Table of Contents






CERTIFICATION OF CHIEF FINANCIAL
OFFICER

PURSUANT TO SECTION 302 OF THE


SARBANES-OXLEY ACT OF 2002


I, James R. Lattanzi, certify that:

1. I have reviewed this quarterly report on
Form 10-Q of King Pharmaceuticals, Inc. (King);

2. Based on my knowledge, this quarterly
report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period
covered by this quarterly report; and

3. Based on my knowledge, the financial
statements, and other financial information included in this
quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of
King as of, and for, the periods presented in this quarterly
report.

4. The registrants other certifying
officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:



| |                                                                                                                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this quarterly report is being prepared;
|
| | (b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this
    quarterly report (the Evaluation Date); and                                                                                                      
|
| | (c) presented in this quarterly report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                

5. The registrants other certifying
officer and I have disclosed, based on our most recent
evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons
performing the equivalent function):



| |                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) all significant deficiencies in the design or
    operation of internal controls which could adversely affect the
    registrants ability to record, process, summarize and
    report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | (b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    

6. The registrants other certifying
officer and I have indicated in this quarterly report
whether or not there were significant changes in internal
controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.



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

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

Date: November 14, 2002

44